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Home > Ask The Get Out of Debt Experts > We Made Some Mistakes, Drained Our Savings, and Sinking Fast. – Mel

We Made Some Mistakes, Drained Our Savings, and Sinking Fast. – Mel

“Dear Steve,

Hi Steve, we are sinking. We have about $54,000 in credit card and personal loan debt as follows:

Capital One $14K
Discover $14K
Bank of America $11K
(I call these the Big 3)

Credit Union Visa $10K
Credit Union Line of Credit $4K

Monthly minimums total $1700.

The credit union accounts are cross-collateralized with an auto loan we owe $1300 on. They are current, and I stopped paying the others around Christmas. We would like to find some other way to take care of the Big 3 besides bankruptcy, if possible.

Like many others, my income took a tumble over the last couple of years, and so we’ve used the cards to live on. Through dumb moves like cashing out our retirement plan and borrowing from my life insurance, we have kept the Big 3 current until we stopped paying in December. I knew that they would not help us unless we stopped paying. We also needed to take care of some overdue car repairs and other things.

I checked my credit score about three months ago, and it was just over 700, and my husband’s should be about the same. We are now just under two weeks delinquent on the Big 3. We don’t have much they could take if they sued, as everything is covered under Colorado exemptions. I’m self-employed, and hubby is an auto mechanic. We live in a mobile home and pay lot rent.

I have been investigating as many options as I can. We have considered bankruptcy, but as we have no health insurance, I’m reluctant to pull that trigger just now. I want to save it as a last resort. We are both in our early 40s. We really do want to pay this back, but with the interest rates, we’re getting nowhere.

I read your book and love your plan A, but don’t see you mention it much now. Is that because creditors won’t do it? I’ve thought about a 5-year debt management plan because we can afford to pay at least half the monthly minimum.

I’ve also thought about trying for a loan from Lending Club and settling with the Big 3, or paying 2 of the 3 off. This option makes the most sense to me, but what I’m afraid of is that the Big 3 will see that we have this loan and will not play nicely and settle with us. We could wait a couple months before trying for the Lending Club loan to try to get them to play, but our credit would be worse and the interest rate higher, and we might not get the Lending Club loan at all…I don’t know how they work.

Sorry for the length of this, but since you are part of Lending Club, I thought maybe you could shed some light on whether they would be a good option for us. Thank you very much for everything you do. Please feel free to share this and/or post it online.

Mel”

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The Answer

Dear Mel,

Thank you for contacting me.

The real trouble spot here is the credit union stuff. While credit unions all want to be the warm and fluffy community banker, they have this nasty cross-collateralization agreement in their contracts tying all your debt together making it tough to get it cleaned up easily.

LendingClub.com may be a good solution if you could afford the monthly payments. But you’d have to apply fast. Your scores are dropping down near the cutoff point of 660 for a LendingClub.com loan. There is nothing preventing you from trying the small loan approach to resolve your debt situation with some quick settlements. If you work with one of the debt settlement providers I list it should be an easy and straightforward matter.

If seems that if you don’t try that approach then the subsequent solutions are going to be more problematic. They would most likely expose you more to being sued and potentially getting a wage garnishment.

In fact the approach I cite on my book is probably the pro-ratta method of paying what you can afford but in this climate it is not going to prevent you from the same escalation problems.

My suggestion at this point to to do three things.

  1. Read The Honest and Unvarnished Truth About How to Get Out of Debt.
  2. Find a local bankruptcy attorney and go talk to them about your situation.
  3. Contact one of the preferred debt settlement providers and talk to them about your situation.

After that, come back and let me know what you decide to do.

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

We Made Some Mistakes, Drained Our Savings, and Sinking Fast.   Mel
Get Out of Debt Guy – Twitter, G+, Facebook

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.

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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.
  • Kristin Witzenburg

    Another idea might be to go in and talk to your credit union about the entire situation. Sometimes they have programs — like Balance — where you can take financial literacy courses and get benefits. Also credit consolidation programs and credit counseling through a credit union are usually by a trustworthy non-profit. A cross-collateralization may be tricky now, but I’m sure the original process was meant to help you. I’d probably follow the same advice Steve recommends, and hopefully this additional idea about credit unions is helpful too.

  • Kristin Witzenburg

    Another idea might be to go in and talk to your credit union about the entire situation. Sometimes they have programs — like Balance — where you can take financial literacy courses and get benefits. Also credit consolidation programs and credit counseling through a credit union are usually by a trustworthy non-profit. A cross-collateralization may be tricky now, but I’m sure the original process was meant to help you. I’d probably follow the same advice Steve recommends, and hopefully this additional idea about credit unions is helpful too.

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