Credit Card Debt - What should She do?

February 4, 2008 11:41 AM

Background: I am in a serious relationship. The woman I am dating currently has what I would consider significant financial problems. What are her best options?

Background:
I am in a serious relationship. The woman I am dating currently has what I would consider significant financial problems. As explained to me by her in her pervious relationship she and her partner had several accounts – all in my girlfriend’s name – in which the X was suppose to responsible for. Unfortunately it wasn’t until most of the items went into collection that my girlfriend was made aware of the outstanding balances. I have been relatively keeping a low profile on the issue, trying to offer emotional support and guidance what needed however as the relationship gets more serious the more I am concerned about the situation the lack of positive movement into resolving the problem.

The Numbers:
She has roughly 6 to 8 credit card accounts in collection – totaling 5 thousand dollars. In her communication with these agencies they are requesting payment in full and no “payment plan”.
She has one defaulted car loan in which the vehicle has been marked for repossession however she has the vehicle in “hiding” (I do not know the location). Her reason for this in not letting it be repossessed is that she believes she can “bargain” with the loan-agency on a buy-out option for the car in a lump sum. She believes if it is repossessed it will go to auction be auctioned off at such a small amount that it is in her best interest to keep it as bargaining tool.
Her FICO score is 585.
She has no savings – and is paying off the accounts one by one as she accumulates the money.
I have not – at this time – offered financial support. I would consider doing so however her lack of interest in speaking to professionals about her situation and coming to a resolutions has be greatly concerned about the severity of the situation.

Questions:
I have on numerous occasions tried to get her to get credit counseling and some professional advice to help her start digging out of the hole but I believe she feels that the course she is on (paying the accounts off one by one and hiding the car) are the route to go.
My question is – particularly about the car – what are her options? Would it be better to let be repossessed?
Does she have any options on consolidating her debt?
Is there any disadvantage to paying off the accounts one by one (I assume the longer they sit in collection the worse it is).
Any other suggestions?

posted by lutzla23 to work & money (22 comments total)

She has to go to credit counseling, based on what you describe she should be considering bankruptcy, if only to get some semblance of control back over her life. She's already damaged her credit, it's time to get control of the situation and not make things worse.
posted by iamabot at 11:47 AM on February 4, 2008

Uh, that car is owned by the bank, so technically, she's "hiding" something that's not hers. She could get into serious legal trouble over this.

A consolidation loan with a FICO like that would require some collateral, such as equity in her house - I'm guessing she does not own one. Credit Counseling centers will let you make single payments, then distribute them to creditors. But those organizations are not without criticism, and this would take years.

Were I in this situation, I'd give up the car and declare bankruptcy. Not may other options.

How serious are you about this relationship?
posted by M.C. Lo-Carb! at 12:03 PM on February 4, 2008

$5,000? Assuming she has a decent job, that is manageable and I think declaring bankruptcy would be an extreme way of dealing with the problem. But, yes, she should talk to a reputable credit counselor or financial adviser to get on a plan of some sort.
posted by mikepop at 12:17 PM on February 4, 2008 [2 favorites has favorites]

$5000 is nothing, $50 to $100 in minimum monthly payments in a normal situation.

Credit counseling with the angle of establishing payment plans is the best.

The approach of targetting to pay off the smallest and/or highest-rate first, and then after that's paid off roll the payment into the next balance, is the way to go.

$50000, that's a problem.

with the loan-agency on a buy-out option for the car in a lump sum

she needs to let the car go and put that lump sum money toward clearing her debts.
posted by panamax at 12:26 PM on February 4, 2008 [1 favorite has favorites]

First of all, I am no lawyer in any state, nor a financial advisor.

lutzla23: As explained to me by her in her pervious relationship she and her partner had several accounts – all in my girlfriend’s name – in which the X was suppose to responsible for. Unfortunately it wasn’t until most of the items went into collection that my girlfriend was made aware of the outstanding balances.

You are unclear as to an essential issue. Did your girlfriend create these debts, or did her ex? You make it sound as though you don't know yourself, although she has explained that they were created by her ex.

If these debts were created by the ex, then the recourse is simple. These accounts may be in her name, but if they are the ex's debts, then that ex must assume them. Gather them, account for them all on paper, write up a summary of how they were incurred, and take the ex to small claims court. In most states, small claims court is for claims under $10,000. I don't know what state you're in; search "small claims court" and your state in google, and you'll get good information on how to go about filing. It's generally some paperwork, but it's worth it, especially in this case; and they make it relatively simple for small claims like this. Even if the debts were not incurred by your girlfriend, but it was understood that they were to be paid by her ex, she has some case.

If it turns out that this is certainly her debt, and the ex is not involved in any way, and she must pay it entirely:

The first thing I'd do is talk to her bank. Most banks offer financial counseling on these issues. I've found that Credit Unions are especially outstanding on this. If they can't help you, they'll often have a credit counselling hotline that you can call. (Since she's a customer of the bank, she's usually entitled to this for free.) They'll know more about some of the technical aspects of what you're asking, and they'll want to help her come up with a plan for what to do.

That plan is key. 585 is a low credit score, but it's certainly not the end of the world; in two years, she can have a high enough credit again, so long as she sticks to it and does things according to a plan. She has to know how she's going to get out of this, and she has to keep doing things that will make that happen.

Now, as far as some of the particulars:

She has roughly 6 to 8 credit card accounts in collection – totaling 5 thousand dollars. In her communication with these agencies they are requesting payment in full and no “payment plan”.

At a score of 585, she's not going to be able to get a credit card to pay all of those off at once. She'll have to pay them separately. Collections agencies almost invariably offer payment plans, as they'd rather get the money slowly than not at all-- are you sure that she's not talking to the credit card companies when she's told that it must be paid in full at once? The collection agency is a different company, one that has contracted to receive a portion of the money if they're able to recover it for the credit card company. I can imagine they've told her that she must pay it all up-front if she wants to make her card valid again, but I've never met a collection agency who demands it all up-front. You and her should sit down, call each credit card company and their collection agency one by one, and ask about options.

For the record: five thousand isn't too much, in the long run, and my experience is that credit card companies will not be extremely upset about it if she takes her time to pay it off. She can have this taken care of in less than a year-- so long as she makes a plan and sticks to it.

She has one defaulted car loan in which the vehicle has been marked for repossession however she has the vehicle in “hiding” (I do not know the location). Her reason for this in not letting it be repossessed is that she believes she can “bargain” with the loan-agency on a buy-out option for the car in a lump sum. She believes if it is repossessed it will go to auction be auctioned off at such a small amount that it is in her best interest to keep it as bargaining tool.

Repossession law is complex, differs from state to state, and is certainly not my field. You should tell her that, if she'd like to pursue this course of action, she should talk to a lawyer about it to find out what her options are. As it stands, however, it's my opinion that this is a very, very bad move. The company can and probably will take further legal action if they don't hear from her soon, and she clearly has no plan to contact them soon. If she wants to use whatever lump sum she can earn later to buy another car, then that's the best option; right now, she needs to get this straight, if not because she doesn't want to get arrested and thrown in jail for theft then at least because this way she won't have to put up with worrying about hiding her car. You and she should sit down and call the loan agency and ask them what your options are.

A brief note: it is best to avoid debt consolidation (a service whereby you pay a company a monthly fee in exchange for having debts removed from your credit) which is ironically very destructive on credit; I've known mortgage guys who've told me that they see debt consolidation on a credit report as worse than a bankruptcy. There are, of course, times when you can't avoid it, but this does not sound like one of those times; the debts are certainly not that out of control, although they are dire.

Is there any disadvantage to paying off the accounts one by one (I assume the longer they sit in collection the worse it is).
Any other suggestions?

Most information falls off of your credit report after three years. As such, the sooner she can get these taken care of, the sooner they'll fall off her credit report. However, having them fall off isn't going to be the biggest good thing she can do for her credit, so I believe that it's generally not the most important priority to take care of them as fast as possible. (The thing that helps the most, by the way, is making some sort of credited monthly payment, like a credit card payment. Once she's paid off, she should go to her bank and get a subsidized credit card. It sometimes goes by other names, but it's a credit card where you give them a certain sum like $1000 as a deposit and are then able to buy things to that limit every month. You then make payments, and the payments show up as good activity on your credit report.) It's more important (and, incidentally, a good habit-forming activity) for her to lay out a plan, document all her debts, and budget how she's going to take care of them monthly. This repossession thing is very pressing, but other than that, she'll just want to call the collection agencies and take care of the credit card debts as fast as she can. If you want to, you could pay off her cards on your credit card and set up a payment plan with her, but I don't think that will be that much easier for her, and keeping track of her debts will be a good exercise. It certainly is for me. Long story short: the biggest help I think you can give her is your time and effort; help her pull together paperwork, call collection agencies, and make a planned budget, and you'll be doing her a world of good.

Let her know, last of all, that this isn't an impossible hole to crawl out of. You should make sure she realizes that this is awful, but I think she knows that already; denying it at every turn is a sign of panic. All the same, I have a friend who declared bankruptcy (which your girlfriend shouldn't, by the way) four years ago; today, she has a mortgaged house, a car, and high credit score. She just made a plan and stuck with it.
posted by koeselitz at 12:31 PM on February 4, 2008 [2 favorites has favorites]

M.C. Lo-Carb!: A consolidation loan with a FICO like that would require some collateral, such as equity in her house - I'm guessing she does not own one. Credit Counseling centers will let you make single payments, then distribute them to creditors. But those organizations are not without criticism, and this would take years.

Again, avoid a consolidation loan, as it'll be a pretty bad mark on her credit, and worse than a piddling $5000 debt. The individual collection agencies will almost certainly offer payment plans. Try there first. If not, a free credit counseling service through her bank is the best place to turn with this.

It is a bad idea to go with a credit counseling service that costs anything, as you're not assured of their lack of bias.
posted by koeselitz at 12:35 PM on February 4, 2008

Having six or eight credit cards sounds like a lot of money… but this is only $5,000! If you sit down and think about it, that’s really not a lot of money. She can and needs to pay this stuff, and do it quickly. It’s complete bull that the companies will not take a bargain. Many credit card debts go for 50% or even as low as 30%. She needs to scrape together some cash, call these people every day, and make them some offers.

WARNING: If they do accept an offer, get it in writing that this is “payment in full without recourse.” That means they can’t come after her for the difference later like the scum they are. Also, never EVER give them access to your checking account. Overnight them a money order if they insist quick payment, but if you give these people access to your checking account electronically, they will take whatever they want.

It would be better for her to just sell the car. Again, she can scrape together or borrow the money to pay the difference, but this would be a much better option than letting it go to repo. Yes, if she lets it be repoed, it will auction off for much less than it’s worth and they’ll come after her for the difference. Don’t let this happen.

Overall, she needs to kick this stuff in the pants as soon as possible. The bottom line is she doesn’t have a money problem, she has a behavior problem. She needs to be on a strict budget. She needs to stop buying everything she wants just because she wants it. You can help her with this, and so can a good financial counselor.

For the love of Mike, don’t let her go into bankruptcy over this! You didn’t say how much the car is worth, but I’m going to assume it’s less than $20,000. If she can sell the car and start knocking out these credit cards, this mess can be cleaned up quickly. If she declares bankruptcy now instead of sucking it up like she should, she doesn’t have that option later in life if she really gets in a huge mess.

I am not a financial counselor... blah, blah, blah... the usual applies here. This is just common sense.
posted by joshrholloway at 12:37 PM on February 4, 2008

I know it totally depends on your financial situations, but five grand doesn't seem a very big deal.

She has this car in hiding, which means she's not using it-- so why not sell it, on the open market, or to the bank and cut that loan down? Again, I've got no idea the value of the car, but I would assume it's a couple of grand? What else can she sell, cut down to the bare essentials? If she has to live uncomfortably for a few months, surely that's a decent sacrifice-- What are her current non-vital expenses, and how can she cut those down, or out.

And, if the relationship is serious, why not help her out financially? Bankruptcy seems an awfully terrible step to take if it can be at all avoided.
posted by Static Vagabond at 12:38 PM on February 4, 2008

Sorry-- thought the car was part of the $5k, rereading it seems it's on top, even so, my humble advice still stands, get rid of it-- if she can afford to hide it, she really doesn't need it.

Once she's paid off her bills, she can buy a old, working car for not much money at all, and she'd be in a better financial situation because of it.
posted by Static Vagabond at 12:47 PM on February 4, 2008

Make sure a car is legally yours before you sell it.
posted by wilko at 1:12 PM on February 4, 2008

Wilko's right. If the car is financed, there's a lien on the title and she can't sell the car.
posted by robinpME at 1:38 PM on February 4, 2008

Static Vagabond: She has this car in hiding, which means she's not using it-- so why not sell it, on the open market, or to the bank and cut that loan down?

That would be illegal, as it's not her property.
posted by koeselitz at 1:45 PM on February 4, 2008 [1 favorite has favorites]

Hi All,

Some really great advice in here. I do appreciate everything and everyone's time on this. I do agree that this is a behavioral adjustment, which I am delicately working on.

Sorry to left out some vitals – Car loan is around $7,000 – low end book value is around $4,000. And when I mean it is “hiding” it really is…it’s in some garage some where that I’ve never seen. She drives some piece of shit now anyhow.

I am not to concerned about the dollar amount, as many of you have mentioned this isn’t too significant in the realm of debt, but jump starting a flame under her is the issue and getting her out of some false-impressions into believing that she may not have all the answers.

Anyhow, again appreciate everyone’s time and expertise on this. I think I am going to come down on the issue a little harder and strongly recommend some professional assistance for her (and me). And hopefully we can do it togther.

Thank you!
posted by lutzla23 at 1:54 PM on February 4, 2008

If your significant other is in a situation where she's got to come up with a full $5000.00 relatively quickly, you might consider a loan via prosper.com. You will avoid the banks altogether and instead have Prosper members fund you (or not, depending on the level of risk they're willing to deal with).

From what you've told us about her credit and whatnot, you might be looking at an interest rate of 28%+ over 36 months, but if you can't consolidate the debt on a credit card at a lower or comparable rate or feel you have no other options, it's worth at least checking out.

(The maximum interest rate allowable on prosper is 36% [actually this may be a federal law]. I went to the site, plugged in $5000 for the loan amount, 36% for the interest rate, and marked it as a "high risk" credit candidate, and it calculated the monthly payment at $230.00 a month for 36 months.)
posted by DawgterFeelgood at 2:16 PM on February 4, 2008

I was in a similar situation after law school and I went to Consumer Counseling Credit Service. It is one of the only reputable agencies out there, funded I believe largely by the United Way. With their help, my credit was solid in no time. There was NEVER a problem. They negotiated lower interest rates for me, suspended late payment fees and deducted a fixed amount from my checking account every month.

But, and this is a big one, I did this on my own because, as much as it sucks sometimes, grownups have to take responsibility for their own finances. I'm with MC Lo-Carb on this one. Are you serious about this relationship because, IMHO, it does not bode well for the future that she doesn't seem to care enough about this situation to get help. The flags are red so we can see them.
posted by notjustfoxybrown at 3:04 PM on February 4, 2008

I do not recommend "[coming] down on the issue a little harder." It's her money, her debt, and her car. She is making forward progress, she's paying off the cards and trying to come to a resolution with the car.

You will only compound her stress (and strain your relationship) if you try to force her to do something she doesn't want to do.

I think the most helpful thing for you to do would be to ask her what support she needs while she's going through this frustrating time, accept that she is going to handle her problems in her own way, and be a partner--not a boss.
posted by sondrialiac at 6:34 PM on February 4, 2008 [1 favorite has favorites]

I have not – at this time – offered financial support.

Do not, I repeat, do NOT get tangled up in this financially. If you're not married or about to be, assuming your SO's debt isn't the best idea (and even then, I'd talk to my fiancee about a financial plan before the wedding). Loaning your SO money leads to anxiety and creates a strange power dynamic, not to mention resentment on your part if she defaults on you.
posted by runningwithscissors at 8:57 PM on February 4, 2008

It’s complete bull that the companies will not take a bargain.

Agreed, they always bargain- they say they don't but they do. After all, you're the one with their money.
posted by mattoxic at 9:26 PM on February 4, 2008

Credit Counseling centers will let you make single payments, then distribute them to creditors. But those organizations are not without criticism, and this would take years

These days you have to go through credit counseling before you can go bankrupt.
posted by delmoi at 11:13 PM on February 4, 2008

You will only compound her stress (and strain your relationship) if you try to force her to do something she doesn't want to do.

I agree with this. It's her car, her money, her life. Since the two of you are not financially intertwined it's really none of your business, although I'm sure you care. Be supportive but don't put pressure on her unless you think she wants you too.
posted by delmoi at 11:23 PM on February 4, 2008

Tip on reducing the panic. I was never in deep financial trouble, but at one point I was totally intimidated by what it might take to get on top of financial things in general. For me, reading personal finance blogs helped a ton. For deflating fears about bad credit, read creditboards.org too. And here's an inspirational story (if an extreme example of what some people do).
posted by salvia at 2:37 PM on February 5, 2008 [1 favorite has favorites]

if you give these people access to your checking account electronically, they will take whatever they want

They can't legally take any money out of your account that you do not authorize them to take. If they do, you can have the unauthorized charges reversed.
posted by oaf at 3:31 PM on February 7, 2008