Dear Credit Wise,
In the past three years, I have lost three jobs due to layoffs. Financially, it's wrecked me. I have been bending over backward to keep my payments current and have not missed a payment on any of my credit cards, car payments, personal loans or student loans. However, due to the short cycle of my layoffs, I unfortunately racked up my credit card balances after consolidating my debt, twice. My payments have reached the tipping point of me not being able to live on the dismal amount that's left over after I pay my bills.
Over 40 percent of my take-home paycheck is going to credit card debt (and that's not even factoring my car, student debt or rent/living expenses). I don't own a home, I don't have a savings, nor do I have an amazing trust fund/inheritance that I'm expecting in my lifetime. I've been researching my options, but I feel like none of them really fit my situation. I'm not late on my payments; I don't have a substantial savings that would allow me the power to attempt to negotiate a lump sum payoff to my creditors. I've considered bankruptcy, but it seems like that's a bad idea. I've looked into debt settlement companies, but that seems to be an even dumber/worse option than bankruptcy.
I'm not quite sure what to consider and who to talk to that would help point me in the right direction without any personal gain from the matter themselves. Any insight, advice or ideas that you may have I would greatly appreciate. Thanks in advance -- Joan
Dear Joan,
I have to say that you have done a great job keeping up with everything during a very tumultuous time. Three layoffs in three years would make it hard for just about anyone. I assure you that there are not many people out there who have a trust fund or inheritance that would solve all of their financial problems in one fell swoop. This means it is up to you to find a way out.
While both debt settlement and bankruptcy are options for handling your debt, I agree that neither is a great idea. Debt settlement can only work if you have a lump sum to offer, which you say you don't have. Debt settlement companies that rely on you for payments are not doing you any favors, because they are using your payments to build up that lump sum and not paying your creditors in the meantime. This is devastating to your credit score. In addition, there are tax consequences with settlements, because you are responsible for the taxes on any forgiven amount. Bankruptcy exists in this country for good reason, but should only be considered as a last resort. That, too, will play havoc with your credit score.