Jobless grad with student loans, $29,000 card debt ponders bankruptcy

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I relocated to California two years ago and could not find a job. I was a full-time student and just graduated last week, but am still searching on the job market. During this time I have accumulated $22,000 and $7,500 both through my Chase credit cards.

Now I am struggling just to make the minimum payments, which are mostly interest. I realized I could not keep going in the same circle without stopping the payments and breaking this endless cycle. Should I try to settle my debt directly with Chase, or do I have to go to a collection agency to do so? And can they sue me? I have to pay my student loans as well, so it's almost impossible to make payments on those credit cards.

Also, reading articles and talking to people, it seems the amount owned is too low to be solved by filing bankruptcy? Please, advise me on how to proceed in this situation. -- Sophia


Dear Sophia,
Not to scold you, but I must point out that you made a terrible error. When you needed cash, you turned to your credit cards. The issuer lent you the money with the expectation that you would repay these loans. At the very least you promised to meet the bare minimum of payments.

In situations such as this, I always urge cardholders to picture that they are not borrowing from a large, faceless bank, but from a close loved one instead. Would they behave the same way? For example, would you beg your best friend for a series of loans until you eventually hit a wall, then say, "Sorry, but I can't pay you. How about just taking less?" You'd jeopardize an important personal relationship. A credit card company is not much different. Renege on the contract and you lose a valuable financial relationship and create a bad reputation. Other lenders will see what happened when they pull your credit reports and will back away. So might landlords and employers.

Therefore, before I cover debt settlements and bankruptcies, let's figure out if you can pay it back as agreed.

You owe about $29,500 in credit card debt, so the minimum combined payment could be around $885, figuring a 17 percent APR. That figure would decline each month as the balance goes down. However, as you noticed, the principal would barely budge because your interest rate is probably high. By only sending the minimum, the payoff time would be over 22 years! Yet if you stick with that same payment amount every year, you'd be done in fewer than five years -- a huge difference. And that's not counting the finance fees you'd save: a hideous $25,952 in the first scenario versus $19,600 (still horrible) in the second.

In either case, you're looking at a major financial and time commitment. But if you can do it by extreme budgeting and working hard to earn extra money, that's what you should do.

And if you can't and fall behind? After approximately six months, Chase will either sue you or sell the account to a collection agency. If you are sued, you'll probably lose and the debt will increase dramatically, since court costs will be added. A judgment will be placed on your credit report, and your present and future wages may be garnished and assets taken. Collection action isn't any better. Not only will they pester you for the amount due, if they don't get it, they also have the right to take you to court.

Have a conversation with someone at Chase right away. Maybe they will consent to an interest rate reduction so more of your payment goes toward the principal. If it won't, it might for a third-party program, so go to a local credit counseling agency to find out if it can help negotiate with Chase on your behalf. You can probably find one in your area affiliated with either the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

As for a settlement, you may be able to arrange one with the bank before the account is delinquent, though it's not usual. Most are done via collection agencies, as they buy the accounts for less than their true value. The problem is, you'll need the cash up front and lots of it. Even if you could negotiate the balance to half, you'd still have to be ready with a check of about $15,000! Oh, and be hit with a larger than expected tax bill, too.

Regarding bankruptcy, you can discharge the amount of debt you have in a Chapter 7. If approved, you will walk away from all your consumer debt, leaving just the student loans to satisfy. You may have to forfeit some property, and the notation stays on your credit report for a decade.

You might also be able to use a Chapter 13, which is a court-supervised, three-to-five year payment plan. The upsides are no property loss and possibly paying less than what you owe, while the downsides are trustee fees and intrusiveness. You'd have to earn enough to pay the agreed upon sum, but if you make more or get bonuses, that money would be rerouted to your creditors.

In the end, there are no easy answers, which is why I emphasized the mistake of using a line of credit as income in the beginning. The best way to deal with the debt is by making a supreme effort to pay it off in full, as fast as possible. But if this is absolutely impossible, one of the bankruptcies may be your only choice.

See related: Your map through Chapter 7 and 13 bankruptcy, Extreme ways to tackle debt

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Updated: 01-23-2018