To clarify things, I have about $7,000 in credit card debt and around $3,000 in student loan debt. Yeah, I know that compared to most people, $10,000 is chicken scratch. But the big credit card ($5,000) has just gone to the collection agency (I got the letter today), and they want it all. Now.
There’s no way I can possibly free up $5,000 immediately. I’ve been unemployed for over a year, and just started a new job last week. I have a car in the shop now and I don’t know how much that’ll cost. I just moved to a new city.
On the assets side, I own practically nothing, unless a pile of mass-market books and 3-year-old computer software counts for anything. My car is in my mother’s name. I have no stocks, bonds, or securities. I don’t own a house. I have no valuable collectibles. Homeless people wouldn’t touch my wardrobe.
So what’s the worst that could happen if I declare bankruptcy? And what’s the worst that could happen if I don’t?
You should consult with a bankruptcy attorney licensed in your jurisdiction for definitive answers. IMHO I wouldn’t declare bankruptcy with the dollar amounts you’re talking about. The student loan debt won’t go away anyway (it’s a non-dischargable debt) so you’re talking about declaring bankruptcy over $7,000 which to me doesn’t make a lot of sense. What I would do is sit down and figure out how much of your monthly income you can afford to dedicate to paying your debt. After this is done, contact the collection agency and explain the situation (without discussing specific numbers) and see about working out a settlement or a payment schedule. It’s going to end up on your credit report anyway and IMHO it’s better for it to show up as either settled for partial or making payments than completely unpaid. Maintain minimum or better payments on the $2000 card and STOP USING IT. Pay cash for everything. If you don’t have the cash then you can’t afford to buy it, whatever it is.
And congratulations on getting yourself employed and starting to dig yourself out.
I think you may want to look into this a little deeper before declaring bankrupsy. As your debts are unsecured the lenders have very little recourse to get it back from you other than going to court or making payment arrangements. All the collection agencies will want to play hardball and threaten legal action, but with the amounts so small and you having no house or car they can’t do much. I’m not sure what the laws in your state are, but in PA there is no wage garnishment for unsecured loans. Student loans are a little different though, they can garnish your wages but just about everyone should be willing to make a settlement (pay maybe 80% and the debt is paid off) or arrange monthly payments you can afford. You can also try disputing some of the debts with the credit bureaus, this trick works some of the time. Bankrupsy stays with you a long, long time.
I have several friends who work with collection agencies so I have some second hand knowledge. At least for the company they work for, they always try to set up some sort of payment schedule. I definitely think that you should consider that to be an option, even if it says they want the full amount now. And I do think you should talk to someone who could mediate the situation, someone who is experienced with debt and bankruptcy and knows how to talk with the creditors. Good luck and Congratz on the new job!
I would also try and negotiate with the collection agency first. They buy the debt anywhere from 30 to 50% of the value, so they do have some playing room. Tell how much you’d be willing to pay, and over how long. I’m not sure if you can arrange this, and ask them to stop reporting it to your credit profile. Not only that, but if they call you at work, get their name, and ask them to not call you at work again. As for the student loan, if it’s due to hardship, you are able to apply for an extention.
And the effect this will have on your credit rating is where the real damage lies. Maybe not now, but four years from now when you want to buy another car, or house.
If I recall correctly, you can call the bank or credit card company, and offer to set up a payment schedule based upon what you can afford. Since that means they’d be collecting the money directly, it’s worth it to them to collect from you rather than having a collection agency pay them a percentage of the debt. If you do so, then call the collection agency and tell them you made arrangements with your original creditor–they legally cannot keep contacting you and try to strong-arm you for the money.
You do not want bankruptcy on your credit report, I’ve been told it will f*k you for life when you eventually want to buy a car or house or do any sort of buisness that requires a credit check.
Of course, all of this is second-hand knowledge, so YMMV and all that jazz.
Mixie, depending on the creditor they may or may not be willing to set up payment plans. I work in collections for my company and we don’t set up payment plans on accounts which have gone to a collection agency. We’ve already contracted and paid for the collection process on these accounts and if the customer pays us we still have to pay the agency so it’s not worth it to us to maintain the records of the payment plan.
Bankruptcies will remain on one’s credit report for up to ten years. You are not screwed for life but getting a loan or mortgage will be difficult. Ironically, some creditors (especially Sears from what my bankruptcy prof told me) will issue credit almost immediately after you file bankruptcy, because they know you can’t file again for seven years.
I agree that you should consider trying to negotiate a settlement. However, bankruptcy is not the end of the world. I know two different people who filed bankruptcy who a) purchased a car within a year or b) a house within 2.