When people think of consumer debt, they think of credit card debt. According to the Federal Reserve, however, student loan debt has now surpassed credit card debt among consumers.
A new report from the Government Accountability Office (GAO) urges legislators to revise the Fair Debt Collection and Practices Act (FDCPA) to give consumers more rights.
Bankruptcy is sometimes called a “financial weapon of mass destruction.” I think of bankruptcy more as a financial Project Genesis, because after the bomb goes off, you get a fresh start.
Whether to file bankruptcy is a business decision, not a moral one. If a business has more debt than money, it declares bankruptcy or goes out of business. Consumers cannot go out of business, but they can file bankruptcy. Bankruptcy is—and should be—a last resort, but if your debts are so numerous you cannot see a way out, it is probably time to talk to a bankruptcy lawyer.
Once a debt is in default—meaning you stopped paying it—one option is to attempt to negotiate a settlement with the creditor. (You can try this before you go into default, but creditors are rarely willing to play ball until you prove your poverty—and before they rack up some more fees.)
You could just pay the full amount of the debt, but that probably means paying a bunch of fees that bear little relation to your debt. And hey, it never hurts to ask.
When you make the call to negotiate a settlement, consider the following.
Nobody likes to talk about their debt. Not me, not you, not anybody. But your debts do not like to be ignored. As I wrote in my column for Consumerist yesterday , if you let your debts go into default and do nothing, it could end up hurting.
Credit card companies in particular want you to ignore your debts. While you do, they and the buyers of their debt will add bucketloads of fees and interest. Then, in a few years, someone will sue you for twice the original balance (or more).
Negative information may remain on your credit reports for seven years, ruining your credit and making everything you buy on credit more expensive.While you may be able to win your lawsuit if the original creditor or a debt buyer sues you at some point, that costs more money.
Even if you think you are judgment proof, think hard before deciding to do nothing. Judgments are good for ten years, and may be renewed indefinitely. While your creditors may have a hard time actually collecting, you may spend a lot of time fending them off.
Ignoring your debts is not a real option, even though it is the option most consumers seem to take.
(photo: Andres Rueda)
Credit counseling is, quite frankly, someone you can do on your own. But this is true of a lot of things in life. JLP over at AllFinancial Matters recommends seeking out a credit counselor in the following situations (via The Consumersâ€™ Guide to Credit Counseling by Liz Pulliam Weston):
Those look like pretty reasonable times to look for a counselor to me. However, take my Mom’s advice: always make a payment, even if you can’t afford to make the minimum. If you will be back on your feet in a couple of months, float. Your debts will probably not go into collections if you are paying something, and it is better not to spend money on a credit counselor–or risk getting screwed by one–if you can get out of debt on your own.