I answer many reader submitted debt and credit questions that are submitted to my site using the “Ask Michael” feature. From time to time I receive enough information of someone’s current hardship, as well as a clear picture of monthly cash flow and bills, to be direct with my feedback, rather than offering generalities with my own follow up questions to the reader. That is the situation with the reader submission I will break down below. My feedback about being disabled with 50 thousand dollars of credit card bills is often going to be candid, and hopefully instructive to anyone who thinks they are doing the right thing, by trying to avoid bankruptcy. But there is a little more to go along with this persons situation that may suggest there are more things than bankruptcy to consider. The reader clearly believes bankruptcy is not an option, but I would not rule it out.
What follows is the complete reader submission broken into smaller parts. I add my commentary in the same way I am thinking when I read something like this for the first time, which is usually several times a day. I am highly interested in what others see as the best way to manage the situation given the limited options.
“I hope you don’t mind me writing, but I thought I would tell you a little about my debt predicament that I am currently faced with, and perhaps you may be able to offer some advice as to how to deal with my situation. Without getting into too many details, allow me to give you the abridged version.
I have $50K+ in CC debt on numerous accounts; $35K in savings (yes, I am technically insolvent); I am on long term / permanent disability ($1127/mo.) and in a low-income bracket. I am now spending about $1100 a month in CC payments and at that rate my savings will be depleted within 3 years (not including emergencies). BTW… nearly all my SSDI goes to paying rent, which is another horror story of its own.”
I immediately can see that this person will not benefit from consolidating debt with a credit counseling agency in order to have one lower monthly bill. At best the consolidated monthly payment on 50 grand of credit card bills is going to be $850.00 a month (that does not include any fees). And it is equally pointless to try to get each creditor to agree to hardship payment concessions that may mean the credit card payments combined would be as low as $833.00 a month.
In under 30 seconds I know my feedback to this reader will focus on filing bankruptcy unless I learn something suggesting that should be avoided (forced liquidation of nonexempt assets and other limited circumstances). But that is not the gimme I thought it would be when I read further.
“I need to restructure the debt through consolidation or haggle with the [credit card] companies until they either offer a significantly reduced settlement/payment plan or take the risk of stopping payments for 6 months and having it go into collections — and hope I do not get sued in the process. Ideally, I would like to stop payments, ignore their phone calls, and wait until 5-6 months to see what kind of settlement offer they propose by mail.”
Someone has read through my article series about negotiating and settling directly with credit card lenders, but somehow missed out on the better approach being calling and talking to creditors along the way. Not all credit card issuers are going to send a reduced lump sum settlement offer in the mail. That type of expectation is now very 2010.
You absolutely must be behind with payments before any major bank will typically talk to you about a balance reduction. And there is next to no point in talking about what that lower payoff amount might be in the first several months of missed payments (there is a very small list of lender exceptions). I hope this will change in years to come.
Swayed to thinking that settling debts is the better path?
You would think that this situation calls for settling the credit card bills in the first stage of collection (dealing mainly with creditors and lenders internal collections staff). I could make an argument for it, but I am not ready to yet. Are you?
“What I am very curious to know is if the credit card companies will need documentation to verify my income if I get into any type of negotiations? I ask as on many of my recent cards which I established, I did not provide accurate info about my income; although I did provide accurate amounts with my 2 largest creditors (owing $11K each), both of which accounts I have had for about 20 years. With that said, as much as I would like to file for bankruptcy, I now realize filing ch.7 is not an option, combined with given what I have left in savings.
As you can see, I got myself into a real mess, and don’t want to find myself being prosecuted.”
Now we get into an area where I will often encourage someone pick up the phone and talk with me. Because all of my reader Q&A is public, I will generally stay away from questions I know I would never answer openly on the internet, even anonymously. That said, I just do not see many instances of people being prosecuted for credit card application embellishments. I would still want to know who the banks are, the balances, when the accounts were opened, and the type of account activity leading up to payments being missed, or that would soon be stopped.
Knowing the account history often helps me convince someone their fears of being prosecuted are overblown, or that perhaps later lump sum negotiations will be difficult. I will generally encourage talking directly with an experienced chapter 7 bankruptcy attorney for feedback about what they see a specific group of creditors contest to in a creditors hearing near the end of the chapter 7 process.
As for income and other forms of documentation being required to negotiate, those requests are not common when settling credit card bills with original lenders, though I have used documentation of hardships to get extra ordinary debt reduction, and one particular large credit card lender has recently taken to forgiving balances in total when there is every reason to believe the debt has no chance of being paid.
When to do nothing about your credit card debt
Doing nothing about your debt is an actual strategy. It can be a temporary strategy, but is also a long term approach for folks who are judgment proof with limited or fixed income and low to no assets.
“I would also like to say that I no longer care about my FICO; restoring it is not a priority in life. I stopped driving 20 years ago due to health matters; I will not be buying a car, home, etc. To be honest, I do have a variety of health problems and who knows if I will still be around 3 days from now, let alone 3 years.
Thank you for taking the time to read about my situation. Which is my best course of action to deal with the credit cards I cannot afford?”
So here I am. All of the quoted content above was what I received from the reader in their Q&A submission. I know where my feedback will be focused when connecting with someone like this off line. But I am hoping to solicit others opinion by voting in a pole about the best course this person should take in order resolve the 50k credit card bills.
My goal with the pole is to share the results in a future piece about the morality of debt and credit, and whether, or how much, we all should care about our neighbors behaviors in this regard.
What would you suggest be done in this persons situation? Please click this survey that consists of the following bulleted options and vote: https://www.surveymonkey.com/s/DMMTDRV
- Use the 35k to pay down the debts so that monthly payments could be reduced to as low as $250.00.
- Use what could likely be between 15 and 25 thousand dollars of the 35k to settle debts.
- Stop paying the bills and do nothing until cash reserves dwindle to point of meeting chapter 7 bankruptcy exemptions.
- Stop paying the debts and do nothing… forever, if judgment proof.
There really are no right or wrong answers. I have seen situations like the above play out in all manner of ways. It is what it is when there is more month than money, and more obligation than time left to meet them.