I’ve accumulated a debt of about $8,000, and I haven’t paid back a single cent in years because I feel like I’ve gone past the point of no return. I know my debt is a lot less than other folks’, but its enough to eat away at me. I don’t have any savings and I pretty much live paycheck to paycheck. I feel that going bankrupt might be my best option because I don’t know how long it will take me to repay. I don’t feel like I have much money out of my paycheck to spare, yet I have to do something. I’m 25 and I would like to go back to school, repair my credit, and be financially responsible. I’d like to just feel normal and have a credit card.
In addition to general advice on this matter, I would like to know:
-Am I better off paying back little by little, or should I just file for bankruptcy and start over with a “clean slate”? Which looks better on a credit report?
-How long will the bankruptcy be on my report?
-If I end up repaying, will my debts be wiped from my report?
-What exactly does the process of filing for bankruptcy entail? How do I start the process?
-How long does it take?
-Will I be able to get a credit card? What kind should I be looking at?
-Will a bank/lending institution give someone like me a loan for school?
I know these are long, involved questions and some answers may depend on a specific circumstances. I appreciate any answers and advice given. I welcome personal experiences.
I am not a credit counselor, and have never declared bankruptcy, but I’d have to say that it is way too soon to declare bankruptcy. $8k may seem large, but it at least manageable. Bankruptcy can hose you for years to come. What kind of debt is it, credit card/student loans only? Your credit won’t be terribly impacted as long as you pay the minimum, although just paying that is often not enough to even cover interest.
There are a number of non-profit organizations that will sit down with you, often at minimal cost, and give you advice that is tailored for you. Many times these organizations offer simple advice (eg, how to set up a monthly budget) that people think they know how to do, but just don’t do well.
I would urge you to check your yellow pages for such an organization in your area rather than leaving it to the whims of the fickle population of an Internet message board.
You say you haven’t paid on the debt for “years”. What are the creditors doing to collect? Have they stopped billing you? What kind of debt is it? If it’s credit card debt, aren’t the interest and finance charges piling up?
If it’s credit card debt, paying it off a little at a time can take (literally) forever. A credit counseling agency can negotiate with the card companies to get the interest lowered, maybe even reduce the debt. I’d do that first, and if you can’t live with their advice, then see a bankruptcy lawyer.
$8000 seems like a small amount to got through the difficulty of bankruptcy. Also, I don’t think you understand, you will still need to pay something, it’s not a magic pill to wipe it out, and if you get a great job in the meantime, your payments go up.
When we declared it, we had gone for counselling and the credit counsellor said, “I see no other options for you.”
It looks very bad on your credit and it is usually better to make small payments and get it taken care of.
Call your creditors, explain the situation. A lot of times they will waive some interest (or lower it) and try to work with you. They want the debt cleared up as much as you do.
Go and see a credit cousellor. The initial consult is free and you have the advantsge of telling your creditors “I am going for counselling.” This makes them back off for a while and give you time to consider your options.
Answers from a person who completely screwed his credit score by age 25…
How many years? Because after a certain number the information about the debt simply drops off your credit report. If you can ride out the angry letters and phone calls, and not promise to pay anything (assuming you truly can not), they have to charge you off and not report it anymore after a period of years. Of course, this puts your credit score in the toilet for the duration. And doesn’t do much for your sense of self-worth, either. but it’s an option.
Bankruptcy laws have changed drastically in recent years. It’s not the safe haven from your creditors it once was. You need to make yourself oaware of the laws and how they might apply to your sepcific debt to see if bankruptcy will help you at all.
The road to financial responsibility does not begin with a credit card. Credit cards can be used for two things:
To use as a convenient method of payment for things for which you plan on sending a check IN FULL to the card company at the end of each and every month.
Taking out a fairly high-interest bank loan in order to purchase items you can’t afford right now. This puts you deeper into the debt you say is eating away at you. You need this kind of misery now?
If you don’t, as you say, have much money, then nothing you can afford right now wouls make it inconvenient to work with cash or checks.
Realize that a lot of the people you know who buy cool things with their credit cards are deeper in debt than you, and will be for a long time, even if (unlike you) they haven’t started thinking about it yet.
Again, if it has been enough years (around seven, but don’t take my word for it), you may be better off not paying at all. If you haven’t paid back a cent in years, you have probably been charged off on a lot of this debt, and some collection agency is hounding you for money. If they stopped hounding you, and have recently started again, it’s because the deadline for them not being able to report the debt is approaching, and they want to “reset the clock” by working out a payment agreement with you. If you can hold, out, the debt will magically disappear (eventually) from your report, and you will have your clean slate. Also a low credit score for lack of records.
If you have magically not been charged off, at least pay the minimum payment on your debt, increasing as you can afford to. This looks better than bankruptcy.
The next worse option is to go to your local Consumer Credit Cousenling service, who will help you work out a plan to repay a smaller portion of the debt. This also goes on your credit report, and lenders don’t like to see it too much more than bankruptcy. You will notice you pay nothing for your appointment, becuase the agency is paid by the creditors. Which should tell you something very important.
Bankruptcy stays on your report for 7-10 years, as a big fat signal that you can’t handle debt. It should be used as an absolute last resort.
Eventually, yes.
Again, I don’t think you should be looking at one at all. If you simply can’t live without a piece of plastic to use to pay for things, see if your bank will give you a debit card attached to your account. This is very risky if you are irresponsible, because some debit card systems allow you to overdraw your account anyway. Then, instead of having nothing left on your credit limit, you have nothing left in your BANK ACCOUNT.
Next option is a secured-line credit card. You give the card company a certain amount of money that they put in an interest-bearing savings account for you, and whatever you gave them becomes your credit limit. If you default, they take the money from the savings account in lieu of payment. Again, if you are irresponsible, this one will screw you just as bad as any other option.
If your credit score is low, any credit card you get is going to charge a hefty interest rate. If you have very little money at the end of the month, and can’t apy off your balance in full, then you’;ve taken out a loan and gotten yourself deeper in debt.
Probably, but your interest rate may be high.
It’s no secret that having no money sucks. Just remember that owing what little money you have to someone else with interest sucks even more.
If you are truly worried about your level of financial responsibility, go all-cash for awhile. Very inconvenient, but there’s nothing like it for giving yourself a sense of how much money you actually have, what the things you want and need actually cost, and how you want to priortize your spending.
Yes, you will spend a lot fo Saturday nights sitting home reading. I recommend The Money Book for the Young, Fabulous and Broke by Suze Orman. Check your local free public library. There’s also a TV special she did based on the book that is on DVD. The library may have that too.
$8k is not insurmountable. Since it’s “eating at you” I’m assuming you have a second or third job? If not, then sign off the internet and get another job. You certainly wouldn’t be the first person who’s had to hold down multiple jobs. You’re young and childless. Now’s the time you should be accumulating wealth, not increasing debt.
Some things to consider:
*Cut off all your credit cards so you don’t accumulate more debt.
Move back in with your parents.
*Ask your parents for a loan.
*Take in a roommate.
*Definitely talk to a credit counselor.
*Significantly reduce how often you eat at a restaurant, go to movies, etc.
Ignoring your debt is not an option. Not only is it immature, but I assure you that the elephant sitting on your back isn’t going to be content to be ignored much longer. If it hasn’t already ruined your credit score, you need to take steps to salvage it.
And to answer one of your other questions, you’ll probably be able to get another credit card. At about 28% interest.
Bottom line: You need to learn within your means and to take responsibility for your financial future AND past.
Actually, a debit card will do nothing to improve your score. You need to get a credit card, secured if necessary, and use it to buy one tank of gas every month. Pay it off well before the due date.
Depending on the type of loan you have and when they drop off your report, you may be on your way back to good credit if you can keep this up for 6 months.
Check out the Clark Howard message board to find other people in your position as well as people who have worked through it.
My general advice, without knowing the specifics of your loans:
develop a budget. Use Microsoft Money, Quicken, or any of the free budgeting Excel sheets online.
Figure out what can be cut. You may have to be creative, and if you want to post your budget we may be able to help.
Once you know how much money you can possible put toward your debts, pay the minimum toward all debts except for the highest interest. Pay everything you can towards that.
call your creditors and try to work out a plan with them. This will be easier if the debt is still with the orignal creditor. They may be willing to reduce the amount you owe. Watch out though, because you will have to pay taxes on whatever debt they forgive.
If your creditors won’t work with you, call a consumer debt counselor. This will hurt your credit score a bit, but they may also be able to get you lower monthly payments then you would get on your own.
If all else fails, go for bankruptcy. The counselor should help you make that decision.
bankrate.com also has a lot of good articles about credit scores and what you can do to repair them.
Good point. I didn’t mean to imply that a debit card would help long-term. It’s just that the phrase “I just want to feel normal and have a credit card” in the OP is a red flag to me. A credit card, used improperly, can put you thousands (unsecured) or at least hundreds (secured) of dollars in additional debt. A debit card gives you that all-grown-up feeling of paying with plastic while reducing your risk to a small overdraft (due to batch processing delays) and some finance charges, which are plenty steep enough.
Just some more food for thought, from Eric Tyson in Personal Finance for Dummies, 3rd edition (more recommended reading for those long Saturday nights):
Declaring bankruptcy is the worst decision you can make at 25 over an $8000 debt.
Contact your creditors and get it paid off. Borrow the money from your folks if you can, then pay them back.
You don’t need a credit card to feel grown up and normal. Paying off what you owe (because you did choose to spend the money, after all…) would be better.
Sorry I’m not blowing sunshine up your butt. Pay what you owe and try not to keep spending money you don’t have.
Don’t bother paying it. At 25 by the time you hit 32 your credit will be perfect again. With two major exceptions if you owe the IRS or school loans you’ll never be free.
I had major medical problem when I was 26. The hospitals sent people around saying they’d put me in jail etc… That was in the days when collectors could do all sorts of shady things. I put the hospital bills, some $15,000 on credit cards, I soon couldn’t pay.
I went to a bankruptcy lawyer and she basically laughed. She said "What can they do to you, you can’t go to jail and you have a minimium wage job. So if they attach the wage just quit and find another low paying job.
Basically I was judgement proof. She was right I got judgements but they couldn’t collect from me, and as the lawyer pointed out IF you declare banckruptcy and you have more medical problems, you can’t declare bankruptcy for another 10 years.
After 7 years it fell off the judgements are long since old and uncollectable now. The only issue I had with my credit was I short paid the IRS once and wasn’t aware of it. The IRS put it on my credit (for $150) and it IRS and school loans NEVER fall off. As soon as I gave the IRS the money they cleared it all up.
Don’t bother with credit counseling. That is a big mistake. Lenders consider counseling to be the same as bankruptcy so you might as well just declare bankruptcy.
Even if you are bankrupt you can always get a car loan because the car is your collateral, but you WILL pay a higher interest rate but you’ll get a car.
So depending how old the debt is, if you haven’t paid in 4 or more years, skip it and wait the 3 more years for it to fall off.
$8,000 isn’t a huge deal. For instance in NYC Starbucks will pay $8.00 and you can work two days a week Sun and Sat 10 hours per day. That is $8 X 20 Hours X 52 weeks. In one year you’ll have $8320 (less taxes).
So it’s not insurmountable. But don’t worry about ethics. Big companies declare bankruptcy all the time. I find it ironic that our lawmakers made it HARDER for little day to day people to start fresh while we have Enron’s by the caseload ruining people’s lives daily with no consern to these lawmakers.
“Everyone steals/speeds/gets high/cheats a little, go ahead and do it, too!”
If you don’t like the new banko laws, I’d love to read the letter you must have written to your local congressperson about it before it passed last fall. If you haven’t had a chance to mail it yet, you’ll find their address here.
Keep in mind, Swirl, that any payment you make will likely restart the statute of limitations, making that debt fair game for a suit.
Also, wages aren’t the only thing that gets garnished; you gonna change banks every time the collection agency finds out where you keep your money? My God, after a while it will feel like you’re living on the lam.
Pay your bills or file for bankruptcy, I don’t personally care. I know how much pressure debt can lay on you and I also know how important ‘good credit’ is to feeling you are successful. But if you do nothing it can only get worse.
FYI, some companies are running credit reports on potential employees…
Bankruptcy costs money. Yes, it costs money to be broke. After the filing, anybody you owe money to, can’t do anything to collect, including your lawyer. So you have to pay the lawyer up front. The lawyer estimates how many hours it will take them to sort your mess out and you pay him or her, first, then they file. I would guess that you would need at least 5 grand to pay the lawyer and if you had that, well you could pay off quite of bit of your debt.
However, I will say that bankruptcy is ethical. The laws in our country allow it and using those laws to your advantage is no different from taking legal tax deduction or obeying any other law.
In the bankruptcy, you may get a repayment plan, usually at some reduced rate. (50 cents on the dollar, 10 cents on the dollar) or it may be wiped clean. However taxes don’t go away. If you owe taxes, bankruptcy can’t help you.
And again, bankruptcy laws were recently rewritten, after lobbists from the credit card industry took your congressman to a real nice lunch.
Some good advice already given…and I have to agree…$8,000 might seem like a lot but I don’t think it is worth declaring bankruptcy.
I am not sure how many creditors you have, but if there are not a lot, try calling them and seeing if they can cut you a deal. Seriously, lots of those places have special programs where, for instance, they will cut off your credit, but allow you to pay less than what is owed over a longer time period. For instance, a credit card company might, and I mean “might”, discount what you owe and give you lower monthly payments. Just make sure you get the deal in writing, and make sure they do not report this agreement to the major credit agencies.
Honesty sometimes works, and in your case with what is really not an unsurpassable debt, I think you will be surprised that they will work with you…but you have to call them first, don’t get on their list of bad debtors.
You have to also at least admit that credit card companies do everything possible to force feed their cards down the throats of the young, the immature and the least educated. Their tactics are without any ethics or class or responsibility and their hidden fees and calculations are in print the size of nanotubes. Louie the Icepick has better interest rates than some of these credit card companies. So in one respect, I say, “fuckem.” But as I mentioned in the post above, it is always better to at least call and try to work out a deal. But sympathy for these gougers?
Uh…no. It is one thing to owe money to Mom and Pops grocery store and screw 'em, but it is quite another thing to have Capital Credit Card hounding you after their bait and switch approach.
Admit what? That when faced with “hey, spend money you don’t have, at a high rate of interest” they just have to do it? Sorry, but no. If someone thought they were getting over, getting free money, then woe to them.
If you couldn’t take responsibility and control yourself when you were spending the cash, at least try and do it now.
An example of this popped right into my head when I read your post- when I started back to school in 2002 (at age 32), the bookstore made you take out any purchase in a bag. And in that bag was an application for a hip and cool credit card geared just for students. I asked the manager and it turns out the school is paid by the credit card company to hand these out. I always reached in the bag and gave the application back to the clerk, saying, “No thank you.” They didn’t like it, but they couldn’t force it on me. I know younger students must have filled out some and are statistically likely to be over their head in debt by now. I did my time under the Visa thumb and learned my painful lesson.
They’re like the tobacco companies, these credit card people - hook 'em while they’re young.
I know exactly what you are talking about. It’s a trap. You really need revolving lines to build credit for good rates on mortgages, auto loans, etc. so you almost have to get them, but often times people abuse them once they do get them.