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Don't Qualify for Bankruptcy - What Can You do About Credit Card Debt?
Last Updated: March 8, 2011
I've counseled many people who were $50,000, $75,000, $100,000 and even more in debt. Due to the changes in bankruptcy law in 2005, many people who could have done a Chapter 7 bankruptcy in the old days are now out of luck. They don't qualify for bankruptcy simply because they don't pass the bankruptcy Means Test. If you find yourself in this situation, what should you do?
Take This Test
What you can do depends on the answers to the following "test" questions. Some of them may sound ridiculous, but I have to ask. Sometimes when people are panicked, they aren't thinking and may overlook the obvious.
- Do you have any equity in your home?
- Do you have any cash to settle your debts?
- Do you have 401K funds or retirement savings?
Do You Have Equity in Your Home?
Can you refinance your home and pull cash out to pay off your credit cards? This assumes good credit and enough equity to make the refinance worthwhile to you and your family. If the answer is no, then go to Test 2. If the answer is yes, then go ahead and refinance your home to pay off your debts.
Do You have Cash to Settle Your Debts?
You would be amazed how many people do have some cash to settle their debts, but want to hang on to it instead of paying off credit cards. Often, this is a mistake as the interest on your credit cards can be as much as 30%. You should run the numbers to see if it makes sense.
Let's say the numbers are overwhelmingly in favor of paying off cards versus keeping money in a savings account. There may be another reason to hold off spending your cash: emergency reserves. If you don't want to use your cash because you want it as an emergency fund, this might be a good idea. If you're unemployed or your employment situation is shaky, having reserve cash can get you through some tough times.
Questions you should be asking yourself (and there are no "right" answers):
- Your savings are paying what interest rate per month?
- What is the interest on your credit cards? How much in finance charges are you paying per month?
- Do you feel more secure having a little cash saved?
If the answer is no, you don't have cash, or no, you don't want to use it, then go to Test 3. If the answer is yes, you have cash and want to use it, then you may be able to settle your debts with the credit card companies. Read this article on debt settlement to learn how to do this.
Do You Have a 401K or Retirement Fund?
Accessing your 401K or retirement funds is sometimes a route people want to take. You must be careful about this, though, especially if you are near retirement age. Taking out money from 401K or investment mutual funds makes the temporary (we hope) loss in your portfolio permanent. Why is this? If you hold on to your mutual funds portfolio, they have a chance to recover. If you withdraw money now, you are essentially selling at the low point of your mutual funds. Here are other things to consider when pulling funds out of your 401K or IRA.
If the answer is NO to all of these questions, you only have one option.....
Stop Making Credit Card Payments
This sounds ridiculous, but I mean really, what other option do you have? You are really backed into a corner here. Stopping the payments to your creditors is what happens when you file for bankruptcy, so you are creating your own "bankruptcy" status. If you create your own "bankruptcy" by not paying your cards, you are doing so without the hassle of the court system, but also without the protection of the court system.
Let's say you did qualify for a bankruptcy. What are the advantages and disadvantages to filing a BK Chapter 7 and not paying your debts:
Filing Bankruptcy Chapter 7
- You don't have to make payments on your credit cards.
- All of your debts are wiped out, your creditors will not be contacting you.
- Your credit is really ruined for 10 years. You will have a tough time getting an unsecured credit card. It's tough to get a bankruptcy off your credit report.
Not Paying Your Credit Cards
- You don't have to make payments on your credit cards.
- All of your debts are not wiped out, your creditors will hounding you.
- Your credit is ruined for 7 years. Late payments and any corresponding collections only stay on for 7 years from the date of first delinquency. You will have a tough time getting any credit for a while.
- It's possible to fix your credit before the 7 year reporting time is up.
Not Paying Your Debts vs Filing Bankruptcy
Your strategy should be:
- Stop paying your bills.
- Put aside the money you were paying the credit card companies into a separate saving account. This will be used for possible settlement with collection agencies later.
- Save all correspondence from credit card companies and collection agencies.
- Don't answer the phone unless you want to talk to the credit card companies or collection agencies. Talking to them is not recommended.
- Once you get a letter from a collection agency, send them a debt validation letter IMMEDIATELY.
- Once you have enough money saved, you should attempt to settle your debts with the collection agency. You can settle for 10-25% on the dollar.
If You Stop Making Payments on Your Credit Cards, What Happens?
Time line:
| Time From Last Payment | Action Taken Against You | Who is Holding Debt |
|---|---|---|
| 0-30 days late: | Nothing | Credit Card Company |
| 30-60 days late | Phone call from credit card company or letter reminding you to pay | Credit Card Company |
| 60-90 days late | Increasingly urgent phone calls from credit card company or letters reminding you to pay | Credit Card Company |
| 90-120 days late | Increasingly urgent phone calls from credit card company or letters reminding you to pay. Possible Settlement Offer Letters | Credit Card Company |
| 120-150 days late | Phone calls and letters, possible settlement offers, possible charge off. | Credit Card Company |
| 150-180 days late | Phone calls and letters, possible settlement offers, possible charge off. | Credit Card Company |
| 180+ days late | Charge Off | No One |
| 6-8 months | Sold/Assigned to Junk Debt Buyer(JDB)/Collection Agency (CA) | JDB/CA |
| 8-12 months | First contact made by CA/JDB, either by phone, letter or mark on credit report. Possible lawsuit | JDB/CA |
| 12 months until Statute of Limitation Expiration | letters, calls, possible lawsuits | JDB/CA |
Frequently Asked Questions
Q. Do credit card companies sue you?
A. No. First of all, let me define a credit card company as any financial institution that issues a credit card, which could include your independent small bank or a credit union. Credit card companies either sell or assign bad debts to collection agencies or junk debt buyers. Credit card companies write off the bad debt and take the tax benefit.
It is a collection agency or junk debt buyer that could sue you. In some cases, the collection agency or junk debt buyer will name the credit card company as the plaintiff in the lawsuit, which is not quite legal, but gives them advantages. Read up on this practice.
Q. Do you know which collection agency will get your account once it is charged off?
A. No. It is impossible to guess which collection agency will get your account after it is charged off. Bad debt paper is sold on the junk debt market to the highest bidder. In some cases, your credit card account will NEVER be sold or assigned to a collection agency.
Q. Do collection agencies ALWAYS sue?
A. No. In some cases, even if a collection agency is known for filing a large amount of lawsuits, they may not sue you. It is impossible to predict whether or not a collection agency will sue you.
Q. Can a collection agency or credit card company seize my house, garnish my wages or get into my bank accounts?
A. No one can ever seize your home - most states have homestead exemptions protecting your home from creditors. Since credit card companies do not sue - your credit card company would never seize your assets.
If (and it's a big if) a collection agency sues you, you can beat them in court. If they do win a judgment against you (another big if), yes, they can garnish wages and get into your checking account.
Q. When am I "safe" from lawsuits or when can I stop worrying about my debts?
A. You will be "safe" from lawsuits when the statute of limitations on your debt is up or you settle with the collection agency.
Do you have a question you feel we haven't answered?
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