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 CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.
Dear To Her Credit,
My husband and I were in a serious car accident in 2002. Subsequently he can no longer work. I have developed a serious health problem and cannot work. We quickly used up our nest egg to survive, and now over time accumulated $45,000 in credit card debt on 18 cards, at an average of interest rate of 20 percent.
We have $3,000 a month from disability income and now no savings. We have a mortgage, a car payment as well as all the normal bills, taxes and medical copays and so on, totaling about $3,100 per month. This month is the first month we are falling behind.
In 2012, my husband was in another bad accident. They are settling, and he will get $64,000. If we take the $45,000 and pay off that debt, we are back to having maybe two years of money left after necessities, utilities, taxes and all. Should we just squash the credit card debt right away? We thought of debt counseling, but we don’t want any issues with ruining our credit or getting sued.
Thoughts without judgment? – Carrie
Of course, there’s no judgment. But if I were to judge you at all, I would definitely see positive things about your situation and how you are handling it, despite your tragic circumstances of having both of you become disabled.
First, you know exactly how much money it takes you to get by. So many people can’t tell me how much money they need to live. I wonder, do they just pay bills until the money runs out? That sounds terrifying to me. It would be like driving with my eyes shut. You, on the other hand, know that you need $3,100 per month.
You’ve also managed to keep up with your bills in the face of extreme stress and medical hardship, until now. And you want to pay your bills, not get out of them. It sounds like, despite what it may have felt like in the midst of it all, you’ve set an excellent example of how to handle a financial crisis.
Determining the best course of action
Now, for the best course of action with the $64,000 settlement. That’s a tough one, because if you use $45,000 to pay off credit card debts, you have little to fall back on in any emergency. Further, if you are running a monthly deficit, you could be back down to no savings in a couple of years, as you say, and then what?
If you don’t pay the credit cards off, however, you will continue to rack up interest expenses every month. If your monthly expenses exceed your income, eventually the $64,000 will be gone.
Either way, looking at your long-term financial situation, you must find a way to balance your monthly budget and not depend on depleting savings accounts to make up the difference. It’s not easy in most parts of the country for two people to live on $3,000 per month, especially with ongoing medical expenses. But you’re so close!
From here, it looks like the quickest way to get your monthly budget out of the red would be to ditch the car payment. If you sold the car and bought something affordable with some of the money from your husband’s settlement, that could be the difference between a budget that works and one that doesn’t. With a less expensive car, your insurance payments should be reduced. In that way, the settlement could make a lasting improvement to your finances.
You may be able to find other ways to save or make just a few dollars a month. Some people move to a less expensive location, or they run errands or give rides to other people now and then. A few dollars’ difference every month would mean the difference between financial progress and falling behind.
Reducing high-interest debt
Another option may be to pay off the balances on the highest interest cards with a portion of the settlement and transfer as much as you can with the remaining balances to a 0 percent balance transfer card. That will buy you some time to continue to pay down what you owe without interest costs. Paying off as much debt as you can would reduce your stress levels in the short term.
Before you even think of filing for bankruptcy, it’s best to pay a visit to a nonprofit credit counselor in your area. The counselor will review all your bills and help you determine whether bankruptcy is the way to go or not.
The most important thing, however, is that you keep your eye on your long-term plans. You’ve done well so far, keeping your bills paid in difficult times. You can find a way to plan your financial future with the assets and the good common sense you have, too.
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