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.
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.
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.
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.
Struggling with debt?
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q4 2023 was $17.503 trillion. Student loan debt was $1.601 trillion and credit card debt was $1.129 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 South Carolina, 37% have any kind of debt in collections and the median debt in collections is $2026. Medical debt is common and 22% have that in collections. The median medical debt in collections is $860.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.