“Dear Steve,
Yesterday a very dear family member came over to ask for some debt advice. Because my husband and I are the only ones in the family with sound financials (we are both 30, live in Manhattan, have zero debt, and are about to buy an apartment where we are putting a minimum of 20% down with a less than 3.1% interest rate because my lowest credit score is an 802), so our friends and family alike often come to us for advice.
I was aware that she (aforementioned dear family member) was in debt, but yesterday I got (most of) the full picture and it is GRIM. Though she has more lines of credit with outstanding balances than she can count, the most pressing one right now is with Macys.
Three years ago she made a conscious effort to get her debt in order and she entered an agreement with Care One to set up debt payment for four of her accounts. For three years she has never missed a payment and has been dedicated to paying this balance down, and has paid one off entirely, and is very close with two of the other three.
She works in early intervention education, and her income is directly related to the amount of cases her firm can pick up and assign to her. She has been doing this for years, and is aware of the typical/seasonal ups and downs, and has been fine with managing the income variances for three years.
But, over the past few months she has been hit with 2 financial hardships: #1—Hurricane Sandy (she lives on Long Island) and #2—Because NYS is going to be cutting significant funding for Early Intervention Education counseling, she will not be getting back those hours after the start of the New Year (which is typically a more busy time for her field).
I went through her paychecks, her taxes, her bills, ect (she also takes care of her elderly parents that have very little income, so she often covers their expenses as well), and have discovered that she is making approximately 66% less per month than she was making at her busiest times, and that her expenses exceed her income by a minimum of $500 every month (these expenses include the $545 she pays to Care One every month for her payment plan).
In light of her new (and desperate) financial situation, she called both Care One and the companies to which she owes money. After hearing about Hurricane Sandy, both Chase & HSBC (two of the accounts being paid off through Care One) waived her payments for Nov—I am not sure if it extends the life of the loan payment, but it was relief because she lost work for two weeks and had nothing to give them. But, the third account, a Macy’s Visa, is proving to be extremely troublesome. They will not budge at all, and des pite her income decrease, expect her to pay that $379 month no matter what (which is now about 30% of her monthly income).
As I am sure you are aware, Macys is notorious for harassment (by both phone & email), uncapped interest rates, and for accepting ONLY ONE payment plan on an account for the life of that account. She has already missed one payment (Nov 17th), and when she spoke with Care One again yesterday, they advised that if she misses another Macy’s will consider the account in default and then the balance will balloon even more.
The three of us (my husband included) sat in our living room yesterday and brainstormed about our options:
#1—Debt consolidation loan
PROs
A. Macys will be paid off and their 30+% interest rate will be tames
CONs
A. Because of her extremely poor credit (below 600) a debt consolidation loan will cost her more in the long run, and may even charge her more (or the same interest) as Macys. We found a few places that run between 27-30% on 1-5 yr loans.
B. Debit treadmill that could get her into more trouble down the line
#2—Let the loan go into default until Macys writes it off as a “charge off” and sends it to a Third Party Collections Company
PROs
A. Can settle for less than the amount owed, eventually (40-50%?)
B. Provides immediate relief for the current $379/month solution
C. Creates a shorter term solution than a 5yr Debt Consolidation Loan
CONs
A. Credit Score will take a Significant Hit (100+ pts)
B. Macys will harass her for the 90-180 days until it is charged off (can send cease & desist letter)
C. Third Party collections company will harass her after Macys (can send cease & desist letter)
D. Macys may not let her settle (I have not found any solid evidence of macys settling or not, but, because they are so predatory and inhumane in their credit practice, I am assuming worst case scenario)
So, now that you have the full picture, here are my questions.
#1—Are there other options that we are not aware of that will help her get Macys to budge?
#2—Do you have any information regarding Macys Visa behavior after an account is moved to collections? Is there a likelihood that they will settle?
#3—As I am sure you can tell, I am no finance/debt guru, so any advice you can offer would be really super helpful.
Please note that because of the payment deadline with which we are dealing. Thank you so much!”
I’m not sure how much debt is remaining but the situation typifies the problems of an extended repayment plan, life changes.
While it’s nice the two banks waived the one payment, her situation is going to last for much longer than a month.
We need to look at her situation under a new light considering her impact by Hurricane Sandy and the loss of hours.
The logical approach here is to evaluate the situation anew based on projected income and expenses moving forward. Not only has her income reality changed but also the impact of the terrible storm.
From what you’ve shared bankruptcy is a reasonable option as well and would be the fastest way to deal with the debt and allow her to move forward and able to deal with her new income reality. You can click here to find a local bankruptcy attorney and the directory lists a really great guy in New York who is terrific.
I would have her talk to the bankruptcy attorney before making any rash reaction. We need all the facts here to make a well informed decision.
An unsecured debt consolidation loan is available through LendingClub.com. But it’s not at all clear based on the current circumstances if it is reasonable to expect she would be able to service the loan.
And with the Macy’s default approach, while a possible solution, I’m not sure loading her up with lawsuit threats and collection pressure at this point helps her life when compounded with the other stress. Even if she was to try to settle the debt by defaulting, the best settlements are available to people who can make one single settlement payment or just a few. It doesn’t sound like she has those resources available.
So I come back around to bankruptcy again. It would stop/prevent all collection activity, most likely discharge her debt in less than 90 days, and give her a better opportunity to move forward and live within her current income.
I’d suggest you first read How to Get Out of Debt. The Honest and Unvarnished Truth and The Truth About The Success Rates, Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy. They will give you a great overview of what we need to deal with to get you moving in the right direction.
Then use the free How to Get Out of Debt Calculator to review your options.
Once you’ve identified a company you want to work with, then follow my step-by-step guide on what you should look for and expect from a good debt relief company.
Please post your responses and follow-up messages to me on this in the comments section below.
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