No, this isn’t an advertisement for some service that promises to get rid of your credit card debt. And for legal reasons, I am stating that I am not a lawyer and you should not consider any information that follows without consulting a licensed attorney. This is opinion only and not a recommendation. Continuing to read this article constitutes an agreement that you will consult an attorney before considering any of the information in this article and agree that what is contained in this article does not constitute legal or financial advice. It is merely a personal perspective on a personal experience.
That said – let me begin.
First of all – who am I to say what I have to say? I have some paralegal training and was a licensed real estate agent, a loan officer, and also walked away from credit card debt twice – totaling over $50,000.
The first time I was a stupid kid and thought in future I will have a bigger income and be able to pay off my debts – then lost my job when my company sold to another company. I swore I would never use credit that way again. The second time I had started my own business and in my best year took in over $200,000. I thought it would last forever, but the industry changed, profits turned into losses, and I thought (stupidly) if I financed my company’s losses through credit cards I could weather out the storm until the business turned around. It never did.
The credit card industry is easily and clearly the most profitable business in the world to be in, more profitable than a gambling casino because the suckers never win, and never get lucky. Drug dealers wish they had a business as profitable as credit card loans. The Mafia grinds their teeth at night knowing they lost the loan sharking racket to the credit card companies. And so I felt no guilt in walking away from my debt and no guilt in relating this all to you.
Credit card debt is unsecured debt. By that I mean that there is no property to back up the debt. Mortgages and car loans are secured debt. Default on a mortgage and they repossess your home. Default on a car loan and they take your car. Also many large store purchases done through the store’s finance service may or may not be secured and they might pull up a truck to your house to take your furniture.
It’s very tempting to use credit cards if you don’t have a lot of cash. Imagine your refrigerator is dying and you see one that’s 10% off list price. You don’t have the cash right now, so buying it with a credit card makes sense. Right? Think again. If you have a 20% interest rate on your credit card, that 10% off would mean actually paying 10% more than list if you let the balance run over a year. It’s far better to scrimp and save and hope your refrigerator hangs on until you have the money.
If you are young and think that it will be a million million years before you are at retirement age, which most young folks do, you are just plain ignorant. It’s sad to think how many people at age 65 are still paying credit cards for purchases they made in their 20s.
If you have debt you can’t handle and are thinking of filing for bankruptcy, that is the very worst way to eliminate debt. First of all, you usually have to sign a binding contract saying that you will have to pay at least some, if not all, of your debt at the close of a bankruptcy. Even if you are lucky enough to have all the debt erased, a bankruptcy stays on your credit report … forever. (Another thing — most legal services charge $1000 or more to file bankruptcy, and there may be other court charges on top of that.)
Making minimum payments is a financial death sentence. When you make minimum payments you usually are just paying on interest and not the principal, and sometimes it is just part of the interest. You’re paying “juice money” and not getting anywhere.
Using the “rule of 72” which is a basic concept of calculating interest, if you have a 20% credit card interest rate, the amount you owe doubles every 3.6 years. (72 divided by 20 equals 3.6) If you have a large balance in credit card debt, you are, well, screwed for life. Someone with a balance of only $10,000 can wind up paying over $100,000 through the life of the debt. So you see the best advice is to wait on that purchase until you can buy it cash instead of using a credit card.
If you can negotiate a lower settlement payoff with your credit card company, great. Usually they won’t even consider it at first or the person you talk to will tell a lie and say they just don’t do that – which is what happened to me. You may have to stop payments for 6 months or more, or hire a settlement broker, or both before they will agree to a lower payoff amount. There is just too much easy cash involved to let it slip away so easily.
There are credit card services and “debt consolidation companies” which advertise all over tv, radio, and the internet. They say they are non-profit services. Well, legally they are, but they are also funded by the credit card companies. Their greatest fear is that you will walk from your debt so they have created these companies to keep you paying on those debts, even if it has to be for a lower interest rate. (But it still has an interest rate – they don’t let you get away without paying some juice – er– interest.) Also the amount you owe at the time you make a deal with one of the credit card services stays the same. Usually none of the credit card companies will even waive any interest or fees.
One serious word of caution – if you decide to walk away from your debt, as I did, you will earn every single penny of it. It’s not easy. But then again, I did it twice and my credit scores today are close to 800.
First of all, some advice to everyone who has a credit card. When you change jobs the credit card companies want you to notify them of the name, address, and phone number of your new employer. Technically, according to your credit card contract, you are supposed to do that. I have filed business licenses for private companies with my own business name, address, and phone number. I have had no problems taking out new credit cards with my own company as my place of work. You see, getting a credit card is not that hard in the first place – if you have a decent credit score it’s almost automatic.
Why do this? Well, I found out the hard way. I have seen articles on the web that say creditors will not hassle you at work to the point of losing your job because they don’t want you to lose your job (so you can pay your debts). Baloney. When a representative of a creditor is assigned to get you to make a payment, they will receive a commission if you promise to pay a certain amount and then pay it within a few days. They want their commission, baby, and if they think they are putting a sweat on you by hassling your boss at work, they will hassle the living hell out of your boss.
Collection agencies are even worse. They are – (fill in obscenity here)
So what happens when you decide to walk away and default on a loan? The first thing they do is log into the credit reporting agencies and see what information they can get. They are, first of all, looking for contact information. Places of work and phone numbers. They will call every phone number listed in your credit files. This may even include your landlord, if you are renting and filled out a credit form with your landlord. They will take any addresses and look up any and all phone numbers associated with those addresses. They hope they can find your work number, but they are also known for contacting neighbors and relatives.
Another thing to consider is that if you decide to default on one or more credit cards, don’t even dream you can keep one or more cards for emergencies. As soon as any other card company sees you are defaulting on one card, they will freeze all credit.
If you decide to walk, make sure there are no current phone numbers for work or landlords – or addresses for that matter. (It’s pretty simple to look up a business phone number.) They will hassle the living hell out of your landlord and he or she may even actually consider evicting you – or raising your rent for the hassle.
If you are positive work or landlord information is not current, you can possibly walk from a loan. When I first walked from my credit card debts about 30 years ago, it was relatively easy. The second time – about 10 years ago, it had all changed and easy is not the word.
If you do consider walking, you should keep a journal and record dates and all pertinent information. This is crucial. Although a bankruptcy stays on your credit report forever, a default disappears after 7 years. Read that again. A bankruptcy is forever but a default is only 7 years.
During the next 7 years you won’t be able to get a mortgage, a car loan, or get financing for a major purchase through a store. You notice I didn’t say get a new credit card. You can still get a new credit card but it will most likely be a secured credit card with an extremely low balance and a high interest rate – like half the secured deposit and 36% interest.
If you do get one of these easy credit cards, make sure the information doesn’t give them a way to track down your work or landlord.
It would be advisable to get a new, unlisted phone number but, for some reason, they may be able to get it anyway. The credit card company’s collectors are pretty good, and they will certainly hassle you. You will get notices that huge fees were applied to your credit cards and now the balances are slowly exploding. Then after about 6 months, they will start to suspect you are trying to walk.
When the card company realizes you are thinking of walking, and they are unable to speak with you, they will use all their ammunition. They will send letters stating your interest rate is going up to 36% (or more) and late fees are going from $25 to $200. You can avoid all this – by calling them! They will even offer you an easy payment plan or even a discount on your balance – just call them! But when all else fails – they will sell your debt to a collection agency. There is a huge market for “paper”. Paper are transferable debts. Even banks and mortgage companies do this – which is why you can suddenly get your mortgage statements from an entirely new bank or mortgage company.
Now when you get a letter from a collection agency they will say they were hired by your credit card company to collect the debt on their behalf. Usually this is a lie. Normally a credit card company will sell your debt to the collection agency for a much lower price than the amount you owe – and the credit card company itself will be completely done with it. They will write off the debt on their taxes which is a windfall for them because they are including the interest and fees at the time of the write-off — legally taking a tax credit for far more than you actually borrowed. One exception to this would be the Discover card which never sells it’s debt to collection agencies. However – they will file the entire balance as a tax loss and then send you a tax form requiring you to list the entire amount of your debt as income.
Well, we know the credit card companies are nasty, but the collection agencies are far, far worse. They are the spawn from hell. If they do not collect the debt, they will sell it to another collection agency for a discount and suffer a loss, but if they do collect, they get a massive profit and the agent who gets you to pay gets a huge commission. With this “win or die” concept they will do anything and everything to get some money – sometimes even breaking the law.
Now suppose you are a clever and aggressive individual who takes no bleep from anyone and can talk an Eskimo into skinny-dipping. When someone from one of these collection agencies calls you, they will turn you into pudding. The top collection agency people can make Rush Limbaugh admit to being a liberal. You are no match for them. Period. When they call do not even attempt to talk to them – just hang up. They do this for a living and the top people are ringers who have a track record for getting the nastiest and most stubborn and clever people in the world to pay up and whimper like a puppy.
In the “old days” you could send a “cease and desist” letter to a collection agency. It would instruct them not to call you at home or at work and would have to be notarized and sent with a delivery receipt. That part is easier now and an email with the words “(signed)” and your legal name underneath should fill the requirements. (Once again I remind you I am not an attorney and a licensed attorney for your state or jurisdiction should be consulted before following any advice in this article. This article represents a personal opinion only.)
Once they receive a cease and desist notice, they have no options for collecting and will sell your account to another collection agency. Of course, they can’t sell it if they tell the new agency you sent a cease and desist, so they won’t tell them and once again you get all the phone calls and have to send a new notice to the new company.
Okay. You are going to default and wait out the 7 years to get your credit back. Then they will send you a letter offering to settle for a lesser amount. You are very tempted. Just know that if you do pay this settlement, your credit will be bad for 7 years from the date you settle. Not from the time of your last credit purchase – but instead from the date of the settlement.
Can a collection agency sue you? Yes. Chances are they won’t, but they can, and they have. They usually feel it’s not worth the cost if you don’t have any money, but if they think you are just holding out on them, they may give it a try. Depending on where you live, they have 1-5 years to sue you from the date of your last credit card purchase or payment. (Once again, check with your lawyer, this is opinion only and not legal advice.)
The process server has to hand you the subpoena in person. If you have a video doorbell or a security camera you can see if there is a stranger at your door. Of course, they can also do it at your place of work which would be extremely embarrassing so if your current work address is somewhere in your credit information, that would be unfortunate.
After 5 years of your last credit card activity, legal action is not an option. (Consult an attorney in your jurisdiction for verification – the details can vary from area to area.) After 7 years, the default will usually disappear but creditors could still possibly post a negative comment on your credit report. A negative comment, however, has far less weight than any delinquent activity.
How long can the collection agencies continue to pursue you? It makes good business sense to stop all activity after 7 years but that is not to say all collection agencies have good sense. Although it is totally fruitless, collection agencies could try to contact you forever.
The very best advice is to not let your credit activity get out of hand in the first place. Pay cash and when you don’t have the cash, wait until you can save up the cash. Don’t buy things on a whim. Go home, check prices at other retailers, stew on it for a week, and then decide if you really need it. Save, save, save. When an emergency comes up, paying out of savings is far, far better than using credit.
Remember – that 1% cash back is a sucker deal when they are charging you 20% interest, and a sale price with 10% off disappears when you buy it with a 20% interest credit card.
Go forward and think free.