Editorial Policy

What to do if job bonus debt payment plan backfires

Erica Sandberg

June 23, 2015

QHi Erica,

What do you do when you are led to believe that you will make a certain amount of a merit bonus at your job? It was going to go to the credit card, but the real bonus is much smaller. Now I have the bill, and I don’t know how I’m going to pay it off. I literally do not have $5,000, and this is a bad card because the interest is 29.99 percent. As you can probably tell, I’m extremely mad and freaking out. Don’t say do a transfer because I already tried and was denied.  Am I forced to file for bankruptcy? –Mo

ADear Mo,

Let’s not make the leap into legal waters right away! There is a lot of ground to cover before diving into bankruptcy court.

While it may be tough, it’s also important to adopt a calm, positive attitude. I know you’re frustrated that the big check did not come through as expected, but you’ve got to move past it. Negativity is rarely conducive to making good financial decisions.Ask Erica

Once you’re calmer, do the following:

1. Suspend charging for now. This is fundamental advice for anyone wanting to pay down debt. If you increase the balance, your payments will be higher and additional regrets are sure to follow. Put your plastic on ice. Only after the balance reads “zero” should you charge again, in increments you really can delete quickly.

2. Assess your entire financial situation. Rather than dwell on what you owe, concentrate on what you do have — your base income (not projected bonuses) and maybe some owned assets. List the amount you bring home every month, then tally any funds you might have in the bank. Review your tangible assets, too, which is property that has worth, such as bicycles, laptops, and sports equipment. Finally, write down your essential living expenses and what each costs.

3. Dent the debt. If you’ve identified available funds, withdraw what you can afford and make a large payment to the credit card company. Try not to touch retirement accounts, though, as the penalties and taxes can be as much as 45 percent. Start selling items you can part with and send the proceeds to the creditor. If you can, return unnecessary merchandise you bought with the card. With these actions, the balance will shrink to a more manageable sum.

4. Determine a fixed payment. Subtract the total of your necessary expenses from your monthly earnings. The remainder will be your personal minimum payment. If another bonus does come,, put it toward the debt, but never send less than what you promised yourself.

5. Request a lower APR. At nearly 30 percent, a substantial portion of a payment is going toward interest, so call the creditor and ask for a lower rate. Your credit rating may not have been wonderful before (hence the balance transfer denial), but if you reduce the debt and pay on time, the request is more likely to be granted.

Here’s an example, to see how it could work out:

Your original debt starts out at $5,000, but by scraping up cash from various accounts, selling assets and returning a few items bought with the card, that figure drops to $3,600. After subtracting your essential expenses from your income, a steady payment of $400 may be feasible. Reduce the interest rate to 15 percent and you’ll be debt-free in 10 months and for about $240 in fees.

This is not an overnight process, but it’s far better than giving up. Bankruptcy is only right for qualified individuals who genuinely can’t meet their obligations, and the negative impact on a credit report is serious and longstanding. If none of my advice is feasible, you may want to schedule a visit with a nonprofit credit counselor affiliated with either the National Foundation for Credit Counseling or the Financial Counseling Association of America. The counselor will help you go over your budget and can contact the credit card company to arrange a debt repayment plan.

I have a strong feeling you can overcome this problem with effort and dedication — and you won’t make the same mistake in overcharging, then counting on a non-guaranteed bonus to deal with the damage.

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