Pay off debt or declare bankruptcy? Good & Bad Credit

[mix2pix]

My wife has had medical issues for many years. She has 60+ accounts on collections at a total of around $23,000. Many of them are under $200. She has no credit cards and no other debts other than those in collection. Many of these debts have also been in collections for years. Obviously, her credit is horrid. She has NO assets and is 40 years old.

I have great credit, no debt, and some savings. We married this last October and none of my assets have her name anywhere on them.

Other facts.
1) She has had Crohns for most of her life and will probably need more medical in the coming years.
2) She has health insurance now but it's a standard 80/20 and the bills will still flow in from ER visits, medications, etc.
3)I could pay off all of her current debt in the next year or two but it would wipe out all of our savings.


Given all the information above, here are the options I see:
1) I pay off her debts, wipe out our savings, and try to keep her new medical debts under control.
2) She claims bankruptcy and then we try to keep her new medical debts under control.
3) I keep her off all current and new assets and stay the course.
4) ???

Right now, I just don't see where fixing her credit will do us any good since she doesn't have any assets and her wages wouldn't really help us qualify for much even if she did. I'm very confused as to what to do. In short, what would be the fastest way to re-coupe her credit with the least amount of financial pain and should we fix her credit at all given the situation? Would paying off just all the small debts do any good? With option 3, I would feel extremely guilty as that would be taking advantage of the system but the alternative could be both us of living near poverty until the end of days. Of course, we all hope she gets better and we can living a normal life but there is no guarantee of that. I'm torn.

[disneysteve]

Welcome. You will get differing opinions on this but here's my take.

You are married now. This is no longer about "her" debt or "her" assets or "her" credit. You are now a team. Everything is joint. "Her" debt now affects you just as much as it affects her. Any debt, regardless of who created it, affects what the two of you can do and accomplish together moving forward.

Should you file bankruptcy? Only if you are realistically unable to repay the debt which doesn't sound like the case here from what you've said. If you have the means to repay the debt, you should repay the debt. You haven't shared your income but 23K is not that much to owe even if your income is relatively low. And you've said that you can repay the debt from savings so clearly bankruptcy isn't a need here.

Do you guys have a budget? If not, sit down today and create one together. Cut expenses as much as possible and free up as much cash each month as you can to attack the debt. If you have savings that you can use, even better. Leave yourself a couple thousand as an emergency fund and put everything else toward the debt. Once it is paid off, start rebuilding the savings.

By the way, this has nothing to do with raising her credit score. That isn't the intent or the goal (thought it will be a side benefit). The goal is to pay back what was legitimately borrowed and is legitimately owed. Doing anything else, unless you are truly unable to do so, is nothing short of theft.

[photo]

When I was reading your post, I thought maybe you accidentally wrote "wife" instead of someone else you meant.

Since you have married, you may also be legally responsible for her debts now, as well.

The following from Steve is important enough to repeat:

The goal is to pay back what was legitimately borrowed and is legitimately owed. Doing anything else, unless you are truly unable to do so, is nothing short of theft.

[Nightfly]

I won't give you an option based on morality here - this is strictly based on practicality. That said:

* I wouldn't declare BK on such a relatively low amount. You may need the option to declare BK somewhere down the road (let's hope not, of course). Given your wife's medical situation, save the "nuclear option" of BK for when you might have debts of, say, over six figures; should that predicament ever come to pass.
* Pay your current debts in 2 or 3 (or more) years, starting with the smallest ones. Keep cash in some form around. Find a middle ground between knocking down the present debt and having a cash cushion. Paying off ALL your debt at the expense of all your cash isn't a good option.
* Contact every collector, especially for the largest debts, and negotiate settlements of 30% to 50% of the amount owed. They'll likely accept any type of payment, vs. the "zero" they would get if you declare BK. If they settle at a discount, get them to put the settlement in writing before you pay anything.
* What state are you in? This will affect the statute of limitations on debt collection. Older debts (that is - those that are outside of your state's statute of limitations for debt collection) should not be a concern. Worry about the more current debts.
* Leave morality out of it. Equating failure to pay debt with "theft" is oversimplifying a usually complex issue, and very unfair. Your wife's medical problems lead to this situation. She didn't rob a bank or engage in corporate fraud on a massive scale. She simply can't pay her bills - this doesn't make her evil or a thief.

Live within your means going forward - but you're probably already doing that. Knock out a handful of the smallest debts and you might feel better about your situation; this may give you added incentive to avoid BK.

[mix2pix]

Thanks for the replies so far. This has clarified a lot of things. I like the save the "nuclear option" and I feel pretty dumb not thinking about that one. That makes a lot of sense as we might be fine the next 30 years or she could needs hundreds of thousands in medical care. It does sound like a mistake to use that option right now when it could be a lot worse.

To answer some of the questions brought up. We do have a budget. Everything is itemized and I even have her on an allowance since she is really bad with money. Since we've been together and I've been learning of her finances, everything is under control right now except her old debts. She is completely OK with everything because she is finally getting some help on all levels.

We are in Florida and she has been here a few years. Some of those debts may be from New York but I have not verified that yet. I'm waiting on the latest credit report so I can get the itemized list. As you can tell, I'm just now getting around to taking a detailed look at this since I've spent the last year or so getting everything else in order.

[jpg7n16]

Originally Posted by mix2pix

She has 60+ accounts on collections at a total of around $23,000. Many of them are under $200...

Other facts...

3) I could pay off all of her current debt in the next year or two but it would wipe out all of our savings.

Originally Posted by disneysteve

...By the way, this has nothing to do with raising her credit score. That isn't the intent or the goal (thought it will be a side benefit). The goal is to pay back what was legitimately borrowed and is legitimately owed. Doing anything else, unless you are truly unable to do so, is nothing short of theft.

Totally agree with this response from DS.


It's only $23k, you have the ability to pay it back in 2 years, I see no reason for a bankruptcy.

If paying back that quickly would 'wipe you guys out' just pay it off over 3-5 years starting with the highest interest rate ones. Better to take a little bit longer to pay it all off, than to needlessly file bankruptcy.

[disneysteve]

Originally Posted by Nightfly

* Contact every collector, especially for the largest debts, and negotiate settlements of 30% to 50% of the amount owed. They'll likely accept any type of payment, vs. the "zero" they would get if you declare BK. If they settle at a discount, get them to put the settlement in writing before you pay anything.

I respectfully disagree. Why is it okay to avoid paying the full amount when you have the money to do so? I think negotiating settlements should be reserved for a situation when you have more debt than you can possibly repay given your resources (the precursor to your "nuclear option" of filing BK). If you find yourself buried in an insurmountable amount of debt, the first step should be to try to negotiate with the creditors. If that doesn't work or still leaves you with more debt than you can ever repay, that's the time to consider bankruptcy.

When you have the money, you should repay your debts in full.

[SarahJ]

Negotiating a lower amount on the medical debt IS needed. No one should clean out their savings and have to start all over. What if an emergency were to arise, what if he loses his job, anything could happen. If the debt has been in collections a long time, more than likely the debt has been charged off and sold to these collection companies. They will be willing to work with him to get anything. It wouldn't be very smart to clean out your savings to pay off all medical debt in full. Having no savings is the reason most Americans are in financial trouble now, mainly because of job lost or any unfortunate financial trouble. That's just my opinion... But bankruptcy should be a last resort.

[photo]

Debt is a legal obligation to pay for goods or services provided. We may morally differentiate between debt that is accumulated via spendthrift consumerism as opposed to medical care, but the latter is no less a legal debt. Medical staff, rent, utilities, insurance, and medical equipment all have to be paid when we are given care, so when people don't pay their bills, the rates for all of us increase to cover those debts.

If a person is a low-income wage earner and has no realistic way of paying medical bills, there is Medicaid.

[photo]

Originally Posted by SarahJ

What if an emergency were to arise, what if he loses his job, anything could happen.

You're right, and that's why we should all live below our means and save money for when that happens.

[disneysteve]

Originally Posted by SarahJ

Negotiating a lower amount on the medical debt IS needed.

No it isn't. OP has said they have the savings to repay this debt. They are not in need of assistance.

Originally Posted by photo

Medical staff, rent, utilities, insurance, and medical equipment all have to be paid when we are given care, so when people don't pay their bills, the rates for all of us increase to cover those debts.

Exactly. Why is it okay to not repay medical debt if you are able? You received the care - you should pay for the care to the best of your ability.

[mix2pix]

The current plan is to start paying off the debt slowly as to not wipe out our savings. It will not be the end of world and I appreciate the advice from this forum.

[disneysteve]

Originally Posted by mix2pix

The current plan is to start paying off the debt slowly as to not wipe out our savings. It will not be the end of world and I appreciate the advice from this forum.

I totally agree with not wiping out savings, especially since there could still be more medical bills in your future. Just don't drag this out too long. Remember that you are paying interest and possibly other fees on this debt so the longer you take to pay it off, the worse it gets.

In what order to repay the debts is debatable. From a strictly financial point of view, it is best to pay the minimum on all but the debt with the highest interest rate and work your way down from there. From a more practical and motivational point of view, you mentioned that many of the debts are for under $200. I would suggest taking a couple thousand out of savings right now and get rid of those. It will clear the slate a bit and make the whole process seem less overwhelming. It will give you fewer bills to pay and fewer creditors to deal with.

If you are willing to list your assets and your debts, we could suggest a repayment order. List the debts with the balance, the monthly payment and the interest rate.

[wolfy]

I agree don't wipe out your savings to pay all these debts right away. Spread it out. As soon as you wipe out your savings you will need it for something. Maybe you can call the agencies and see if they will lower the interest rate or stop charging interest if you start making monthly payments.

The other thing I would suggest is to see if your wife can qualify for State Medicaid to help pay the future medical bills. Sometimes regardless of whether you have other insurance or not, if your income meets the requirements you can still get medicaid.

[mix2pix]

Of course, I will keep very detailed records of what was paid off so I can follow up with the creditor or collection agency if they continue to show it as unpaid, is not removed from the report, etc. Two more questions:

1) What is the typical amount of time that needs to pass before a debt is removed from the reports once it's paid?

2) Is there any advantage to contacting the original creditor to pay them directly as opposed to paying the collection agency or will that just complicate the issue?

[disneysteve]

Originally Posted by mix2pix

2) Is there any advantage to contacting the original creditor to pay them directly as opposed to paying the collection agency or will that just complicate the issue?

Once the debt has been sold to a collector, you need to deal with them as the original company has removed the loan from their books at that point.

[DebbieL]

Sometimes I'm very grateful to be Canadian. This is just so unheard of here. I would hate to have to worry about paying off big medical bills. I wish you both the best of luck, and better health for your DW. I know Crohns is no fun. I know a couple people who suffer with it.

[Eric80]

You also have the option of a debt consolidation, if the medical bills are on different policies? I would say start to tackle them together as now you are married now and one entity. I would not use all the saving at once because there are future medical bill in the future and you never know when you will need the cash?

[HousingCounselor]

Hello.
Medical collections can stay on your credit report for up to seven years after they've been paid. However, I've never heard of paid collections being on there for that long. Congress is looking to pass a law that will make paid medical collections over $2500 each be removed after three months. Also, most creditors don't care about paid medical collections that are left on your report regardless of what it does to your score. In fact FICO is looking to re-vamp the scoring formula once again to reflect that in your credit scores. It used to be all collections were created equal. A $5 overdue fine from Blockbuster was just as detrimental to your credit as an auto repossession. Now they're changing that especially with medical collections. Anything under $100 won't be factored into your score at all.

I would see if you can get settlements or work out payment arrangements with them and leave the savings for if you lose your job or have to cover an expense that can't wait to be paid in a monthly arrangement like a car repair, furnace repair, or something like that.

[Eric80]

whatever you do, Do not declare yourself bankrupt! this will go against you for the rest of your life and credit rating will be non-existent!
Maybe you should go and speak to a debt advisor and maybe consolidate your debt or maybe get an IVA debt management plan, i think this is definitely a better option then declaring yourself bankrupt!