Living on disability with $8,000 in card debt

Even bankruptcy is too expensive


To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs. See her website for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
I am disabled and only get $741 per month in disability payments. I have about $8,000 in credit card debt. What should I do? I can't pay the debt off or even the minimum payments, because the interest is too high. I support two people and can't afford filing fees for bankruptcy. I have no assets.  -- Patricia


Dear Patricia,
Even without the $8,000 in debt, $741 per month is not enough money to support two people with today's prices.

You're right that you cannot afford to file for bankruptcy. Bankruptcy is more expensive than most people realize. You may see a small fee advertised for bankruptcy, but it often does not include all expenses, including trustee fees, that you must pay. For a relatively small amount of debt like this, bankruptcy is not a viable solution. In addition, filing for bankruptcy takes a significant amount of time and trouble. You'd be better off using that energy to find ways to increase your income.

Because your sole source of income is disability payments and you have no other assets, you could stop making payments as the credit card company would have no recourse. It can't take your disability payments, so you could be considered "judgment proof." Your disability payments are automatically protected from being frozen or seized by creditors. Instead of simply not sending any more more payments to the credit card company, you should send a letter stating that you are dependent on disability income and unable to pay. Some banks automatically write off a debt when the debtor is placed on permanent disability.

Of course, not making the minimum payments will hurt your credit history and credit score. However, your credit score only matters if you intend to apply for a mortgage or other credit in the future, or sometimes a job or an apartment. In your situation, it may not matter.

If you stop paying and the credit card company places negative marks on your credit report, remember that the negative marks do not stay on your report forever. They become less and less important as the years go by. After seven years, they disappear altogether. Just know that your card will be closed and your ability to qualify for another card now or in the near future will most likely be met with rejection.

If you negotiate and settle the debt less than what you owe, you will receive an IRS Form1099-C from the lender or creditor for the amount forgiven. This forgiven debt is considered taxable income. However, with your low income levels, you are not likely to actually owe any tax on the amount. In addition, if you were insolvent when the debt was settled or forgiven, meaning you had more debts than assets, you may qualify for an exception to paying any tax on the forgiven debt.

Depending on the level and type of your disability, I'd encourage you to find some way to create more income. Sit down and assess your abilities, interests and talents to see if there is some way you can earn some income. Even a few dollars here and there would make a big difference. Perhaps you can dog sit, tutor students after school or sell items online. With Skype, people are giving piano and voice lessons online. You may consider some type of temporary or part-time work that's not too stressful. I know people on disability income who earn a modest, part-time income that doesn't interfere with their disability status.

I hope that the new year brings you less financial stress and new hope for your future. Take care of your health, your total financial picture and your credit.

See related: What it means to be judgment-proof, 6 exceptions to paying tax on forgiven debt

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Published: January 2, 2015

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