Reader Question
Dear Steve,
I owe over $20k in credit cards (Discover and Visa, both of which are maxxed out) and over $40k in student loans (which are currently deferred). I changed my spending habits and budgeting over the last 6 months. Despite all of this, I am still only able to make slightly more than the min payments every month (before I was making the min payments but charging again on my credit cards!). I don't think my income or budget situation can change that much more in the near future.
I managed to sell a bunch of my old things and collect money from friends and family and odd jobs. I have $4k in cash, but it is very unlikely that any future months will be like this. Again, I am barely able to pay a little more than the minimum payments.
Should I:
1. Pay it towards the higher APR credit card? This would make my credit score better but I'm still left with a huge chunk of debt.
2. Try to settle the debt with the credit card company? Not sure if this could work for me but
I have heard of people having to pay half the balance with some negative effects to credit scores. My credit score is currently at 680. It would be a HUGE relief I owed less money overall, even if my credit score took a hit.
Advice?
Annie
Answer
Dear Annie,
The most critical point you shared was that your student loans are deferred. While they are in deferment they are just growing and growing. Deferring your student loans does not solve anything. It makes it worse.
The point you are at right now is reacting to the credit card debt because it is the most in your face. The student loan debt is just sitting there quietly, ticking by.
The student loan debt is the time bomb, not the credit card debt.
I don't care what your credit score is because one way or another it's going to take a hit to drag you out of this financial quicksand. Besides, the credit score can be easily rebuilt.
The other key bit of information you shared was about your repayment strategy so far. After tightening the budget and selling stuff not nailed down you could part with, you are still close to running negative each month.
When you pay the card minimums but might have to use the cards to get by, that's a clear sign you can't afford the minimum payments.
And on top of all of this I would safely bet you are unable to save money each month and have no sustainable emergency fund to fall back on.
The most logical approach at this point would be to get a legal fresh start and second chance through bankruptcy.
That would allow you to eliminate the credit card debt and get back to making full student loan payments to knock that debt off as soon as possible.
You need to change your mindset and see what we really have here is a math problem wrapped in emotion. The math seems to clearly indicate the likely chance of you making payments to dig out of this in a reasonable period of time are slim.
Any repayment strategy you embark on must also have a saving component to it as well. Just making the minimums or barely over, without a cash windfall is going to cost you years of your life and lost saving for retirement when you can least afford it.
Many people have misperceptions about bankruptcy and there are many common myths about bankruptcy that are just untrue.
Rather than stay the current course, I beg you to take some positive action to change your destination. Otherwise you will run onto the shoals and it won't be pretty. Your ship will sink.
It's always better to take proactive action to intervene than reactive action to fight back creditors.
Please post your responses and follow-up messages to me on this in the comments section below.
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