“I can’t afford to pay my credit cards anymore…what do I do?” Part 1
I have $120K in credit card debt, primarily as a result of financing a business which took a big hit from the recession. Some of the cards are “Business” cards others are personal (about 7 cards). Interest rates all over the map (6-24%) I have paid the minimum monthly payments of all them on-time many I’ve had for more than 10 or 15 years. I believe I’ve had maybe two 30-day late payments (by accident) in the past 7 years.
I’ve done my homework. I’ve attempted to negotiate lower rates but because I have no history of not being able to pay, the only way I can get lower rates is to have a Debt Management Service (DMP) negotiate them.
I have determined that I can no longer make the minimum payments on all the cards (it has eroded my savings to nothing) and I need to build back up an emergency fund, resume saving for retirement and childrens college. I have $200K equity in my home which is inaccessible as I already have the max mortgage I can qualify for. Moving is currently not an option (for reasons I won’t go into) and bankruptcy is not an option as the judge will see I have enough equity to erase the debts if I sold my home.
I’m trying to determine which strategy will have the least negative effect (both credit score wise and length of time that it effects my credit score):
a) Enroll in a DMP. This will make it so I am unable to access the available credit which in order to make ends meet I have to do each month (as a result the balance on a couple cards are not going down) This also runs the risk that further hardship will not allow me to make the DMP payments. So I would only enroll half the cards in this with highest interest (two which are closed anyway due to the original bank going out of business.) Credit Counseling agencies are unable to provide clear answers on how the DMP will effect my credit. They say it varies on the creditor and how the report it.
Wow, so far I must say I’m impressed with your research, you are far more educated then most people, but I must say again that it amazes me how many people get really bad advice from “experts” that have no practical experience outside of their own field/job or what they need to know to “sell” you a service.
I’m going to answer this very long question in a couple posts…
To clarify, I’m assuming in my answers you have been making the minimum payments on these cards from savings, and are unable to continue doing so with your current income…
DMP in my opinion is one of the worst things anyone can do, it’s just really sad to say it but it’s true. DMP when it’s free, is paid (mostly secretly) by the Credit Card industry and it’s purpose is to MILK out the last pennies a morally responsible debtor has before they finally file for BK.
The bad DMP’s will promise to improve your credit over time (but most have such horrible accounting practices that you’ll end up with LOTS of late payments while they manage the program.) They will of course have lots of excuses over the phone and hidden in their contracts as to why the late payments were inevitible, expected and not their responsibility, although they will never tell a client before they sign that they most likely will have many late payments in the process. The client EXPECTS that their credit will improve over time and although in theory the score will improve because the debt to limit ratio improves, it will NOT improve until you get NEW credit cards with available limits, so the score improvement did NOT come from the DMP service.
The good ones will successfully negotiate a lower payment and in some cases drop interest rates to zero, but you’ve obviously done the math… if you have been paying these payments from savings and that is gone, you can’t afford to pay a large enough payment to actually get the debt reduced.
A person in a DMP is reported by the creditors to the credit bureaus… ALL of them that participate (and some that decline) will report you as “in debtor repayment program” or something similar. Your credit score will TANK as badly as if you filed a Chapter 13, and if by some MIRACLE you don’t rack up late payments from the DMP mis-management of the payments. All of your creditors will RARELY change the listing back to paid as agreed, without the threat of a lawsuit. (some will, some won’t but it only takes ONE notation on the file to trash the score.)
IF by some chance, the DMP OR the creditor agree to reduce the principle balance they WILL report the paid acct as “settled for less then the full amount” and this notation will tank your score for the next 7 years.
Enrolling 1/2 of your cards won’t hurt your score more or less then just one of them. Once you enroll, and the first notation hits the credit file, ALL your credit cards will close/reduce your available credit, you won’t have any available credit.
Your option b… stop making credit card payments for 2-3 months is equally flawed. I will cover this in more detail in my next post…
For your Health, Wealth and Liberty