whether or not i should pay off my debt

[ektorp]

so here's my situation. until recently i have always been a financially responsible person with no late payments or account defaults in over 10 years. i had a credit score in the low to mid 700's. however, due to the real estate collapse, i was behind several mortgage payments and recently sold my property in a short sale and my credit score dropped to the low 600's. i have about $25,000 in credit card and about $25,000 in savings. i was initially thinking about taking my savings and paying off my debt in full and be debt free. i am now being advised to settle my debt for about 20% of what i owe. this would cause my credit score to drop but it is already low because of my short sale. does it make sense to pay off $25,000 in debt and still have a low credit score or settle the debt, have a lower credit score but have about $20,000 in savings? any advice would be greatly appreciated.

[Eric80]

If I were you, I will settle the debt which makes me have $20K onhand. Credit score does not mean anything if you do not need it. I assume you will not buy another house or new car soon, correct? long term, You can always build your score. Just keep debt free (or a little bit debt), you will get credit score back. But, probably, it is dificult to get $20k saving if you used it.

But, just my 2 cents.

[ektorp]

thanks Eric80. i was actually thinking the same. i had great credit for years but never needed or used it. and no, i dont plan on buying another property for at least a few years by which time, my credit should be greatly improved. thanks for the advice.

[EconoMutt]

I second Eric80's opinion.
Hold on to the cash.

[TheStreetCeo]

Maybe I missed something but why do you have 25k in credit card debt if you have 25k in the bank?

[Joan.of.the.Arch]

Do you have no income? Can you not work on paying your debt from your income, especially as you are no longer paying a mortgage?

Is your $25,000 in a retirement account, or is it in more available savings? If it is not retirement money, do you have retirement savings elsewhere?

[littleroc02us]

You stated that the realestate market crashed and that made you late on your mortgage payments. Can you explain what you mean by that?

[ektorp]

littleroc - i had an adjustable rate mortgage and the interest rate raised my payments to an amount I was not able to make. this caused missed payments and ultimately to a short sale which caused a significant drop in credit score.

joan - yes, i am employed and make a reasonable income. yes, i can make payments to pay off debt but my issue is why pay off debt when my credit score is already shot due to my short sale. i am thinking it would be a better idea to just settle the debt for a fraction of what i owe and keep my savings in tact. i feel that a good credit score is only important if i intend to use it. i have no plans to purchase a home or car for at least a few years. my savings is a personal savings account and not from retirement. i have a separate retirement account but am fairly young and do not consider an retirement accounts for short term financial planning.

theStreetCeo - yes, i do have both 25k in savings as well as 25k in debt. the majority of this debt was caused by home improvements a few years back and medical expenses more recently. yes, i maybe should have used out of pocket resources for some of these expenses...but i have always considered personal savings as a resource for emergencies.

in my case, my main issue is why would i put down 25k into debt that wont really help me since my credit score is already shot plus i currently have no need for good credit. i figure i can settle the debt for a fraction of what i owe and still have a reasonable savings for emergencies. and in 3-4 years or so, everything is back to normal.

[snshijuptr]

You should pay because you are an adult and have the means to do it. You took the risk of an adjustable rate mortgage and you paid for it. You improved the home and you enjoyed the benefits. A credit score is just an impersonal way to rate your trustworthiness, and you are consciously going against your word, breaking a promise. If a bank broke it's promise to you, you might sue them. In this reverse situation, the bank is instead willing to give you a break even as you break your promise.

Do this, but do it with humility.

[littleroc02us]

I'm sure you know this by now, that by taking an adjustable rate mortgage isn't the markets fault. You signed for a risky loan and it came back to get you. I would suggest settling your debts and working to pay off all of your debt. Keep a $1000 around in the meantime while working the debt snowball. Once all debts are gone it should be easy to replenish your ER account. As for the future would you agree that a house that is no more than 35% of your take home pay is a decent mortgage making sure that it is a 15 year with a fixed rate. You have learned in the past that 100% of foreclosures and shortsales are from people with mortgages.

[Ima saver]

I think you should pay off your debt with the money you have.

[disneysteve]

Originally Posted by ektorp

i can make payments to pay off debt but my issue is why pay off debt when my credit score is already shot

As I've said several times before, posts like this make me think the whole country has gone morally bankrupt.

Why should you pay off your debt? Because you agreed to do so when you borrowed the money and you have the means to do so. You have a legally binding contract with the lender to do so.

It is not the lender's fault that you bought a home you couldn't afford and made home improvements that you also couldn't afford. Why should they negotiate with you when by your own admission you have the money to pay this debt? If you were unemployed or disabled or buried in medical debt and really didn't have the money to pay the bills, that might be different, but that isn't the situation you are describing here.

Pay your bills. Don't look for ways to get out of meeting your legal obligations.

i am now being advised to settle my debt for about 20% of what i owe.

I'm curious where this advice is coming from.

[Cassius King]

Did you stop paying on your cards? I'm trying to figure out why the card companies are willing to settle for 20% if this hasn't been going on for awhile.

I agree with what's been said already. If you have the means, pay your obligations. If you don't learn from your mistakes, your destined to make them again.

[jpg7n16]

A good question to ask yourself would be:

If someone owed you $25k and had $25k in the bank, how would you want them to handle that? Would you rather they paid you in full for the money they borrowed? Or would you rather that they settled with you for 20% of what you owe, so they could keep cash on hand?


Whatever your answer to that question is, you should do the same for the people you owe.

I would personally rather get repaid in full - maybe not all at once, but over time is fine. So I'd suggest you pay them in full and not settle.

[ektorp]

thank you all for your responses. the main response i am hearing has to do with morals and ethics and legal obligations. i get that. i get all that...i really do. the message i am getting is that we live in an ideal world where everything works exactly the way it is suppose to, which is far from true. our country's current economic status is a clear indication of this. as i previously stated, until recently i've always been a very financially responsible person meeting all of my financial obligations. i never had a late payment in over 10 years, with the exception of my recent mortgage.

yes, technically i bought a home i could not realistically afford...but since i technically could not afford it, the lender never should have given me the loan in the first place. millions of other americans are in this position, not just me. the banks should not have given out these loans but now it's too late and its something we all need to deal with. the government is bailing out these banks costing billions of dollars. when times get tough, you adapt. you put set aside your normal conventions and do what you have to do in order to make the best decisions for yourself.

i am interested in settling my debt because it simply makes the most financial sense for me. one thing worth mentioning is that when i bought my property, i put 80k as a down payment. that is now gone. the 25k i have in savings is all i have. if i use that to pay of credit card debt i am left with nothing else. yes, i should meet my financial and legal obligations, especially when i have the means to. i get that. but like i said...when times get tough, you adapt. you assess all of your options and see what makes the most sense. i already lost 80k in my home and have no interest in losing 25k more. settling a debt with a financial institution is very different from settling a debt from another person. debt settlement is a legal option and a great option for many people. my credit is already shot. i have accepted that. paying off my debt will not help it...very little if at all. and again, i have no need for credit in the near future. so settling my debt for a fraction of what i owe seems to make the most sense to me.

the question i have is this...if someone were to offer you 25k in cash and the only cost to you would be that it would significantly reduce your credit score for about 3 years when you have no need for credit...would you take it? that's pretty much the way i see it.

[jpg7n16]

Originally Posted by ektorp

thank you all for your responses. the main response i am hearing has to do with morals and ethics and legal obligations. i get that. i get all that...i really do. the message i am getting is that we live in an ideal world where everything works exactly the way it is suppose to, which is far from true. our country's current economic status is a clear indication of this. as i previously stated, until recently i've always been a very financially responsible person meeting all of my financial obligations. i never had a late payment in over 10 years, with the exception of my recent mortgage.

So you don't care about morals, the world's not fair - so why not screw someone else over?, and you didn't make a late payment for 10 years, so you've earned a free $20k. Is that what you're saying?

yes, technically i bought a home i could not realistically afford...but since i technically could not afford it, the lender never should have given me the loan in the first place. millions of other americans are in this position, not just me. the banks should not have given out these loans but now it's too late and its something we all need to deal with. the government is bailing out these banks costing billions of dollars. when times get tough, you adapt. you put set aside your normal conventions and do what you have to do in order to make the best decisions for yourself.

It's just as much the bank's fault as mine (even though it's not really), so I'm allowed to screw them out of 20k. Everyone else is doing it, so why not me? the banks are gonna get theirs anyways, so why can't I get mine?

i am interested in settling my debt because it simply makes the most financial sense for me. one thing worth mentioning is that when i bought my property, i put 80k as a down payment. that is now gone. the 25k i have in savings is all i have. if i use that to pay of credit card debt i am left with nothing else. yes, i should meet my financial and legal obligations, especially when i have the means to. i get that. but like i said...when times get tough, you adapt. you assess all of your options and see what makes the most sense. i already lost 80k in my home and have no interest in losing 25k more. settling a debt with a financial institution is very different from settling a debt from another person. debt settlement is a legal option and a great option for many people. my credit is already shot. i have accepted that. paying off my debt will not help it...very little if at all. and again, i have no need for credit in the near future. so settling my debt for a fraction of what i owe seems to make the most sense to me.

More and more reasons why you're going to settle regardless of the moral/ethical implications of doing so.

(fyi - you don't have to pay the entire debt right now. You can pay over time and still fulfill your obligations. -ie. pay 8k this month, and 350/month until it's gone. The choice isn't between, lose everything you have in the bank or settle.)

the question i have is this...if someone were to offer you 25k in cash and the only cost to you would be that it would significantly reduce your credit score for about 3 years when you have no need for credit...would you take it? that's pretty much the way i see it.

I already know you're going to settle. I can tell from your post.

I feel debt settlement has a place in our system for those who need debt relief. And you are not one of those people - you have the means to repay. (I don't argue against your short sale, because at that time you were in need of debt relief)

But what you're doing now is in my view, very selfish.

So I've said what I wanted to say, you know where I stand. Good luck to you.

[disneysteve]

Originally Posted by ektorp

the main response i am hearing has to do with morals and ethics and legal obligations.

What else is there?

technically i bought a home i could not realistically afford...but since i technically could not afford it, the lender never should have given me the loan in the first place.

I agree. Mortgage lenders made millions of bad loans and they knew they were bad loans when they made them. The system is broken in that regard. However, I still feel that the ultimate responsibility to determine if you can afford a loan is you. If you knew that you couldn't afford the loan, you shouldn't have taken it. The bank didn't force you to sign the mortgage agreement.

i am interested in settling my debt because it simply makes the most financial sense for me.

Sure. Borrowing $25,000 and not paying it all back is a great deal. That doesn't mean you should do it.

i should meet my financial and legal obligations, especially when i have the means to.

Exactly. This is the only statement that matters. You know right from wrong. This is right. What you are proposing is not.

How any of this will affect your credit score is completely irrelevant. You shouldn't make choices and decisions based on how FICO will judge them. That isn't what matters in life, not in my world at least. I think defaulting on debt is dishonest, unethical and illegal. I'm not even sure that a CC company will agree to a settlement when they see that you have 25K in savings, but that is beside the point.

[Snodog]

I know this is not what you want to hear but if it were me I would pay my debt if I had the money and chalk it up as a lesson learned.

It's been said that experience is the toughest teacher because you get the test before you get the lesson.

[asmom]

Unlike the others, I am not going to tie your unwillingness to pay off your debt to morals. The credit card companies willingly loaned money to people who perhaps could not afford it in an effort to make huge profits and it worked. I won't even get on the subject of unreasonable fees and interest rate hikes. Greed goes both ways. It's quite unbalanced to suggest that the banks' actions were justified as "just doing business" but consumers have some sort of "moral obligation". It's business both ways. And I am someone who never even pays my bills late. I've never not paid a debt in full. But that's the way I do business. Now the way I treat people and individuals is guided by my morals and principles.

However, I do question the way you use your resources. You are saving the $25K for "emergencies". You've already lost your house and you ran up debt paying off medical bills. What do you consider an emergency? If you had that money on hand or the ability to save that much money, you might have considered paying your mortgage until you were able to get an adjustment or paying your bills outright before you accrued the debt. It's water under the bridge now but for food for thought in the future.

P.S. If you have a good, stable income, then pay the debt off in full. You don't have to pay at once. Start with a lump sum of maybe 10K from your savings and pay the rest off over a year from your income. You'll preserve a good bit of your savings that way. If your job situation is shaky, go for the settlement and hold onto your savings. In the future, pay as you go.

[littleroc02us]

After reading these posts I can see why we elect the people we do. I strongly believe it's because most of us need baby sitters for we are uncapable of making smart financial decisions and need the gov't to bail us out for them. Personal responsibility is slowing dissapearing and it makes me sick, but that is what we all truly want subconciously. I for one blame no one expcept myself when I went 50k in debt. I didn't blame the credit card companies or the auto industry. I dug my feet in and paid off those debts in 4 years by working my butt off and checking off each debt as I destroyed them. I have my own brain and am totally responsible for my actions. Therefore one of my main goals in life is to build my own personal wealth without the gov'ts help and to give back to the poor. The bible states "The rich rule over the poor and the borrower is slave to the lender."