Dear Credit Card Adviser, I am 76 years of age and retired. Currently, I live on a pension and Social Security, which amount to about $3,400 per month. I owe $5,000 for a personal loan and $15,000 in credit card debt. In view of my age and the weight of the debt, what are my best options?
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I have about $8,000 in assets and reside in a mobile home that is quite old and worth practically nothing. If I default and stop paying, what can happen? I was going to try a default, save some money and try to make several settlements with my creditors. Is good credit necessary for me at this time in my life since I am not buying a house or new car? -- Harvey
Dear Harvey, A heavy debt load is always a burden, no matter your age. But paying off debt gets harder when you're on a fixed income, such as in your situation. Ideally, Americans should aim to pay down their debt before retiring. Unfortunately, circumstances may get in the way of that plan.
Your dilemma involves two key questions: One, should you bother paying your debt, given your age? Second, if you don't pay it, would bad credit haunt you in your golden years?
Let's tackle the first one.
While the balance of your personal loan isn't too big, your credit card debt of $15,000 is sizable, hard for creditors to ignore and difficult to outrun. Your issuer, and maybe later a debt collector, will try aggressively to collect payment after you default. It's possible either the issuer or debt collector will sue you for the debt.
If a court grants a judgment against you, the party that owns the debt can seize your assets for repayment. That means your $8,000 in assets could be in jeopardy, and a lien may be put against your home if you own it. Your Social Security benefits are safe from debt collection under federal law, but your pension may be up for grabs, depending on state laws.
The collector can have up to 10 years from your last payment to sue you, depending on the state. It's possible the debt collection process outlives you, but collectors could take from your estate, which would include $8,000 and a mobile home at the very least, leaving little for loved ones.
If you'd rather roll the dice on eluding debt collectors, there's still the issue of your credit. You're right that your largest loans are behind you, although it's not guaranteed you won't need another car. But credit follows you beyond just obtaining debt.
If you carry auto or homeowners insurance, your premiums could rise, or your coverage could be terminated if your credit takes a beating. Property insurers often use a credit-based insurance score to determine coverage and set premium rates. The more negative information in your credit report, the lower your insurance score.
Landlords, utilities and cellphone companies also use credit history to establish security deposits or pricing. Some employers pull credit reports as part their background checks on job applicants, although this likely won't affect you. Lastly, you won't be able to help a grandchild or other relative get credit as a co-signer on a credit card or other loan.
So, what's left to do about your debt?
Contact a nonprofit credit counseling service. The National Foundation for Credit Counseling at NFCC.org or (800) 388-2227 can help you locate a local, reputable credit counselor who can help you make a budget to pay back your debt or help establish a debt management plan if needed.
This type of plan is worked out with your creditors, who often lower the interest rate on the debt and waive certain fees. In exchange, you make a monthly deposit to the credit counseling agency, which then pays your creditors.
These plans can last a long time, up to several years in some cases. But the good news is these plans are neutral to your credit, unlike debt settlements. This may sound like a tougher road, but the risks to your credit and financial security are lower.