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August 16th, 2014, 7:30pmET

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Old 02-21-2010, 08:17 AM   #1
Bng_Hevn
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Default Debt vs Bankruptcy vs no debt + bad credit

Over the years, my wife and I spent like drunken sailers. Once I got into the IT field, we were making good money and figured to use credit cards because "we can afford it".

Well, X years later we found ourselves with about $25K of revolving debt, medical bills (from child being born) and in a vicious cycle of minimum payments Our credit was excellent but the making min payments was not getting us anywhere.

We looked into bill consolidation but they charged 5% of what you owe and to use them, you had to basically pay them and not your creditors. Then they would pay the creditors out of the money you gave them.

After looking a bit deeper, they collected the money and would pay the creditors when they had received X dollars that the creditors would accept. Meaning the bills would not be paid immediately and therefore go into collection status.
We wanted to get the bills paid off and try to keep our credit intact so I figured if a consolidation company can do it, so can we but the creditors would not work with us because we were “making the payments”. What I tried to do was ask them to reduce or eliminate the APR in order for us to pay off one card at a time. Not one of them would work with us.

So, we talked to a bankruptcy lawyer and were eligible for chapter 14 which requires 3 years of paying off X % of the total balance and then 7 years after that before it is off your credit. My wife's friends filed for bankruptcy (chapter 7) and actually got the same APR on their house that we got on ours (just 2 years removed from bankruptcy) so we decided that if the creditors weren't willing to work with us, then they'd get nothing.

We paid the lawyer's fees ($1200) and started down that road. First step is to not pay your bills so we started putting away all our cash in preparation for not being able to use credit.

5 months into it we decided we didn't want to do it. We called our creditors and now, after 5 months of no payments and knowing we were doing the bankruptcy thing, they were willing to work with us. We got $200 back from the laywer and started to formulate a plan for each creditor.

The biggest problem with doing this is that although the creditor are willing to come down in the amount you owe, they want the amount to be paid in 3 months.

For the past year we've been paying off creditors in 3 month increments, with some overlapping others, and paying anywhere from $1500 to $2800 per month, with a month or two break (paying a couple of hundred) in between. We tightened our belts and were able to do it fine. A bit stressful, but we made it through it.

Paying the money was never the issue because we spent it so we owe it and I make excellent money at what I do so it's not a big deal. The main obstacle was getting it all paid off quickly rather than min payments for the next 50 years.

Anyway, the creditors are all paid and we had to count any “forgiven debt” as salary so this year we owe about $6100 in taxes. Owning a house and having 1 kid, we usually get back about $2500 a year between state and federal.

Again, no big deal. It will just extend a few more months before we are “totally” free. The amount paid ends up being pretty close to the original balance due so we didn't “get over” but at least we are out of debt. Last year I made close to $100K and can realistically make the same this year which will allow us to save good money.

My FICO score is basically in the toilet, which brings me to my point.

How long does it take for delinquent accounts to “fall off” in calculation of your FICO score? I figure it will be 1 year, maybe 2. Does anyone know for sure?

We make excellent money so debt to income ratio is in our favor (we still have a mortgage and a car payment) so the only thing holding our FICO down now are the delinguencies.

Anyone know anything of how that works?
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Old 02-21-2010, 09:03 AM   #2
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

Quote:
Originally Posted by Bng_Hevn View Post
Over the years, my wife and I spent like drunken sailers. Once I got into the IT field, we were making good money and figured to use credit cards because "we can afford it".

Well, X years later we found ourselves with about $25K of revolving debt, medical bills (from child being born) and in a vicious cycle of minimum payments Our credit was excellent but the making min payments was not getting us anywhere.

We looked into bill consolidation but they charged 5% of what you owe and to use them, you had to basically pay them and not your creditors. Then they would pay the creditors out of the money you gave them.

After looking a bit deeper, they collected the money and would pay the creditors when they had received X dollars that the creditors would accept. Meaning the bills would not be paid immediately and therefore go into collection status.
We wanted to get the bills paid off and try to keep our credit intact so I figured if a consolidation company can do it, so can we but the creditors would not work with us because we were “making the payments”. What I tried to do was ask them to reduce or eliminate the APR in order for us to pay off one card at a time. Not one of them would work with us.

So, we talked to a bankruptcy lawyer and were eligible for chapter 14 which requires 3 years of paying off X % of the total balance and then 7 years after that before it is off your credit. My wife's friends filed for bankruptcy (chapter 7) and actually got the same APR on their house that we got on ours (just 2 years removed from bankruptcy) so we decided that if the creditors weren't willing to work with us, then they'd get nothing.

We paid the lawyer's fees ($1200) and started down that road. First step is to not pay your bills so we started putting away all our cash in preparation for not being able to use credit.

5 months into it we decided we didn't want to do it. We called our creditors and now, after 5 months of no payments and knowing we were doing the bankruptcy thing, they were willing to work with us. We got $200 back from the laywer and started to formulate a plan for each creditor.

The biggest problem with doing this is that although the creditor are willing to come down in the amount you owe, they want the amount to be paid in 3 months.

For the past year we've been paying off creditors in 3 month increments, with some overlapping others, and paying anywhere from $1500 to $2800 per month, with a month or two break (paying a couple of hundred) in between. We tightened our belts and were able to do it fine. A bit stressful, but we made it through it.

Paying the money was never the issue because we spent it so we owe it and I make excellent money at what I do so it's not a big deal. The main obstacle was getting it all paid off quickly rather than min payments for the next 50 years.

Anyway, the creditors are all paid and we had to count any “forgiven debt” as salary so this year we owe about $6100 in taxes. Owning a house and having 1 kid, we usually get back about $2500 a year between state and federal.

Again, no big deal. It will just extend a few more months before we are “totally” free. The amount paid ends up being pretty close to the original balance due so we didn't “get over” but at least we are out of debt. Last year I made close to $100K and can realistically make the same this year which will allow us to save good money.

My FICO score is basically in the toilet, which brings me to my point.

How long does it take for delinquent accounts to “fall off” in calculation of your FICO score? I figure it will be 1 year, maybe 2. Does anyone know for sure?

We make excellent money so debt to income ratio is in our favor (we still have a mortgage and a car payment) so the only thing holding our FICO down now are the delinguencies.

Anyone know anything of how that works?


Congratulations friend!

Excellent question. There are a lot of variables that go into calculating a credit score.

I have reviewed thousands of credit reports.

It can take years for collections, etc. to come off a report.

IMO it is best to focus on the things you can control to raise your score as much as you can & keep monitoring your report.

Here is the simplest thing to do imo:

1. Open 3 or 4 accounts that report that you are paying on monthly...(secured if necessary)

2. Keep your "revolving" balances less than 1/3 of the credit limit.

3. Always make the payment early and pay more than the minimum.

4. Monitor your credit report to see how quickly your scores are coming up based on what you are doing.

5. Don't have your credit pulled too frequently, that can drop your scores as well.

This should bring up your scores relatively quickly and just keep watching for the collections to drop off.

CAREFUL - Credit scores can be calculated differently. For instance I had a realtor friend who kept telling me he wanted to buy a house and his score was around 700 on his free credit report type program. When I finally pulled it to qualify him for a home purchase, his score was 595....he could not qualify.

Good luck!
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Last edited by GBMelBlount; 02-21-2010 at 09:46 AM.
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Old 02-21-2010, 10:29 AM   #3
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

Quote:
Originally Posted by Bng_Hevn View Post
How long does it take for delinquent accounts to “fall off” in calculation of your FICO score? I figure it will be 1 year, maybe 2. Does anyone know for sure?
2 years for credit inquiries, 10 years for bankruptcy, and 7 years for late payments, collection accounts, "charge offs" and any other "dings" on a person's credit report, I believe: Fair Credit Reporting Act (Section 605). Best to avoid bankruptcy as that stays on a person's credit report the longest.
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Old 02-21-2010, 10:47 AM   #4
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

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Originally Posted by fansince'76 View Post
2 years for credit inquiries, 10 years for bankruptcy, and 7 years for late payments, collection accounts, "charge offs" and any other "dings" on a person's credit report, I believe: Fair Credit Reporting Act (Section 605). Best to avoid bankruptcy as that stays on a person's credit report the longest.

So it stays in the mix for calculating the FICO for 7 years?

Not counting the amount of time it stays on the report, how does bankruptcy affect it compared to delinquent accounts? Which is better or worse?
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Old 02-21-2010, 11:24 AM   #5
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

There's an old rule of thumb I use when I hear someone having any issues with debt... and its this: "If you have to borrow money to buy something... then the cost of whatever your trying to buy is out of your league ".... how can someone that's playing middle school football be ready for the pros ?? Basically, if you have to finance it, then therefore you can't afford it..... That's just how I look at it....
As a result... I have never had a problem with debt and have everything I need and 'most' of what I want...
Instead of paying monthly credit card, etc... bills I "pay myself " by putting that money in the bank or some other form of investment. Also, the 'peace of mind' from no debt and not having to worry about creditors is absolutely 'priceless'........
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Old 02-21-2010, 11:48 AM   #6
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

Quote:
Originally Posted by Bng_Hevn View Post
So it stays in the mix for calculating the FICO for 7 years?

Not counting the amount of time it stays on the report, how does bankruptcy affect it compared to delinquent accounts? Which is better or worse?
It depends.

Bottom line is there are a ton of variables that go into credit score calculations.

If you have paid off your debts and your goal is to improve your credit scores, your credit will come up MUCH more quickly if you strategically use credit again. If you don't create and use new credit your scores can stay very low for years.
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Old 02-21-2010, 12:40 PM   #7
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

Some things you could do when you buy something is look for places that have 6-12 months same as cash. Get what you want to buy and open an account and use the same as cash deal. Even if you have enough cash in pocket to buy outright, just pay it off with the first couple of statements you get. Every little bit helps to get your score back up.
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Old 02-21-2010, 02:55 PM   #8
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

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Originally Posted by Bng_Hevn View Post
Not counting the amount of time it stays on the report, how does bankruptcy affect it compared to delinquent accounts? Which is better or worse?
To be honest, I'm not sure how each is "weighted" in relation to a FICO score, or if they "count" differently from each other or not. All I know is that late payments are pretty much held against you for 7 years on your credit report.
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Old 02-21-2010, 02:58 PM   #9
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Default Re: Debt vs Bankruptcy vs no debt + bad credit

I've lived by a very stringent self-imposed rule for over 20 years now. If I can't afford to buy it with cash, including my cars and vacations, I don't need it.

Good luck Bng_Hevn in whatever you decide to do.
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