debt

Stop! Keep debt from going to collection

Justin Harelikq_v2.gifDear Bankruptcy Adviser,
During the course of getting my degree, I didn't accumulate any student loans, but I did accumulate a tremendous amount of credit card debt. I also was very foolish in buying homes in another state in the hopes of flipping for a profit. Big mistake!

I was foreclosed on and filed for bankruptcy in 2008. However, during this time I tried everything with balance transfers, including transferring a lot of my debt to my parents' credit cards for better rates. I have since started working full time. Unfortunately, I had to stop paying on the cards in my parents' name for maybe the past month and a half. My question is what is better for my parents? They don't know much about credit, so I'm wondering if they should discuss debt settlement with the credit card companies or seek out a bankruptcy attorney? I feel terrible for my mistakes and for ruining their credit.
-- Abigail

a_v2.gifDear Abigail,
I can only imagine that you have a tremendous amount of guilt associated with this situation. I know your parents were only trying to help with whatever they had available. Unfortunately, that was credit, not cash. But I assume your guilt would be just as great had you cost them money and not their credit.

At this point, you cannot undo what has been done. However, you can make matters worse unless you act immediately. Right now, you are only about one and a half months behind on payments. That means that the original creditors are still holding the accounts. You are in the collection department, but the companies have not charged off the accounts yet.

When the accounts are charged off, that means the original creditors basically believe they will not be able to collect. The accounts are usually sold to a collection agency that buys the debt for pennies on the dollar. For example, a collection agency can purchase $1,000 in debt for as little as $50 from the original creditor while giving that agency the right to collect the full $1,000 at interest rates as high as 25 percent to 30 percent! Those companies are very aggressive and will do everything to collect on the outstanding debt.

You state you are working full time and able to pay down some of the debt. Here are your available options:

Option No. 1: Work with the original creditor. It is worth asking the original creditors if they will allow you to make lower monthly payments at zero or low interest until the balance is paid. Although their cooperation is unlikely, you will lose nothing by calling.

Option No. 2: Credit counseling. These are nonprofit organizations that consolidate your bills into one monthly payment. Typically, this option exists only when the accounts are still with the original creditor. That is why you must act immediately. Collection agencies tend not to work with credit counseling companies. Once the original creditor charges off the debt, there may be few, if any, options for your parents.

Try to find a company that will work with every creditor your parents owe. Try to avoid consolidating some of the bills with one agency and then paying the other creditors directly. It will be very difficult to maintain monthly payments to various companies.

Option No. 3: Debt settlement. I will discuss this option, but I don't think it would work for you. Most debt settlement companies will tell you that they can obtain great settlement offers. You will make a monthly payment to them, and they will hold the money in a trust account and settle the debt after you reach the agreed settlement amount. This will be very difficult because you will need to come up with the money to settle these debts in a short period of time.

The original creditor is only going to wait so long for you to pay. The account could be charged off before you reach the agreed settlement amount. Therefore, you could end up wasting quite a bit of money and seeing no result. Any deal you reached with the original creditor will be void once the debt is sold to a collection agency.

Option No. 4: Bankruptcy. Your parents might be eligible for Chapter 7 or Chapter 13 bankruptcy. You will need to review the bankruptcy laws in the state where your parents live to determine whether they are eligible. You also could consult with a bankruptcy attorney in their area.

Chapter 13 bankruptcy might be a viable option because this is similar to a credit counseling consolidation, but every creditor will be included. You will have one monthly payment and that money will be distributed to all creditors until completion of the case.

You must act immediately. Your options are limited and will only lessen the longer you do not make some sort of payment arrangement.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Bankruptcy Adviser columns and more stories about debt management. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "Bankruptcy" as the topic.

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