Expert: Regan Shinski - 2/22/2010

Question
Those credit agencies that say they can cut your crecit bills by up to 70%... I have $45,000 in unsecured personal credit card bills. I own a house...What kind of "hit" will that do to my credit and business.
Any other implications?  Any suggestions?  Thanks....

Answer
Hi bob:

I don't like them.  There may a few reputable ones but they perform no function you cannot do yourself and you typically end up paying more.  If you want to try one, make sure it is based on a written contract, spells out their fees - including if they take a percentage of your payments - and gives you the flexibility to leave anytime you want without penalty.  It should also give you final authority on any negotiation.  This allows you to control your credit because, in theory, you can put in there a new contract that stipulates payment terms and credit reporting terms.

A better scenario is for you to negotiate directly with your creditors.  Both Chase and Citi were offering discounted rates a while back between zero and six percent.  Others were offering deferred payments.

Another option if you credit is still viable is a consolidation loan.  Most will make you close the credit card accounts you are paying, but that is much better than defaulting on them.

Bankruptcy is another option.  It kills your credit, but chapter seven does not drag out the rebuilding time like maintaining a poor payment history only to eventually default.

To answer your question, anytime you default on the existing contract, your credit will take a hit.  First with 30 day lates, then 60, 90, 120, charge-off, possibly to collection and/or judgement.  Each step is obviously progressively worse.  Therefore, your only true option to guarantee your credit is to either make all payments on time or formally enter into a new agreement with your creditor to give you better terms.

The exact impact on your scores that using a debt consolidation company, having late payments, collections, or even a bankruptcy would have is impossible to predict.  However, remember that 30% of your score is based on utilization.  If your cards are maxed out already, your scores are no where near what they could be, so the fall may not be as much as you think.  Again, bankruptcy is the only one of the "bad" options that starts you clean from day one.  All the other "bad" options would be at their worst while CURRENTLY being late and cannot start the rebuilding process until they are caught up.

That should not be deemed an endorsement of bankruptcy.  It lasts ten years versus seven on most everything else and obviously is the worse impact of all in the short term.  It should be deemed a last resort.

My suggestion if you cannot pay them off or maintain on-time payments is to contact your creditors immediately.  Make your situation sound as dire as possible and ask for better terms.  Try to get your offers as high up the corporate ladder as possible.  If they don't respond positively, then inquire around on debt consolidation - but don't spend money on it!

If you cannot find a satisfactory company, look at the other options described above.  DON'T settle for a debt consolidation company that does not put in writing what you need.  You may not even find one, but that is better than hiring a bad one because you will be in the same boat - only months or years down the line and several hundred or thousands of dollars shorter.

Good luck, sorry for the longer answer but it is difficult to give you specific answers without knowing the entire scope of your financial situation.

Good luck,
Regan