Dear Credit Care,

Due to a reduction in pay, I have been unable to pay my credit card debt and have had three cards charged off, three on current payment arrangements and one charged off that may be heading to legal, though I have not yet received this notice. I was told by a bankruptcy attorney that I am over the median income amount to file Chapter 7 bankruptcy, but I can file Chapter 13, paying $575 a month for three years. This would close all accounts, even those in good standing. I would like to try to go through a consumer credit counseling agency to make arrangements with creditors and keep the current accounts open. Which is best? My credit is already ruined. 

-Rose

Dear Rose,

There are several options for managing debt, but the key is to consider the long-term impact of each of those options.

It sounds like being able to use your credit accounts again is important to you. With this in mind, you will need to find a way to pay your creditors in a way that satisfies the agreed-upon terms, even if they are new agreement terms. It's also important to remember that in order to pay down your debt, you will need to refrain from using credit that adds to your debt load. 

So, if you have not worked out a spending plan based on your reduced income, I encourage you to do so. Your goals for the plan are to spend less than you earn and to save as much of your income each month as you can.

Now to your question about which is best, Chapter 13 bankruptcy or repayment through a consumer credit counseling agency. I would recommend that you contact a qualified, nonprofit credit counseling agency, such as Money Management International or any member of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. Your credit counselor will go over your monthly expenses and income and help you determine if repaying your debt through a debt management plan (DMP) would be in your best interest. The monthly repayment amount on a DMP may be more than the repayment amount through a Chapter 13 bankruptcy filing. If that is the case, you and your counselor can review your budget to determine if you can realistically afford to enter into a DMP.

The positives for entering into a debt management plan are:

  • You would be allowed to continue paying your three cards that are currently on repayment arrangements.
  • You would only have to include in the plan those that have been charged off.
  • You would avoid the stain of a bankruptcy on your credit report.

The negatives may include:

  • A larger monthly payment.
  • A longer period of time until your debt is repaid.
  • Any accounts not already charged off that are placed on the plan would also be closed.

Whether it is better for you to file Chapter 13 bankruptcy or to repay your debt through a consumer credit counseling agency, establishing an emergency savings cushion of six to 12 months of living expenses will help you avoid being in a similar situation in the future. Right now, it may feel impossible to save anything, but getting in the habit of saving is the first step. Save what you can now and build on it as your financial situation improves.

Handle your credit with care!