What’s best way to dig out of $50K in debt?
Question: I’m 64. My credit score is about 656. For different reasons over a long period of time – including unemployment and health issues – I accumulated credit-card debt of about $50,000.
I intend to take out an unsecured personal loan, but I don’t want it to have a negative impact on my credit score. I have a job now and I will pay my monthly payments on time. But what will happen if I cannot continue my payments to the lender? If I should file for bankruptcy, which is worse: defaulting on credit-card debt or an unsecured personal loan?
If I try to negotiate a reduction of my debt with the creditors, do you think this procedure will be successful and not take too long? And what is a nonprofit debt relief company/agency, and how could they help me?
Bottom line: What strategy would you implement to resolve the debt problem if you were in my place? Do you think I could avoid bankruptcy?
Answer: An unsecured personal loan can be an effective way to consolidate debt without hurting your credit score, as long as you can make all the payments on time, says April Lewis-Parks, director of education and corporate communications at Consolidated Credit, a credit counseling organization.
Depending on the term you choose, this option may reduce the monthly payment amount, “which can help because it allows you to balance your budget so you can stop making new charges and focus on debt repayment,” she says.
If you use a loan to consolidate, it zeros out your creditcard balances but typically leaves the accounts open.
“As a result, you can run up new debt before you pay the loan off,” she says. “This is why it’s critical to create a budget that ensures you can live without using credit cards until you at least have your debt completely paid off.”
Should you default on your unsecured personal loan, the lender would have to sue you in civil court to get a judgment to force repayment, Lewis-Parks says. “However, the worst outcome you could expect would be that the judge would order something like wage or tax refund garnishment.”
Lewis-Parks also says you can try to negotiate repayment plans on your own with each creditor. But results may vary. Success depends on the creditor, your history as a customer, the status of your debt and even whom you talk to in the customer service department.
If you decide to negotiate with your creditors, make it clear that you want to repay everything you charged in full, Lewis-Parks says. “If you settle for any less than the full amount owed, then you will damage your credit.”
As for your question about a nonprofit debt relief company/ agency, or what is also known as a credit counseling agency (such as Consolidated Credit), “These organizations basically offer a professionally assisted repayment plan,” she says. “It’s not a loan because you still owe your original creditors.”
The agency talks to each creditor to set up a repayment plan and reduce or eliminate interest charges. It’s the same as you negotiating with creditors on your own, except the agency can negotiate a single repayment plan that covers all your debts, she says.
Lewis-Parks says these agencies also have established relationships with creditors and proven records of helping others get out of debt. “As a result, they often have more success negotiating on your behalf than if you try to negotiate on your own,” she says.
There are other advantages to using a professional nonprofit debt relief company as well, she says.
“First, once you set up the repayment plan, all of your credit-card accounts are frozen until you pay off your debt. This may seem like a disadvantage, but it keeps you from making new charges, which is one of the biggest pitfalls of consolidating debt on your own.”
What’s more, the credit counseling team will also help you set up a budget so it’s easier to manage your money and live credit-free while you’re enrolled. “These programs are often more effective at helping people break bad credit habits,” she says. Working with a nonprofit debt relief company should not damage your credit as long as the plan is set up correctly and you make all your payments on time, she says.
Fees charged by the agency are based on a person’s budget, how many credit cards they have and how much they owe. The average client pays about $40 a month, she says. The fees vary by state but are limited to $79 a month.
The good news is that, given the situation described, the creditor in question should be able to avoid bankruptcy, Lewis-Parks says.
“And as long as you repay everything you charged in full and avoid debt settlement, you shouldn’t damage your credit either,” she says.
As for which option is better – unsecured personal consolidation loan or repayment plan – that really depends on you and your budget. With $50,000 to repay, you are right at the cusp of what most people can afford to repay with an unsecured personal consolidation loan, Lewis-Parks says. Plus, you’ll likely need to use the maximum term to get payments you can afford, which is usually 48 to 60 payments, depending on the lender.
“On the other hand, the repayment plan that you enroll in through a nonprofit debt relief company is designed to help consumers deal with larger volumes of debt,” she says.
So, it’s up to you, LewisParks says. “If you can afford the monthly payments on an unsecured debt consolidation loan and you think you can balance your budget and stop charging, then you may be able to go it alone,” she says. “However, if you’re concerned you won’t be able to stop charging, do-it-yourself consolidation can be risky.”
But if you try to consolidate on your own and start to run into trouble, you can still decide to work with a debt relief company.
Robert Powell is editor of The Street’s Retirement Daily and contributes regularly to USA TODAY. Email: rpowell@allthingsretirement.com.
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
If you decide to negotiate with your creditors, make it clear that you want to repay everything you charged in full.