Ask Stacy: I’m Barely Making Minimum Payments. What Now?

Photo (cc) by lemonjenny

Here’s a reader note I recently received. It’s long, but because it describes the situation of so many people I’ve heard from, it’s worth reading.

I have just recently started reading your Money Talks News, and I’m pretty impressed with what I see.

Do you have any advice for people who are deeply in debt, but who can (only) afford the minimums on their cards? I’ve been trying to help my brother, who’s made some questionable decisions and is deeply in debt. He’s let me go through his finances, and I started by helping set up a budget for him. It works, sort of.

The problem is, every time he starts getting his savings accounts up and making headway, something happens that drains them. He’s getting very depressed and it’s starting to take a toll on his marriage. The latest was the transmission went out on his car, which just drained ALL of the savings he had acquired over the last year.

He makes enough to make the payments on his house and debts without falling behind, but he can barely afford to pay over the minimums. He would kill me for sharing this, but I’m at the end of my knowledge.

He doesn’t want to file bankruptcy because his job is moving him and he’ll need to set up a new place to live when he gets there. Bankruptcy would look terrible on his record. What are some ways, in addition to budgeting better, that he can dig his way out of his crippling debt? A bunch of 0 percent interest credit cards to transfer to? Just stop paying all except one of them until it’s paid off and then go down the line?

Just for reference: He has two car loans, total payment $500 per month, three years left on each; six different credit cards, $1,100 per month. Total amount owed (on credit cards): $32,500. That $1,600 is half of his paycheck. His wife also brings in about another $1,000 a month after child care.

Thanks in advance for your advice!
— Matthew

Here’s your answer, Matthew!

When half of your income is going to credit card and car debt, it’s unlikely you’re going to budget your way out of this mess. There are two ways I’d suggest to start digging out of this debt.

Credit counseling

If you’re having trouble making payments, one option is a reputable credit counseling agency. They’ll gather the details of your financial life, then help you figure out what to do. If you can pay your bills with your existing income, they’ll tell you. If you can’t, they’ll probably suggest a debt management plan, or DMP.

When you enter into a DMP, the agency contacts your creditors. They make collection calls stop, possibly get some interest rates reduced and fees eliminated, and help you prepare a repayment plan you can live with. For example, if you’re now paying $1,100 a month but can only afford $800, you’ll send the agency $800 every month and they’ll divide it among your creditors.

When using a DMP, you’ll agree to completely stop using credit cards. These plans typically take three to five years to complete.

The vast majority of credit counseling agencies are nonprofit and offer free advice. Debt management plans, however, aren’t free. You’ll normally pay a monthly fee of $25 to $50, although that can be waived if you can prove hardship.

Warning: There are bad apples in this business, so you need to be careful selecting one. We’ve teamed up with a credit counseling agency that we refer readers to: Consolidated Credit Counseling Service. I’ve personally known the folks there for more than 10 years. They’re good people.

If you’d rather go another direction, however, no problem. But before deciding on a counseling agency, read articles like “Ask Stacy: Where Can I Go for Help With Debt?” for tips on what to look for. You’ll generally be safest if you stick with agencies that are members of the National Foundation for Credit Counseling or the Financial Counseling Association of America. Both of these organizations’ websites can hook you up with a counselor in your area.

Bankruptcy

In a story I did a few years back called “Dealing With Debt: Bankruptcy,” the lawyer I interviewed offered some simple advice: If you don’t have enough income left after eating and putting a roof over your head to make even minimum payments on your debts, it’s time to talk to a lawyer.

Personal bankruptcy comes in two forms: Chapter 7, in which most debts are wiped out, and Chapter 13, in which some of your debts will be repaid over time.

Bankruptcy isn’t free; it typically costs $1,000 to $2,000. One way to raise the money is to divert the payments currently going to credit card debts and deliver them to the lawyer instead.

Some people hesitate to file bankruptcy because they feel morally obligated to repay what they borrowed. But while it’s true you owe your creditors your best efforts, you don’t owe them your health, your life, your sanity or your self-respect. If you’ve done your best, hold your head up and do what needs to be done.

Which should Matthew’s brother do?

Matthew’s brother should start by talking to a credit counseling agency. It doesn’t cost anything, and they may offer helpful advice. If he ends up with a DMP, problem solved. The DMP will show up on his credit history and could be viewed negatively by some potential future lenders. It will not, however, affect his credit scores.Bankruptcy, of course, will radically lower his credit scores. But if that’s the best course of action, the credit counseling agency should suggest it and he shouldn’t hesitate to do it. Even if the credit counseling agency doesn’t suggest it, it never hurts to talk to a lawyer. Initial consultations are often free.

And if pride gets in the way, consider this: If you owe $32,500 on credit cards and are paying $1,100 a month minimum payments, you’re probably paying about 28 percent interest. Keep doing that, and it will take about 40 years to pay it back. Along the way you’ll pay $75,000 in interest.

Now assume you have the $32,500 wiped out in bankruptcy. Take those old $1,100 payments, invest them at 5 percent, and in 40 years you’ll have $1.6 million. Earn 10 percent and you’ll have $7 million.

I understand Matthew’s brother doesn’t want a bankruptcy on his record. But when you compare being a slave to debt for 40 years with having millions in the bank, maybe it’s not so bad.

Bottom line? If you’re paying huge interest and are only able to make minimum payments, get help. Now.

If you can get your payments reduced with credit counseling, you’ll end up repaying your debt, but at potentially lower rates and with more manageable payments.

And if you’re going to end up filing bankruptcy anyway, you’re flushing $1,100 down the toilet every month — money you could be using to take care of your future and your family.

Either way, enlisting professional help is going to do more than save money. It’s going to replace helplessness with empowerment and stress with relief. Do it. You’ll be glad you did. And if you have a friend who could benefit from this advice, use one of the buttons above or below to share this story on Facebook or elsewhere.

Got a question you’d like answered?

A great way to get answers to just about any money-related question is to head to our Forums. It’s the place where you can speak your mind, explore topics in-depth and, most important, post questions and get answers. It’s also where I often look for questions to answer in this weekly column. You can also ask questions by replying to our daily emails. If you’re not getting them, fix that right now by subscribing here.

About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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