I have a nephew that like many Americans has had the job of 70,000 - 95,000 a year. He had accumulated on 2 seperate credit cards a total of near 50,000 in debt. He has a total income now of 52,000 per year. With other expenses related to living he is in a jam. Most likely he will not improve his income salary for the next 5 years due to his situation.1. What is the best approach? Credit Card Companies will not work with him.2. Legal help then what does he file?3. How does that impact his ability to go forward and purchase a 8,000 to 10,000 vehicle he needs? He is using one that is 15 years old now so he has the sacrifice part down.4. How will this affect his future employment opportunities if they do a credit check?5. Can debtors get his 401K, home if not paid for, car worth 3,000,no boat, no other property, Need your input
1. What is the best approach? Credit Card Companies will not work with him.They will if he is delinquent enough. Of course by then it will have gone to collections which is its own kind of stress.2. Legal help then what does he file?There is no legal help that will do him any good. He agreed to pay this debt. He can't pay it. Legally he is required to pay it.3. How does that impact his ability to go forward and purchase a 8,000 to 10,000 vehicle he needs? He is using one that is 15 years old now so he has the sacrifice part down.He will have to save cash for this, and I would recommend a $3K - $5K car instead. I have no debt except my mortgage, and I bought a 11 year old Volvo for $3K a year ago. He CANNOT and should not be planning on getting a car loan. First of all, with his credit issues he would only be able to get a bad rate. And secondly - he already has debt he cannot pay (and debt he accumulated when he actually had a decent salary!). If he gets yet more debt on a car he will end up having it repo'd when he defaults on that debt too.4. How will this affect his future employment opportunities if they do a credit check?Badly, if they do it. But almost no companies actually do this. Just financial sector or military contractors I think. I've never had an employer do it for me in 25 years of working.5. Can debtors get his 401K, home if not paid for, car worth 3,000,no boat, no other property, It depends on who the debtor is. 401K - no, that is protected.House? Well, it is secured by the lender, so they can foreclose on him.Other items? Only if secured, but he can be sued by unsecured creditors and if successful they can garnish his wages, thus leading him to need to sell some of those things. And if sued, there's nothing to fight. If he said he would pay it, then he will lose and there's no legal anything he can do about it. Straight ahead contract law.I recommend he pick up Dave Ramsey's "Total Money Makeover" or listen to his podcasts. He's got great advice for those looking to shed debt sensibly. Of course it takes hard work - there's no shortcut. It should be noted that Dave is also a very religious Christian, which he refers to a lot and can be a bit distracting if you aren't of his background (I am not), but his advice is still quite good, and very clearly laid out.
Most likely he will not improve his income salary for the next 5 years due to his situation.5 years??? Heck that's crazy. He should be looking for second jobs at least. Or at a minimum get a clear plan in his head as to how he can get back to his old salary in 1-3 years. He can't just write off the next five years of his life...
2. Legal help then what does he file?I should have said that there is no legal help that can help reduce/waive the debt. But there is bankruptcy, which is a legal solution. It is a messy and hard one though, with long-term consequences, and also will not address his basic issue which is that he has and continues to live on more than he makes. So, bankruptcy might help wipe the slate clean, but if he's back in the same situation in a year or two, there is no recourse to bankruptcy again.
By legal help do you mean bankruptcy? Yes, he can file. And it appears that he will be eligible for Chapter 7, which wipes out unsecured debts.However, before he can file, he'll need to save up some money to pay the lawyer and he'll have to undergo credit counseling. (Lawyers refuse to put their charges on a credit card if someone is filing; they want immediate payment).Here's a link to a national group of credit counselors.http://www.nfcc.org/And here's list of approved credit counselors.http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htmAs Gingko said, the creditors can't touch his 401(k) and his home, but they can file a lien against his home which will make for difficulties if he needs to sell it. A lawyer can explain all the risks he might face. (Bankruptcy, while filed in Federal court, has different rules in different states, so your nephew will really need to talk to a lawyer about what exactly might happen).My greatest concern is if your nephew has stopped the spending spree. Has he changed his habits and his way of living, or is he likely to start spending again once the debt is gone? There are plenty of people who wipe out their debt, and once it's gone charge up the cards again. They'll never get out of that way of thinking.Hope this helps.Nancy
1.) Decrease his expenses What is his mortgage payment? How does his mortgage compare to rent? His income has decreased 25-50%, he needs to decrease his expenses. The credit card debt implies that he didn't. He may not be able to afford the house. He needs to sit down and start from zero on ALL of his expenses. 2.) Find a second source of income Yes, it means working extra hours. He needs income now. 3.) Unlikely that they can touch the 401K or car. Equity in the home depends on the state.4.) He can't afford a 8-10K car. 5.) Employee theft is a serious problem. Many employees are doing credit checks. If you are in financial trouble, you are a higher risk. Especially for any job that requires handling inventory or cash. A bankruptcy is only a problem for specific jobs. Many years ago when a was working for a military subcontractor, there was a general statement that a bankruptcy was worse than a felony. Bankruptcy was serious, and would cause you to lose your clearance and therefore your job. Being deeply in debt can be more of a security risk. I haven't needed a clearance since that job, so I am not up todate on the impact. 6.) Credit counseling.Not one of the "We can make the credit card companies write off your debt by destoying your credit rating and paying us a large amount of money." He should be able to work himself out of this situation without bankruptcy. He can contact a bankruptcy lawyer, and see what options he has. He will have to have credit counseling before filing anyway.
He had accumulated on 2 seperate credit cards a total of near 50,000 in debt.Has he stopped using the cards?He has a total income now of 52,000 per year.With annual income slightly more than his debt, if he buckles down, he's still in a position where he could pay the debt off, although it will probably take a while.With other expenses related to living he is in a jam.Has he examined his 'other expenses related to living' to ensure that he has minimized them? Is he tracking his spending so that he knows what his 'other expenses related to living' are?Most likely he will not improve his income salary for the next 5 years due to his situation.He needs to look for other ways to improve his income then, like another job, or selling some of that stuff that he accumulated while doing all the spending.1. What is the best approach? Credit Card Companies will not work with him.Have him come here himself. While it's a nice gesture that you are trying to find out information for him, he really needs to decide that he wants help himself, and if he's not ready for that, no amount of coaching that you do from the sideline will help the situation. If he has decided that he's ready for help, it's much more likely to be effective if he seeks out the help himself.2. Legal help then what does he file?He could file for bankruptcy, but that may have employment implications, depending on what his career is. Prior to filing for bankruptcy, he will need to go through approved credit counseling anyway, so that might be a good first step. He should check www.nfcc.org to find an accredited credit counselor.3. How does that impact his ability to go forward and purchase a 8,000 to 10,000 vehicle he needs? He is using one that is 15 years old now so he has the sacrifice part down.I assume that you are talking about getting a car loan here. If that's how he is planning to 'afford' the $8k - $10k car, he's just going to get himself into deeper financial trouble, if anyone would even lend him the money. If he is struggling with the level of 'other expenses related to living' and isn't going to increase his income anytime soon, how does he expect to make payments on a car loan? He needs to look at a vehicle that he can save cash up for if he wants a different car.4. How will this affect his future employment opportunities if they do a credit check?Many employers require credit checks for even entry level positions, like customer service reps. If he already has late payments and defaults on his credit history, he's may already have limited his chances of employment. Declaring bankruptcy could further limit his chances for employment. It depends a lot on what he does, as some industries/positions will be more picky about what's on your credit report than others.Also - be aware that for employment credit checks, employers can see the entire credit history, not just the last 7 - 10 years. So any late payments he already has, and declaring bankruptcy now could continue to affect his employement chances for the rest of his working life.5. Can debtors get his 401K, home if not paid for, car worth 3,000,no boat, no other property,401(k)s are protected from creditors by ERISA laws. IRAs (rollover, as well as other types) are protected to a lesser extent, depending on state laws. Also depending on the laws in his state, it is possible that they could put liens on his house and/or his car, although it is unlikely that they could seize either one for credit card debt.AJ
One often-quoted bit of advice that I haven't seen yet: Have him join here (free) and post his own details. People here are unfailingly hard on folks with debt, but they also have their hearts in the right place and will give solid advice. I think your nephew has a solvable, albeit difficult, problem. It's a matter of figuring out how to stop digging the hole, and then slowly start filling it in. ThyPeace, started off further in debt than your nephew.
I wholeheartedly agree with ThyPeace's post. I had 44k in credit card debt with an annual net of 28k, and I am now debt free. I could not have done it without the tough love and sound advice from the members of this board.Shire
Gingko100,BossGman2 wrote, 4. How will this affect his future employment opportunities if they do a credit check?To which you replied, Badly, if they do it. But almost no companies actually do this. Just financial sector or military contractors I think. I've never had an employer do it for me in 25 years of working.This hasn't been my experience. I'm a computer programmer and I do not work in either the financial or military sectors. I just took a job in the Seattle area with a major corporation here. They pulled my credit report as part of a background check. It should not be possible for me to do things like embezzle funds or sell military secrets. However, I will be privy to product plans of the company and its partners. This company decided that knowing my financial situation is important to understanding the risk I might pose to the company's intellectual secrets.So I would say that a bad credit report can affect your career in unexpected ways. And I would also say that the more you make, the more likely it will affect you ... at least as long as you are not self-employed.- Joel
Hmmm...interesting. I haven't had it done - and I have worked also for a computer company. They specifically told me they only do it for their finance hires.
It should not be possible for me to do things like embezzle funds or sell military secrets. However, I will be privy to product plans of the company and its partners. This company decided that knowing my financial situation is important to understanding the risk I might pose to the company's intellectual secrets.=====================================Or being in financial difficulties could lead to bribery....selling those secrets.
Hmmm...interesting. I haven't had it done - and I have worked also for a computer company. They specifically told me they only do it for their finance hires. My experience is similar to Joel's. In my entire career, I've only had one company that did *not* do a credit check on me and I've been in IT roles the whole time until my current gig.
Jeanwa,You wrote, Or being in financial difficulties could lead to bribery....selling those secrets.Precisely my point.The greater your position of trust, the more relevant a credit report can be to your career. The position doesn't necessarily have to involve money, expensive goods or military secrets. If a company entrusts you with anything - including knowledge - that you might be tempted to turn into cash, then your financial situation could be relevant.- Joel
He's in a hole. The first question is, has he stopped digging yet?Really, before you can even begin to address things, he needs to make sure he is living at or below his means. Even declaring bankruptcy won't help if his lifestyle costs $75K and his income is $52K. He'll just be in the same position in a few years and won't be able to re-file for many years. (plus, spending when you know you won't pay it back is basically stealing).Second jobs, starting a cash-only diet, writing down every expenditure and cutting everything he can is my recommendation. Pay the minimums and take any extra money and snowball it into the debt - for maximum savings pay the highest interest rates first, although many people have success with the Dave Ramsey method of paying off the debts smallest to largest.He can't be afraid to look at the big things for potential savings - like housing. If you buy a house at the top of your limit when you're making $95K, and now you make $50K, you can't afford that house anymore. Like cars - you drive a $15K car when you're making $95K but when you're making $52K and are $50K in debt, you drive a beater.I don't think filing bankruptcy is not going to be a good solution since he does make decent money. He'd probably have to file chapter 13 and go into a 5-year payment plan to pay the creditors off at some rate. So he might as well try to work out payments himself and keep that sort of thing off his credit.401K is pretty protected. Home is secured by the mortgage - if he stays current on that other creditors shouldn't be able to take it. They can sue and get a judgement of course.
It appears that Windowseat has the most reasonable approach. Even though the dialog from many such as stop the spending, dig out best you can, are all noteworthy. It appears the voice of reason and being a neutral referee was from the Windowseat.1. Cost for legal generally around 2,500 correct??2. How much for credit counseling he will need it??3. What are the legal options? He has learned his lesson?4. What are the top 3 downsides to filing?5. What are the up sides of this process if there is one? List several if any.
Bankruptcy is very much driven by state law, so he would really need to review details with an attorney in his state to discuss details.Upside: it clears your debts to a certain extent (student loans and IRS being notable exceptions). Downside: Complicated; You have to declare it forever, even if it drops off your credit report; For chapter 13 rather than chapter 7 it doesn't fully discharge them but sets up a structured payment plan; It doesn't do anything to solve the problem of someone with inadequate income or prone to living above their means, as it won't create a means to pay debts.I think if he really does want to look into bankruptcy he should consult a local attorney to find out options. Sometimes the state attorney general or the state bar have low cost legal services available that can help advise on things like this.
Is there other debt that he hasn't told you about? Often when people are in deep credit card debt, they may have tax problems and medical/dental bills. It appears that he isn't self employed. Withholding may have kept him out of tax issues.
If he's looking to declare BK, then he needs to see a local attorney, as already mentioned a few times. To get answers to his questions, a better place might be the Bankruptcy Forum http://www.bkforum.com/I will say, for less than $50k in debt, it seems a shame to declare BK, with all of the implications for the rest of his life. And, as already mentioned, if he's still living the $75k - $80k lifestyle, but only has $50k in income, declaring BK isn't going to resolve his problem.AJ
BossGman2: "It appears that Windowseat has the most reasonable approach."Sounds like you mind was made up before posting.Means Testing for Chapter 7 Filings"The first step is simple: If your current monthly income is less than the median income for a household of your size in your state, you pass. . . . For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called "disposable income"), after paying your "allowed" monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). . . . Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation."http://www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-...Look for the relevant online calculator for preliminary check.Event hough his income has been reduced, your nephew (w/ $52k) may still not qualify for a Chapter 7.Regards, JAFO
And - another argument in favor of NO car loan. If he gets the loan and then declares bankruptcy he probably won't be able to discharge it - you can't just load up on debt and then plan to turn around and discharge it all in BK. That's considered fraudulent. And he won't be able to get a car loan after bankruptcy for a while (a few years).Obviously, based on my posts above, I already think a car loan would be an awful idea. But BK makes it even more complicated and difficult.
If he gets the loan and then declares bankruptcy he probably won't be able to discharge it - you can't just load up on debt and then plan to turn around and discharge it all in BK. That's considered fraudulent. And he won't be able to get a car loan after bankruptcy for a while (a few years). It is a secured loan that isn't discharged in bankruptcy (cram downs do occur, but that probably would not apply). The recommendation to obtain a car loan before bankruptcy isn't that unusual. The interest rate will be high after bankruptcy, but it isn't true that you can't get a car loan after bankruptcy.
Thanks, vkg - I had always heard otherwise, but I guess it's more grey than I had thought.
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