Family of 6 – How to Pay Off, Reduce, Eliminate High Credit Card Debt – Phillip
I am a 43 year old male with a wife and 4 teenage children. I have always struggled with debt being a single income family and raising a family. I filed bankruptcy once already ( 9 Years ago ). I am currently back in debt with around $34000 in unsecured debt. I don't know how it got there again. I make a decent income and am on time with all of my payments and have decent credit. My issue is that I am stretched out from month to month and am finding it hard to juggle my payments. I have considered stopping payments and saving that money to try to settle my debts one at a time later on or filing bankruptcy again, which I don't want to do. Is there a different strategy I should take? I really want to pay back what I owe but am feeling a lot of stress. I also keep a few thousand cash on hand for emergency money and will be getting a decent tax refund. Any advice would be greatly appreciated. Thank You
What options / strategies do I have to pay back such a large amount of debt
—Phillip
I would like to walk through a process of elimination with you that will ultimately help you narrow down your options and point to the most reasonable strategies to help you reach your goals while paying off, reducing, or eliminating your credit card debt. In order to do this I will need some questions answered.
What strategy you choose to tackle too much credit card debt and avoid bankruptcy starts with the math.
You want to avoid filing for bankruptcy. This desire is coming from a place of experience because you have already filed for bankruptcy in the past. Most people want to avoid bankruptcy even when they know little to nothing about it. Let’s drill in to some basic math to see if you can avoid bankruptcy. Later, likely after some comment participation, you may have to question if you should avoid bankruptcy.
Can you afford your credit card debts if your interest rates averaged 8 percent?
Is there is room in your household budget to pay roughly $750.00 a month toward your credit card bills? I came up with this figure based on your debt load of 34k and an average of 2.2% of that total being your new monthly payment until the accounts are paid off – which would take close to 60 months.
Can you still contribute a monthly amount to your savings/emergency fund?
Settling credit card debt when you cannot afford minimum monthly payments.
Debt settlement is not a go to alternative to bankruptcy that my industry likes to make it out to be. There are very real risks to debt settlement when you cannot get through the process fairly rapidly. There are also cost based reasons to skip the debt settlement strategy. For more on why debt settlement works best when you take an aggressive approach to settling, see: https://consumerrecoverynetwork.com/settling-credit-card-debt-is-a-race
In order to estimate the costs and timing of your individual debt settlement strategy it is best to know:
The banks the credit cards are with?
The balances on each credit card account?
If there have been recent large purchase or balance transfers to some of the credit cards?
Are any of the credit cards only recently opened (last 12 to 24 months)?
Are you late on any credit card payments, and if so, by how many months?
Are any of the credit card debts already enrolled in any type of hardship payment plan?
Do you have any credit needs in the next 24 months (refi – car loan – parental plus loans)?
If you can answer all of my questions in a comment reply below, I will be better equipped to provide feedback and outline a strategy using today’s trends with your creditors.
Phillip says
Thank you. I will go ahead and try there system and see how it goes. I deeply appreciate your time and advise. I will post back with an update in the future.
Sincerely
Phillip
Another question I have is that I checked out a link in one of the articles you referenced . ” Ready for Zero” . Is this a reputable company? I was a little hesitant as you have to give all of your log in info and link a bank account. Would you recommend them? Thank you
Phillip – Yes, I do highly recommend RFZ. I have followed them since they were a start up company. I have spoken with the founder and met several of their staff. They have a great set of free tools to help people manage their way through paying off credit card and other debt. They are as principled a group I have found in the debt space. For anyone wanting to visit their site and learn more go here: https://www.readyforzero.com/
RFZ is the first place I encourage people go for credit card debt pay off tools when the situation has not gotten to a place where some form of debt relief intervention, like credit counseling, debt settlement, or bankruptcy are needed.
Thank you for taking the time to respond. I’m not completely opposed to bankruptcy but do not feel i’m at that point yet . It was chapter 7 that I had previously filed. My reasoning for not going the bankruptcy route at this time are my high school age children are probably going to need my assistance with co-signing in the near future and I will do everything possible to avoid that mark on my credit report again. I am going to sit down and take a hard look at the Debt Roll Up strategy as I believe I will have at least the 20% to apply. I have some cash on hand and usually get a tax refund around $ 5-6k which should give me around $9k total cash . I will use a portion of that to eliminate the small cards but still keep cash available to me as I feel it is important to have such funds available. Do you agree? I appreciate all you have showed me and think with budget cuts , no new debt and some financial discipline I will have a clearer picture in 6 months. If at that time I don’t see it working then I will have to look at other options. Again thank you. Phillip
Phillip – With a tax refund of that size and a disciplined approach to a debt roll up strategy, you should be able to get a good grip on the credit card debts in a short period of time. I do agree it is important to have a cash savings in preparation for emergencies. If you are not using credit, the more prepared you are for unexpected costs the better. Please do come back to this post with updates, additional question or concerns.
I encourage any readers to post questions or comments that apply to themselves and the content of this page.
Thank you for your reply. Here are some answers to your questions.
1) The 2 largest cards are with Bank of America ($7400 not used in years) and Chase ($5500 also not used in years). the other cards are with capitol one ( 2k) orchard bank (1.5k) and Merrick bank ($2500). the rest are just small cards with $500- 2 k on them , about 14 cards total. here is a rough list
Bank of America-$7400
Chase-$5500
Wright Patt Credit Union$3800
Wright Patt Credit Union$1800(wife)Juniper-$1300
Merrick$2400
Merrick$1300 (wife)
Orchard$1400
Orchard$1200(wife)
Capitol one$1800
Capitol one$600(wife)
HH Gregg$3700
Chase $1100
Bill me later$1800
Sears $390
Target$980
2)No recent large purchases
3)Yes some opened within the last 12 – 24 months
4)No I am not late on any payments at this time and have never been late.
5)As far as credit card needs , I don’t have any other than my oldest son will be going to college within the next 2 years and would like to be able to help him. maybe not financially but as a co-signer for his student loans.
6) I believe I can afford $750 a month towards my payments
Thanks for the follow up details Phillip. Let’s hit your options one at a time starting with the least confrontational first.
Debt Roll up:
Use a measured debt roll up strategy to pay off the accounts over a period of time without anyone’s outside assistance or using a consolidation loan. There is a report about debt roll up and a visual example of what this might look like here: https://consumerrecoverynetwork.com/debt-roll-up-pay-down-credit-cards
There are different creative ways to approach a debt roll up strategy. You can take the straight forward approach outlined in the debt snow ball report linked above, or get creative using some of the ideas in this report: https://consumerrecoverynetwork.com/consolidating-credit-card-debt
I will point out one creative way to do debt roll up by using current savings and/or your tax refund and paying off the accounts in your wife’s name. I am using this creative example because paying off your wife’s accounts can be used as a strategy in other alternatives I will highlight later on.
If I assume you will receive a 3k tax refund, were you to apply that and some of your savings to the debts in your wife’s name, you would knock out 4900.00 of your total credit card debt. If you later experience some type of financial setback where you were to file bankruptcy (without your wife), enroll in a credit counseling repayment plan, or settle the credit cards debts for less than what you owe, your wife’s credit would remain intact.
Credit Counseling and a credit card repayment debt management plan:
In my initial response I asked about your ability to come up with 750.00 a month to pay toward the credit card debts until they are paid off. I came up with that figure by calculating 2.2% of your total balances today. By enrolling with a credit counseling agency you would be able to consolidate your credit cards into one payment. Credit counseling companies are able to get your monthly credit card payments reduced because they have prearranged interest rate concessions with your creditors. The national average for interest rate reduction in a credit counseling plan is roughly 8%. There are creditors with policies that allow for lower than 8%, even reducing interest to zero if you meet certain criteria. I do not think you would meet some of the credit card lenders criteria if there is room in your budget to save more than 200.00 a month while enrolled in a debt management plan with a credit counselor. So, the 8% average interest rate reduction is likely going to apply to you.
Your monthly payment with a credit counseling agency will be fixed for the duration of the plan. Debt management plans through a credit counseling last a little less than 60 months on average. You could certainly make additional payment using your tax refund in 2014, 2015, and so on. This would allow you to exit the credit counseling program much quicker.
With credit counseling, any impact to your credit report and credit score will be negligible. Your credit cards enrolled in a debt management plan are closed. That can lower your score a few points. You will not have revolving credit card accounts open, nor will you likely be able to open new credit card accounts, while working with the credit counseling agency. This creates a several year gap in your credit profile. This is not a big deal, and certainly should be one of the last things you think about in your strategy evaluation. You have a debt problem that has to be dealt with first. Credit reports and credit scores can be improved later.
Many people are able to qualify for auto loans, student loans, even mortgages, after a year or more of timely payments while in a credit counseling program. I point this out because of your only stated credit goal in the next couple years being cosigning for your child’s student loans.
Credit card debt settlement:
You do not have what I would generally describe as a good creditor profile when considering settling credit card debts. I would encourage you to read the following reports:
https://consumerrecoverynetwork.com/credit-card-debt-to-include-in-settlement-plan
https://consumerrecoverynetwork.com/keep-credit-card-open-when-settling-debt
Once you have read those reports, my general comments here will be better received.
Settling credit card bills with a credit union is often not a great option.
Settling credit card debts that have smaller balances is not a problem when they are already in advance stages of delinquency. But when you have the ability to plan and think ahead, it will often make more sense to pay them off rather than take the settlement approach to resolving credit cards with low balances.
All of that said, here are the current trends for settling in first and second stage collection with your specific list of creditors.
Bank of America credit card settlement target 40%.
Chase credit card settlement target between 30 and 40%.
Wright Patt Credit Union credit card settlement between 60 and 100%.
Juniper credit card settlement target 40%.
Merrick bank credit card settlement at 40%.
Orchard bank credit card settlement 40%.
Capitol one credit card settlement between 50 and 70%.
HH Gregg credit card settlement target at 40%.
Bill me later settlement target between 35 and 45%.
Sears credit card settlement is ill advised with a balance so low.
Target credit card balance is too low to gain much of anything from settling it.
There is the Capital One credit card your wife has that will be of little to no benefit to settle. The lower balance Chase account can be lumped in with the higher balance chase account when settling direct with Chase prior to the accounts charging off. The benefits as an aggregate on both accounts would be obvious.
Let’s assume for a moment you will need to come up with 14k to settle all but the smaller balance accounts. How long will it take you to come up with the 14k?
Once I know the time frame for you to come up with the amount you will need to settle your credit card debts I can then paint an even clearer picture and help you prioritize your creditors.
Nothing you have shared with me at this point would cause me to be concerned with your ability to cosign on student loans for your child if you follow a debt roll up plan, whether straight up, or with some built in creativity.
The credit counseling and debt management plan strategy should not impede your ability to co sign for the student loans 2 years from now. If it does, you could possibly drop out of the plan and take over your payments on your own and reapply.
Settling your credit card debts, if you can get them all knocked down rapidly (12 months preferred), would not likely impede your ability to cosign in my experience.
The cost of avoiding bankruptcy and the impact to cosigning for student loans:
You filed bankruptcy 9 years ago. Was it a chapter 7 or 13?
The cost to file a straight chapter 7 bankruptcy nationally is roughly 1800.00. That covers court fees, attorney fees etc. If you live on either coast the cost can be a few hundred more. Middle states a couple hundred less. Let’s use a round figure for you and say the total cost of chapter 7 bankruptcy is 2k and make some cost comparisons:
34k of credit card debt wiped out in a chapter 7 bankruptcy for 2k in anywhere from 3 to 6 months.
34k of credit card debt paid off in a credit counseling services debt management plan lasting no more than 60 months (these plans are not allowed to exceed 5 years), with an affordable monthly payment where ultimately you will pay a total of roughly 38k.
34k of credit card debt settled for roughly 14k – not including alternatives that must be explored for smaller balance and credit union credit cards. Length of time to be determined.
34k credit card debt paid off with a debt roll up strategy (with creativity) for what I would guesstimate about 40k over 3 years and while using some self administered interest rate reduction strategies if some of your higher balance credit cards are carrying interest above 15%.
From a pure cost analysis – bankruptcy wins. I know that is what you are trying to avoid. I am sure you have good reasons. You already have filed and perhaps that experience is something you do not want to repeat. I understand there are other reasons to avoid bankruptcy than just facts and figures. Some of those reasons are compelling.
When it comes to cosigning for student loans, current underwriting standards with most options suggest you wait 3 years after discharging debt in a chapter 7 bankruptcy.
If your only bankruptcy option is a chapter 13 I will have a whole different set of comparisons for costs, timelines, and credit access. For now, you should know that a chapter 13 bankruptcy lasts either 3 or 5 years. Most chapter 13’s are 5 year repayment plans. It would be unlikely the trustee would approve taking on more debt as a cosigner on student loans while in the chapter 13 bankruptcy.
If you want to speak with a credit counselor to determine exactly what your monthly payment on the credit cards can be reduced to, call 888-317-8770. Speaking with a counselor is free, and making that call is just smart as part of your due diligence into your options.
I have raised new questions for you in my above reply. If you can answer those I will reply with additional feedback and perspective.