Home > Uncategorized > Beth’s Story: Should I Consider Bankruptcy?

Comments 0 Comments

For more than a decade I have used a fairly specific approach to help people find their way when struggling to keep up with their bills. I generally focus on six mainstream options to deal with debt, including filing for bankruptcy, debt consolidation loans and negotiations with creditors and debt collectors. Once I gather some basic facts about an individual’s income, expenses and debts, and rule out conventional wisdom approaches, I can usually narrow down the workable solutions to one or two realistic options.

I have conducted thousands of debt relief consultations by phone. And this past week, after receiving a fairly detailed reader question, I exchanged emails that I am sharing (with permission) in a four-part series about how you can self-assess your situation and determine the path to better managing, or even eliminating, your debts.

Here is the initial reader submission from Beth (not her real name):

Hi Michael. I’m desperate and need advice ASAP.

I got laid off in January 2012 and haven’t had a stable job since then. I’ve always made the minimum payments in time, and used my savings and help from family to keep up with the payments. I just got a temp job in February 2015.

Here are my debts:

Chase (2 cards) = $12,320 – min. pymt. $246 13% interest
Citi (2 cards) = $11,035 – min. pymt. $247 12% interest
BofA (1 card) = $7,180 – min. pymt. $144 14% interest

I called chase and they said I may qualify for BLP (balance liquidation plan) at 0% for 60 months min. payment $174, or settlement.

I have only 1k now but I’m making about $1,750/month after taxes. My current living expenses are around $1,100. Then I pay $246 to chase; $247 to Citi; and $144 BofA. I’m looking for a second job; this temp job is supposed to last for 4 months not sure if it will turn into a permanent. In a year or two I may be able to save some money or get money from family and try a settlement.

I can no longer make the min. payments, I need to get back on my feet, buy a car, get health insurance but the credit cards are killing me. I can’t make the min. payments next month so I’m trying to find a good solution before late payments/no payments kick in and the situation gets worse. THANK YOU SO MUCH IN ADVANCE

Here is my initial email response to Beth:

“Okay. I want to compare some numbers and time frames for you.

Can you afford to pay $550 toward your credit cards each month based on today’s income and expenses? Now consider whether you can commit to that for 50 or so months. If you had job security, it would be easier to say yes, right? But with a temp job, the confidence just is not there.

I do not see your monthly payments working out with hardship payment, and balance liquidation plans. The monthly reduction available is not likely to go any lower than the $550, and maybe even closer to $580 a month.

Now look at negotiating and settling all three of your accounts. A fair estimate would be 40% of the totals, so roughly $12,000 to resolve them all. You can take two years saving that up at the rate of $500 a month. How long it takes to pay settlements that can be negotiated has always been a factor in my evaluation of workable solutions. And two years is at the end of where I would recommend settling debt. There are a host of reasons for the time frames I choose when negotiating settlements. I will focus on two:

  1. When you’re not paying your credit cards you are subjecting yourself to the recovery and collection policies of the banks. And banks may choose to sue in order to collect at some point. Debt buyers to whom the banks sell accounts could also sue you to collect. You have the risk of being sued at all stages of debt collection. The sooner you can save up money to settle each account one by one, the quicker you are able to eliminate the risks of being sued. You can settle when sued for collection, too, but that can complicate the rest of your strategy if you still have other remaining accounts to negotiate.
  2. After filing Chapter 7 bankruptcy, which can often allow you to eliminate all of the credit card debts for a total cost of $2,000 (often much less), in two years or so your credit could be in better shape, enough for you to be able consider financing a home. There are reasons to avoid or delay bankruptcy, but the impact Chapter 7 will have on your credit is not a good enough reason when compared to the time and cost it will take to negotiate and settle, or consolidate debt for a lower monthly payment.

So far, with the little information I have to go on, Chapter 7 bankruptcy may be the better option for you when it comes to affordability, risk, time and peace of mind. There are many other things I would want to weigh before choosing to file Chapter 7. Your age, health, industry you work in all can have an impact on the direction you decide to take to resolve your credit card bills.

If your employment were stable, the choice to continue paying for 50 to 60 months by consolidating your bills would be much easier to make. But taking that step now, when you have no idea whether you will be able to make your lower payments four months from now, could be throwing away money that could be used to pay settlements, or that would have completely paid for Chapter 7 bankruptcy.

When you mentioned help from family members, what did you mean? Can you borrow money to pay for settlements? How soon would that be a possibility?”

Why I Asked These Questions

The first thing I did was consider whether the credit card bills could continue to be paid based on a consistent income, and they can’t. And trying to consolidate debt in this situation, where finances are sinking, is often akin to shuffling deck chairs on the Titanic.

Roughly 70% of credit card debt consolidation repayment plans are not completed, according to a study by the National Consumer Law Center and Consumer Federation of America. That is not to say that many people fail. Many drop out because they are able to manage the rest of the way through repayment without help. But a large number of people drop out of these plans because they were not a good profile for success. And often because they convince themselves they can do something that mathematically just will not float.

In the next installment, you will see how Beth is beginning to focus on negotiating lower balance payoffs, while still considering other options, like 0% interest balance transfers that can become a trap. You will begin to see that negotiating lower payoffs with creditors, while not complicated, has a learning curve.

More on Managing Debt:

Image: Wavebreak Media

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team