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Should I Declare Bankruptcy?

11/19/2008

One of our readers, Alicia, asked:

I have one Credit Card debt with a balance of $15,000 can not pay the Min amount they want like 3,000 they will not work with me to set up a payment plan i tried many times.

I can only send them a certain amount each month and yes it is small $125.00 but they still want there 3,000 each month they keep calling asking for this amount i told them if they will not accept the $125 a month i will have to file Bankruptcy which i do not want to do.

I thought they would rather have some money going to this account as little as it may be at least I’m trying to pay something on this account then to have to file Bankruptcy and they get no money it’s all i can sent (not only Debt i have) should i keep paying $125 or file Bankruptcy and Pay nothing on this account?

Thank you for your question Alicia.

Declaring bankruptcy is a serious issue – I know, I’ve done it. There are a lot of things I wish I had known beforehand, that might have helped me during that time. So, I’ll do the best I can to try and help you figure out your options here.

The general (and it does not fit everyone) – the general rule for bankruptcy is to ask yourself this question: Can I pay down all or most of my debt within the next 5 – 7 years?

There are two reasons for the 5-7 year question. The first is because that is how long a bankruptcy will hurt you on your credit report. Bankruptcy actually stays on your credit report for ten years, but as long as you make your payments on time after the bankruptcy, then 5-7 years is about the amount of time you will have to wait before lenders stop looking at you like you’ve grown two heads when you apply for a loan.

The second reason for the 5-7 year question is because if you can pay down your debt, or make settlements – even if it is over a period of years – it will always look better, and keep your credit score higher than defaulting on all of your accounts and declaring bankruptcy.

See, this was something I didn’t understand when I declared bankruptcy. I was panicked – we owed a lot of money, and I had no idea how I was ever going to pay it back. After declaring bankruptcy I realized that given 5 years to pay my debt back, I probably could have done it, and I would have been better off. That was how my situation went- let’s take a better look at yours.

Since I do not know what your income is, or what your total level of debt is, it’s hard to make a conclusion about whether or not bankruptcy is the right thing for you to do. But I can certainly help you with the one account that is driving you nuts!

You can consider credit counseling:

Since you are wanting to make payments, and you are having trouble getting your credit card company to cooperate, then you may be a good candidate for this.

If you choose to see a credit counselor you will take in all of your bills to them. They will sit down with you and to work out a repayment plan. At that point, the counseling service will call the people you owe and work out payment plan with them. Pretty much all you will have to do from that point is to send your credit counseling agency a check each month, and monitor your credit report to be sure they they are sending your payments in as agreed.

Pro’s of a credit counseling agency:

They will probably help keep you out of bankruptcy because they will take on the tough negotiations with your credit card company, and your other lenders. They should be able to get your interest rates reduced, your late fees removed, and get you set up on a reasonable payment plan. You simple meet with them, hand it all to them, and write your checks. It takes a lot of stress out of a bad situation. In the long run, this can help keep your credit score healthier than if you default and declare bankruptcy.

Con’s of a credit counseling agency:

Unfortunately, not all credit counseling agencies are legitimate. Also, it is standard practice for them to hold your checks for a few months in order to make negotiating with your creditors easier for them. (Its always easier to negotiate with a credit card company when you’ve made no payments for several months.) This will definitely hurt your credit score, though not as much as a bankruptcy will. You can also ask your credit counseling agency to negotiate with your credit card company so that those late payments are removed from your credit report.

It is worth it to say that some of the better credit counseling agencies will not hold your checks and make you late – it just depends on which one you use.

If you use a credit counseling agency, you will need to monitor your credit reports. This is just a safety measure that double checks your counseling agency. You need to know that they are paying on your accounts as they agreed to, and that your credit is not being damaged by they way they make the payments on your behalf. You can usually monitor all three of your credit reports for about $15 a month by using Equifax, Transunion, or Experian’s services.

We have several resource articles on how to choose a credit counseling agency – I’ll link them here for you.

So, that is one option for you. The second option would be for you to continue trying to negotiate with your credit card company yourself. If you choose to do this, keep sending in your $125 a month, whatever you do. This should prevent your debt from being sold to someone else. Here’s a few quick tips for that.

  1. Don’t be intimidated – yes, you owe them money. But that does not mean that they are allowed to harass you day and night either. Check out how to stop collection calls for a quick fix to that problem.
  2. Don’t be afraid to negotiate with them – If you call them to set up a payment arrangement, and they will not work with you, hang up, and call back. If the next person you reach will not work with you, ask for a manager. Keep asking for a manager until you get one. Repeat to the manager what you told me. “I have $125 to pay you each month. I will obviously send more if I have it, but I am going to guarantee you that if you make a payment arrangement with me I will send in that $125 every single month until the entire debt is paid off.” Keep repeating it if you need to, until they listen.
  3. Don’t respond to threats – Collections reps can be evil, there is no doubt about it. I hate that you have to deal with them, but you should never be afraid of them. They are there to get as much money out of you as possible, and they are trained to do that. So, just don’t hang up with them until you have a set payment arrangement and a plan of action.
  4. While you are talking to them, do not forget to ask them to remove all of the late and over the limit fees on the account. Talk to manager again if you have to. All collection reps can, and will do this when you call them to make a payment, so if someone is giving your trouble, hang up, and call back until you get human being who really does want to help you.
  5. For help on this, check out Credit Card Debt Settlement – How To Do It Yourself.

If you try both of the tactics above, and bankruptcy still seems better for you (as I said, I don’t know your whole situation here) then call for a free consultation with a lawyer. Sit down with them, and let them walk you through the bankruptcy process so that you understand what is involved before you make the leap.

You can also check out my bankruptcy story, that will tell you more about what I had to do to start recovering from my own bankruptcy.

I hope this helps a little, please feel free to come back and ask a question any time.

Have a question for us? Leave a comment below!

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3 Comments
john
December 4, 2008 @ 4:46 pm

thank you. it is odd how the same company can call you even minutes between and how one person will help you while the other one would not.

Reply
Surbhi
February 11, 2009 @ 3:56 pm

Hello,

First of all I have written to you before and have found your advise very useful, and actually most of the advise you gave me actually worked so thank you for that.

My husband and I are in a lot of debt. I have already called most of the credit cards and reduced my APR to 6 % or lower. But since we are already in so much debt it is getting increasingly difficult for us to make our bills every month.

There are few facts I want to bring to light.

1 We bought an apartment last year in which we invested a lot of this debt. The apt at this point is a little bit more but not a whole lot. We tried refinancing but since this is a co-op we cannot go under the FHA program and the equity we built is so low that doing a home equity loan is not possible as well.

2 At the same time period we also bought a business and since had already invested a lot of the money at home had to pick some on our credit cards which put us in further debt. The business due to economy and other reason did not do well. At this point we have almost closed that company and partnered with some one else to keep the business afloat.

Here are my questions for you:

1 I would like to pay all my cards, and I think that we can remove most of our debt in the coming 5 years. Is it possible for us to call the credit cards and request them if they can help us and somehow hold the account for 3-6 months. That for us would be a perfect solution cause by that time we would find other means to increase our income which we are looking at very positively at this point of time. How would that effect our credit score and the APR they offer us after the time period elapses

2 Should we declare bankruptcy for the old company. How will that effect my husbands credit. and even though my name is not in the company will it effect mine.

3 If we choose the option of declaring personal bankruptcy which truly will be our last option can we keep both our credits separate some how. If we separate our names legally from most credit cards is that something doable. Also in that case do we fill for separate taxes in this coming year.

4 I have read a lot of your website and found contradictory information as in, there are areas where you say that bankruptcy is worser than going to a credit counseling agencies and other areas where you say otherwise. I would like a clarity on that.
Thanks
For taking the time to read this
Surbhi

Reply
pam brown
October 17, 2009 @ 2:45 pm

Hi,

I became unemployed in January and lost my insurance. I have a Wells Fargo credit card. I owe $3,600 and just received the letter of upping my interest rate on all of it. What happens to me if I choose not to pay on this anymore. I am 60 years old and will probably not have to worry too much about credit anymore. I have a checking account with them with direct deposit of my unemployment. I am going to be done with unemployment in January and I don’t know how to keep paying this bill especially when they are raising the rates.

Thank you

Reply

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