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Should I Go With ClearPoint Credit Counseling or File Bankruptcy?

“Dear Paula,

I am at a crossroads with deciding between debt consolidation with a reputable lawyer in Manhattan, Clearpoint Consumer Credit Counseling, or taking a loan from Lending Club to resolve my debt. I realize I should have done something about this sooner but I always thought “things will change” – however, that’s not happening and I’ve finally come to terms with it.

I live in NYC, I’m in my mid-30’s and I, like many others, was greatly effected by the nation’s economic downfall leading to on and off unemployment since 2009. Years before that I had incurred alot of medical expenses and made bad choices in my 20’s. Hence, a $31K credit card/student loan debt.

I stay in this city because, for what I do, it is the best place to find work that pays a fairly decent salary. However, since 2009, I have not been able to find full-time work, only short-term project based jobs, to keep me afloat. By the time I pay rent and my monthly credit card payments, I have little left for savings or to pay more than the minimum amounts owed. I am basically working to pay my minimum payments.

I am $31K in debt, and have been carrying this with me for too long. I pay almost $900 in MINIMUM credit card payments a month, and my interest rates are the highest they could possibly be (some 24%+). I do have one card with a 12% interest rate and another that is at 0% and closed which I just make an automatic payment on. This 0% card is my highest balance card, totaling 50% of my debt, so I’m lucky in that respect. I would be fine if I could just get down the other 50% of my debt (15K), which consist of several cards, a retail store card and a student loan.

My credit score is 705 so it’s not that bad, mainly because I am 100% positive on making my monthly payments, having never missed a payment.

Clearpoint Credit Consumer Counseling Services said they can only lower interest but I am not sure if that means it will also lower my monthly payments, which is what I really need to happen. I need more disposable income.

I have been told my debt isn’t high enough to claim bankruptcy. The debt consolidation option with the lawyer requires me to start becoming delinquent with my payments so they can negotiate with my creditors. That scares me as my timely payments are the one thing I have going for me. Is this smart to do?

I am about to lose my job again, working for a large firm facing layoffs. I can’t catch up.

What would you do in my situation?

Thanks,

B”

Dear B,

I’m going to start with the end of your question and work backward. First and foremost, there’s no such thing as having “too little debt” to go bankrupt. Was it an attorney who told you this, or was it one of the companies you mentioned in your question?

When it comes to qualifying for bankruptcy, the ratio of your debt payments to your available monthly income is what matters most, and that would determine whether or not you would be eligible for a Chapter 7 (discharge of debts that wipes out everything but the student loan) or Chapter 13 (where you pay a percentage of the debts over 3-5 years and then the rest is wiped out) would be best for you.

You say you pay rent, so I’m assuming you don’t own real estate. You don’t mention a car and you live in NY, so I’m gonna make another assumption (you know what they say about assumptions, so bear with me) that you don’t own a car either. And you say that the one credit card at zero interest makes up nearly half of your debt. Which means your student loan debt (the one thing that wouldn’t go away under a bankruptcy) is less than 15,000 (although you didn’t indicate how much of your total is student loan debt).

So, I have a few questions for you to ponder. First, any consolidation or loan company that would enter into an agreement with you when your income is unstable is not the best reputable company in my mind.

If you miss a payment because one month freelance work is low, it can seriously effect your credit or bump you out of the consolidation program. In addition, many consolidators don’t always (not saying it’s true about these guys, because I don’t’ know them from Adam) pay your creditors by the due dates, which could also impact your credit.

So do you want to join up with a company that can take your money for their fees and then pop you out if you miss a payment? And as you said, one where you have to miss payments to get them to work with you if on-time payment history is important to you.

Next, I’m assuming that it’s with the freelance income you’re able to pay the $900 worth of minimum payments AND your rent. Not knowing how much your student loan payment is every month, my next question is: if you didn’t have those monthly debt payments (minus the student loan payment you make each month), would you have some breathing room? Do you wind up charging up your balances more when you’re unemployed, to make ends meet? If so, you’re caught in a wicked cycle.

I’m not advocating bankruptcy willy nilly. It’s not always the best choice for everyone. But it sounds like the debt, and the cycle of being unemployed and then trying to make ends meet hunting down freelance work, is creating undo stress for you.

I’d recommend going to see 2-3 bankruptcy attorneys for a free consultation, explain your situation and then see what they offer as options. Not knowing how much you make each year, or how much you’ve made in the past six months (which is the look back period for determining your “income”), bankruptcy or may not be the best financial option for you.

You can click here to find a local bankruptcy attorney in your area.

I can hear that you truly want to make good on these debts. And you can always go back and repay them later, once you’ve gotten back on a stable financial footing and built up some savings. But right now, making sure you can pay your rent and have insurance and food on the table without having your credit card balances grow and grow and grow each time you’re unemployed is more important to your mental health.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

As for taking the loan from the loan company – it’s never a good idea in my mind to “borrow” to get out of debt – unless you’re borrowing from family and doing it as a draw on your inheritance, where it won’t impact your relationship with family members, I don’t generally recommend swapping one debt for another.

As for consolidation – before you go this route, call the creditors with the high interest – ask for the “workout department” – tell them you know that you’re not delinquent and you’d like to stay that way, so you’re asking for their help. Tell them that you’re considering debt consolidation and bankruptcy – tell them that what you’d really like to do is get them to lower your interest rate to 3%-4% so you can make your payments and actually make some progress on paying them off.

Most creditors won’t do this directly for you unless you are already 3 months late – so ask yourself – is it better to be a few months late and create a new payment plan with them or is it better to have a perfect payment history and be stressing out. Two years from now, the small dings of late payments will not have any impact. Your credit score is just a number. It’s better to do what works best for you financially, with the knowledge that you’re attempting to pay them, rather than force yourself to pay more than you can comfortably pay.

I’d still recommend talking with the bankruptcy attorney first. Good attorneys will help you weigh all your options, review your salary, and any non-exempt assets you may have and walk you through the pros and cons of all your options. I would be glad to do the same with a Financial Strategy Session over the phone. Check the coaching options on my website for more details if you want to go that route.

Paula

Paula Langguth Ryan wrote Bounce Back From Bankruptcy (now in its 4th edition) the book that’s recommended by 5 out of 5 consumer bankruptcy attorneys and trustees nationwide. To know if it’s time to file bankruptcy, or what to do after bankruptcy to rebuild your credit and your life, visit Paula’s Bankruptcy Tools section and check out the Life After Bankruptcy Monthly Member Support Group, our books, and our free How to Know If It’s Time to File and How to Travel Without Credit reports at www.newcreditafterbankruptcy.com and www.paulalangguthryan.com

Paula is a debt industry professional who has volunteered his time to help answer reader questions.

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