Consumer Credit Counseling or Bankruptcy?

[consultant]

Long story short, I'm screwed. Self-employed with little saving and annual income varies widely. Took a big loss in my business - recession killed me, now I have tons of CC debt I used to finance my business at average rate of about 12%. I own an $800K home but already have the largest mortgage I can have at $400K so can't tap any more home equity. I am barely able to make all the minimums on the credit cards. I'm hoping my income will rebound this year but not sure if I can take the CC stress much longer. Have a family of 4 to support.

I know one solution is to sell the house and downgrade to a townhouse. But now is the WORSE time to sell my house. My credit rating is still decent. Checked 5 months ago it was 690.

I'm wondering if it is time to throw in the towel and utilize one of those cheezy Consumer Credit Counseling outfits. I'm not sure how they work though and what it will do to my credit rating long-term. If someone can give me a link to some good, unbiased info on them, I'd appreciate it.

I'm guessing the way it works is somewhere along the lines that they scare the CC company that you are soon going to stop paying you CC bills because you can't afford them anymore. So the CC company decided do we want to get nothing or something, or spend lots of effort trying to squeeze the customer. So the middleman negotiates a lower flat rate and pays all the CC companies on your behalf and you just pay the counseling people one payment you can afford.

I would assume during all this, the CC companies freeze the card so you have to pay cash or debit card for all your purchases and that something appears on your credit report so you can't get any new credit cards.

That's my educated guess.

What I'm wondering is what if income improves. Can you cancel the agreement and ask to go back to being a regular customer paying each CC individually and thereby able to use the card again and mark on credit report goes away? Or are you stuck with the agreement until everything is all paid off?

What I'm really really wondering about is the short-term and long-term effects on your credit. I know bankruptcy is 7-years to clear off credit and it is not an easy process to file, and I would imagine a judge would order me to sell my house to pay off my creditors? So I'm guessing I'm not really a candidate for bankruptcy - nor would it be a wide decision if I was?

[am_vanquish]

Didn't realize you had multiple threads going here ...

The short answer is that debt consolidation companies don't do anything you can't do yourself, so don't waste your money.

The real answer is most likely that you need to get a handle on your spending & saving behaviors. To get the best answers here, you need to give us the most information you can. Start by listing your debts by type, amount, and interest rate. An outline of your monthly spending will also help to find spots where you might not be spending your money efficiently.

[consultant]

I've already done all that. I was just curious what my options are should things get any worse. We cut out everything - health club, eating out, no vacations, have no Auto Loans - wife is back to work. Debt is about $120K. $50K on two business credit cards used to help finance a business and $20K on a consumer card. Avg interest rate on that debt is about 12%.

When you are self-employed and lose a couple major clients due to the economy cutting your income by 2/3 almost overnight, its a little different than some average person that just spent to much for several years.

Really it is the house that is a major expense keeping us from paying down the cards. $400K mortgage. Yearly Property Taxes are $9,000 let alone utilities, maintenance/repairs, insurance. Main problem is we can't access any home equity and now is the worse time to sell. So we are currently just barely able to make minimum payments hopefully until the business turns around or real estate market comes back to make selling a wiser decision.

After I posted I totally thought the same thing. Just call the individual card companies, tell them I need a lower rate and want to freeze the card and a payment plan to pay it off in 4 years or so because I'm trying to avoid bankruptcy. I used to work for a bank but not in the CC department. I've negotiated lower rates before but that was only when I had offers from other companies to put them againsts. No offers any more for low-rate balance transfers so I have little leverage. But they don't need to know that I guess.

[disneysteve]

Are you upside down on the home and, if so, by how much? What could you realistically get if you could find a buyer?

[disneysteve]

I can't help but point out the incongruency of your posts. On this post, you are talking about credit counseling or bankruptcy while in the other thread, you are talking about selling a $20,000 car and replacing it with a $30,000 car. Something is seriously wrong here.

[consultant]

I wouldn't mix the threads. This thread is just exploring a curiosity I had. It's always best to know your options if you ever found yourself in a worse predicament. I'm not in need of renegotiations of my unsecured debt or am even close to bankruptcy. But this recession as prompt my interest into what options are out there should things get worse.

There's a ton of more detail regarding the car thing that are not in this thread so it is unfair to mix the two including warranties, or lack thereof, maintenance costs, income generation from the $20K recovered in the current car which ends up being a net positive compared with not getting the money out (because all my capital is tied elsewhere), and the fact I have to meet with business executives so I need something to drive that is middle-of the road that that instills confidence but isn't overly luxurious. But again that's the other thread.

I'm not looking for a debt solution here. I just was curious about what the CCC services do and how they compared to bankruptcy. If we get a double dip in the economy I may have to look seriously at either one. But not right now.

[jIM_Ohio]

I'm with steve, something appears off.

Here is best way to get detailed, specific assistance:

You need to show 3 things:

1) income
2) expenses
3) debt

The level of detail needed for the 3:

1) income- list fixed and variable sources of income
list gross and net salary
if you get a tax refund, post that as income as well

2) expenses
list a month by month budget
and also summarize with an annual budget

3) debt
list each debt
the amount on each debt, the interest rate, and if its a bank loan, list the repayment start and end dates.



You asked in other post about getting a new car to create some liquidity to remove 20k of cc debt.

This is moving debt from one pocket to the other- only thing which might change is your cash flow month over month... but in reality getting a new car increases the amount of your debt, it does not lower it.

So the pending questions would be
a) why is car debt better than cc debt to you?
b) why not disclose budget and let experts here help you...

in general this site is not going to recomend anyone deep in debt finance something. I have debt in my cars and house... that is all. Many others here care to carry less debt than this. Do not judge any one poster as representative of whole board- we each have our strengths, but attacking us personally is not a good way to start off.

If you want general assistance, you already have it...
if you want specific assistance, you need to provide much more detail.

[Seeker]

I just was curious about what the CCC services do and how they compared to bankruptcy. If we get a double dip in the economy I may have to look seriously at either one. But not right now.

Generally the CCC operate in whatever way they deem necessary to make a buck.

They will encourage you to stop all payments, now, even if you can afford to continue them. This, of course, demolishes whatever credit rating you have.

They reason they do advise this is so they they can better "deal" with your creditors and get negotiated results.

Their approach is: "He's not making any payments now... so how much can we lower the rates in order for you to get some of what is owed on this debt???"

They are in a position of empowerment because they lose nothing by negotiating for you. The CC companies actually favor this somewhat because it's a company that they're nogotiating with and not a single person who may enter into even more unfavorable contionions (from their perspective).

IMO, you can do this yourself and get almost essentially the same results. You've worked in a bank before, you know the processes. And frankly, a CCC will not care as much about what they do to you (your finances, credit rating etc.) as much as you personally do. Why pay someone else to lose more control over the financial mess?

Bankruptcy is a last resort. Always.

[maat55]

I wouldn't mix the threads. This thread is just exploring a curiosity I had. It's always best to know your options if you ever found yourself in a worse predicament. I'm not in need of renegotiations of my unsecured debt or am even close to bankruptcy. But this recession as prompt my interest into what options are out there should things get worse.

There's a ton of more detail regarding the car thing that are not in this thread so it is unfair to mix the two including warranties, or lack thereof, maintenance costs, income generation from the $20K recovered in the current car which ends up being a net positive compared with not getting the money out (because all my capital is tied elsewhere), and the fact I have to meet with business executives so I need something to drive that is middle-of the road that that instills confidence but isn't overly luxurious. But again that's the other thread.

I'm not looking for a debt solution here. I just was curious about what the CCC services do and how they compared to bankruptcy. If we get a double dip in the economy I may have to look seriously at either one. But not right now.

There are different levels of sacrifice people will take to get out of debt, avoid BK and build EF's. For you to know all your options you would have to post more details.

Credit counseling is not necessary. BK, may not be necessary. The choices you make now will determine your future options. IMO, you are not doing everything you can to better your situation.

[wincrasher]

I don't think we need all his grimy details to offer alittle advice.

First, a 690 score is not all that hot in the current banking environment. You won't even get a conventional mortgage or decent car loan below 720.

If you go credit counseling or bankruptcy, then your score will literally be demolished. You are looking at at least 3 years to repair your score with counseling and 7 to 10 with bankruptcy. There may be bottom feeders with obscene rates that could offer you credit in two years.

Your third option is to pay late or pay what you can when you can. If you think the economy is recovering, this may be your least damaging option. I think your shortest recovery time could be this route.

I would strongly suggest that you sell your house even if it just at break even. Holding out for a fantasy profit may take you down in every respect, so it would be better to wipe your slate clean and start over. Lots of people hold on to thier homes with the hopes that recovery is around the corner. It's often not and they slowly death spiral into bankruptcy or homelessness.

[disneysteve]

I would strongly suggest that you sell your house even if it just at break even. Holding out for a fantasy profit may take you down in every respect

I agree with this and it hasn't really been addressed so far.

You've said it isn't a good time to sell, which I'm sure is true, but you said you owe 400K and the house is worth 800K, so you aren't upside down. If you can get 800K or even somewhat less than that, you'd have more than enough to pay off your mortgage and walk away with 350K or so in your pocket. Then you could go buy a more modest home, maybe 400K and have little if any mortgage. That would go a long way in clearing up your situation.

[wincrasher]

The problem he may have is that to sell at that level, he is either needing a cash buyer or someone who can qualify for a jumbo - not an easy feat these days.

So deep discounting will probably be required. It's a tough pill to swallow. But it's better than the humiliation of bankruptcy.

[am_vanquish]

Then you could go buy a more modest home, maybe 400K and have little if any mortgage. That would go a long way in clearing up your situation.

Best advice so far! But I'm guessing that isn't an option ... because of his clients!

[Seeker]

I agree with this and it hasn't really been addressed so far.

You've said it isn't a good time to sell, which I'm sure is true, but you said you owe 400K and the house is worth 800K, so you aren't upside down. If you can get 800K or even somewhat less than that, you'd have more than enough to pay off your mortgage and walk away with 350K or so in your pocket. Then you could go buy a more modest home, maybe 400K and have little if any mortgage. That would go a long way in clearing up your situation.

The problem he may have is that to sell at that level, he is either needing a cash buyer or someone who can qualify for a jumbo - not an easy feat these days.

So deep discounting will probably be required. It's a tough pill to swallow. But it's better than the humiliation of bankruptcy.

Actually DS is correct and wincrasher may or may not be depending on the area (discounting depends on other factors more than buyer qualification -- factors like quantity of homes available, quality of homes available, pricing and jobs in the area, etc). Discounting the price of a home depends more on competition in the area for the buyers.

OP did say that selling the house and going for a townhouse may be an option. Not having 400k mortgage to pay on, and using most of that money for a DP on a townhouse, will go a very long way toward his immediate needs.