||Ask Dr. Don
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?
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
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
-- Posted: Dec. 17, 2002