I am 51 and I became permanently disabled. Can I blow off my credit card payments and not worry about my FICO score?
I am 51 and I became permanently disabled last year. My home is paid for and if I didn't have a large credit card debt I could easily live on my SSDI payments. Nearly half of my SSDI income goes to credit card payment. I currently have an excellent credit score however (in the 700s). I'm coming to critical times however and there just may not be enough to live on. Is it all that important to keep my credit score high at this stage in my life and can I more or less blow off my credit card payments and not worry about them as much?
Remember that 51 isn't that old and you have a significant asset in your home, so after you get though this rough patch you can expect to rebuild your credit score. You may wonder why a person on permanent disability and SSDI cares about their credit score. You may be classified as permanently disabled according to the Social Security Administration, but I know many disabled people who develop accommodations for their disabilities and find ways of earning an income.
You, for example, sent me an intelligent and articulate question. Perhaps in the future you will start a small business where your chief business tool is a computer. To expand your business you may need credit. Or, perhaps you want to travel, and traveling is always easier if you have a credit card with a useful credit limit. In both situations, you will have a higher quality of living if you have a higher credit score.
If you can't make your credit card payments your credit score is going to take a hit one way or the other, so from this point forward you can only minimize the damage to your credit. I see five options for you, which I will discuss in a moment.
The four primary concerns for most consumers are: i) monthly payment, ii) time to debt freedom, iii) total cost, and iv) the credit rating impact of the consolidation program. Be sure to evaluate each program, relative to your prioritization of these factors.
Since there are a variety of debt consolidation options, including credit counseling, debt negotiation/debt settlement, a debt consolidation loan, bankruptcy, and other debt resolution options, it is important to fully understand each option and then pick the solution that is right for you.
1) Credit Counseling
Credit counseling, or signing up for a debt management plan, is a very common form of online debt consolidation. There are many companies offering online credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. It is important to understand that in a credit counseling program, you are still repaying 100% of your debts Â- but with lower monthly payments. On average, most online credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan DOES show up on your credit report… and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy- or using a third party to re-organize your debts.
2) Debt Settlement
Debt settlement, also called debt negotiation, is a form of online debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are NOT paying your creditors. This means that a debt settlement solution of online debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.
3) Debt Consolidation Loan
Many people think first of a debt consolidation loan when seeking online debt consolidation. This option typically means a second home loan (or home equity line of credit) or refinancing your primary mortgage. In a debt consolidation loan, you exchange one loan for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high interest rate credit card debt. It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation, if there is ever a chance that you cannot afford the new mortgage payment you are now putting yourself at risk of foreclosure! In the case of a debt consolidation loan, most mortgages are 30 year loan, which means that the total cost and the time to debt freedom could be very high, but the monthly payment will be lower than other options and there is no credit rating impact.
4) Bankruptcy
Bankruptcy may also solve your debt problems. A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort. Since bankruptcy reform went into effect, it is much harder to file for bankruptcy. If you are considering bankruptcy, I encourage you to consult with a qualified bankruptcy attorney in your area.
5) Default
If you stop paying your creditors, they will attempt to contact you to ask you to make payments. If you ignore them they have the right to sue you to get a judgment. Once they have the judgment in hand, depending on the state you live in, they may garnish your wages, levy your bank accounts, put a lien on your real estate or other private property, such an expensive car, RV, boat, or other titled property.
Your disability income may not be garnished. However, once your disability income lands in a bank account, it may be subject to levy. You can notify your bank that your account contains only disability income and may not be levied. However, banks are big, lumbering institutions that have the IQ of the most overworked clerk receiving levy orders. Even if there are big, blinking, red letters on the screen warning the clerk not to allow a levy of your account you have to expect them to do so. It's Murphy's law.
With a default, eventually your account will reach your state's statute of limitations barring collection. However, if there's a judgment in place, this may be 10 years or more. During that time you will be reminded constantly by the creditor of the balance (plus interest) that you owe. Default is a long, painful road I do not recommend traveling.
Summary
Although there are many forms of online debt consolidation, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high credit card debt and poor credit may want to explore debt settlement or debt negotiation. However, each consumer is different, so find the online debt consolidation option that fits for you.
Lastly, here are some fast tips for your own quick Debt Consolidation Evaluator:
1. If you have perfect credit and have equity in your home - consider a Mortgage Refinance.
2. If you can afford a healthy monthly payment (about 3 percent of your total debt each month) and you want to protect yourself from collection and from going delinquent - consider Credit Counseling.
3. If you want the lowest monthly payment and want to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections - then evaluate Debt Settlement.
4. If you cannot afford anything in a monthly payment (less than 1.5 percent of your total debt each month) - consider Bankruptcy to see if Chapter 7 might be right for you.
Bills.com makes it easy for you to apply for traditional forms of debt relief.
I wish you the best of luck in resolving your financial difficulties, and hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
Struggling with debt?
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Housing debt totaled $12.612 trillion and non-housing debt was $4.891 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in Montana, 20% have any kind of debt in collections and the median debt in collections is $1589. Medical debt is common and 11% have that in collections. The median medical debt in collections is $702.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.
8 Comments
You face a difficult circumstances. However, once you are armed with more information and knowledge of your rights, I think you will feel better about your situation.
Social security disability cannot be garnished. Other forms of disability is also protected by law. Also since this was first published federal banking regulations instruct banks to protect twice the amount of ss electronically deposited in a bank account no matter the source of funds in the account at the time of a garnishment. A cease and desist letter can be sent to collectors which will stop unwanted collector calls and letters. A mortgage refinance from someone on disability is highly unlikely. Credit Counselors almost never advise disabled or seniors that their income is protected and they don't have to pay debt. Instead they lead many lower income persons into utter poverty with payments they don't need to make. Debt settlement companies are simply con artists when advising lower income seniors or disabled. Since the income is protected, bankruptcy is absolutely unnecessary let alone if it can be afforded.
Thank you for pointing out that this answer, written years ago, contains some outdated information. Not everything you write is accurate or represents the view each person in debt may have.
Original creditors can still contact you after a cease and desist. A C&D doesn't protect you from being sued, so even if it does stop a 3rd party debt collector, it doesn't mean sunshine and roses.
A person may prefer to pay a debt versus not doing so for more than one reason. One, people may wish to pay a debt because they has paid every debt owed during their life and don't want to not meet an obligation they committed to. Also, judgment debts grow with interest. A person may want to clear out the debt without it growing. A person also may wish to avoid a lien on the home that, in this question, is owned outright.
People may be well served to negotiating, on their own or by hiring a professional firm, even post-judgment. If a creditor knows that it will have a hard time collecting, a settlement may have appeal.
Bankruptcy may be a wise choice, depending on the equity in the home and the state exemption. For example, if a lien were filed and a person wanted to move at some point, the lien would be paid from the sale proceeds, whereas bankruptcy could eliminate that debt and protect the person.
I have difficulty reading recommendations to debt counselings or settlement when persons are receiving permanent disability. These persons incomes are generally minimal. Here he says his condition is near critical and he may not even have enough to live on let alone deal with debt or a new mortgage loan. Why? Because these companies do not provide lower income seniors or disabled persons receiving protected income with complete information. Their vocabulary does not include "You don't have to pay old debt you can't afford because your income is protected." If these for profit and nonprofit companies gave the compete truth I would agree with referring people to them. Unfortunately they do not and that is accurate. I agree most people certainly want to pay their debt, but some people simply are not able. I do agree that bankruptcy may actually be an option, I hadn't read the part of the question where he owned his home free and clear. That option would depend on how much his home is worth and the homestead exemption in that state. If the numbers are not right a trustee could sell his home in bankruptcy. Nevertheless if a credit card company sued and got a judgment lien it is not the practice of consumer judgment creditors to foreclose on judgment liens. They will wait till a home is sold. Again all indications are this person simply doesn't have excess funds to deal with the debt. Blowing off the credit cards as he says might be his best option.
"You don't have to pay the debt because your income is protected" is not advice that should be given, based on the information shared in the question. The rest of your comment indicates that individual situations require a complete examination of the person's circumstances. We agree with that. All the ramifications and repercussions of not paying should be looked at, not just the fact that income is protected.
The words in the question that he or she is "coming to critical times" doesn't necessarily mean that he or she is about to die. I took it as a comment on the ability to maintain payment relationships in good standing.
There are many twists and turns that such a scenario could take. For example, the homeowner enough equity to sell the current home and make a substantial down-payment on a home in a cheaper part of the country. That person would approach things differently than a person who wants to stay in the current home indefinitely. If there were a ton of equity, that person could be well-served by a reverse mortgage, being over 50, though that niche product has its own set or risks that need to be considered.