$20,000 in CC defaults: starting over

December 10, 2010 12:48 PM

I'm about to default on a lot of CC debt, how do I start rebuilding right away.

I got in over my head with credit cards (almost $20,000) and then lost my job. Citi, Chase, and a large credit union are the primary debt holders. Had/have almost no money to work out repayment and even their reduced offers were just too much. It looks like my situation will improve markedly in the next few months, and I want to get my credit in "recovery mode" as soon as possible.

Good things:
a. I have a car loan that I've managed to keep 100% on time with Chase and I'll continue to do so until it ends in 2013.
b. I have a tiny Orchard Bank card with a $300 limit I've kept going for deposits on hotels and rental cars.
c. I have no assets. Sadly, this is a "plus" in my situation.

I'm 28 and involved with a woman I think I'm going to be building a life with. My main concern is eventually getting a mortgage. I'd like any experiences similar and had a few specific questions.

1. Defaults will begin in a few weeks according to letters. Is bankruptcy an option worth exploring?

2. Can you "settle" with debt collectors? Bargain on price? Is it possible to rebuild without fully paying your existing debts off? (Also, please don't derail into morality of paying off debt)

3. Are any of those "rebuild your credit!" cards worth it? The ridiculous fees and all?

4. Any advice on dealing with debt collectors? I have GoogleVoice, so I guess any help with setting up something like "nobody outside of these area codes rings to my phone" would be awesome.


Any additional questions: email is [e-mail]

thank you

posted by anonymous to Work & Money (14 answers total)

Things to keep in mind:

1) If you default, that's going to look really bad on your credit report whether or not you file bankruptcy.

2) If you do file for bankruptcy, it's going to look even worse.

Both of these events will stay on your credit report for a few years. So if you really are going to default before you wind up being able to service your debt again, it really sounds like you may as well declare bankruptcy. There isn't much downside, as defaulted debts still hanging over you are going to make it pretty hard to get a mortgage to begin with, and the upside is that you won't have that debt anymore.

Still, if you do think you'll be able to get this thing turned around soon, just call your creditors and start talking. You don't have to go through any special steps to negotiate with them, just call the number on the back of the card, get to a real person, and tell them what you want to do.

You can probably avoid debt collectors if you're actively working with your creditors. They won't send your debt off to collection as long as they're in the loop.

But if they won't negotiate and the collectors do start calling, dude, just file. There's almost no downside, as you're pretty much screwed already at that point, and the upside is that you're out of the hole.

As far as how to file, open the Yellow Pages and look in the attorney section. There will be at least a dozen attorneys who will be more than happy to take your money. Most of them will probably tell you to stop paying your bills right now so that you'll have money for their fee, which will usually be a fixed amount.
posted by valkyryn at 12:55 PM on December 10, 2010

First, defaulting on debt doesn't mean the debt goes away - it mostly just means the credit card closes the account and moves it to collections. Paying off the debt as soon as possible is #1 for rebuilding credit. Any new credit will look at the fact that you still owe your old credit cards over $20,000, and you are unlikely to get any new credit.

Yes, they'll sometimes forgive the entire debt for a large lump-sum payment of like half or more of the defaulted balance -- but if you can't keep up with your credit cards now, I'm not sure how you expect to do something like this. They won't negotiate a lower balance in order to set up a payment plan.

"Rebuild your credit" cards probably won't help you -- get the debt paid off first, and as fast as possible. Keeping your good debts in good shape will help you far more than opening new credit will. Keep up your car loan and your small credit card, and they'll help you rebuild credit once you get the defaulted debts paid off.

Lastly: Bankruptcy is an option, but should be a last resort, and it takes time, in which the credit card companies will make your life much harder than you'd like.
posted by AzraelBrown at 12:57 PM on December 10, 2010

If you think you are going to get back on track and be able to pay off your debt then you want to avoid bankruptcy and defaulting as much as possible.

Call your credit card companies quickly, try to get your minimums reduced as quickly as possible. These companies really want you to repay - they lose money if you go to collections (where they sell your debt) and if you want decent credit in the near (like 7 year) future you need to continue making payments.

Check if your local community has a reputable credit counseling service. I don't mean something that consolidates your debt and buys it out and lets you pay off a smaller amount - this will also negatively affect your credit. I mean someone who can work with you and advise you in working with your existing cc companies. These are usually non profits.
posted by bitdamaged at 1:10 PM on December 10, 2010

You should speak to a bankruptcy attorney now, don't wait until you've decided to file for bankruptcy. I'm not saying this as a standard CYA statement, I'm saying it because a BK attorney can look at the specifics of your situation -- income, debt, assets, jurisdiction, future goals -- and help you determine what the best option is for you.

It may be that negotiating the debt -- either by yourself, or with the help of an attorney -- is in your best interests. It may be that filing for bankruptcy immediately, before any further negatives accrue on your credit report, is the best choice. You should be able to get a free consultation to talk through all your options and their ramifications. A good place to start is NACBA, the National Association of Bankruptcy Attorneys.

If you decide to file, your attorney can tell the credit card companies to buzz off. In fact, once you've filed the bankruptcy petition, it's illegal for the companies to attempt to collect the debt (the "automatic stay") which means the phone calls stop immediately.
posted by katemonster at 1:12 PM on December 10, 2010 [3 favorites]

You should probably be aware, defaulting in one card affects all cards. It's possible orchard will cancel your 300$ credit line with them if they think you are a credit risk due to several defaulting debts
posted by ShootTheMoon at 1:24 PM on December 10, 2010

If you default, they could get a court judgement against you and begin garnishing your wages.

When I bought my house, they went through my credit file with a fine-toothed comb. I had to explain just a couple of late payments from years ago, and pay off a 9-year-old ambulance bill that I had expected to "drop off" my credit record after a certain period of time. And this was back in the early 00s, when pretty much anyone who could fog a mirror could get a mortgage. Now, you pretty much have to have a FICO score above 620 to even get in the door, and with $20,000 in defaulted credit card debt, it's guaranteed you'll come nowhere close to that.
posted by M.C. Lo-Carb! at 1:29 PM on December 10, 2010

(right now, today, you need a FICO score around 720 to get in the door on a mortgage)
posted by bitdamaged at 1:44 PM on December 10, 2010 [1 favorite]

You might check out Creditboards for more information, targeted advice and, in particular, descriptions of exactly what your rights and obligations are.

I'm not an expert here, I think that you may be misunderstanding what it means for you to "default" on this credit card debt. I don't really think that it means that anything ends or that they or a debt collector will stop trying to get the money, all it will mean is that your status with the credit card company and the way they report the activity to the credit bureaus will change. I'm not sure it will necessarily be a good thing.

But really, there are specialized places on the internet to learn all about this. Check those out and educate yourself.
posted by iknowizbirfmark at 2:15 PM on December 10, 2010

if you DO negotiate the debt, get the entire deal in writing BEFORE you send any money. Or they will take the money and forget the negoitation.
posted by CodeMonkey at 8:44 PM on December 10, 2010

Embrace 'catastrophe mode'. Don't rush into bankruptcy, it stays on your credit report 10 years. Should you decide this, it will be two years before you can even think about buying a house on credit and then you will have absurdly high rates offered to you. Do NOT be flippant about tossing your responsibilities as a debt-embedded person, you obviously know it's morally wrong or you wouldn't have mentioned the disclaimer. You own your debt, work it out, *especially* if your situation is going to change. What kind of change? Will it enable you to consolidate your debts into one manageable payment? You may have outstayed your visit into the credit card world, but try to do the best you can to take the responsibility in paying it off before much worse incrementally debilitating legal action is taken against you. Clark Howard is a wonderful resource for financial advice and Suzi Orman's site may offer you some assistance. Believe me, it will tail you much longer than anything else you can imagine, these companies can be brutal. You will be treated like a criminal. Hang on to every viable credit card you have, use it once a month, charging only a small amount and pay it completely off every month. Try and keep every single line of credit open and in good standing because in this economy you won't be likely to get any more credit options available to you again. Good luck!
posted by ~Sushma~ at 8:46 PM on December 10, 2010

Anonymous, you seem to be saying "I'm about to default on a lot of CC debt" without having a good idea of what that really means, how it works or the immediate or long term implications. If marriage and thus a joint financial future is on your horizon, it is in your partner's best interests for her to pay for you both to consult an experienced financial planner or attorney in this field. I'm not sure how you qualify someone to give solid advice here, but I know I would do nothing without it. Please don't ruin this woman's financial future because you have no idea what you're doing.

I recall reading a post recently on MeFi where someone made no payment for six months, took all the calls, talked to the creditors each time, returned all their calls, and at the magical six month mark right before the charges went to collections, was able to negotiate direct with the credit card companies for immediate payment at about 33 cents on the dollar. If you're going to be able to save 6K over the next six months, plus the money you're not sending out in minimum payments, you could gamble that this could work out for you.

I can't find that post right now, but the thing that struck me is that the guy had a really solid, educated plan, didn't dodge his creditors like you're considering, and used the time to accumulate the cash to buy himself out of his own debt. Two years later his credit had rebounded. I was impressed. That's a plan.
posted by DarlingBri at 11:27 PM on December 10, 2010

Mod note: few comments removed, please don't start a fight about the morality of not paying back credit cards, thank you.
posted by jessamyn (staff) at 12:36 PM on December 11, 2010 [1 favorite]

Just to correct the record a bit on what bitdamaged said: while you need a 720 credit score to get a jumbo mortgage, FHA and Conforming mortgages are available at lower credit scores. For example, Wells Fargo's cutoff for a FHA mortgage is a 660 FICO.
posted by centerweight at 10:06 PM on December 11, 2010

I was in a similar situation a few years and I did end up defaulting - and man do I regret it. I've made a lot of headway but I'm still under 600. It sucks.

If I could go back I would have paid just enough to keep the account open until I got back on track. Miss a couple months then pick up the phone, explain the situation and usually they will do a bit of negotiation and take a pretty small payment - if you can keep this going for a while, it will buy you time. If you have anyone in your life you could borrow some money from to help make these string along payments, it would definitely be in your credit score's best interest. My credit will be in the crapper for another 3 years no matter what I do.
posted by amycup at 10:01 PM on December 20, 2010