If you're buried in credit card debt, bankruptcy is one way out, but it comes with a steep price. So just how bad should debt be before bankruptcy makes sense -- and what can you do to avoid it altogether?
We asked finance and bankruptcy attorney Theodore W. Connolly, who wrote the new book "The Road Out Of Debt: Bankruptcy and Other Solutions to Your Financial Problems," with Joan Feeney, a federal bankruptcy court judge who deals with consumer credit card debt every day.
Connolly mainly handles corporate bankruptcy, but brought his own personal experience to the book, having pulled himself out of serious credit card debt.
CreditCards.com: How did you get into debt?
Ted Connolly: Like many college students, I thought credit cards were the greatest thing ever. You could just put them up and pay for anything. I don't know how long it took me to pay off the kegs we bought for our parties. I made the minimum payments, but it just kept adding up. When you're young, you don't realize the ramifications of paying 20 percent interest. I spent my 20s dealing with that. I got a job and devoted most of what I made to paying off my debt.
I knew more about finances by the time I entered law school, so I only took out federal loans and kept my spending down. Student loans combined with credit card debt can be crushing. There is no statute of limitations on student loans and they're non-dischargeable in bankruptcy.
CreditCards.com: So the threat of filing for bankruptcy can be an advantage to negotiating with credit card issuers?
Connolly: A big advantage. Credit card companies don't like to write off their debts. If you tell them bankruptcy is on the horizon, it may give you some leverage. If you've been a long-term customer, you can also say, "I really want to stay here, and I don't want to switch cards, but I need a better interest rate and I need some of these charges taken off."
CreditCards.com: What if you've been in debt for so long enough that you're not getting credit card offers?
Connolly: Then you have to be creative and find offers on the Internet that for which you could potentially qualify. Amazing offers do come out, even for people who've just filed for bankruptcy from the cards they've just discharged.
CreditCards.com: What's the first hurdle you have to jump over with credit card debt?
Connolly: Your own fear and denial. People keep tucking away the bills and it gets worse and worse. That's just human nature. I know I did it.
CreditCards.com: You quote Andrew Tobias in your book: "If you want 21 percent risk-free, pay off your credit cards." So many people obsess over interest on investments while ignoring the much higher rate they're paying on debt.
Connolly: That's especially dangerous now, when you're paying 28 percent or 29 percent. Getting rid of debt means a huge bonus on your rate of return, but it's hard to think of it that way. Watching debt go down isn't that gratifying until it's gone. It's more satisfying to see your stocks go up $100 in one month than to watch your debt go down $100.
CreditCards.com: Debt collectors can make you feel like a deadbeat or pretend to be your best friend. What's the best way to handle that?
Connolly: You have to find it in yourself to be your own advocate when you confront credit card collection companies. Once the debt is handed over to debt collectors, you're dealing with professionals who are very skilled and do this everyday. They make commissions off what they collect, and they're looking for the maximum amount they can get. They use whatever techniques they think will get them there. Just understand that they're looking to collect a bill. That's what they're paid to do. Don't take it personally.
CreditCards.com: On the other hand, they don't want you to slide off the hook.
Connolly: Right, and there are two ways you slide off the hook. If the debt is still with the credit card company, you can get another card and move your account. Or you can declare bankruptcy. They don't want that to happen. In most bankruptcies, they'll get nothing because credit card debt is considered an unsecured debt in Chapter 7 bankruptcy.
One of the things credit card companies will tell you when you're trying to negotiate your debt down is that bankruptcy will impact your credit score for 10 years, which is true. With certain jobs, it will reflect poorly, and it usually takes about two years before you'll be able to consider a mortgage. But if you're in serious debt, your credit score is low anyway. The faster you deal with your debt, the sooner you're going to be able to rebuild your credit score.
CreditCards.com: How bad should debt be before bankruptcy makes sense?
Connolly: Judge Feeney and I agree that bankruptcy is the solution if your debts are so overwhelming that your daily life is seriously impacted. If your debt is always on your mind or your way of life is threatened -- your house is going to be foreclosed, wages garnished, the car you need to get to work is going to be taken -- then bankruptcy has to be, if not your first thought, then right up there.
The biggest advantage to declaring bankruptcy is the automatic stay which will prevent a foreclosure from going forward or a car from being repossessed. Bankruptcy is difficult, and it's recommended to get a lawyer. There are costs, but it is a way to get out of overwhelming credit card debt.
CreditCards.com: You stress in your book that the law is on our side where debt is concerned.
Connolly: The law is on your side regarding harassment, for one thing. You can stop the phone calls by sending a letter to each of your lenders referencing the Fair Debt Collection Practices Act. That's a huge relief. You can also no longer be put in debtors prison. Owing money is a civil matter, not a crime.
CreditCards.com: In "The Road Out of Debt," you use billionaire Donald Trump as a model for getting out of debt.
Connolly: Donald Trump was $900 million in debt and had personally guaranteed a lot of that, so clearly he could have been on skid row. Yet he's not someone you'd expect to just throw in the towel. He was not going to let this debt be the end of him. He was coming back whatever it cost him. If everyone could take that attitude, we'd all be much better off. Debt is not the end, just a roadblock to becoming financially successful.
One thing we wanted to impart in this book is that you need to fight to get out of debt. You need to confront it. You can't avoid it because it isn't going away.
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