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I Stopped Paying My Credit Cards. Now What?



Question: I stopped paying my credit cards about a year and a half ago. But I would like to pay off my debts rather than file bankruptcy. I haven’t kept track of any of the amounts or responded to any collection attempts (except for one credit card, which I settled because they were threatening to sue). So, I have no idea who I owe and for what amounts. What happens once you stop paying your credit cards completely? Is there any way to catch back up? I just ordered my free annual Equifax report but I’m confused.


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Howard Dvorkin CPA answers…

Your situation is not as uncommon as you might think. I’ve seen this same situation many times during the past 20 years., where someone gets fed up and just decides to stop paying. It usually happens like this…

You fall a little behind on your bills, but you’re still in control (or so you think). Then a catastrophe happens: You’re laid off, you suffer a debilitating illness, you get divorced, or a family member suffers one of these fates.

You run up big credit card balances to get you through the tough times, and because you’re so preoccupied with these major life emergencies, you put those bills on the back burner. Only when the threatening phone calls from debt collectors begin do you consider what to do next.

I’m pretty sure this sounds familiar, Vanessa, but even if doesn’t exactly describe your situation, the results are the same either way. You have a problem that you’ve ignored, and now you don’t know where to start.

The good news is: You can dig your way out, and it’s not as hard as you think.

Step 1: Figure out where you stand

Finding the right path out of debt will depend on where you really stand. To find that out, you’ll need to gather up all the information you can find about your accounts. This is really the most painful part of this process because it’s easy to feel overwhelmed. But you need to buckle down and take a day or two to really figure out the status of all of your debts. That way, you’re informed enough to decide how you want to move forward.

You’ve already taken a good first step, but there are other sources of information that you’ll want to check, too.

Your credit report

The free credit report you got from Equifax — and you’re entitled to one free report each year from the three major credit bureaus — will help a lot in figuring out where you are. (Read more about Decoding Your Credit Report.)

You can use your credit report to figure out:

  1. The status of each of your accounts — whether it’s been charged off yet, sold to a third-party collector, or if it’s still with the original creditors.
  2. The balance on each account, since they are no doubt higher with interest and fees since the last time you checked your bills.
  3. How many accounts you have in collections, as well as the name of each collection agency

The only thing your report won’t give you is the actual account numbers of your credit cards. Equifax codes that information for its own internal use and your protection. So you need to call the creditors yourself. The easiest way? Look for the toll-free number on the back of your credit card, or on your monthly statement.

Check your accounts

If you’ve been keeping the monthly statements that you receive, but just haven’t been looking at them, go back through your physical mail or email to find the most recent monthly statement you have for each account. You should also try to organize any collection notices you received, so you can start matching up original accounts with the third-party collection accounts that may be listed in your credit report.

Once you have your monthly statements, you can start calling the credit card companies to see if they’d be willing to help you work something out. Don’t make any agreements yet, but write down whatever they’re willing to offer, thank them for their time, and tell them you’ll be in touch soon.

Step 2: Understand your options for debt relief

Once you know where you really stand, it’s time to decide how to move forward. You have four choices, Vanessa. The first is the worst: Do nothing. By writing to me, you already know this is a terrible choice that will haunt you in the long run.

What’s left are these three options…

Option 1: Pay your balances in full.

This will solve your debt problem but not your credit problem. Your credit will still be listed as poor, making it difficult to get a loan or a mortgage. And of course, if you had this sum of money available, you wouldn’t have this debt in the first place. So, it’s unlikely you have the cash on hand to do this upfront. And I recommended against cashing out a retirement account to pay off credit card debt.

This means that the way forward with this option would be to call each credit card company and collector to set up a repayment plan. You’d work out monthly payments you can afford to pay off each debt. Since you have multiple debts that have gone unpaid, you’d probably need to start with a few and work your way down the list. If you decide to do this:

  1. Start with the accounts that are still with the original creditors.
  2. Then move on to the accounts that have been in collections for the shortest amount of time.
  3. Work your way down to the older debts in collections and remember that the statute of limitations on collections is ten years and those accounts can only remain on your credit report for seven years. So, if you have old debts in collections, they should be your last priority.

The downsides to this method: This is going to be a long and exhausting process and the results can vary. Some creditors may not be willing to work with you at all. And even if they do, you’ll need to set up workout arrangements for every debt you owe. And unfortunately, all that work won’t do much to fix your credit score in the short term. So, unless you’re set on getting out of debt on your own, I recommend against this option. It’s too much energy for not enough return.

Option 2: Get free credit counseling.

I’m biased since I’ve been involved in the credit counseling business for more than two decades, but I think this is usually the best solution for most people. Credit counseling agencies are nonprofits that offer free consultations to help and minimal fees for other services. During the free consultation, a certified credit counselor evaluates your debts to see where you stand and help you find the best solution for your needs. They may recommend a number of solutions depending on your financial situation.

If most of your debts are still with the original creditors, then they can also help you enroll in a debt management program (DMP). This is a debt relief program that makes it easier to pay off your balances in full by consolidating your debts into one monthly payment plan. The credit counseling agency acts as a go-between for you and your creditors to get them to reduce or eliminate the interest charges applied to your debts. That makes it faster and easier to pay off your balances.

The downsides to this method: The biggest downside to this for most people is that any credit cards you enter into the program freeze until you complete it. But the bigger issue that I see for you is that most of your debts will be beyond this kind of help. A DMP works best when the debts are still with the original creditors and accruing interest charges. It sounds like most of your debts may already be in collections, so there shouldn’t be any interest rates to negotiate. So, for your case, Vanessa, I think Option Three is going to be your best bet.

Option 3: Settle your debts for less than you owe.

Debt settlement is a relief option where you get out of debt for a percentage of what you owe. Because your debt-to-income ratio is so high and most of your debts are likely already in collections, this is probably your best option, Vanessa. Each debt you settle will ding your credit with a seven-year penalty, but since you’re already dealing with collections and charge offs, the damage won’t be as steep. Using settlement will let you make a clean break, so you can turn the page on your finances and start moving forward without the burden of all these balances.

There are two ways to settle your debts;

  1. Negotiate settlements on your own by calling each creditor or collector and working out a settlement arrangement.
  2. Enroll in a debt settlement program and let an expert do the negotiating for you.

Deciding which method to use depends on if your debts have already been sold to third-party collectors and how long ago that happened. Settlement agreements are easier to arrange with third-party collectors because they purchased your debt for pennies on the dollar with other bad debts. So, they can take a percentage of what you owe and still make a profit.

If you go this route, start out seeking to pay 10 percent of what you owe. Then work your way up. Make sure to do all the negotiating in writing, instead of over the phone. That way, you don’t risk saying anything that could reset the statute of limitations on how long the collector has to sue you over the debt.

A better option may be to enroll in a debt settlement program. This way someone else handles the negotiating for you. In addition, settlement companies are usually better at negotiating even if your debts are still with the original creditors. So, you can handle all of your debts at once and get out of debt for the least amount of money possible.

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