Dear Debt Adviser,
I am on unemployment, which will run out within the next couple of months. I have no savings and no assets except for a car worth about $1,000. A major bank just filed a collections suit against me with a court date of May 2011. I have about $40,000 in credit card debt (from various companies). I am 53 years old. What would you recommend I do -- especially about the lawsuit?
My first concern is whether you have a plan for meeting your essential needs when your unemployment funds run out. For now, put your credit card debt on the back burner and concentrate on how you will pay for basic needs such as shelter and food in the months to come. Without savings, assets or the use of credit, you need to find some type of employment until you land a job in your field. I know the labor market is very tight, but you should be able to find a job -- or perhaps more than one part-time job -- to get you through until you are fully employed again. Once you have secured some work, then you can move on to dealing with your credit card debt.
You will want to appear in court and/or answer any written communication from the court concerning the lawsuit. Best case scenario: Your court date rolls around five months from now and you are fully employed and able to present a repayment plan to the collector or the court. Worst case scenario: You are still underemployed and will bring proof of income to the court. If the debt is yours and is owed, the court will most likely still find in favor of the creditor. But the creditor will know that you don't have sufficient income to make a significant dent in the $40,000 you owe if they were to garnish your wages or levy your bank account.
Before your court date, consider consulting a bankruptcy attorney to determine if filing for bankruptcy protection makes the most sense for you. You can find a pro bono attorney in your area at Probono.abiworld.org. You should qualify for Chapter 7 protection (where your credit card debt would be discharged and no longer owed) with a limited income. The other benefit of filing a bankruptcy petition is that any collection activities on your accounts will stop as soon as you file.
If you go the bankruptcy route, I suggest you wait until you get re-employed before pulling the trigger. You may incur other debt-related problems between now and when you are once again gainfully employed. If you use your bankruptcy bullet too soon, you may not be able to discharge subsequent debts, because once you file you can't refile for an extended period of time.
Neither the collection account nor a bankruptcy on your credit report will help your job search. Many employers check credit reports as part of the hiring process. Have a short explanation about what happened, and why it won't happen again. Tell them about it before they find out on their own. Many times they won't ask. It's easier to just move on to the next candidate. A potential employer will want to know that you are responsible and not trying to hide anything from them.
Once you have a job and come to terms with your debts, you need to get serious about saving for the future. At 53, it's not too late to begin building aggressive retirement and emergency savings accounts. I recommend you use a Certified Financial Planner for guidance and encouragement.
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