Lost In Debt Part 1
What should you do if you’ve defaulted on your loans? Declare bankruptcy, or pay them back?
One of our readers, Lost In Debt, sent this question in:
So here is my situation (thanks in advance for reading and hopefully offering me any kind of guidance).
i am currently contemplating filing bankruptcy. the position i am in right now is that back in 2007 i picked up everything (literally) and moved to the Philippines for family reasons.
At that time the company i worked for was in the process on liquidating assets and I was one of them (was given a severance).
So I decided that it was a good time for me to be with my family (being that they needed me) i decided to liquidate all my assets as much as i could, (alot of people will hate me for this) but i pulled out as much cash from almost everywhere i could (credit, bank, etc) and the only thing i had left behind was my almost 2 year old car which i was just going to let them repossess (but a friend took over payments for 6 months and then it finally got taken away).
So that is the back story (and i do apologize for this being so long) and here is the current situation.
almost 18k worth of credit card debt / misc. (no payments or contact with creditors since AUG 2007) repo CAR balance (worth 3k; friend will split if need be) 3k student loan (but i am going to pay it off before filing, because it wont come off either way) Right now i am considering relocating back to the states (home sick to be honest).
I do have the means to pay about 10k or so of the outstanding debt, but that would cut into my relocation fund. because since being out in the Philippines I have been able to save more since i have left all my debt (i know i know, that it was not the right thing to do).
Basically I have enough funds for me to be able to come back to the states and cover cost of living for about 10 months (which includes a rent, food, etc). and that is if I came back and didn’t find work for 10 months. if i were to repay a large chunk of debt, I might end up in the same place again but with no fall back this time around.
Now here is my dilemma, I don’t know whether to pay of the existing debt (which has all been sent to collection agencies and I am no longer dealing with the main creditor) or to file for bankruptcy.
I cant really find much information about how my credit will look if I paid off the debt and then how hard it would be to re-establish my footing and get my credit score somewhere north of 700 and also start getting credit again.
I have acclimated myself to not using credit (and in my honest opinion I like it much better, but you never know).
Also I do have people that have offered to let me lean on them in the case I do file bankruptcy and would be more than willing to co-sign their lives away so to speak (an option, but likely a last option).
How will that help my credit score move if I had someone that has amazing credit co-sign with me on say a car loan or something smaller like the sort (don’t really know how that would work).
So after all that jibberish (again i do apologize), I can sum everything up into 3 points:
1. Pay off debt… How will Credit Look? How will i be affected in terms of getting credit(i.e. unsecured cards / loans / etc)?
2. File bankruptcy…. Save the savings… get say $500 secured card and start for dead scratch …. How will a Co-Signer help with move my credit score & getting Credit (i.e. car loan) and should i be the primary or should they be the primary?
3. Stay where i am and just come back for a visit and hope i dont get detained when flying back out to the Philippines.
If you made it all the way to here. I do greatly appreciate any feedback that you might have more me. and I do apologize for it being so long.
Thanks and looking forward to your response.
Lost in Debt.
Thanks for your question Lost in Debt. And thanks also for being so specific about your situation. I’m answering this one instead of Mr. Credit Card because I haven been through bankruptcy – I hope you don’t mind.
I am going to break this answer up into two parts so that we can give both situations (Bankruptcy vs. Debt Repayment) the attention they deserve. Today we’ll take a look at what will happen if you declare bankruptcy, and tomorrow we’ll cover what you need to do to repay your debt and get a fresh start.
I’d also like to welcome any readers to comment: those who’ve been through bankruptcy and those who haven’t. The more people than can give you the benefit of their experience, the easier it will be to make an informed decision. Help us out guys!
Bankruptcy As An Option:
Here’s the basics of your situation:
You have around $24,000 worth of debt. If you take all the money that you can pull together right now, you have about $10,000 to pay on the debt.
Because you have no real assets (house, car, etc.) you are an excellent candidate for Chapter 7 bankruptcy as long as your income isn’t too high.
The cost of chapter 7 bankruptcy is around $1,000 depending on your lawyer (possibly a couple of hundred dollars more). You will also still have to pay off your $3,000 in student loans.
Total cost of declaring bankruptcy / student loans: $4,000.
Money you have left to begin a new life: $6,000
What happens to your credit if you file bankruptcy?
Actually, my bankruptcy hurt my credit less than all of the negative accounts did. After bankruptcy my credit score was 590. Before bankruptcy it was around 630. That was a 40 point drop for me.
Now, credit scores are difficult to compute and predict (FICO does that on purpose) so your credit score may be affected differently. In my case, it was 40 points. I was able to recover that 40 points in about a year.
Anyone else out there who knows their credit score before and after bankruptcy, please let us know. I can only speak from my own experience.
Starting Over After Bankruptcy:
If you declare Chapter 7 Bankruptcy your bankruptcy will usually be discharged within 4 to 6 months. (Possibly a little sooner depending on your lawyer and your state’s laws.)
Once your bankruptcy is discharged:
Apply for 2 or 3 secured credit cards. A $500 balance on each is a great place to start, just do them one at a time if you can’t do all three right away.. Make sure you get all three though, because you need several positive accounts being reported each month to the credit bureaus.
Charge no more than $50 a month on your credit cards – but do charge a little bit each month. Otherwise you have no record of payment.
Also, avoid applying for “bad credit” unsecured credit cards. The terms are rotten, and you never get your money back. A secured credit card will serve the same function, and instead of paying the deposit in fees, you get it back when you upgrade your credit card account.
Make sure that all three secured credit cards report to all three credit bureaus (TransUnion, Equifax, and Experian). Otherwise they aren’t doing you any good.
Your next step will be to pull your credit reports, several months in a row and double check that all the accounts you included in your bankruptcy show up as actually being included in your bankruptcy. Don’t let any negatives slip through once the debt is included. That really is essential to raising your score.
We have instructions on how to challenge items on your credit report here:
If you keep the balances on your credit cards to less than 15% of your available credit, you clean up your credit reports, and you make all of your future payments on time you can expect your credit score to go up easily.
How long will it take to get your credit score over 700?
Well it depends on what your credit score is after bankruptcy, but Most people can recover their credit in a minimum of three to five years. The bankruptcy will not fall of your credit report for ten years. After seven years, it will not matter as much to lenders.
The hard truth about bankruptcy:
With a bankruptcy on your credit report some lenders will not lend money to you for any reason, no matter what your credit score is. If that happens, you just move on and find a lender that will work with you.
The surprising truth about bankruptcy:
You can get car loans and home loans (at terrible interest rates) immediately after bankruptcy. The higher your credit score is, the better the interest rates will be. You can always consider refinancing as your credit score goes up.
The important thing to realize is that you can still get loans, even in the current economy with a bankruptcy on your record. It won’t be easy, but it is certainly possible. Especially when you have a reasonable down payment.
Co-Signers and Bankruptcy:
The best advice I can give you is to avoid getting a co-signer on anything after bankruptcy. Once lenders see that you have a ready co-signer you will never be able to get a loan without one until the bankruptcy is off your credit reports.
Instead, I suggest getting those secured credit cards, ing a cheap used car that you don’t have to make payments on, and avoid borrowing money for a couple of years. That will give your credit score enough time to recover enough that you should be able to get a loan without a co-signer.
Additional considerations:
Remember that moving back to the states is going to involve considerable expense. Since your credit is poor (from the defaulted debt) you are going to have to have hefty deposits on a car and apartment. You will also need money to live off of as you look for a job. Make sure you have all the details of starting your new life accounted for before you make a decision on debt repayment.
As a last consideration, make sure that you do speak with a lawyer. Sit down with one who offers a free consultation, and explain your situation. A lawyer working in your new state is going to be the only person who can explain the bankruptcy laws in that state, and help you make your final decision.
Questions to ask your lawyer:
- How will the fact that you’ve been out of the country affect your ability to file bankruptcy?
- Will you need to use the last tax returns you filed in the United States to pre-qualify you for a bankruptcy?
- Some student loans (non-government) can be included in a bankruptcy. Can you include yours?
- Will the $10,000 that you have right now affect your ability to declare bankruptcy? (And what should you do with it if it will?)
Tomorrow we will cover all the details you need to know if you want to repay your debt, how it affects your credit, and the steps you can take to do that.
Thanks again for your question!
Have a question for us? Want to share your experience? Leave a comment below!
Keep Reading:
