Credit Card Debt and Disability Income

I am 51 and I became permanently disabled. Can I blow off my credit card payments and not worry about my FICO score?

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Bill's Answer: Answered by Mark Cappel

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 – 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

bills.com

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Comments (4)


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Bills.com
October 23, 2009
Your creditor has the right to pursue the course of collecting on the debt if you have not paid off the balance and your account has gone past due. In terms of what options the creditor will utilize when collecting on the debt I recommend you read a blog that I wrote where I provide collections advice. If you are concerned about the possibility of a creditor garnishing you social security income I recommend you read advice on protecting your pension and social security from garnishment.
William G.
October 23, 2009
I have been disabled for about 3 years now and have credit card debt that I have been paying out of my savings acct. which is now depleted. I am on social security disability. Is my credit card debt uncollectible ?
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Robert J.
Phoenix, AZ  |  October 30, 2012
I had a stroke and it left me disabled. I filed for Social Security Disability myself and was approved. I have over $100,000.00 in credit card debts with about 11 credit card companies. I called them all and understood, but I credit card company (Capital One LV) filed for a judgment. My stroke left me unable to work, cannot walk without a wheelchair after 30 feet, and need a walker up to that 30 feet. I receive a check from Social Security directly deposited into my bank account $1,175.00, out of that Social Security sends a check for $275.00 direct to Wisconsin Child Support which leaves the check going into my account for $900.00. I live in Arizona and live in a Assisted Living Home which the State pays the Assisted Living the remainder of my rent. Arizona has a formula and all I have left to live on is $104.00 per month which I have to purchase all my necessities, hygiene, clothing, and any other needs I may need. My question is I received papers from the Law Firm who purchased my debt from Capital One LV credit card, and is asking the court for a Judgement they say my only defense is hardship. I have no other assets except for my home which I owe $337,000.00 and the value is only $250,000.00, I have someone paying ALL the upkeep and bills for the home and they use it as a business. I receive no monies other than my bills for the home, utilities, maintenance and anything else pertaining to the home. Will the Court give them a judgment against me? The only monies deposited into my bank account are from Social Security and I am left monthly with $104.00. Can they get any part of that money? I do not know how to respond to this action. Thank you very much for any help you can give me. What I can do so they can't take the little money I get now?
Bills.com
October 31, 2012
I have several assignments for you:
  1. Read the Bills.com article Social Security Garnishment to understand your rights and liabilities and how Social Security payments are shielded from judgment-creditors. They are not protected from administrative garnishment (such as child support), as you pointed out, or offset (usually for delinquent taxes).
  2. Read the Bills.com article How to Answer a Summons & Complaint to get a handle on some of the steps a defendant must take when responding to a lawsuit.
  3. Call your county bar association and ask for the names of the organizations that provide no-cost legal services to people with low or no income in your area. Make an appointment with one of the organizations, and bring all of the documents and letters you have regarding your debts and housing deal to your meeting. The lawyer you meet will advise you accordingly.

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.

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