Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Credit report charge-offs

Dear Dr. Don,
What does it mean when you have a charge-off on your credit report? Am I required to pay even though they charged it off? We are $26,000 in debt and are only able to pay for necessary expenses. Plus, we have $45,000 in student loans. Don, is there any hope? What are we to do?
Thanks!
Ray Report

Dear Ray,
A charge-off is the lender classifying the loan as a nonperforming asset. You still owe the money. The lender reports the charge-off to the credit bureaus to reflect your payment history. Depending on the company's practice, its next step may be to sell the loan to a collection agency. If they go this route, make sure you understand your rights under the Fair Debt Collection Practices Act.

If you haven't consolidated your student loans, you should consider it. The Department of Education walks you through the consolidation decision and has a calculator that will show you the financial effects of consolidation. In general, you can free up money in your monthly budget if you can either lower the interest rate on your loans or extend the loan term. Ideally, you would be able to do both.

Alternatively, you may be able to use a deferment or forbearance provision in your student loan to postpone payments, giving you the opportunity to get your other debts under control. Talk to your lender about these options before becoming delinquent on your payments, and you'll have more options available to you.

Many readers write in and tell me how much debt they have but don't give any indication about what income they have to service the debt. Your ability to carry $71,000 in nonmortgage-related debt depends on your income. There may be hope, so don't throw in the towel just yet.

Put together a household budget, and see how realistic it is to carry this debt load. If you can't figure out a way to make it work, then its time to turn to credit counseling to set up a repayment schedule or bankruptcy. If the credit counselor can't help you figure out a way to repay your debts, then you should work with a bankruptcy attorney. Don't hire a credit counselor before reading the FTC brochure, Fiscal Fitness: Choosing a Credit Counselor.

A Chapter 13 bankruptcy sets up a repayment schedule over the next three to five years while a Chapter 7 bankruptcy filing uses your non-exempt assets to create a bankruptcy estate that is used to pay your creditors.

It's difficult to discharge your student loans in a bankruptcy filing. You have to show that repaying the loan would be a severe hardship for you. It's harder than it sounds to meet this standard.

-- Posted: Dec. 17, 2002