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Expert Q&A: When You Can’t Pay Your Bills

 
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August 19, 2011
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QHi Erica,
I have tried to work with my credit card company, but they will not budge an inch. Both me and my husband are not working right now, and I don’t have the money to pay them. We owe approximately $12,000.00 to them, and the balance keeps going up and up because I am unable to send them anything. The interest on that account is now over 20 percent. Now I got a letter from their lawyers saying they will sue me. But why would they do that if they know I don’t have the money? I already told them I don’t have the money a thousand times!! What can I do? — Caroline

ADear Caroline,
Imagine that you’ve met a stranger who asked you for a line of credit. To determine the wisdom of this decision, you looked at his record of repaying money that he had borrowed from multiple people over the past few years. He did pretty well! Then you checked out his income, and he seemed to have enough to pay you back. With risk appearing low, you extended him credit at a fairly low interest rate. The deal is mutually beneficial: He gets a cheap, flexible loan, and you earn a little profit from the finance charges.

He’s responsible at first, but then runs up a big bill and loses his great job. What do you do? He’s not a friend or family member, so you have no emotional connection. It was purely a business arrangement, and you’ve got financial obligations of your own. His not making good on the debt is impairing your bottom line. Should you accept his excuses and say, “eh, forget it — pay me when you can,” or do you start to take a hard line approach? Ask Erica

I’m presenting this hypothetical turn around because it’s very important for borrowers to maintain perspective. Yes, you’re having a tough time, but the arrangement you made was based on the promise that you would repay what you borrowed. Just as you would expect a stranger to fulfill their end of a bargain, so too do banks and other credit issuers.

So what can you do to appease your card issuer and stop the lawsuit? You have two basic options:

1. Scrape together cash from other sources. Maybe you can sell a car, some furniture or other large item and use the proceeds to reduce the balance enough so you can make the lower minimum payments. You may also consider a secondary loan — borrowing from a loved one who is willing to help you out of this jam. Of course, you run the risk of angering them if you don’t pay, so you better be sure you will.

2. Consider discharging the debt. If you really don’t have the cash, can’t secure employment to save your life, have nothing at all to sell and are living on rice and beans, then perhaps Chapter 7 bankruptcy is for you. The bank won’t like it (just as you wouldn’t) but it will prevent them from dragging you to court. There would simply be no point in taking that action.

Whatever you do, don’t wait around hoping you won’t get sued. If they say they will, believe them. The reason they might, even knowing that you have no current means to pay, is that some day your finances will improve. If they win (and they will), they can collect for years. Additionally, your total liability will greatly increase and the monetary judgment will appear on your credit report. As you’re in the job hunting process, that could hurt your employment chances. Many companies pull reports to determine whether or not you’re a good potential candidate.

Oh, and if bankruptcy is looking attractive, be aware that it too will show up on your credit report, which also won’t look great. However, it could be construed as a touch better than a judgment. With that, they might have to deal with your wages being garnished — which is a whole lot of paperwork they’d rather avoid.


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