There goes the credit score
February 28, 2011 7:36 PM Subscribe
Can you strategically default on student loans and credit cards like you would a mortgage?
Here's the rundown: I'm in a crapton of debt ($30K in credit cards - due to medical bills, not frivolous spending - and around $90K in undergrad/grad debt.) I got laid off back in August, moved back in with my parents who are struggling as it is to pay their mortgage and other necessities, and I haven't been able to find work since. I'm on unemployment but the amount I'm receiving is a joke, and I don't know how much longer I'll be eligible for it.
I've applied to hundreds of jobs, only to be turned away for not having enough experience, and can't even get under the table work or a position in retail hell. My student loans are a bigger burden to me than my credit cards. I've used up all my deferments and forbearances, and since they're private loans they don't care if I were hooked up to an iron lung - they want their money.
I've been trying to keep my credit score afloat, but I know I'll have to miss at least one payment next month, and I might as well learn to fall gracefully if I know I'm going to slip. Has anyone else gone through this? If so do you have any tips or ideas to consider? I'm in PA if that makes a difference.
Thanks, hivemind!
Here's the rundown: I'm in a crapton of debt ($30K in credit cards - due to medical bills, not frivolous spending - and around $90K in undergrad/grad debt.) I got laid off back in August, moved back in with my parents who are struggling as it is to pay their mortgage and other necessities, and I haven't been able to find work since. I'm on unemployment but the amount I'm receiving is a joke, and I don't know how much longer I'll be eligible for it.
I've applied to hundreds of jobs, only to be turned away for not having enough experience, and can't even get under the table work or a position in retail hell. My student loans are a bigger burden to me than my credit cards. I've used up all my deferments and forbearances, and since they're private loans they don't care if I were hooked up to an iron lung - they want their money.
I've been trying to keep my credit score afloat, but I know I'll have to miss at least one payment next month, and I might as well learn to fall gracefully if I know I'm going to slip. Has anyone else gone through this? If so do you have any tips or ideas to consider? I'm in PA if that makes a difference.
Thanks, hivemind!
Student loans are near impossible to discharge, unless the bankruptcy judge finds that being required to pay them would put you on the street and would use up nearly 100% of your income. You might be able to get an additional forbearance from bk proceedings, but getting them discharged is nigh impossible.
posted by msbutah at 7:53 PM on February 28, 2011
posted by msbutah at 7:53 PM on February 28, 2011
You can generally put student loans into forbearance (where you don't pay, but accrue interest) for quite awhile, so contact your loan company and see how to do that. Generally, it's just a form to fill out, and you can take 3-6 months' worth of forbearance at a time. This doesn't ding your credit one bit.
posted by xingcat at 8:00 PM on February 28, 2011
posted by xingcat at 8:00 PM on February 28, 2011
Crap, I see you've already used forbearance. See if you can consolidate your loans and put the consolidated loans into forbearance. That sometimes works.
posted by xingcat at 8:01 PM on February 28, 2011
posted by xingcat at 8:01 PM on February 28, 2011
I'm not sure you understand what a strategic default is. Strategically defaulting on a mortgage means that someone who can still make the payments decides to stop paying the mortgage because the value of the home declined to the extent that it makes more sense economically to just walk away than to keep paying. It is possible because many states are what they call no-recourse, meaning that the only thing the bank(s) can do when someone stops paying the mortgage is to take back the house; they can't go after other assets.
You're not talking about strategically defaulting but just plain ol' defaulting. You can't pay your bills. You should stop thinking about this as a strategic default and start thinking of it as You Are Bankrupt, and go from there. As others have said, one big issue is that student loan debt is a monster. I don't have the expertise to advise you on that. You'll have to talk to a debt person.
So my advice is first to acknowledge that you aren't in a position to strategically default on anything 'cause you plain ol' don't have any money to pay your debts, and two you should talk to a debt counsellor post haste.
posted by Justinian at 8:19 PM on February 28, 2011 [11 favorites]
You're not talking about strategically defaulting but just plain ol' defaulting. You can't pay your bills. You should stop thinking about this as a strategic default and start thinking of it as You Are Bankrupt, and go from there. As others have said, one big issue is that student loan debt is a monster. I don't have the expertise to advise you on that. You'll have to talk to a debt person.
So my advice is first to acknowledge that you aren't in a position to strategically default on anything 'cause you plain ol' don't have any money to pay your debts, and two you should talk to a debt counsellor post haste.
posted by Justinian at 8:19 PM on February 28, 2011 [11 favorites]
To back up justinian, your two options would have been deferment and forbearance, and since those are all used up, you're out of options. Student loans are backed by the feds, and they will follow you around, so strategic default is not an option. If you've talked to the debtors and they literally don't care, I don't see an option other than plain ol' default or possibly a bankruptcy.
posted by Gilbert at 9:03 PM on February 28, 2011
posted by Gilbert at 9:03 PM on February 28, 2011
I wonder if it would make sense for someone in this position to get as many credit cards as possible, use them to pay off student debt, and then declare bankruptcy?
posted by LarryC at 9:20 PM on February 28, 2011 [4 favorites]
posted by LarryC at 9:20 PM on February 28, 2011 [4 favorites]
You're pretty much screwed with the student loans. You can default on the credit cards, tell the people who incessantly call you about them to stop, and they'll have to write you instead, and then you can throw their letters in the trash, and four years later (in California anyway) the statute of limitations will expire and you'll know for sure they can't sue you over it. Three more years after that and they'll fall off your credit report and you can have your fresh start. Ask me how I know.
Students loans though are pretty much for life, as far as I know.
posted by tylerkaraszewski at 9:31 PM on February 28, 2011
Students loans though are pretty much for life, as far as I know.
posted by tylerkaraszewski at 9:31 PM on February 28, 2011
LarryC: "I wonder if it would make sense for someone in this position to get as many credit cards as possible, use them to pay off student debt, and then declare bankruptcy?"
Negative. The bankruptcy "reform" act of 2005 made it a lot harder to do a lot of things in bankruptcy and one of the areas it tightened is discharging recently-acquired debt. Any cash advance over $750 made in the 70 days prior to the petition being filed (or luxury purchases over $500 in the 90 days prior) are presumed to be fraudulent and it is the debtor's responsibility to justify why the charges were made.
It is possible to rack up debt and not file for bankruptcy, but I would only do this as a resident of a state like Florida or Texas that makes collecting on an unsecured debt virtually impossible. However, creditors can and will still sue, even if the debtor is in one of those states, provided the debt is large enough.
If you're truly having a substantial hardship making these payments, discussions with a bankruptcy attorney would be wise. There are hardship discharge provisions for student loan debt, though the bar is incredibly high. However, most student loan borrowers have certain rights to restructure under income-based repayment plans, even under a private loan (though having a private loan severely limits available options). An attorney experienced in debt matters might be able to shake something loose from the student loan lender, even without an actual bankruptcy filing.
posted by fireoyster at 10:43 PM on February 28, 2011
Negative. The bankruptcy "reform" act of 2005 made it a lot harder to do a lot of things in bankruptcy and one of the areas it tightened is discharging recently-acquired debt. Any cash advance over $750 made in the 70 days prior to the petition being filed (or luxury purchases over $500 in the 90 days prior) are presumed to be fraudulent and it is the debtor's responsibility to justify why the charges were made.
It is possible to rack up debt and not file for bankruptcy, but I would only do this as a resident of a state like Florida or Texas that makes collecting on an unsecured debt virtually impossible. However, creditors can and will still sue, even if the debtor is in one of those states, provided the debt is large enough.
If you're truly having a substantial hardship making these payments, discussions with a bankruptcy attorney would be wise. There are hardship discharge provisions for student loan debt, though the bar is incredibly high. However, most student loan borrowers have certain rights to restructure under income-based repayment plans, even under a private loan (though having a private loan severely limits available options). An attorney experienced in debt matters might be able to shake something loose from the student loan lender, even without an actual bankruptcy filing.
posted by fireoyster at 10:43 PM on February 28, 2011
You just have to be willing to relocate.
Keep this in mind. Not that leaving the US is something you want to undertake lightly but there a fair few countries that are relatively easy for Americans to immigrate to, have strong and growing economies with decent job prospects, and make citizenship a pretty fast process (in some cases just a few years residency). Some of these are even first world countries.
Yeah, talk to a bankruptcy attorney to see what your options are. But I know if I was facing $100,000 in non-dischargeable debt and living in a country with bleak job prospects in my field (or out of), starting a new life in another country might start to sound like a reasonable plan, even if it ultimately meant giving up US citizenship. Something to consider at least.
posted by 6550 at 12:51 AM on March 1, 2011 [4 favorites]
Keep this in mind. Not that leaving the US is something you want to undertake lightly but there a fair few countries that are relatively easy for Americans to immigrate to, have strong and growing economies with decent job prospects, and make citizenship a pretty fast process (in some cases just a few years residency). Some of these are even first world countries.
Yeah, talk to a bankruptcy attorney to see what your options are. But I know if I was facing $100,000 in non-dischargeable debt and living in a country with bleak job prospects in my field (or out of), starting a new life in another country might start to sound like a reasonable plan, even if it ultimately meant giving up US citizenship. Something to consider at least.
posted by 6550 at 12:51 AM on March 1, 2011 [4 favorites]
nthing that basically nothing will get rid of that student loan debt, including filing a bankruptcy. That kind of stuff only gets discharged when it is impossible to ever be repaid, e.g. you're 65 and on SSDI from a chronic disease and will never work again. Honestly, maybe moving to another country could be a good bet, although I'd want to talk to competent lawyers here in the US and there, wherever "there" is, to be sure that my debt couldn't follow me across borders.
posted by Aizkolari at 4:52 AM on March 1, 2011
posted by Aizkolari at 4:52 AM on March 1, 2011
I hate to say this, but the above answerers are correct: you're basically screwed.
Student loans are not impossible to discharge in bankruptcy, but you need to demonstrate undue hardship, which is a really high bar and something about which judges have a decent amount of discretion. But nothing you've said here indicates that you're a good candidate. You've been dealt a shitty hand, but you appear to be able-bodied and looking for work.
Getting a college education isn't a guarantee of gainful employment, so the mere fact that it isn't working out for you isn't enough. You need to be able to show that there's something unusual about your situation, i.e. you're permanently disabled, your children have unbelievable medical bills, etc. None of those seem to apply here.
You should still consider bankruptcy, as you can probably make the $30k go away, but the rest of it you're probably stuck with.
Look into income based repayment.
posted by valkyryn at 5:17 AM on March 1, 2011
Student loans are not impossible to discharge in bankruptcy, but you need to demonstrate undue hardship, which is a really high bar and something about which judges have a decent amount of discretion. But nothing you've said here indicates that you're a good candidate. You've been dealt a shitty hand, but you appear to be able-bodied and looking for work.
Getting a college education isn't a guarantee of gainful employment, so the mere fact that it isn't working out for you isn't enough. You need to be able to show that there's something unusual about your situation, i.e. you're permanently disabled, your children have unbelievable medical bills, etc. None of those seem to apply here.
You should still consider bankruptcy, as you can probably make the $30k go away, but the rest of it you're probably stuck with.
Look into income based repayment.
posted by valkyryn at 5:17 AM on March 1, 2011
Public Service Loan Forgiveness. Lots of stipulations, but worth a shot. 10 years isn't that long if you're young and it sounds like you might be.
Also, I hope you're not looking for under the table work online. Sounds like you have a medical condition that is causing problems with getting a job.
posted by cashman at 5:58 AM on March 1, 2011
Also, I hope you're not looking for under the table work online. Sounds like you have a medical condition that is causing problems with getting a job.
posted by cashman at 5:58 AM on March 1, 2011
IANAL, but I think it would be worth talking to one.
Here's my thinking- I know under that under bankruptcy reforms, private loans are nondischargable, but if you did get a bunch of credit cards to pay the loans off... then what? The loan companies have their money. They aren't going after you. If you tried to file bankruptcy on the new credit card debt, the judge may very well opt to not discharge the credit card debt, but you could just not pay the credit cards. It will take a while, possibly longer than it would take for a bankruptcy fall off your credit report, but eventually, if you just *don't pay* the credit cards, the debt will go away.
The other thing is that (and I know this from personal experience) a private loan will eventually be charged off if you don't pay it. Once it goes to collections, you can settle. I settled a loan of $7K, with fees and interest it was up to $10K, for $2800. Now, I wrecked my credit- my version of playing hardball was to be totally broke, unemployed virtually that entire time, and not pay a thing on it for nearly five years, but I saved $4200-$7200, and now, ten years later, my credit score is 700.
You don't have to pay these. You just can't expect to not pay, and have credit. Eventually, you will probably be able to get credit again, but you will have to plan on living without it for a long time. This is more or less what I did. I rented from individuals, rather than management companies, and always paid cash for cars. It was not as difficult as some would have us believe. It is even easier now, with services like Mango Banking where no credit score is required. Considering that these are credit cards and private student loans, not federal ones, I don't think that they can garnishee your check, but I would talk to a lawyer, or at least buy some books from Nolo, to ensure that your check won't be tapped.
My tactic for preserving my credit was two fold: I paid off one small government student loan, a $1000 Perkins loan, and paid $40 per month over two years to pay it off. Then I got a car loan- at 13% interest- but making your car payment on time boosts your credit faster than almost anything else. Once I got the car paid off, my credit was fine, and after that, I borrowed money very judiciously and literally have never been late on anything, and now my credit is good. My remaining government student loans are in IBR, my payments are $0, and whatever is left on them will be discharged in 20 years or so. I can live with this, especially since making my $0 payment on time every month boosts my credit score.
Another tactic to preserve/improve credit is to take out a credit card or a loan that's secured by a CD. How it works is that you get $500, open a CD, and borrow against the CD and pay back the loan over time. And at the end of the loan term, you'll have your $500 back, plus a few points in interest. You'll pay more in interest than you'll earn, but that is the cost of improving one's credit.
Honestly, if I were in your position, I would either try some version of the above, or I would move out of the country. I would also spend this unemployment time haunting CreditBoards. If there is a way to game this situation, those people have found it.
posted by Leta at 6:27 AM on March 1, 2011 [3 favorites]
Here's my thinking- I know under that under bankruptcy reforms, private loans are nondischargable, but if you did get a bunch of credit cards to pay the loans off... then what? The loan companies have their money. They aren't going after you. If you tried to file bankruptcy on the new credit card debt, the judge may very well opt to not discharge the credit card debt, but you could just not pay the credit cards. It will take a while, possibly longer than it would take for a bankruptcy fall off your credit report, but eventually, if you just *don't pay* the credit cards, the debt will go away.
The other thing is that (and I know this from personal experience) a private loan will eventually be charged off if you don't pay it. Once it goes to collections, you can settle. I settled a loan of $7K, with fees and interest it was up to $10K, for $2800. Now, I wrecked my credit- my version of playing hardball was to be totally broke, unemployed virtually that entire time, and not pay a thing on it for nearly five years, but I saved $4200-$7200, and now, ten years later, my credit score is 700.
You don't have to pay these. You just can't expect to not pay, and have credit. Eventually, you will probably be able to get credit again, but you will have to plan on living without it for a long time. This is more or less what I did. I rented from individuals, rather than management companies, and always paid cash for cars. It was not as difficult as some would have us believe. It is even easier now, with services like Mango Banking where no credit score is required. Considering that these are credit cards and private student loans, not federal ones, I don't think that they can garnishee your check, but I would talk to a lawyer, or at least buy some books from Nolo, to ensure that your check won't be tapped.
My tactic for preserving my credit was two fold: I paid off one small government student loan, a $1000 Perkins loan, and paid $40 per month over two years to pay it off. Then I got a car loan- at 13% interest- but making your car payment on time boosts your credit faster than almost anything else. Once I got the car paid off, my credit was fine, and after that, I borrowed money very judiciously and literally have never been late on anything, and now my credit is good. My remaining government student loans are in IBR, my payments are $0, and whatever is left on them will be discharged in 20 years or so. I can live with this, especially since making my $0 payment on time every month boosts my credit score.
Another tactic to preserve/improve credit is to take out a credit card or a loan that's secured by a CD. How it works is that you get $500, open a CD, and borrow against the CD and pay back the loan over time. And at the end of the loan term, you'll have your $500 back, plus a few points in interest. You'll pay more in interest than you'll earn, but that is the cost of improving one's credit.
Honestly, if I were in your position, I would either try some version of the above, or I would move out of the country. I would also spend this unemployment time haunting CreditBoards. If there is a way to game this situation, those people have found it.
posted by Leta at 6:27 AM on March 1, 2011 [3 favorites]
I just ignored my payments, letters etc. When i finally got a decent job they garnished my wages, and i didn't have to think about it at all.
When I bought a car I brought up my student loan debt and the banker said that and medical bills don't matter as far as credit ratings go ( i didn't even HAVE a credit rating so that probably didn't matter anyway).
I also had a friend who did as Leta did and negotiated with the collector to settle his debts, he paid about 1/4 of what he owed.
posted by Max Power at 6:39 AM on March 1, 2011
When I bought a car I brought up my student loan debt and the banker said that and medical bills don't matter as far as credit ratings go ( i didn't even HAVE a credit rating so that probably didn't matter anyway).
I also had a friend who did as Leta did and negotiated with the collector to settle his debts, he paid about 1/4 of what he owed.
posted by Max Power at 6:39 AM on March 1, 2011
*the private loan that I settled on was a private student loan- I didn't specify in the earlier post, sorry, and I wanted to make that clear*
posted by Leta at 6:47 AM on March 1, 2011
posted by Leta at 6:47 AM on March 1, 2011
As everyone said already, the student loans are a bitch. You're pretty much stuck. But look on the bright side, the worst thing they can do is garnish your wages to the tune of (I think) 15% of your discretionary income (it might be 20%, I can't remember). That's probably less than you would owe on a 10 year repayment plan anyway, it's not the end of the world. Keep trying to get back on your feet, don't do something drastic like flee the country just because of student debt. Although that still may be an option to find a job. Talk to a bankruptcy lawyer if that's the way you need to go, the other debts can be discharged.
posted by T.D. Strange at 7:02 AM on March 1, 2011
posted by T.D. Strange at 7:02 AM on March 1, 2011
Here's my thinking- I know under that under bankruptcy reforms, private loans are nondischargable, but if you did get a bunch of credit cards to pay the loans off... then what?
Just my two cents on the theory behind this comment - that sounds an awful lot like fraud to me. You can't take out loans, bury the cash in your backyard and then declare bankruptcy. Or rather, you can, but if they suspect that's what you've done, you can face criminal charges (depending on this and that, circumstances, etc). This sounds a lot like what Leta is suggesting. Be very careful of anything along the lines of "gaming" the system to make sure you don't get in more trouble.
posted by loquax at 7:35 AM on March 1, 2011 [1 favorite]
Just my two cents on the theory behind this comment - that sounds an awful lot like fraud to me. You can't take out loans, bury the cash in your backyard and then declare bankruptcy. Or rather, you can, but if they suspect that's what you've done, you can face criminal charges (depending on this and that, circumstances, etc). This sounds a lot like what Leta is suggesting. Be very careful of anything along the lines of "gaming" the system to make sure you don't get in more trouble.
posted by loquax at 7:35 AM on March 1, 2011 [1 favorite]
Any bk lawyer giving you Leta's advice (pay the student loans with the cards and then try to file and get that debt discharged) would be breaking the law by advising you to do something that is technically illegal.
It could work, but you would want to let 3-5 years pass between paying off the student loans and filing to get rid of the credit card debt so that the creditors won't look too carefully at what kind of debt it really is. I am not a lawyer and this is not legal advice, and is probably a bad idea anyway.
posted by Aizkolari at 8:22 AM on March 1, 2011
It could work, but you would want to let 3-5 years pass between paying off the student loans and filing to get rid of the credit card debt so that the creditors won't look too carefully at what kind of debt it really is. I am not a lawyer and this is not legal advice, and is probably a bad idea anyway.
posted by Aizkolari at 8:22 AM on March 1, 2011
For the record, if you DO have a degree in almost any kind of undergraduate field you can probably teach english overseas in Korea for kids for about 2300 a month plus free room and usually a plane ticket. I did it. I even sent a girl I went on a date with over there. You don't make a ton but it sounds like anything might help you at this point. Check out DavesEslcafe.com and look at the Korean Job board. They also have jobs in Hong Kong, China and elsewhere but all that is a lot harder to get and pays crap. Korea I got hired on a Tuesday and was overseas by Friday. Mind you the owner was a crook but for 11 1/2 months it was still a good deal all around.
Now some of them want additional certifications (some of which you can take in a basic way in a three week course) and some are just happy enough to have warm bodies with degrees who look traditionally American and like kids.
It's not a magic bullet but your expenses are mostly paid for over there so you could concievably throw most of your salary at either the loans or the credit cards.
posted by rileyray3000 at 9:18 AM on March 1, 2011 [2 favorites]
Now some of them want additional certifications (some of which you can take in a basic way in a three week course) and some are just happy enough to have warm bodies with degrees who look traditionally American and like kids.
It's not a magic bullet but your expenses are mostly paid for over there so you could concievably throw most of your salary at either the loans or the credit cards.
posted by rileyray3000 at 9:18 AM on March 1, 2011 [2 favorites]
I have several friends who have taught English abroad, some even took their kids. One friend did this Dubai and made a ton. So, yeah, it's a thought.
posted by Leta at 9:41 AM on March 1, 2011
posted by Leta at 9:41 AM on March 1, 2011
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