Three years ago, I had a good job and a credit score of 750. Then I had to stop working for almost two years because of a death in my family. During that time, I put a lot of expenses on my credit cards, and I got so far behind on bills that my credit score has fallen to 450. I am now employed again (I hold a leadership position in education administration), although I’m making less than at my last job, about $85,000. I’ve also resumed saving, investing, and paying my bills on time. The problem is, I still owe about $17,000 spread across four credit cards. Should I try and pay them off, or file for bankruptcy and try to settle? Or is it better to just pay the monthly minimums until I get my credit score up? My current household expenses are about $4,000 a month, including $2,350 on a mortgage, so I don’t have a lot of extra money. I also have student loans, which are currently in deferment. I’m working toward getting my real-estate license so that I can have multiple streams of income, and I want to avoid bankruptcy if I can. I also want to improve my credit score as quickly as possible. What should I do?
I hope you don’t have to file for bankruptcy, but I’m glad you’re open to it. Obviously, it’s not a thrilling prospect, but just because it’s a last resort doesn’t mean you should wait until the last minute to explore it. To me, it’s similar to divorce: The longer you put it off, the more collateral damage there is. And it’s also a chance to walk away from an unfixable problem and start fresh.
That said, you may very well be able to get rid of your debt on your own. Plenty of people manage to pay off credit-card debt far worse than yours, although it’s never easy, especially once interest rates pile up. Alternatively, you sound like a great candidate for a debt-relief plan, where you sidestep bankruptcy by working with a credit counselor to iron out a special payment schedule with your creditors. But it all depends on how far behind you are on these bills already — in financial parlance, how delinquent this debt has become. If your creditors have already sued you to collect payment, then you need to speak to a lawyer. More on that in a minute.
I also want to acknowledge that wrestling your way back to zero is stressful and difficult, and it sounds like your situation was brought on by a painful time. You are right to seek as much support as you can find. I wish our country had more comprehensive safety nets for people who find themselves squeezed for reasons outside their control — as millions do right now — but here we are, and you do have options.
First, a brief primer: Consumer bankruptcy (for personal debt, not business-related) falls under one of two camps — Chapter 7 or Chapter 13. Under Chapter 7, much of your debt may be forgiven, but you have to liquidate your assets (your home, your car, any jewelry or other valuables) to pay your creditors what you can. Under Chapter 13, you keep your assets and hammer out a settlement that reduces what you owe and requires you to follow a strict payment plan. Chapter 7 is quick and dirty, but it’s usually over within three to six months, although it does stay on your credit report for ten years. Chapter 13 proceedings take three to five years, but you get to keep your stuff — and it only stays on your credit report for seven years. While Chapter 7 is more common, comprising about 68 percent of bankruptcies, it’s also reserved for more dire cases, which yours probably isn’t. Either way, there will be consequences for your credit score, and you may not be able to access credit for a while, perhaps several years.
Of course, I can’t give you legal advice, and neither should anyone else besides a qualified bankruptcy lawyer who has looked at your case thoroughly. Most will give you a free initial consultation, says Ike Shulman, the legislative co-chair of the National Association of Consumer Bankruptcy Attorneys. “A bankruptcy lawyer will analyze all the details of your situation and evaluate whether you can afford to pay off your debts, or whether it’s a good idea for you to file, and what flavor of bankruptcy you’re looking at,” he explains. (The NACBA’s website has a helpful guide to finding a good attorney, plus what kinds of fees to expect, here. It probably won’t surprise you that trying to represent yourself is not a great idea. Sure, you’ll save money on a lawyer, but you’re likely to get a worse settlement as a result.)
Even if you’re pretty sure you can avoid bankruptcy, Shulman recommends consulting a lawyer anyway. Sure, you’ll spend a few hours talking about a very uncomfortable subject, but you’ll walk away knowing all your options, one of which may be credit counseling.
Credit counseling is the main alternative to bankruptcy, and the two solutions also go hand in hand. “It’s not a bad idea to reach out to both a credit-counseling agency and a bankruptcy lawyer at the same time,” says Bruce McClary, a consumer credit counselor and representative for the National Foundation for Credit Counseling, a nonprofit organization that connects people to certified financial counselors. (I recommend using their website to find an agency — some “credit counselors” aren’t properly credentialed and, worst-case scenario, prey on vulnerable people. Beware the credit counselor who promises anything that sounds too good; they cannot reduce your debt, for example.)
Basically, a credit counselor’s job is to go through all of your debts and reach out to your creditors to work out a realistic payment plan that (a) you can afford, and (b) will pry you out of the cycle of compounding interest rates. “They can help you get lower monthly payments, lower interest rates, and a reduction of penalty fees, so that you may end up paying off your debt sooner even though you’re paying in smaller increments,” says McClary. While it isn’t free — McClary says credit-counseling services typically cost somewhere between $25 and $35 a month — you should expect your counselor to check in with you every month and help you budget and stay on track.
Although bankruptcy will relieve you of some of your debts, a debt-relief plan is unquestionably the preferable option if you can swing it, as your credit score will bounce back much faster. A recent study at Ohio State University found that participants in a credit-counseling program saw a 50-point average increase in their credit score within a year and a half. (Those same participants also wiped out an average of $17,000 in total debt during that time — basically your entire debt load!) That’s a far cry from bankruptcy, which — as we’ve covered — will haunt your credit report for years. Either way, there won’t be a rapid fix, but you’re already making the process a million times easier on yourself by confronting it now.