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Stop paying or file bankruptcy: Which path is less painful?

Both have consequences, but only one offers protection

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

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Question for the CreditCards.com expert

Dear Credit Guy,
I read in the latest AARP magazine that it was better just to NOT pay your credit card bills, instead of filing bankruptcy. Is this true? What are the consequences? I only receive a little over $1,000 a month in Social Security, and this is my only income. I am 76 years old and living in Senior Housing. I am broke and can hardly make a go of things. I do always pay my rent on time, so I am not in trouble there. Please help. Thank you. -- Pat

Answer for the CreditCards.com expert

Dear Pat,
In some circumstances, it may make more sense to just stop paying your credit card accounts rather than filing for bankruptcy, but that move does come with its share of consequences. Some may decide to stop paying their credit card bills rather than filing bankruptcy because their Social Security benefits are protected in most cases from garnishment by the Social Security Act (if your creditor is the IRS or other federal creditor, your benefits could be garnished), and they don't own a home or other large asset where a lien could be placed to secure payment.

But, just because the credit card issuer can't garnish your Social Security benefits and you don't own any real property or other assets, that doesn't necessarily mean you should skip the protections provided by filing for bankruptcy.

If you stop paying your credit card bills, your card issuer will eventually charge off the account -- typically, when the account has not been paid for 180 days -- and turn it over for collections either by sale of the debt to an outside collector or to an internal collector. Then, you will begin receiving collection calls. These calls can be quite disturbing and will not end just because you tell the debt collector you do not have the money to pay.

The collection process may escalate to the point that the collector sues in court to collect the debt owed. You would need to appear in court or send in supporting documents to prove to the court that your only income is from Social Security benefits and you do not have enough income to pay the collector. If for some reason you did not appear or respond, the collector may be granted a judgment, which could be used to garnish your bank account. Your bank does not necessarily know that all the funds in your account are Social Security benefits and are therefore exempt from wage garnishment, so they may allow the garnishment order. You would then have to prove that all funds in the account are Social Security benefits and wait for the funds to be returned to your account. While you wait for your funds to be restored, you may miss rent and other essential payments.

Rather than deal with the collectors and possible collection actions, it might be better to just go ahead and file for bankruptcy protection. Because you have a very limited income, you would most likely qualify for a Chapter 7 bankruptcy filing, which would eliminate your debt with the credit card companies. The bonus is that once your paperwork has been filed, all collection activity on the accounts in the bankruptcy filing must cease immediately. You can search for a pro-bono bankruptcy attorney at the American Bankruptcy Institute's website.

Take care of your credit!

See related: Interactive map of state-by-state bankruptcy filings, How wage garnishment works and how to avoid it, 11 tips for dealing with debt collections and collectors, Elderly father's Social Security benefits likely safe from garnishment

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: January 31, 2011


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