April 07, 2014 / Get out of Debt, Part 3
You don't need to declare bankruptcy. Well, probably.
However, your debt might be so weighty that saving or earning a couple hundred bucks a month won’t even make a debt. If that’s the case, you may need to shift from "debt minimization" to "debt mitigation." If you can’t eliminate your debt, you may at least be able to limit the damage it does in your life. So in my last article in this series, I’m going to discuss some tactics you can use to do this.
The Goal: Don’t Fuck Up Your Credit Rating
Remember what I said in part 1: debt can be a giant anchor in your life if you ever want to own property, start a business, have a family, or do pretty much anything else in life. And this anchor will generally manifest as a bad credit rating. It can be very frustrating doing anything when you have bad credit, and it generally can take years until anyone will think your trustworthy enough to lend money to again.
So all this advice is going to be based on an assumption that while you may have high debt, your credit rating is still good enough that you still have some options. Let’s go through some typical scenarios where you may have especially burdensome debt, and what your options are.
1. Credit Cards
The good news is that this is actually one of the easiest debts to manage. Even if you have five figures of credit card debt, it’s still small relative to the other kinds of debt I’ll discuss later.
The only problem is interest. That 18+% APR is making it several times harder to pay off your actual principal. If you have $10,000 of credit card debt, an 18% APR means every month you can pay $150 and still have… $10,000 of credit card debt.
But if you still have decent credit, you’re probably still getting credit card offers in the mail. Look at these offers and see which ones offer you It can be very frustrating doing anything when you have bad credit, A lot of credit cards will charge you a one-time fee of something like $200 to move your entire balance, and give you a really low (sometimes even 0%) interest rate for 12 months. That’s 12 months you can make payments on your principal and not have it eaten up by interest.
Better yet: you can keep doing this! As you reduce your debt your credit will improve, which means you’ll have even more options for transferring your credit card balance.
2. Student Loans
I’ve mentioned student loans as "good debt," but it’s possible that your chose career doesn’t pay enough to let you make a dent in it. This can be especially if true of you got a post-graduate education.
Look into refinancing and consolidating your debt. Depending on when you went to college, you may be paying a much higher interest rate than you have to. Talk to your bank about your options here.
Also, chances are at least some of your student loans are federal loans. The US government has programs for deferment and forbearance on those loans.
Whatever you do, bankruptcy is not an option. As of 2005, it’s basically impossible to discharge student loans through bankruptcy.
3. Underwater Mortgage
If you bought property you’re underwater on, you may be stuck making mortgage payments on something that’s worth a lot less than the principal of your loan.
If this is the case, first study the housing prices in your area. The housing market has rebounded in many regions, so you may not be as underwater as you thought.
There is a federal program known as HAMP that will basically help you work with your loan servicer to modify your loan. Not everyone can qualify, and it won’t happen overnight, but going down this route can get a nice amount on monthly mortgage payments, or even if your principal, sliced off.
The more drastic measure is talking to your bank about a short sale. This will damage your credit score by quite a bit, but it won’t be as bad as foreclosing. Nobody is going to loan you money for a house any time soon, but you should at least still have access to other forms of credit.
4. Medical Debt
If you live in the United States, you’re probably already well aware that we have an absurd healthcare system. It’s very possible to be uninsured and have something like a car accident happen. Then you get rushed to the nearest hospital ER, and get a $75,000 bill in the mail a week later, due in 30 days.
If this happens, you got fucked. Some hospitals will offer some sort of payment adjustment. Part of the reason why being uninsured is so expensive is that insurance company negotiate rates for treatment that are well below the hospital’s "sticker price." An ER procedure billed at $10,000 may only be reimbursed by an insurance company at $1,500 (of which the patient only pays some fraction of that fraction). Depending on how charitable the hospital’s administration is, they may let you pay the same amount as those with insurance. You’ll still be on the hook for all $1,500, but that’s a lot less than $10,000.
If that fails, then this is probably the only scenario I’d say is worth just declaring bankruptcy. Over half of bankruptcies are due to medical debt, and typically bankruptcy judges will look at your circumstances favorably. Although I wouldn’t recommend declaring bankruptcy this way: