I am receiving social security disability insurance (SSDI) and got abandoned with a mortgage back in 2007 that went into foreclosure. I know I can’t get the foreclosure removed but I have been diligently trying to pay off all of my outstanding debt, charge-offs and the ones that report a zero balance but the collection agencies keep contacting me about them by mail. I am scheduled to be done paying all of my debt off in November 2010.
Is it true that my credit score will suffer even more by me paying back all of my debt? Will this prevent me from obtaining another mortgage in the future? How do you still get punished for doing the right thing?
Am I doing the right thing by paying back all of my debts?
Your question is a great example of the confusing crossroads that many people find themselves at when they have financial problems. Your situation is a mixture of a moral dilemma and a practical approach.
From a moral point of view, many would agree that you are doing the absolute right thing by honoring your debts. However, if you pursue this path you should do it because it fulfills an emotional or spiritual need and not one where you hope to be praised or rewarded by your creditors.
It is absolutely true that this course of action can result in negative information being reported about you for longer on your credit report, especially as accounts are passed around from collection agency to collection agency. I urge you to get a copy of this consolidated credit report to see what is being reported about you on all three credit reports. This special consolidated report will show you how to boost your credit score by taking specific actions.
While your delinquent accounts should not be reported for longer than 7 years on your credit report the clock gets a bit screwed up when a collection agency takes on a debt and then reports it again on your credit report. It can look like a new debt and start the clock all over again.
It concerns me that you mention you are getting collection activity on accounts that you thought were a zero balance. I’m hearing from more people these days that they are being chased for debts they either paid off or no longer owe. The sad reality is that usually these debts are so small that it is cheaper to pay the collection company the small balance than it is to try to fight them. That does not make the practice right or just, it just happens.
I’m also concerned by the old mortgage lingering over your head. If you were a joint account holder on that mortgage than you could be in for an awfully big default bill from the mortgage company, even after you finished repaying your small debts in 2010.
I’m not sure how long you can or will be able to skim money from your SSDI income to devote towards debt repayment. A key question to ask yourself is what kind of situation are you left in a day to day basis by using some of your disability income to repay your debt with.
If you are unable to save money, you are living in an unsafe area, you are not able to pay for adequate utilities or you are not eating properly because you can’t afford it, then I think we need to take a good hard look at the path you are on.
While you have a burning desire to repay your debt, you also have a responsibility to be able to properly and safely care for yourself on the income that you have. That means, that even though you may want to repay your debts and do what you perceive to be the ‘right thing’, it may actually not be the best thing for you to do to do the ‘right thing’ for your future.
It is very possible that you can get these small debts paid off by 2010 only to be faced with the larger mortgage deficiency debt. If that’s the case then all the hard work you put in to repaying your smaller debts may have been for nothing since the mortgage debt may be larger than you’ll ever be able to repay on your disability income.
If your goal is to be able to get another mortgage in the future, you could be better off by filing bankruptcy now, discharging all of the debt, saving any extra money each month towards a down payment on a home in a couple of years and starting over.
It is more likely that you will be able to get a new mortgage as long as you don’t have an active, delinquent, and old foreclosure debt still after you.
So you asked if you are doing the right thing, the answer is ‘yes’ if what you want to do is morally honor your debts but probably ‘no’ if what you want to do is be able to get a new mortgage in the foreseeable future or start working to improve your credit report and credit score as soon as possible.