Plan to walk away from card debt? Read this first
By Chris Kissell
In today’s stormy economic seas, millions of Americans are at risk of drowning in their credit card debt.
Adults who hold at least one credit card average $5,540 in card debt, according to a CreditCards.com analysis of debt statistics. The average per-household figure is $9,600 in debt.
Such figures may tempt you to simply stop paying your credit card debt. In fact, noted stock trader, best-selling author and financial iconoclast James Altucher has suggested you do just that in an online video.
“Stop paying back your credit debt completely,” Altucher urges viewers, adding that most of the time, credit scores are a “scam.” At the end of the day, he says, “the banks don’t care about your credit card debt.”
CreditCards.com reached out twice to Altucher to ask him to expand on his comments, but he did not respond.
price you pay for walking away
However, credit experts are not as sanguine about the ease and wisdom of skipping credit card payments.
Robert Stammers, director of investor education at CFA Institute, says simply ignoring credit card debt is almost always the worst solution. For starters, people who refuse to pay debt will have collectors “constantly bombarding them.”
He adds that some of those collectors “aren’t very nice” and can make the debtor’s life miserable. In fact, Stammers says, people who think they are walking away from debt problems are just deluding themselves. “You’re not walking away from anything,” he says. “Those guys are going to hound you like crazy.”
Credit expert John Ulzheimer, who has worked for both FICO and Equifax in the past, agrees that creditors and collectors are unlikely to simply disappear quietly. “You’re likely to get sued, especially if you defaulted on a large amount of money,” he says.
Ignore the lawsuit, and you might end up on the receiving end of a default judgment that forces you to liquidate assets, or results in garnished wages or levies against your bank account, Ulzheimer says.
Gerri Detweiler, author of “Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights,” says there are rare times when temporarily refusing to pay debt – at least temporarily – can be advisable. This might apply to people who lose their jobs and cannot afford to pay for basic essentials. “Paying credit card debt probably should not be their first priority,” she says.
However, she also warns of the consequences of such a decision, saying collection agencies are “pretty persistent – sometimes aggressive.”
Like Ulzheimer, she emphasizes that if you ignore the debts for too long, creditors are likely to sue and may use a judgment to seize your savings or wages. “It can get pretty scary at that point,” she says, adding that in some states, judgments remain in effect for 20 years or more.
“I’ve heard from consumers who ignored their debts, the creditor got a default judgment, and a few years later they discovered the money in their bank account was gone,” she says.
No easy fixes
In the video, Altucher acknowledges that walking away from debt will hurt your credit score. But he goes on to say that the damage to your credit is “easy to fix once your other financial life gets back in shape.”
Stammers, Ulzheimer and Detweiler are especially critical of this claim. “This is where he’s 100 percent incorrect – and, frankly, very much out of his depth,” Ulzheimer says. “The hit of walking away from your debts is catastrophic.”
Fail to pay your credit card debt, and the account will go delinquent, and then into default, Ulzheimer says. Defaulting on debt will scar your credit for at least seven years, and possibly longer if you file for bankruptcy or have a judgment placed against you, he adds.
Default on several cards and you will end up with multiple collections on your credit report, as well as the possibility of bankruptcy and judgments. “I’ve basically just described a credit report that will score in the 500s for many years,” Ulzheimer says. “No reasonable person would call that minor.”
Altucher argues that the impact of a poor credit score is negligible. He says bad credit may make it slightly more difficult – and a bit more expensive – to rent an apartment or secure an auto loan.
Thomas Nitzsche, spokesman for Atlanta-based ClearPoint Credit Counseling Solutions, says Altucher is understating the case. “A severe default can easily keep someone from becoming a homeowner, renting the apartment they want, buying the car they want,” he says.
People with poor credit might see their insurance costs increase, or might have to put down more money on a deposit for cable TV and telephone service, Nitzsche says. “In some lines of work it can even prevent you from getting a job,” he says, citing examples such as being declined for a job in finance, or for a career where you need security clearance.
Nitzsche acknowledges that in some rare instances, a debtor may be considered “judgment-proof.” He cites the example of someone on Social Security who is permanently disabled and has no assets. In such cases, walking away from debts may make the most sense, he says.
However, for most people, it makes far more sense to try to negotiate with creditors and collectors. Or, work with a credit counselor to negotiate on your behalf. “You’ll likely be able to zero out the balance for much less than what you actually owe,” Ulzheimer says.
But even if you decide on this approach, prepare for a long slog.
In the video, Altucher paints a picture of someone with a $10,000 debt who calls a collector and quickly gets the obligation reduced to $1,000. But Nitzsche says that is wishful thinking. “I have never heard of a consumer reaching a 10 percent settlement,” he says. “Twenty-five to 50 percent, yes – but not without a lot of hard negotiating.”
Nitzsche also reminds people that even if they do negotiate a reduction, they are still likely to suffer “severe credit damage.”
If you simply find debts too overwhelming, bankruptcy is always an option, Detweiler says. “This is why we have bankruptcy laws – they can help consumers who can’t pay get a fresh start without the fear of a lawsuit or aggressive collection action,” she says.
Whatever pathway you choose, Ulzheimer reminds debtors that they have a moral obligation to try to work toward a reasonable solution. “You’re not being extorted, you actually do owe that debt,” he says. “So, simply not paying it back is almost like you stole it from the bank in the first place."
“It takes a special kind of dirtbag to think that way.”
Published: June 13, 2016
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