Drowning in debt

February 11, 2009 9:02 PM

How do I know if I should be considering bankruptcy?

My spouse and I have somewhere around $15,000 in credit card debt, and we each have student loans. Between rent, bills (utilities and such), card payments, student loans, gas, groceries, etc. we are getting by paycheck to paycheck. Most bills are paid somewhat late, depending on when paydays fall, which means we end up with late fees, making it even harder to pay, and it's an endless cycle.

I don't want to sound like I just racked up a bunch of debt and want out of it (which isn't the case - due to being laid off, I lived off my cards for awhile, and we moved to a different state for economic/job reasons, using the cards again).

How do I know when to begin contemplating bankruptcy? I don't want to think about having shit credit for years to come if we do this, but on the other hand I'm sure we already have shit credit from all the debt and late payments.

I live in North Carolina if it's relevant. Throw away email [e-mail]

posted by anonymous to work & money (13 comments total)

Note that you will likely not be able to discharge your student loans even in bankruptcy, if that plays a role in your decision - you will probably have to pay those no matter what.
posted by rkent at 9:09 PM on February 11

Student loans don't get discharged by bankruptcy if they're subsidized by the government. Your rent and bills definitely won't. I'd suggest that bankruptcy won't stop you from needing to eat.

At best, you might get out of your credit card debt. Have you negotiated with the credit companies? Have you talked to them at all about your situation? They can be surprisingly generous if it's a choice between no money and some money.

Finally, bankruptcy doesn't change bad habits. If there's any chance you'll get yourself right back in the hole you're in, bankruptcy won't help you. For that, you need to figure out why you have the debt you do right now and how you can avoid it in the future.

I don't mean to be a pain, but $15,000 is not nearly as much as many people have successfully paid off by cutting their spending.
posted by saeculorum at 9:12 PM on February 11

Start by going to an accredited consumer credit counseling service. They will be able to help you craft a repayment plan that you can afford, including lower rates, as long as you comply with the plan. This will include a detailed budget. If in the process it appears that even the relaxed debt terms will not be something you can repay in a reasonable period (up to 60 months), you will be referred to a bankruptcy attorney.
posted by dhartung at 10:47 PM on February 11

First, get a copy of your credit report. You are entitled to a free credit report every year from each of the reporting agencies; however, this does not include your FICO score, which is the simplest way to gauge how good or bad your credit really is. When you request your free report from each of the agencies, they'll all offer you the option to get extras, and you can usually view your FICO score for $10 or less. Don't pay for any of the other extras, especially any of the "credit monitoring" or subscription services. They're really, really not worth it. You just want your credit report and FICO score.

$15,000 can be a totally manageable amount of debt, or it can be absolutely crushing; it all depends on how much money you earn, what assets you have, and what your fixed expenses are. I don't know the details of your situation, so I wouldn't be able to say. After running your credit report, sit down with all your bills and work out exactly where every cent of your money is going every month. Pay close attention not only to how much is going to your credit cards, but also where you might be able to cut expenses. Be brutal. Do you need cable TV? Do you need a cell phone? Could you adjust the thermostat a couple degrees to cut down electric bills? If you own two cars, could you get by with one? How about moving to a smaller place? Nobody enjoys making a budget, but you absolutely must do this.

And yes, you're stuck with your student loans, along with a few other kinds of debt, if you have them.

If you do file for bankruptcy, that will stay on your credit report for 7 to 10 years, depending on which chapter you file under. The precise effects that will have on you are hard to predict, as every individual business has its own guidelines on how to deal with bankruptcies. Expect buying a house to be out of the picture for at least 2 to 3 years. If you happen to need a car, you'll have no trouble getting a loan, but you'll be paying a ridiculous interest rate. If you need an apartment, your options will be somewhat limited--some landlords won't care 1 year later, and some won't touch you with a 10-foot pole. Forget about getting a business loan, if you have dreams of going into business for yourself. And credit cards...well, you're not going to be using credit cards anyway. Right?

If your credit score is good right now, bankruptcy will definitely drive it into the dirt, and limit your future financial options. You'll need to weigh that against how long it would take to pay that debt off, given your income and expenses. 7 to 10 years of a black mark on your credit report, versus ___ years to pay it off and come out smelling like roses. You'll have to decide what that's worth to you.

Also, remember that if you file for bankruptcy now and get into trouble again, you'll have to wait 8 years before filing again is even an option--you will not have a safety net. Therefore, if you want to get these debts discharged, it's more important than ever to establish good habits and build your own safety net. There's no reason that anyone should ever need a credit card. You say your debt is mainly the result of a layoff--why didn't you have a few month's salary saved up in case something like that happened? Make room for that in your new budget, because if you get laid off again post-bankruptcy (or have emergency medical bills, or an unexpected pregnancy, or get hit by an uninsured driver, or...), you've got only your own resources to get you through it.
posted by tomatofruit at 10:54 PM on February 11 [1 favorite has favorites]

If you can avoid bankruptcy, do. It's a big old mess, and best done with lawyers. I second the recommendation for a credit counseling service. I did well going through Money Management International after my divorce. Also, student loans - as long as they're Stafford loans - can work with you. If you haven't already, see if you can get your federal student loans consolidated with the Federal Direct Loan Servicing. They are the only way that I know of to set your loan payments to income-contingent if it gets to that, and they're pretty willing to work with you when you're in a tough financial situation.

Bankruptcy is for when you have absolutely no assets left - while it's surprisingly easy to get up to your neck in debt, it's amazingly difficult to be completely without assets.
posted by medea42 at 11:08 PM on February 11

Can you see if you can defer your student loans for six months due to financial hardship, and dump that money into driving down your credit card debt?

Without knowing the exact numbers, including your living expenses and income, it's hard to say, but 15K sounds mildly difficult to pay down, but not impossible.

Give up cable, get down to one cell phone, check on student loan deferment. Do not make any more late payments on the credit cards, they'll kill you on fees. Set up a smallish emergency fund, like $500, so that you don't hit the credit card because of a surprise trip to the vet for the cat. Stuff like that.

Give it six months, see if you've made progress. If you haven't, reevaluate. But don't dive into bankruptcy over 15k. Maybe in your particular circumstances it's worth it, but if it were me, I'd try it the natural way first.

This is sort of a 'diet and exercise' versus 'gastric bypass' type question. I don't think you're in a gastric bypass place. I think you're in a 'make a series effort using conventional means' kind of place.
posted by A Terrible Llama at 4:13 AM on February 12 [1 favorite has favorites]

Also -- I have to disagree with talking to the credit card companies -- they, along with collection agencies, are interested in getting your money only. They don't care about you or want to help you. They want you to believe they're helping you and hope that you'll never do the math on the things they're offering, and that you won't ask too many questions about the effects of a 'payment plan' on your credit rating.
posted by A Terrible Llama at 4:16 AM on February 12

dammit, that's 'serious effort using conventional means', I meant.
posted by A Terrible Llama at 4:17 AM on February 12

You don't mention how much you make a year but the fact is....you're not bankrupt. Second job for you and/or your spouse, selling items you don't use or need, and cutting back on expenses ~ this is totally doable.

While I'm absolutely not a fan of his conservative politics and religious overtones, Dave Ramsey's money management plan is something you might consider looking into.
posted by kattyann at 6:37 AM on February 12

The credit card companies I have experience with will let you decide on what day of the month your bill is due. You should see if its possible to change your due date - or stagger your due dates - so that they are more consistent with your pay checks and you can hopefully avoid late fees that way.

For example, the main credit card I use had always been due on the 13th of the month. I get paid on the 15th and the 30th of the month and my rent is due on the 1st. With the credit card bill due on the 13th, both my rent and that bill were coming out of the check from the 30th of the previous month (after I pay my bills, I move most of the remaining money out of my checking account, to a savings account so my checking account is essentially check to check, even if my budget really isn't). I changed my payment date to the 15th so that the credit card payment would come from the check I get on the 15th instead, which made my monthly payments much easier.

I don't know for sure whether this is available with your cards or whether you can do that if you're not current on your bills, but its probably worth a five minute phone call or a quick check online (I did it online, and it took less than 5 minutes to complete).
posted by Caz721 at 6:52 AM on February 12

[few comments removed - morning after quarterbacking on how people got into debt is pretty off topic here]
posted by jessamyn at 7:46 AM on February 12

I don't want to think about having shit credit for years to come if we do this, but on the other hand I'm sure we already have shit credit from all the debt and late payments.

IANAL, but I'm pretty sure your credit after bankruptcy is going to be shittier than your credit in your current situation. Seconding the advice to get your credit report. It may not be as bad as you think. How late have your payments been? In my case they haven't reported them unless they've been over 30 days late. (Cannot say if this is true in all cases.)

See this debt reduction planner - it might make you feel better if you know exactly how long it will take you to get out from under the $15K.
posted by desjardins at 9:31 AM on February 12

Have you considered something like DebtWave?
posted by scrump at 9:35 AM on February 12