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:
- 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.
- 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.
- How to Rebuild Your Credit After Bankruptcy
- The Credit Card Payoff Calculator
- Do You Need a Debt Management Plan?
This article originally appeared on Credit.com.
This article by Michael Bovee was distributed by the Personal Finance Syndication Network.