Money Talk: Bankruptcy sometimes best of the badQ: When would you say filing for bankruptcy would be necessary, or is it ever? I have approximately $30,000 in credit card debt, $50,000 in student loans and a $104,000 mortgage.
By: Liz Pulliam Weston, INFORUM
Q: When would you say filing for bankruptcy would be necessary, or is it ever? I have approximately $30,000 in credit card debt, $50,000 in student loans and a $104,000 mortgage. I’m unemployed and can’t find a job that would cover day care for a toddler as well as after-school care for a special-needs child.
However, my field is finance – go figure, huh? – and I don’t want to kill my chances of resuming my career with a bankruptcy. What can I do?
A: Bankruptcy is sometimes the best of bad options, particularly when you’re facing unsecured debts such as credit card bills that equal more than your annual income or that would take you five or more years to repay.
Five years is typically how long you’d be required to chip away at your unsecured debt in a Chapter 13 bankruptcy repayment plan, although given your lack of employment, you may qualify for a Chapter 7 liquidation bankruptcy, which would erase your credit card debt.
Your student loans typically can’t be wiped out in a bankruptcy, nor can your mortgage. But you probably qualify for economic hardship options that would allow you to reduce or suspend payments on any federal student loans.
Private student loans don’t have similar provisions, but you may be able to work out a payment plan with your lenders, or you may have enough financial room to pay them if your other debt is wiped out.
By federal law, a bankruptcy can’t be used against you in employment decisions. Employers may, however, hold against you the late payments, charge-offs and collection accounts that frequently precede bankruptcy, so the protection offered by the federal law may not be of much help.
It’s a tough call to make, and you’d benefit from some advice. Consider contacting a legitimate credit counselor, such as one affiliated with the National Foundation for Credit Counseling, to see if a debt management plan could help you. But you also should talk to an experienced bankruptcy attorney so you understand all your options and the possible consequences of each.
Q: I saw the letter from the gentleman whose wife was called by a collector about a $496 cell phone bill from 2002 she supposedly owed. I had a similar experience about six years ago when I received a demand for an unpaid cell bill from years prior.
I called the collection agency handling it, and they were extremely rude and threatening. So I asked for proof, but all they sent was a copy of my signature, which could have been for anything. So I went to the state attorney general’s office, and the collection agency dropped the matter. I think this is a scam and people should be warned.
A: Many debt collectors buy old debts for pennies on the dollar, and sometimes these accounts come with little documentation about how the debt was incurred, how much it is and who actually owes the money. These debt collectors often cast a wide net when trying to track down the borrower, and sometimes they latch on to the wrong people.
The federal Fair Debt Collection Practices Act specifies that, when challenged, third-party debt collectors are supposed to verify that the debt is legitimately owed by the person they’ve targeted. But the Federal Trade Commission has noted that “the limited information debt collectors obtain in verifying debts is unlikely to dissuade them from continuing their attempts to collect from the wrong consumer or the wrong amount.”
“Many collectors currently do little more to verify debts than confirm that their information accurately reflects what they received from the creditor,” the FTC noted in a February 2009 workshop report. “This is not likely to reveal whether collectors are trying to collect from the wrong consumer or collect the wrong amount.”
The FTC has asked Congress to update the federal law to require that debt collectors at least make a “reasonable” investigation of the consumer’s dispute. So far, though, Congress hasn’t acted.
If you challenge a debt collector and it doesn’t provide proof of the debt, turning to your state’s attorney general or consumer protection office may be your best alternative. Another option is to hire an attorney to fight back against particularly aggressive collectors who may be violating debt collection laws. You can get referrals at the National Association of Consumer Advocates at www.naca.net.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or via the “Contact Liz” form at www.asklizweston.com.