Ok, I know what you’re thinking: “What, another bankruptcy lawyer setting up a new client.” Or, “Has this guy lost his mind?”.
But hear me out. You may be surprised where we go.
Let’s get this out of the way: should everyone stop paying their credit card bills? Of course not! If you are able to pay your credit cards, then pay them. Period.
But what if you’re not? What if paying your credit cards impacts your ability to pay for other more necessary expenses? Then you should seriously consider paying these other expenses, even at the expense of not paying your credit cards. Let’s look at why.
No one should have credit cards. The only exception to this rule is if you are trying to buy a house, then the FICO score required to get a mortgage is pretty dependent upon you having a credit card and keeping it in good standing. So you’re off the hook, and should stop reading now.
But, if you have credit card debt and your income makes it impossible to pay your basic expenses of living, then paying your credit cards should be the last thing on your mind, and drastic measures need to be taken to right your ship.
So, first and foremost, stop using your credit cards! This applies to you even if I told you earlier to stop reading and you ignored my advice. Do not, under any circumstance, increase your debt load. Do not dig the hole any deeper than it already is.
So you can (hopefully) pay for the basic necessities of life: food, rent, utilities, transportation. Any money you have left after paying these bills you need to save. Yes, put it aside-you will need it later.
This savings you are amassing is your emergency fund. That means that when the car breaks down (and it will), or some other minor financial tragedy occurs you’ll be ready to face it without reaching for a credit card.
Your emergency fund is the most important thing you can do financially at this point.
“But won’t the credit card companies be mad at me?” you might be asking. Answer: maybe. So what? What is more important-caring for your family when times are tough or putting an extra few hundred dollars in Citibank’s account? I guarantee you-the credit card company will be fine.
“Won’t I go to jail?” Nope, can’t happen.
“Won’t this kill my credit score?” Yep, definitely. Again, so what? If you are trying to buy a house in the next 3 years, then your FICO score can be important. If you aren’t, then it doesn’t matter since you shouldn’t be accruing debt anyway.
“Won’t the late fees rack up since I’m not making the payments?” Yes. But as you’ll see, it doesn’t matter.
Now, the credit card companies will start to call you. Incessantly. Tell them a couple of times that you can’t make the payments (you can’t). If they start to harass you or do other illegal things like call you at work after you’ve told them not to or start calling your neighbors and family members (I’ve this and much worse), then tell them that under the Fair Debt Collection Practices Act (FDCPA) that they are not to call anyone other than you at your home number. Then stop answering your phone or have your landline turned off. 🙂
After 90-180 days, the credit card company will do one of two things:
- Write-off the debt and sell it to a collection agency, or
- Sue you
Write-Off the Debt
This simply means that the creditor has decided that they can’t collect from you and have sold your account (along with a bunch of others) to a third party collection agency, and will take the rest as a “loss” (tax write-off). Now here’s the interesting thing: the collection agency will buy that debt from your credit card agency for somewhere between 3 and 10 percent of the amount of your debt. Say you owe the creditor $100. Typically, the collection agency will pay your credit card company about $5 to have that debt assigned to them. They essentially paid $5 for your debt, and anything they collect above that $5 is profit. They then take the other $95 you owe as a “necessary cost of doing business”: they write it off their taxes.
What do you think the chances are that the collection agency will accept a drastic settlement from you? Pretty darn good, because even if they accept a settlement form you for $25, that’s still a huge profit for the collection agency. Your credit card company couldn’t/wouldn’t accept such a drastic cut.
WARNING: Keep in mind that the collection agency will probably issue you a 1099C Cancellation of Debt and report the amount of debt they cancelled ($75 in this case) as income to you to the IRS. As a result the IRS will probably treat that cancelled debt as income that you must pay income taxes on. This is something to definitely speak with an accountant/tax preparer about.
Also, since you have been saving your money you might be able to use part of those savings to pay the much lower, settled, amount. As long as it doesn’t dip into your emergency fund, that is.
Ok, this is the big hammer that the creditors have to use against you, and this is when you know it’s gotten serious.
The process is this (at least here in California):
- The creditor files a “Complaint” with the local Superior court
- The creditor serves you with this lawsuit (if they can find you)
- The creditor must wait 30 days after serving you to ask the court for a “default judgment”, which basically means the creditor asks for the judgement because they have sued you , served you, and you didn’t answer the complaint
- The court will most likely grant the default judgment, but this can take 30-60 days after the creditor asked for it
- The creditor can then garnish your wages (25%), levy your bank accounts (for the full amount of the judgment or the balance of your account, whichever is less), and record the “Abstract of Judgment” with the county recorder as a lien on your property.
At this point, the creditor has forced your hand.
Assuming you haven’t been able to save enough to pay the creditor (and if you have, then you should), your only real choice is to file bankruptcy.
Bankruptcy will erase the debt (as well as most other types of debt you may have), and there exists a process by which you can remove the lien that resulted from the abstract of judgment.
If you do go through bankruptcy, you will not owe taxes on the discharged debt like you would have if you settled the debt. Even better, your credit will start to get better as soon as your bankruptcy case closes, and in 2-3 years you may in a position to buy a house (if that is your goal).
The point it this: if you are experiencing financial hardship such that your basic necessities of life are in jeopardy, then conventional wisdom may not offer you a course of action that best suits your situation. It is a legitimate strategy to stop paying your credit cards (don’t even think about incurring more debt in the meantime), take care of your family, and clean up your credit later when your income allows.
Now, since I’m a lawyer I have to tell you that this does not constitute legal advice, your situation may not be amenable to following this strategy, and do not taunt Happy Fun Ball.
Let’s look at the worst that could happen: you either settle the debt for much less than you owe, or you file bankruptcy and get a fresh start in 3 months. Not so bad, is it?
Or you could struggle, lose sleep, go without the basic necessities of life, and make your situation much worse. And then wind up having to file bankruptcy anyway if your income situation doesn’t improve. But howling have you been living like this, and how much longer are you willing to live like this?
As always, call us (or another Bakersfield bankruptcy lawyer) to discuss your specific situation. What you might find is that your best strategy going forward is not what you have been led to believe all these years. But desperate times call for desperate measures, and you need to look at all your options.