Here’s an email we got recently

Dear Mr Credit Card,

I am in debt to CHASE to the tune of $13,000 and I also owe a total of $4,500 on other smaller VISAS (SAMS Club $2,000, Best Buy $2,000 Kroger $500). I have been unemployed for 5 years. We have exhausted my savings and we are only living on $11,000 a year. We do not have a mortgage and we own our home outright. We have no car payments. I cannot afford to pay $500 a month to the CHASE and I called their hardship dept and they are only willing to negotiate to $300 a month. I am still looking for work. My husband is on Social Security.
Do you think that we should take out a second mortgage out on our home?? IF I contact a debt negotiator firm and they negotiate with the card companies, what effect would that have on my credit score?? Does bankruptcy follow you even when you apply for a job?/ I heard that it does and it could impact your ability to get a job?? Can you please help me chose the “least destructive” path to recovery??? Please sir help me!! Thank you!!! Mrs

Loraine Murphy

Our Thoughts – Loraine – I can’ really answer this fully without knowing more details like how much is your husband drawing on social security. But first, given your situation, I would not take out a second mortgage simply because it does not solve your problem, which appears to be insufficient cash flow. Here’s what I would do.

1. Continue to look for a job – That is the easiest fix for your cash flow problem. Don’t be fussy and try to get anything that will pay the bills, whether it be a position in a fast food chain or a grocery.

2. Workout a budget – You may have already done that but if you have not, then it’s time to take out the pen and paper and go through exactly what you are spending. Make changes to your expenditure if you have to (more like cut your expenditure).

3. Consider renting out a room – It’s great that your house is fully paid. Have you considered renting out a room to maybe a student. That might just be enough for you to cover the credit card bill every month.

4. Can your husband go back to work? – You only mentioned that your husband is on social security but not the reason. Has he reached retirement age. Is he on disability? Can he go back to work? Because if he can, that would make a huge difference.

5. Would you consider selling your house and downsizing? – I do not know where you live or what is the real estate like in your area. But perhaps it may be wise to sell the house and buy a much smaller place and use the difference to pay off your credit card debt. But even so, you will probably still have to get some part-time work to make ends meet if your husband’s social security is not enough to take care of the $11,000 living expenses you have every year.

Debt Settlement – If you decide to go the debt settlement route, there are a couple of ways to do it. Most firms will help you settle it such that you pay off your debt over a period of 4 years. Your credit score will definitely take a hit because it will take months to settle with your creditors.

But if you have an emergency fund and can settle for a one-time lump sum payment, that will be easier and takes a shorter time to negotiate. But it looks as though you have used up your savings and this is not feasible.

You should not worry about credit score because since your house and car are all paid for, there appears to be no need to apply for credit anytime soon.

At the end of the day, you might end up getting a job and still settling your debt for less than the principle.

This entry was posted on Wednesday, May 27th, 2009 at 07:41 and is filed under Debt Reduction FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.