Last week the M-Network rolled out a new feature: Ask the M-Network. This week, we’re going to answer a question about debt from one of my readers.
Sandy wrote,
“Hello–what can a person do who is saddled with about $85,000 in unsecured debt
and whose income has reduced to $1,000/month with no increase in sight for at
least 10 months? Creditors are closing in but are not agreeable to waiting that
long. What can I realistically expect? Is it possible to avoid bankruptcy or can
a person be FORCED into bankruptcy? I think bankruptcy is a cop-out, but I need
to know what can happen if I don’t file.”
There were a wide variety of responses from the members of the M-Network.
David from My Two Dollars answers:
I think it’s important to know if this is credit card debt or some other debt – there is a big difference. If credit card debt, then you might want to think about going to a consolidation company who can work on your behalf to cut your interest rate and combine all those bills into one smaller monthly payment. Not all of them are scammers, as my Aunt used one a while back, but you should check them out first to make sure they are a good company. As for bankruptcy, no one can force you into it – but creditors will not stop asking for their money either. So it would be best to either A. consolidate, if possible, to at least minimize what you have to pay out each month, or B. think about filing for bankruptcy to get out from under this pile. I am not a big believer in bankruptcy as I feel it is a cop-out as well, but in your situation it might be your best choice. If you stop making payments, your credit will be ruined just as if you filed for bankruptcy…except if you don’t file, they will continue to ask for their money. There is no winning by stopping payments without bankruptcy or consolidation, so if that is all you can do, then go for it asap.
However, with that being said…would it be possible for you to start maybe finding a different way to make some money in the short term? Could you sell off some assets? Start a money-making hobby (crafts, etc)? Could you maybe tutor part time? I would examine any and all means of making money each month before doing anything drastic. You didn’t say why you only would have $1000 in income each month, but if there was a way to make even a little more, it could go a long way towards helping your situation. Also, by making smaller payments throughout the month to your creditors, it makes it easier to make the minimum due. Something to think about.
Good luck!
Plonkee says:
When you’re in a hole, you need to stop digging. I’m sure you know that, but you might think that it only applies to taking on more debt. I think there’s more to it than that.
With $85000 of unsecured debt, what are your minimum repayments? Credit cards (or other revolving debts) usually have a minimum of between 2% and 5% of the debt per month, but 2% of $85k is $1,700 – more than your income. Unsecured loans are generally don’t have terms lasting longer than 15 years and even at the best interest rates you’re looking at more than 60% of your small income going towards debt repayment. Don’t forget that you still have to live, and eat and house yourself with your income, and being homeless or starving is worse than being bankrupt.
Do as much as you can to increase your income – sell stuff, take on more work, get a lodger, whatever is feasible. Make a budget, prioritise your bills with taxes, housing, utilities and food being put ahead of everything else – including your debt – and economise wherever you can. This will prevent the hole from getting deeper in ways that are far more difficult to escape.
Without a serious increase in the amount of income you have, and barring any other information you probably only have two choices – filing for bankruptcy or negotiating with your creditors and getting them to reduce the payments they want and/or write off a substantial portion of the debt. One issue with the latter is that debt write off can have tax implications in the US. A consumer credit counseling service may be able to help you decide your best course of action – discussion sessions are usually free, but they will want to know full details of all your debts, your income and expenses in order to help you decide what to do.
I firmly believe that going bankrupt is not a cop out – it is often the only practical solution to debts that are arithmetically impossible to pay off. You are where you are now, and there’s no time machine to change things for you, just make the best choice that you can. Whatever you do, don’t ignore the debts, or run away – they won’t disappear and creditors can usually force you to file for bankruptcy anyway.
Gibble from Gather Little by Little has this to say:
Wow, I can only imagine how you must feel looking at a pile of debt that big. First thing, understand that you got yourself their and it’s your responsibility to get yourself out. Also know that while the pile seems big, you can and will overcome it. You will just need to really focus and make some significant life style changes.
How to deal with this:
1) Recognize that you don’t just have debt problem, you have an income problem. You need to get more income. Deliver Pizzas, work retail, start side business, etc. Do anything and everything you can to find extra work. That may involve working multiple jobs, but you need to get your income up.
2) Sell as much as you can. Of course I am assuming, but if you’re like I was many of the things you have were bought using that debt. Here’s what I would (and did) do I was in your shoes: Sell it. Take a hard look at your stuff and determine what you need vs what you want. Sell everything you don’t need and use that money to pay on your debt. Have a house and mortgage where you have equity? Sell your house and rent. Use the equity to pay your debt. Have a car? Sell it, use the profit (assuming you have some) and pay on your debt. Buy a cheap “beater” to just get you around. See where I’m going here?
3) Move that debt to low of 0% interest rate cards. Interest will just keep adding to your already huge pile, so eliminate interest as much as you can.
I would consider bankruptcy and absolute last option to do. Even with bankruptcy, I still feel people owe the money. Bankruptcy just protects you from law suits. Also, depending on the types of debt all it may not just go away with a bankruptcy. They can get a bit complicated.
Do everything that you can to begin making payments on your debt and get caught up (selling stuff may do this), then increase your income so you can make the payments, then try to up the payments as much as you can. It’s going to take time and focus, but I promise the journey will be worth it!
And Paidtwice adds:
Oh, and as to the “what can happen if I don’t file bankruptcy” part of the question – depending on the type of debt (most if not all, really) your creditors can sue you to get it back. Put a lein on property you own as well. I don’t generally jump up and down and recommend bankruptcy, but if you are in a completely untenable situation, it is something you need to look at.
Please consult a professional, not-for-profit debt consolidation type service (a reputable one, not a random ad on the internet) – they will give you the lowdown on your situation and if bankruptcy can be avoided.
I hope these answers helped you out a little bit, Sandy! And I’d like to echo Paidtwice in that it might be wise to consult with a professional or reputable not-for-profit debt consolidation company before making any big decisions.
Do you have a question for the M-Network? Contact me with the subject “Ask the M-Network, and your question might be featured on Being Frugal.net.
And please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a certified financial expert as needed.
Photo by SqueakyMarmot.
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David’s answer where he states “as to bankruptcy…no one can force you into it” is completely incorrect.
While involuntary bankruptcies are unusual they do occur, and they are perfectly legal. If a debtor has 12 or more creditors, an involuntary petition needs at least three creditors who are owed a minimum of $10,775 in total. If there are fewer than 12 creditors – aside from employees, insiders and anyone getting preferences – only one creditor owed at least $10,775 is needed.
There is a great book by Gerold Mundis based on the 12 Step DA System- called How to Get out Of Debt and Stay Out of Debt which goes into multiple strategies for dealing with your creditors -
If your reduction in income is due to unemployment or disability, make sure that you don’t have any insurance on your debt that covers those conditions. When we found out that my dad was going to be permanently disabled after he successfully overcame brain cancer, the insurance that they had on some of their credit cards froze those cards a year, giving them some time to get ahead.
I had to use a consolidation company a few years ago. They stopped the over limit and late fees that were killing me and decreased my interest to around 5%. ( was getting $150 in fees x3 cards + 30 % interest every month). And really, this made a world of difference and made getting out of debit manageable.
There’s a lot more I would caution about using those services. I didn’t research consolidation firms well and had several problems with the service I used. For instance, they required as part of my payment that I give them a “donation” that they said was tax deductible but wasn’t. (I earned too little and didn’t own property, so at the time itemizing my deductions actually cost me more.) They also seemed to have a lot of fees, but switching consolidation companies does not impress your debtors so I was stuck with the service I had. In conjunction with my dissatisfaction of the service I used, I also didn’t realize how much work was still required of me to make the service effective. You need to follow up with all of your creditors to make sure that they accept the terms of the service–we spent months getting declined from one creditor before we realized they wanted a budget from us before they would accept the payment terms. You are still responsible for payments until the terms are accepted and you have built up enough payment with the service that they start sending out payments.
If you get to the point where you’re getting a little ahead and are able to pay more money toward your debt, pay it directly to the card instead of to the service. And also, if you come in to some cash and are close to what you owe, call the credit card company and see if you can settle. Only do this if they’re able to give you a good deal because it will be noted unfavorably on your credit.
Does anyone know where I can find free online applications for student loans?