Don't Settle a Debt for More Than You Can Pay

Dear To Her Credit,

My husband is without a job right now. I have outstanding debt on two credit cards. One company is offering me 0% interest on my credit card debt with a payment option of $110 for the next five years, but the account will be closed. Also, the $110 has to be taken as an automatic withdrawal from my checking account.

Is this a good deal? If I pay a $100 on this account on my own instead of through automatic withdrawals and they still close the account anyway,can they still garnish my wages because I am not paying the minimum payment but paying some amount? When an account is closed, how does that affect your credit score?  -- Molly

Dear Molly,

If they've offered to let you pay $110, they will probably settle for $100. But that doesn't mean you should agree to even that amount if you cannot afford it.

Let's back up a little bit here. Your husband is unemployed,and you're about to promise to pay $100-$110 per month just on one credit card account? Again, if you two are strapped for cash, you may want to reconsider that amount.

Georg Finder, an independent credit evaluator, doubts that you can or should agree to even $100. Good deal or not, allocating too much of your reduced income to one credit card account can leave you without enough money for other bills. Finder says, "She's going to have to stretch that money. You have to squeeze every penny that's coming in."

Creditors can't garnish wages without going through the court system. During that process, you get a chance to present your case. If they try to garnish your wages, Finder says, you in turn can file an injunction. After that, it's highly probable that the credit card company will get far less than $100.

The first thing to do now is find out what you really can afford to pay. Go to small claims court and get a wage garnishment financial statement form (see this sample from California) that shows what you should include in living expenses. Finder says most people are overly optimistic about what they can afford because they forget some expenses. The form reminds you of categories of expenses so you can create a realistic budget and see what, if anything, you can afford to pay.

If you show the credit card company that you can't pay $110,they will back down. Finder says, "I would not be surprised if they only get $25 or $50."

I'm sure you want to do the responsible thing and pay your credit card debt. And you will. But right now, you and your husband are caught in a recession, and we don't know when the job situation will improve. You can't make promises you can't keep, or you'll be worse off. "If you make promises and can't keep them, all the gloves come off," says Finder.

Finder also recommends you close the account yourself. The credit card company will probably either lower your available credit limit to the amount you owe or close the account for you. Even if they didn't, you couldn't charge more on your account in good conscience not knowing how you would repay it. You might as well beat them to it and take that point of leverage away.

Regarding your credit score, if you're having trouble paying your bills, the effect on your credit score of closing one account is low on your list of worries. It may cause your score to go down if you have very little other credit, or if closing it changes your ratio of debt to available credit. I would worry more about staying current on any payment plans you agree to and keeping any accounts from going into collections -- which would have a far more significant negative impact.

I hope your husband finds work soon and things start looking up. Take care!

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