Dear Liz: I was hurt on the job and was fired. I have a lawyer helping me fight the company, but I have no income and I’m being haunted by collection agencies. I owe $5,000 on credit cards and have a student loan that started at $20,000 but is now $30,000. I was thinking of filing for bankruptcy. I have nothing, and I feel bad all the time. I can’t afford Christmas or birthday presents or find a job that I can do. Any advice would be helpful.
Answer: Bankruptcy could wipe out your credit card debt but probably won’t erase your student loans. Student loan debt usually can’t be discharged in bankruptcy unless you’re totally and permanently disabled. Since you’ve been looking for work, that doesn’t seem to be your situation.
Besides, filing for bankruptcy costs money that you probably don’t have. A Chapter 7 filing can easily cost $1,500.
What you might want to do instead is discuss your situation with a bankruptcy attorney to find out if you might be “judgment proof.” If you are, your creditors can still sue you, but they’ll be unable to collect — at least until your circumstances improve.
Many bankruptcy attorneys offer free or discounted initial sessions. You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys, or find an attorney through its website at http://www.nacba.org.
In the meantime, you can visit DebtCollectionAnswers.com for strategies on how to deal with collection agencies when you can’t pay.
Dear Liz: You dropped the ball badly in your response to the man who was in debt after an ill-advised career change. Why didn’t you mention the “B” (bankruptcy) word? Like the gentleman in your article, my wife and I found ourselves overloaded with debt. We took on too much debt in starting our own small business in 2005. Things went very well for a couple of years and then we, like the rest of America, got caught up in the Great Recession. We went through consumer credit counseling and the counselor advised us that bankruptcy was an option we should consider. We filed in November 2010 and it was finalized in January 2011. We were able to keep our business. We also kept our house and our vehicles, which have loans outstanding, by “reaffirming” those debts. Bankruptcy is not a crime. It is the last resort, and it is unpleasant but it is an option. And here’s the kicker for us: Two months after the finalization of our bankruptcy, both my wife and I started receiving credit card offers in the mail (again). Don’t worry, history will not repeat itself in our case.
Answer: Bankruptcy is frequently mentioned in this column as a possible solution for overwhelming debt. Having a lot of debt isn’t the same as being overwhelmed by it, however. What matters is whether you’re able to make sufficient progress on paying down that debt.
The gentleman in question might discover that getting rid of a too-expensive house frees up money to pay down the family’s debt. Otherwise, it would be smart to talk to both a legitimate credit counselor (the National Foundation for Credit Counseling, at http://www.nfcc.org, has referrals) and an experienced bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys are at http://www.nacba.orghttp://www.nacba.org).
Dear Liz: I opened a free checking account at a bank that has since been bought out by another. Recently the new owners started charging a $10 monthly service fee. How are they allowed to do this? Aren’t accounts “grandfathered”? Or is that up to the bank? In today’s economy with unemployment so high and more and more people, like me, living below the poverty level, this seems a step backward for any bank. With the recent bank bailouts and the bad reputation banks have, it would seem that “goodwill” would matter at least a little. When I asked the teller to justify the change she replied, “This is a huge bank. We don’t have to justify anything we do.”
Answer: Your teller gave you your answer. Goodwill doesn’t count for much when banks are trying to maximize revenue.
And there’s certainly no law requiring the new owner to honor the old bank’s promises. The new owners can charge new fees, alter policies and change interest rates on savings accounts and certificates of deposit.
Checking account fees are making a big comeback lately. Banks are claiming these new fees are necessary because regulators restricted one of their big sources of income: bounce fees. Starting last summer, banks were required to get customers’ permission before signing them up for “courtesy overdraft” services that allowed the banks to charge $35 or so each for over-limit transactions. When finally given the choice, many of those customers declined to opt in to the expensive programs and bounce fee income plummeted.
So banks are experimenting with other fees, but you still have options. Often the fees are waived if you maintain a minimum account balance, for example. In your case, that might be tough, so you might want to consider moving your accounts to another bank or a credit union. Credit unions are member-owned financial institutions, and many still offer free checking or have lower fees for low-balance accounts. To see which credit unions you might join, visit http://www.findacreditunion.com.
Dear Liz: In my late teens, I bought a fairly new race car despite my minimum wage job. I soon realized that car payments and insurance premiums would require more than what I was being paid. A friend suggested that I should declare bankruptcy and let the bank take the car away. I am not blaming anyone and should have done my research. Now it has been almost 10 years and I am making close to $60,000. I have always paid my bills on time since the bankruptcy, but the bankruptcy remains on my credit report until July 2011. I would like to buy a house soon, but I wanted to start looking now. Even though it’s been 10 years, I worry the bankruptcy is going to cost me higher rates and a bigger down payment. Should I wait until August to start applying for a home loan?
Answer: If you’ve been paying your bills on time since the bankruptcy and have reestablished credit, much of the effect of your filing should have been erased by now. Where you might be in trouble is if you didn’t reestablish credit and instead have paid in cash all these years. Then there would be little new, positive information to offset your mistake.
Before you apply for any major loan, you should see where you stand with lenders, and that requires a peek at your FICO credit scores. You can buy two of your three FICOs at MyFico.com for $19.95 each. (Your third FICO score is not available because one of the credit bureaus, Experian, no longer sells FICOs to consumers although it continues to sell them to lenders.)
Checking your own scores does not hurt your credit rating, and it’s an essential step so you know what you’re likely to face when you start shopping for a loan. Although the picture you’ll get is somewhat incomplete, since you can’t see your Experian FICO, you’ll have at least some idea of whether you’ll pay a higher interest rate. Charts at MyFico.com can let you know what interest rate to expect on a mortgage given your scores. A loan professional can give you an idea of how big a down payment you’re likely to need.
Dear Liz: My husband and I are struggling with whether to file for bankruptcy. We have $80,000 in credit card debt, which has ballooned because of high interest rates and our paying only the minimum. My husband and I were both laid off in 2008. I collected unemployment for not quite a year and still have not been able to find work. My husband found a job after a year and a half, but then was injured at work and faces another four to six months of recovery, so he is receiving only 67% of his former wage. Now we can’t keep up with our bills. We have stopped paying three of our credit cards and are getting hounded to no end. We are trying to sell our house but even that is not selling. We have nothing left. No retirement, no savings, just debt. We are drowning. We both have such a hard time with the idea of filing for bankruptcy, but is it time?
Answer: People can sometimes avoid bankruptcy if they seek help early enough. If they’re able to pay more than the minimums on their credit cards, for example, they may be able to use a legitimate credit counselor’s debt management plan to pay off their debt.
But debt management plans require that you have at least some disposable income. If you can’t keep up with your bills or find employment, that doesn’t describe your situation.
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You still can contact a creditor counselor via the National Foundation for Credit Counseling at http://www.nfcc.org, but you also should contact an experienced bankruptcy attorney (you can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org). You may not want to file, but you may not have much choice, particularly if you want the collection calls to stop.
What’s especially sad is that you apparently drained your retirement to pay your bills. Your retirement money would have been protected from creditors, but you essentially threw good money after bad. Retirement money should be left alone for retirement, so you can support yourself in your old age. Anyone who’s considering draining a retirement account or home equity to pay credit card debt or medical bills should first consult a bankruptcy attorney to understand the ramifications of this often-foolish act.
Dear Liz: I am 70 and still working hard to retire attorney fees from my divorce while paying my daughter’s college tuition. I met with a bankruptcy attorney and got not-very-encouraging news. The attorney told me it would cost $2,000 to file for bankruptcy and there was no guarantee that my $36,000 in credit card debt would be retired. Instead, I might have to repay the debt over two to five years. He left me with the impression that there would be no debt relief, just a delay with a set repayment schedule. I have made no decision about how I will proceed, but the credit card payments are killing me. Can you advise?
Answer: Not everyone can qualify for a Chapter 7 liquidation bankruptcy, which typically erases credit card debt. If your income is above the median for your area, or you’re trying to protect assets that would be taken in a Chapter 7 case, you could wind up in Chapter 13 bankruptcy, which requires a repayment plan.
The best way out of your situation may be to buckle down and pay off the debt as quickly as you can, even if it means your daughter’s taking a sabbatical from school for a while. You also could sell or cash in some non-retirement assets, if you have them, to pay off your debt.
If you really can’t afford these bills, you could contact a legitimate credit counselor such as one affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org to see if you could swing a debt management plan that would allow you to pay off these bills at a lower interest rate.
If that won’t work, another option is to try to negotiate a settlement with your creditors. Settlements trash your credit scores, and your creditors could sue you if you stop paying your bills, so this solution isn’t for the faint of heart. You may want to return to that attorney and ask for guidance before you take such a drastic step.
Dear Liz: I am 72 and have some credit card debt I can’t pay. I live on Social Security and a small pension and am still paying a mortgage on a house I own in another state. (I’m currently renting.) I’ve been trying to sell the house for quite some time with no success. Can my creditors take my income or my house?
Answer: Creditors other than the federal government are not allowed to garnish your Social Security benefits. Many pensions are exempt as well.
Your equity in your home, however, may be fair game. States have “homestead exemptions” that protect a certain amount of equity in a primary residence, with the amount varying by the state. But creditors may be able to go after equity above those amounts, or any equity in a property that’s not your primary residence.
You need to find an experienced bankruptcy attorney familiar with the laws of both states to give you advice. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.
Dear Liz: I recently lost a rental property to foreclosure, and the lender is after me for the difference between what I owe and the sale price of the property (roughly $58,000). If I am sued, is there any way to get out of this debt without paying?
Answer: If you are sued by this or any other lender, you should consult an experienced bankruptcy attorney about your options. If you can’t afford to pay a deficiency judgment — the difference between what you owe and what the property is worth — bankruptcy could allow you to erase or reduce the debt.
Although some states, including California, protect homeowners from such lender lawsuits, the protection does not extend to rental or commercial property. It can also be waived, inadvertently or otherwise, when a homeowner signs lender documents to arrange a short sale. Anyone who is selling an underwater home or who is in danger of losing one to foreclosure should discuss the situation with an attorney familiar with real estate and bankruptcy laws.
Dear Liz: I was involved in a car accident and had no medical insurance. The hospital bill came to $39,000 and a helicopter ride was $15,000. The only way I could pay this was using credit cards. I have high credit scores. Am I better off filling for bankruptcy?
Answer: You were better off not using the credit cards. If you hadn’t charged your medical bills, you probably could have negotiated a lower settlement amount with the hospital and medical evacuation company.
In many cases, people without insurance are initially charged more than those whose insurance companies have negotiated lower rates. We’re not talking minor discounts, either: The “sticker price” for hospital care for an uninsured person can be two or three times the price paid by insurers, according to the National Consumer Law Center.
Medical providers in these situations are often willing to settle for the lower, negotiated rate, but you have to ask.
Also, most hospitals have charity programs that could have paid some of the cost if your income isn’t high. A typical charity program would erase bills for people whose incomes equal 200% or less of federal poverty limits, and would offer discounts for those with incomes up to 400% of those limits.
Even if you didn’t qualify for the charitable program, a close review of your bill might have turned up errors that, if corrected, could have lowered your cost.
Furthermore, most medical providers have payment plans that would have allowed you to reduce your debt over time at a much lower interest rate than what you’re probably paying on your cards.
Now that you’ve charged these bills, you have to make a realistic assessment of whether you can pay them off within five years. If not, bankruptcy may be a better option. A Chapter 7 liquidation would allow you to erase unsecured debts such as medical and credit card bills, but may not be available if your income is too high. In that case, a Chapter 13 repayment plan would require you to repay some of your debt over the next five years and erase any remaining bills after you completed the plan.
Alternatively, you might negotiate a settlement with your credit card companies.
Any option other than paying your bill in full will trash those excellent credit scores. The damage won’t be permanent, but it initially will be severe, and it may take several years for your credit to fully recover.
Dear Liz: My husband and I have made every mistake when it comes to finances. We filed for bankruptcy protection last year. We were able to keep our car but it’s worth much less than what we owe. We want to buy a better car and return this one to the lender, but when I called the lender the representative said they would garnish our wages. Can they really do this or is it a scare tactic? Do you know a better way to get rid of this debt?
Answer: You reaIly need to talk to your bankruptcy attorney to see what your risk might be. If you “reaffirmed” the loan and promised to keep paying it, then the lender may be able to sue you for the difference between what you owe and what the car is worth.
In many cases, the best way to deal with an “underwater” vehicle — one that’s worth less than you owe — is to “drive out of the loan” by continuing to make the payments until the obligation is paid off.
Then you should continue to drive the car for a few more years while you save up enough cash to buy your next car, or at least to make a big down payment so that you’re not underwater.
The fact that you want a better car is really no excuse for reneging on your commitment. By the way, you wouldn’t be “returning the car to the lender.” You would be agreeing to a voluntary repossession, but that doesn’t get you off the hook. In most states, lenders can indeed come after you for the difference between what a repossessed car is worth and what you owe.
Sometimes, bankruptcy is inevitable when people are facing insurmountable debt. But you took the wrong lesson from yours: Instead of realizing you needed to change your financial habits, you seem to think there’s a “get out of jail free” card when it comes to debt.