Ed Is Scared But Courageous In The Face Of His Debt

“Dear Steve,

Let me start by saying it has been very hard for me to get to this point and ask for help. I hate that I am where I am financially (due to factors both within and not within in my control). I’m 45 years old and for most of my life used to stay very on top of my accounts.

Now, I have approximately $41,000 in credit card debt (two different Amex cards at max interest rates, i.e. 27%), and I’m cosigner for a mortgage and home equity loan with my girlfriend. The home equity loan was used to help my girlfriend buy a business (I know, I know, BIG mistake. Lesson learned) that ultimately didn’t work out.

Anyway, the mortgage is $1550/mo (which was just recently reworked because we were more than 30 days behind so they let us skip a month and start over), and the home equity is $900/mo. Except for the mortgage and home equity loans, we predominantly haven’t been more than 30 days late (except sometimes for cell phone or water bills).

I’m guessing this is enough information for you for now (on a positive note, both cars were recently paid off, mine was used, hers was new).

I’ve been reading online about different options between debt settlement and bankruptcy. Between reading about the pros and cons and trying to sort out the facts and which companies are legitimate, is it better to go with debt settlement (and still have to pay half of what I owe plus (my guess) approximately $6,000 in fees) or stand a chance of wiping all the credit card debt via bankruptcy for whatever fees that may cost?

At this point (even though my credit score is still around 670, not great but not terrible), I don’t care about not having credit cards or my credit report being “marked” for something like 10 years. With the cash this would free up, who needs credit cards? Thanks so much for taking the time to read this and I’m looking forward to your response.



Dear Ed,

Thank you for being brave enough to write me about your situation. Asking for help is not a sign of weakness, it is actually a sign of responsibility and strength. The minute you can lean on others then it allows you to open up for more information and different points of view that you may not have otherwise had. That will allow you to make a better choice on the solution path you choose.

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There is no need for me to lecture you about the lessons learned here about financing a business. I think you learned more from the experience than any expert or book can ever teach you.

I’m glad to hear the the mortgage company allowed you to make an arrangement to get back on track. It is unusual for a mortgage company to be so understanding and reasonable. You are a lucky guy.

Debt settlement and bankruptcy are not necessarily tools used to solve similar situations. There are two approaches to debt settlement. One is when you have a lump sum amount of money on hand that you can use to negotiate a settlement in one fell swoop. That allows you to put that debt behind you and move on. It does blister your credit report but it is not bankruptcy.

The second use of debt settlement is when the consumer stops paying their creditors and makes monthly payments to a debt settlement company. The company then accumulates the monthly payments until they have enough on hand to settle a debt. The problem is that in the meantime the consumer is getting collection calls, notices, pressure, and could actually be sued by the creditor.

This approach to settling debts seems to drag on the debt situation for a longer period of time as money is accumulated and offered in lump sums to creditors. Actually this approach could hurt your credit for longer since negative information would be reported on your credit report for almost seven years from your last payment on the last delinquent account.

Bankruptcy is not necessarily a debt reduction tool for those that have the money on hand. It is a legal process to reduce or eliminate debts through the courts. If you go to see a bankruptcy attorney for a free bankruptcy review and decide to go the bankruptcy route then you may have to do a Chapter 13 bankruptcy, which is a payment plan over three to five years, or a Chapter 7 bankruptcy which would wipe the unsecured debt out. The choice of Chapter 13 or Chapter 7 is going to be guided by your bankruptcy lawyer and the statues.

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If you went and had to do a Chapter 13 bankruptcy your credit report would take a hit but it would be reported for seven years from the date you filed bankruptcy. That would probably end up being less time than the monthly payment debt settlement approach.

If I had to prioritize the three possible options I would rate lump sum debt settlement as the preferred solution, bankruptcy, and last the monthly payment debt settlement.

Don’t forget that the amount of debt forgiven in the debt settlement approach must be reported as income and you will have to pay income tax on that but you don’t have to pay tax on forgiven debt in bankruptcy.


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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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