Be Prepared: Like a Debt Boy Scout
Despite the harsh lessons that were taught to us by the Great Recession, it seems that we haven’t quite gotten the message about the dangers of overleveraging – spending beyond one’s means. U.S. consumers began 2011 by paying down nearly $33 billion in credit card debt during the first quarter of the year, according to a Card Hub credit card debt study, yet completely erased this pay down by the end of the third quarter. While the final numbers are not yet in, we are expected to have ended the year with a net debt gain of roughly $64 billion. Not only does this indicate a need for a priority shift when it comes to spending, but it also gives reason to wonder how one should handle serious credit card debt if overburdened by it.
Whether you are currently indebted or not, you should be aware of the possible ramifications of serious debt – expensive interest, credit score damage, and most importantly, the potential for a lawsuit – in order to either manage your debt strategically or give yourself a valuable incentive to avoid letting things spiral out of control.
The first thing you must understand is debt’s statute of limitations, as everything – from your strategy to the steps creditors can take – revolves around it. Each state has a statute of limitations for written contracts, which dictates the length of time during which creditors can sue you for outstanding payments. These statues last 3 -15 years, depending on the state, but here’s where things get tricky: The clock only begins to run at the time of your last payment, which means it resets every time you pay.
Now, I don’t mention this to promote a sort of payment boycott, but rather to encourage reaching a payment plan with your creditor that will remove the threat of lawsuit and therefore make paying a less risky proposition.
One of the most common and effective amended payment agreements you can reach with your creditor is called debt management. It entails the creditor waiving some fees and interest in order to lower your monthly payments to a manageable level. Creditors do this because having some money coming in on a regular basis is usually preferable to chasing customers around and getting litigious.
The plan you arrive at must obviously be mutually beneficial; your creditor’s not going to reduce your principal, and you shouldn’t agree to anything you cannot afford. That’s why you need to be patient, polite and willing to get creative in order to reach an agreement. Oh, and don’t break a debt management plan because not only will you be back to square one, but you will have also reset the statute of limitations.
If you’ve got a rainy day fund or can scrape together some cash from friends and family, now’s the time to do so. Sometimes, if you are able to pay 30% – 60% of your principal in one swoop, your creditor will waive the rest. This is obviously tough to manage for most people with significant debt, but it will get you out of debt immediately and change the status of your accounts from “not paid” to “partially paid,” which could marginally improve your damaged credit standing.
Unfortunately, these are only first steps because they do not always work. Your situation might be too complicated or your debt too significant for your creditor to give you a break. At this point, you may want to visit an attorney. No, not because a lawsuit is necessarily imminent, but rather because the option of bankruptcy should not yet be taken off the table, especially since many bankruptcy attorneys offer free consultations.
The following are your basic options when it comes to bankruptcy:
• Chapter 7: Involves liquidating your assets in order to pay off what you owe. Chapter 7 bankruptcies remain on your credit report for 10 years from the date of filing.
• Chapter 13: Involves the implementation of a payment plan based on expected future earnings. Completed, or discharged, Chapter 13 bankruptcies remain on your credit report for 7 years from the date of filing, while non-discharged payment plans stay for 10 years.
Depending on what you hear from an attorney as well as where you live, waiting out the statute of limitations could be your last, best option. After the statue expires, your debt becomes time-barred, which is a defense that will get a suit thrown out of court. This is more likely to be an option for people living in the Carolinas, Maryland, Mississippi, New Hampshire, Alaska and D.C. because their statues of limitations are only three years long.
If you do decide to wait, make sure not to make any payments, sign anything promising to pay in the future, or even acknowledge in writing that you owe anything to begin with because in some states this can reset the statute of limitations clock.
Ultimately, I hope you never find yourself in serious credit card debt, but it’s always good to be prepared.