I Got Laid Off, Lived on Credit, and Now Looking for the Best Way to Consolidate My Debt

Question:

Dear Steve,

I was laid off for a year and tried to start a business. The same company hired me back this year and due to COVID the business was put in the back burner. I am an essential employee now.

During that year due to not having a job and starting a business, I incurred more debt. 3 rent payments ended up on credit cards. My debt is now 35000.00. I want to consolidate as I can only pay the minimum at this time. Can you offer me advice?

What is the best way for me to consolidate?

Cathy

Answer:

Dear Cathy,

I love easy questions with tough answers. They challenge assumptions and norms.

Dealing with debt is a balancing act between the reaction to financial pain, managing emotions, and making logical decisions. At the end of the day, debt is nothing more than math wrapped in emotion.

There is never any single right answer to any consumer question about anything since the combination of underlying issues is always unique.

I can offer you my perspective based on my experiences and stand-off position from your stress.

First, we have to look at what debt really is. It’s the pledging of future labor to satisfy a current obligation. To be confident you will be able to meet the repayment demand you would need a crystal ball to see if you will be able to continue to work and earn to make your payments. Most people are confident this will happen and optimistic when they take out the loan, even a debt consolidation loan.

The fact that rent payments landed on a credit card indicates to me your obligations were exceeding your ability to pay them. That means I’m worried about you having an adequate emergency savings account and I really question what your status is in saving for retirement.

In tough times like this people tend to raid their 401(k) and other retirement accounts. Not a smart move.

The process of consolidating is pretty easy. If you can make your regular monthly payments you can think about a credit counseling program to lower your interest rates. But that might not give you extra cash to save to build your emergency fund right now. You could look at a debt consolidation loan through companies like LendingClub or Prosper but I bet the unsecured rate is going to be steep. You’ll have to check.

You could look at a debt settlement approach but you’ll have to default on your debt, it might not all get settled, and it could cost you a lot in fees. Some would charge up to $7,000 in just settlement fees. It will hit your credit report for seven years, can lower your score, and you may owe tax on the forgiven debt. And let’s not forget you might be sued over the defaulted debt as well. Debt settlement is a tool to use in the right situation. Not every situation is right.

Then you also have the option to close the door forever on the old debt in about 90 days for less than $2,000 in legal fees. That would be through a Chapter 7 consumer bankruptcy.

You can find a good local bankruptcy attorney and have a free discussion about what bankruptcy would mean for you. Bankruptcy is the fastest way to get a fresh start for the least amount of money.

So what is the right approach? Well, we also need to think about what the future will bring. If the COVID situation may lead to a loss of your job again if the economy gets worse then rushing to do anything right now might be too early. You might have more obligations coming that could be dealt with in Chapter 7 bankruptcy, which you can only file once every eight years.

So, this is going to sound crazy. But follow my logic for a minute. What we have is a reprise from your loss of income with a return to work. The debt you built up is now dragging you down and I think there is a reasonable amount of concern about what the next year or two may bring for the economy.

A valid out of the box option to consider if you are unable to build your emergency fund right now you might want to consider a modified solution that has some consequences. You could contact your credit card companies and ask for a COVID payment holiday and see if you can get a month or two reprieve from payments. Save those payments in a savings account.

In a month or two before you have to make payments again you can evaluate the situation again. At that time you may want to think about a defensive settlement strategy where you would default on some of your debts and manage what to do based on what the creditors decide to do. You might get up to six months of escalating collection pressure before it gets serious.

This approach would hurt your credit but credit can be fairly easily rebuilt. What it does give you is more time to determine what the likely future will be, a reduced cost of settlement since you can find a company that won’t charge you fees on all your debt, just the ones you actually settle.

If it all hits the fan you can always then think about bankruptcy to slam the door shut on the unmanageable debt and move forward from there without having to look over your shoulder.

I’m a big fan of pause, elicit expert opinions, contemplate what you’ve learned, and then take action based on a customized plan crafted your specific situation. But that’s just me.

If you wanted to talk to a talented debt professional you can always talk to one of my friends like Damon Day or Michael Bovee. Damon and Michael can certainly provide you with a second and third opinion and from there you can make the most informed decision possible.

Big Hug!

Get Out of Debt Guy –
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