My credit has been trashed by me making some dumb decisions, and I'm working with a debt settlement company. A few of the debtors are unwilling to negotiate with the debt settlers and are threatening me with judgments. I'm at the point where I have done all I can do and it doesn't seem to be making much of a difference if I pay or not. It also looks like most of the settlements that have been finalized are still going to be reporting negatively on my credit for 7 years, which is apparently the same amount of time a bankruptcy lasts. I want to play fair and continue with payments, but when people start to get greedy like this I am ready to just stop caring.

With this in mind, it makes me wonder if bankruptcy is a better option, but I have no idea what the pros and cons are of either. I would prefer the option that will give me the most peace of mind and allow me to start saving money as soon as possible. I don't plan on ever using credit again.

edit* Some specific info about my situation, although an answer of pros and cons in general for bankruptcy are all I am really looking for: 25 years old, single, 8k revolving debt, 18k car debt, 15k student debt, and I own a home with a 1280 mortgage payment. I got into this situation because it took me a long time to find a job and things stacked up simultaneously, but now I make 62k annual.

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    I dont know the american credit rating system, but another important point is the money itself. Say you can pay 1k per month towards your debtors which would amount to 84k over 7 years. If you owe less than that, then paying it off is the faster and easier solution - and you played fair. If it is about that sum or a little higher, then it can be a tricky question. If you owe way more than that - bankrupcy will save you money (still can have other negative side effects but that will be very location specific I guess) – Flo Dec 3 '14 at 23:27
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    Lawyers who offer BK services offer a free consult. But they earn money when you file, so their advice may be biased. Your income (when above median income) may push you into Ch 13 repayment plan (3-5 years), and repayment is hard (lookup percentage of filers who fail to complete the repayment plan). The 7 year clock doesn't start ticking until the repayment period (3-5 years) ends. But Ch 7 may be worse - forcing the sale of posessions you may want to keep. – ChuckCottrill Dec 4 '14 at 0:44
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    Are your debt consolidation representatives lawyers or non-lawyers? If non-lawyers, I suggest getting lawyers. They usually charge less, negotiate better, and can even sue if the creditors are making harassing calls. – barrycarter Dec 4 '14 at 1:03
  • @barrycarter They are non-lawyers, but I wish I had gotten lawyers with that in mind. – deadflowers Dec 4 '14 at 14:50
  • Hate to ask, but why do you own the home rather than renting? That's VERY premature at age 25, in my opinion, unless it was inherited. It'd be pushing the bounds, in my opinion, even if you had that projected salary. – keshlam Dec 4 '14 at 16:35
up vote 12 down vote accepted

Bankruptcy should be your last option, and you will find that BK will not resolve most of your problems, and create many more problems.

There are two kinds of BK that are available to the average person, Ch13 debt repayment and Ch7 liquidation. Both have severe repercussions and lasting effects on your credit (7-10 years, after discharge). And the calculations required under the 2005 BAPCPA are complex and may require help to understand. Ch7 liquidation is the more severe course, and the trustee would liquidate assets that exceed exemptions (vary by state) to pay your creditors. Ch13 debt repayment is hard, and only 20-25% of those who pursue that route complete the debt repayment plan. Your credit score for either course would suffer greatly (200-250 points) and would remain reduced for years, especially since you would have to rebuild credit. And the law is flawed both in design and execution as there is no reward for successful debt repayment, few finish their repayment plan (20-25%), the mean recovery for unsecured creditors in repayment is zero (thus does not help creditors), and leaves the debtor with damaged credit for years (not a fresh start).

Although you may have made some decisions that have placed you in a difficult position, you can find solutions to resolve these problems. You may find that simply learning to make better choices will improve your situation. Take a financial education course (such as the Dave Ramsey course), and learn how to budget, and make better choices. The LearnVest website offers a simple way to budget by dividing budgeting into only three (3) categories with suggested percentages for each, essentials (<50%), financial priorities (>20%), and lifestyle (<30%).

The damage to your credit from the derogatory effects of BK would linger for years, but the damage from poor payment history declines much quicker, and loses most of the effect after 2 years (and should you keep the accounts open, leaves you with good history and longer account history), thus the effects decline to minimal after as little as 2 years of good behavior/payment history.

Make a plan that prioritizes the debts, and how you will resolve the problem, and work the plan. Based upon the income and debts you mention, the situation you have may not be as bad as it appears. You may be getting bad advice, especially from a debt settlement company that might be more interested in their fees than in your problem.

Since you "want to play fair and continue with payments, but when people start to get greedy like this I am ready to just stop caring", you really need two things, a plan, and a friend, someone who you can talk to honestly and openly, and who can support you as you work through the plan you make.

Since you "would prefer the option that will give me the most peace of mind and allow me to start saving money as soon as possible", you need to find an approach that fits your goals. Your statement that you "don't plan on ever using credit again", fits with the Dave Ramsey philosophy and resonates with many of us who have learned that those who grant credit are often harsh masters.


Now that you have provided more information, the advice below expands upon the above reflecting upon your specific situation.

Since you make $62K/year, you may be close to the median income, and the BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) has a presumption of abuse for filing Ch7 when you have above median income (for your state, check the law). As you may be pushed into Ch13 debt repayment anyway, examine what you could do to repay the debt (over 5 years, 60 months, as that would be a Ch13 repayment duration).

Since you have $8K of revolving (unsecured?) debt, that would be repaid in Ch13 over 60 months at about $133/month (no interest), but you would also be paying 10% to the trustee. There might be some portion of your auto debt which is unsecured, and also be repaid unsecured, suppose that is $3000. That would add another $50/month to the plan.

The car could be repaid over 60 months (including interest), so you might be repaying $300/month for the car (estimate), although the payment could be higher or lower depending upon how much of the value of the car is unsecured. The trustee might object that the car is too expensive (depends upon the value, and the trustee), and require be liquidated.

Since BK excludes relief for student loans, you might find yourself paying the student loans at the same payment.

Your $62K income suggests that you have about $4200/month (guess, after taxes). The mortgage payment is higher than 25% ($1050-1100 would be ideal for your income). But after your mortgage payment you should still have about $3900. Even with $300 for credit card debt, $500 for car, and $400 for student loans (guessing), that leaves $2700 for essentials (utilities, food), lifestyle (cellphone, entertainment), and savings.

You might find a friend who is good at budgeting who would be willing to help you craft a budget and be your "responsibility partner" to help you stick to the budget.

Here is a sample plan (your mileage may vary),

Essentials (50%, $2100): $2180

  • Mortage $1280 (about $200 high for your income)
  • Utilities (gas, heat, water, trash) $300
  • Food $400
  • Fuel $100
  • Car Insurance $100

Financial (30%, 1230): $1250

  • Car payment $500 (<10% of income, goal $400, sell car get cheaper?)
  • Revolving payment $300 (focus to payoff first, smallest debt, and highest interest)
  • Student loan payment(s) $400
  • savings $50 (you need $1000 emergency fund)

Lifestyle (20%, 840): $500 (pick up slack here, as you have high debt load)

  • internet $50 (limit your internet, can you dump cable for netflix?)
  • cable $50 (limit your cable bill)
  • entertainment $100 (limit your costly entertainment until debt reduced)
  • dining out $100 (limit your dining out which you have debt)
  • (cell)phone $100 (could you reduce to $50 to pay more against debt?)
  • clothes (limit your spending until your revolving debt under control)
  • other ?
  • Very nice, I am rereading the Dave Ramsey books I have so it will burn good finance habits into my brain, and I think the percentages for dividing income is a very handy idea. Thanks for splitting it up like that for me, I have a lot to learn about budgeting still and this helps a lot. – deadflowers Dec 5 '14 at 15:10

You cannot just decide to declare bankruptcy and make the debts go away.

Bankruptcy proceedings under chapter 7 include accounting of all of your assets and income, and all of your debts, and dividing all your assets and income (except for amounts left for your own support) between the debtors.

So if you can (i.e.: capable) pay the debts off - there's nothing magical in bankruptcy that will make it any better for you. You will still pay the debts off, except that now you will also have the huge (and much heavier) stain of bankruptcy.

For chapter 7, the length it stays on the credit report is 10 years, not 7.

Under chapter 13, the procedure is less drastic (doesn't include complete liquidation of all of your assets), but the result is equally not as good - you still pay all your debts but they may be reorganized (interest rates change, durations change, some things can still be charged off - but not likely if you actually have the capability to pay).

Chapter 13 stays on your credit report for 7 years.

  • That's what I suspected, I will just keep paying it off. I should have gotten lawyer settlers instead to help with the uncooperative collectors. – deadflowers Dec 4 '14 at 14:45

Keep in mind collectors are trying to get you to react emotionally, which is having some effect as you are considering bankruptcy.

...threatening me with judgments...

Did they threaten to take away your first born son too? Many of their threats are empty. Even if you do have a judgement, you may be able to negotiate with the lawyer that is handling the judgement. Once you don't pay them anything for a few years, they are more likely to negotiate.

It is good that you recognize that it was your dumb decisions that got you into this mess. Once on the other side of all this cleaning up that you have to do what will you change so this does not happen again? What raises a red flag for me is that you are worried about your credit score. Trying to have a good credit score is what got you into this mess in the first place.

Stop borrowing.

  • Very true, I say now that I will never borrow again, but when the cake's on the table it's harder to resist. I think everyone in this situation should decide sooner than later to save and never borrow. – deadflowers Dec 4 '14 at 14:52
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    I have done exactly that, and the difference it has made in my life is incredible. – Pete B. Dec 4 '14 at 19:18
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    You might also want to read some advice about the Fair Debt Collection Practices Act, as the creditors may be violating the law. Refuse to speak with them when they become abusive. Tell them you will only speak to them once per week, refuse to let them call your cell phone, and provide them a phone number that rings to an answering machine (I use Vonage, which sends me an email when they call). Call them on your schedule, be calm, be firm, refuse to ever give them your bank account number, pay by money order. They will adjust. – ChuckCottrill Dec 5 '14 at 1:41

If you are now in a better position to pay your debts, the wise move for your long-term credit is to consolidate any high-interest debt that remains and pay it off as quickly as possible. This may not be possible depending on your situation, but one way to get such consolidation loans is to have a parent with good credit cosign as guarantor on the consolidation loan. The only way your credit will recover is if you establish a good history of payments over the next seven years.

Frankly I wouldn't cosign a loan with a family member who made the same decisions you have made, because I wouldn't want to put my own credit at risk, but I might loan the money directly, which would ease the pain for that family member, but it wouldn't help their credit going forward.

This may not be a popular opinion, but without any details, it's hard for me to agree that any of your creditors are being greedy when they threaten a judgment. They loaned you the money in good faith, and now you are attempting to negotiate a change of terms.

Are they greedy because the interest rates are too high? Maybe you were a bad risk when they loaned the money and the rates reflected the risk of losing some portion of the money. The fact that you are trying to discharge some portion of that debt vindicates any high rates charged.

In a perfect the world, the most ideal solution would be to find a way to pay back all of your debt so that your credit will not be affected any further. Unfortunately, it does not work this way most of the time.

Debt settlement is where you work with a creditor to settle your a credit card debt for less than the full amount owed. This could be a very viable solution for you instead of filing for bankruptcy. However, there are many scams out there when it applies to debt settlement so you must tread carefully.

Debt settlement can only occur when you're behind on your payments. If you are currently paying off your payments successfully, the creditor has no obligation to settle when they think you should be able to pay it fully back.

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