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I’m a Lawyer and Drowning in Debt. – Paula

“Dear Steve,

I have approximately $50k in credit card debt. My interest rates and limits have recently skyrocketed and I cannot make the minimum payments. Although I am current on all bills (this will last for about 1-2 more months), as my savings have been depleted. Right before graduating from law school in 2008 I was laid off from a very well paying job and remained out of work for about a year. I have now been working for about 8 months but at a much lower salary.

I have done substantial research on debt settlement companies and I am considering going with a performance based company, so payment made after settlement, although total fees still very high. I have also spoken with a local bankruptcy attorney (its seems I don’t qualify for Chapter 7) and Chapter 13 would have me repaying for 5 years plus it stay s on my credit for 10 years after completing the 5 year repayment.

I recognize that none of my options are ideal, but I would like to minimize the negative effects on my credit as I would like to continue to pursue job opportunities and potentially sell my home and purchase another one within the next 5 years.

My current credit score is okay — 600, 680, 690. I understand all tax implications but I am currently considering using my 401K to pay off a couple of accounts and have money to make the monthly payments on a couple of other accounts, but I don’t have enough to pay off all the accounts.

Since bankruptcy seems to be out the question, as I am not willing to give 15 yrs of negative reporting, should I take the chance of using a performance based debt settlement company for the next 3 years? or pull money from my 401K and then attempt to settle one large credit card on my own for less of a negative credit hit?

Paula”

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The Answer

 

Dear Paula,

Hopefully I can prevent you from making a huge mistake here. As far as taking money out of the 401(k) I think you need this other post I wrote today, Should I Cash Out My 401K to Pay Off My Credit Card Debt? – Angie. I think that sums up how I feel about robbing the 401(k).

I think you are a bit confused on the credit reporting thing with bankruptcy. A Chapter 13 bankruptcy is reported seven years from the date you file, not the date it ends. But if you do a debt settlement you will need to fall behind on your debts and they will be reported negatively for seven years from the date of default.

I’ve written so much about the problems with the debt settlement industry today that I hate to write about it all over again. Just search debt settlement on this site and you’ll see tons of posts about how consumers get royally screwed with debt settlement.

Bankruptcy does not mean you will not be able to get a mortgage and get future credit. And as far as having a bankruptcy on your credit report while looking for a job, imagine what it would look like with all of your accounts delinquent and then some written off as bad debts because you are in debt settlement.

And since you went to law school and have an interest in the law wouldn’t you rather pursue a solution that gives you rights and protections from your creditors, bankruptcy, rather than one that leaves you exposed to lawsuits and aggressive collectors, debt settlement?

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

Big Hug!

Im a Lawyer and Drowning in Debt.   Paula
Get Out of Debt Guy – Twitter, G+, Facebook

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

I'm a Lawyer and Drowning in Debt. - Paula by

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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