Editorial Policy

If debts keep mounting, bankruptcy is an option

Erica Sandberg

May 24, 2016

Q Hi Erica,

I do not think that people should be prosecuted for not being able to pay their bills and have their credit ruined as a result. The economy is so bad, and we do not have a minimum wage that lets people pay their bills. I myself have credit card debt that goes back five years, and my credit has taken a huge hit. Now I can’t get another credit card, so what can I do? — Peter N.

A Dear Peter N.,

What you need to do from this point forward is accept that the way you treat financial obligations will be recorded on your credit reports for a fixed time period. Creditors will check your credit history and scores to determine if you are a good credit risk. If you have a history of being trustworthy with your credit and have income that provides you with the means to cover the debts you incur, you’ll qualify for a card. If you have a history of not being able to make payments on your debts, you won’t get a card. It’s as simple as that.

Yes, times are tough. Many people in this country are having a hard time making ends meet, and clearly you are in this position. At this time, you should not be applying for a loan or credit card. If you can’t afford the payments you currently owe, you shouldn’t be borrowing more money.

Regarding prosecution for your credit card debt, try not to worry. While it’s true that unsecured creditors, such as credit card companies and collection agencies, can sue you for delinquent accounts, you won’t be spending time behind bars. If they win the case, you’ll have a judgment placed against you, and the consequences of that can include claiming owed funds from a bank account or garnishing your wages. However, if you have neither property nor earnings, there’s nothing they can collect.

Where do you go from here? If you can’t get a job that allows you to pay your essential expenses and your debts, bankruptcy protection is worth exploring. Chapter 7 allows people who can’t pay their unsecured debts (including monetary judgments) to discharge them in court. A bankruptcy does hurt your credit rating, as the notation will be listed on your credit reports for 10 years. Your credit rating, though,  is already poor. Five years’ worth of debt plus (probably) missed payments and collection action is brutal to a credit score.

Chapter 7 bankruptcy gives filers a fresh start. Instead of struggling with bills accumulated over many years, people can concentrate on improving the present and future. Note that I’m not telling you to file for bankruptcy, but it may be an option worth considering.

It appears you want a credit card again. Once you pay your old debts or discharge them in bankruptcy, you may qualify for a secured card. These cards are collateralized by money you place in an account. The funds give assurance to the issuer that if you don’t pay an outstanding bill, the debt will be covered by what’s in your account. Secured cards usually have very low limits, so you can safely tiptoe back into charging.

Most secured card issuers send account activity to the three credit reporting agencies, so if you use the card responsibly, you’ll be mending your credit reputation. Pay on time and in full for 24 months and your credit score should rise significantly. If you filed for bankruptcy, once that notation is off your credit reports, all that will remain will be perfectly managed accounts, and your credit rating will climb more.

I understand your frustration with economic factors outside your control. My advice? Focus on what you can change now: the way you earn, spend, save and borrow.

Got a question for Erica? Send her an email.

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