Wow! it never ceases to amaze me the quantum level of misinformation regarding credit that exists in the marketplace. What’s worse is the quantum level of bad guidance provided by “experts” who should know better. Case in point, yesterday I was contacted by a prospective client wanting help with her credit situation. She had already made an appointment with a bankruptcy attorney who told her that her fastest and best course for debt relief and credit debt elimination was, you guessed it, Consumer Credit Counseling.
To put this in proper perspective, this prospective client indicated that she had a 660 credit score (this is a good score, not perfect, but good) and had NEVER missed a payment on anything in the last 7 years. This means that her credit is perfect and the only thing keeping the score from being in the 700s or probably 800s was the $70,000 in credit card debt that she and her husband had accumulated when they both lost their jobs. Since then, they have recovered and now bring in $150,000 per year.
Her biggest desire was credit card elimination and understandably so given that all of her credit card lenders had raised her interest rates via that nasty little clause they have in the credit card agreements. What am I talking about? If you read through your agreement with your credit card provider, you will find clauses that enable them to increase your interest rates for a variety of reasons such as:
1. Late payments
2. Going over your limit
3. Exceeding a certain level of utilization
4. Your credit score declining- which it does when you charge up the credit card. Kind of neat how that works isn’t it? You use their service, it causes your score to go down, they charge you higher interest, sounds like a great deal to me, if you are the credit card company
So, here she was with $70,000 in credit card debt juggling to pay her bills every month while living the American Dream and making $150,000 combined household income. Sounds more like the American Nightmare. To add insult to injury, to aid in her credit card elimination strategy, her idiot bankruptcy attorney advised her to enroll with Consumer Credit Counseling. This is, without question, some of the worst advice her idiot bankruptcy attorney could give her. I told her to fire her bankruptcy attorney. Why?
For starters, from a credit perspective, Consumer Credit Counseling is actually considered worse than filing bankruptcy by many underwriters. You are better off doing credit card debt settlement, which is also hard on your credit score. In some cases, they treat it like you are presently in a Chapter 13 bankruptcy repayment plan. Every creditor that Consumer Credit Counseling renegotiates your loans with will amend your credit report to show that you are in Consumer Credit Counseling. Not Good! At least with credit card debt settlement you save some money and your credit file isn’t tainted for the next 7 years.
Secondly, Consumer Credit Counseling is a scam. This is even true of some Christian debt counseling firms. They cannot do anything for you that you cannot do for yourself towards legal credit repair. Do you know what they do to help with credit card elimination?
They simply renegotiate your interest rates and payments with your creditor. Nothing else. You don’t need them to do that and you don’t need to suffer for 7 years because it is reported on your credit report.
So, what advice did I give her to aid in credit card elimination after hearing that she was considering bankruptcy AND Consumer Credit Counseling? Read below.
Credit Debt Elimination Strategies
Here’s the email chain:
CLIENT:
Here is the deal, my husband and I make a good living….he works for AT&T and I run a division for Aaron’s….no kids, etc…we have a good life……5 years ago we had a plan to have our house paid for in 7 years; no credit card debt , etc…we had a plan…THEN behold, he got laid off from his job at Lucent Technologies and the company I worked for closed at the same time….we went from 6 figure incomes to total of around $30,000….SO what did we have to do; refinance our home (interest only) AGH! And we lived on Credit cards….well, now our house payment is up to $1800/ month and our great credit card companies stuck it to us with % rates; and raising the payment that even though we are back on our feet with incomes; our debt is KILLING us…..we have never been late on anything but just need some relief…..
VINCENT:
Ok, let me make sure I understand this correctly. You have never missed a payment on anything? This would suggest that your credit is perfect but the score may be low due to the debt to utilization ratio on the cards.
If you have a mortgage at $1800, what is your plan for that house? Also, why is that too much if you were willing to pay $2000 per month for the lake house? What am I missing?
Also, interest only loans are the very best mortgages available despite what you hear on the news by those who are financially uneducated. Where the problems can come in are what type of interest only loan did you get, in other words, was it an Option ARM, a 6 Mo LIBOR, 3/1, 5/1, 7/1, 10/1 or 30 year interest only loan?
I can help you with relief via housing and with your existing debt and credit. I just need to get all the facts so I can help you.
CLIENT:
We have a 660 credit score due to debt…..we have never missed a payment on anything…..I juggle a lot.
If we cant get any relief then we were thinking of bankruptcy which would free up almost $3000 per month and actually really just starting over…..
(Regarding the mortgage)
It was a (2) year Interest Only that they extended to (4) year with the same payment to apply….NOW my payment went up $200 and the mortgage company says it is “because now we are applying to the principal”……
Also, let me mention we have a rental property that has been available and we have drained all of our savings and have zero to fall back on….as of March 16th this property will be the first payment we have missed EVER!
Please let me know your suggestions…I really do appreciate any relief. I juggle and then can’t sleep at night and my husband and I make $150K a year even with the economy so bad…..
VINCENT:
Ok, I am going to attack this point by point so try to stay with me:
- Bankruptcy is out of the question because they changed the bankruptcy laws a few years back in favor of the lenders. Since you are both W-2’d employees, they will just garnish your wages or not issue you a discharge most likely. What they do now on a Chapter 7 is take a snapshot of your last 6 months worth of income and assets which makes it perfect for self employed people and people who have been laid off and out of work, but not for people gainfully employed whose wages can be documented and garnished. Since you are both gainfully employed and can prove income, the trustee will likely dismiss (not discharge) your bankruptcy. With your income, unless the debt you would be writing off is in the millions, it would hardly be worth the hassle and 10 years of derogatory credit. I am not a bankruptcy attorney and obviously I don’t have all of the facts so there may be something about your situation that I am missing but that is my opinion. Freeing up $3000 per month is NOT a reason to file bankruptcy. What you do instead is increase income, eliminate the debt and move on. You can always consult with a BK attorney for free to see what your options are.
- Regarding your existing mortgage, have you considered refinancing? I am sure you probably have but I have to ask.
- Send me a spreadsheet of the debt so I can see what you are dealing with.
- Regarding the rental property, enroll it into our inventory and email me the photos. I have almost 5000 people in an active database who are looking for a rent to own deal and we can probably have it sold on an owner finance contract before you default on the payment. You can learn more about what we do here: http://www.financethedream.com/sell/ and enroll the home here: http://www.financethedream.com/sell/sell-house-fast/
- A 660 credit score is good credit. If we can maintain no 30 day late payments, it will only get better as we eliminate the revolving debt. So, we are going to put together a plan to reduce the interest rates and debt service and increase income.
It sounds like you are fed up, have finally had enough and are ready to take some positive action. If that is true, read my blog post here: http://www.creditrepaircollege.com/2010/why-employees-are-idiots-destined-to-have-bad-credit/
But only if you are really ready for positive change. Oh, and make your husband read it also.
You have options. Lots of them. You just don’t know what they all are. Your job right now is to talk to a genius like me who has made every financial mistake known to man (and a few aliens) to get the bigger picture on how to solve your problems as painlessly as possible.
I hope this helps.
CLIENT:
Have an appt with a BK Lawyer next week. He has said to do credit counseling first before…I just need some relief…..
(REGARDING CONSIDERING REFINANCING) Yes, cant because it needs to be a 680…..
(REGARDING SPREADSHEET OF DEBT) $70K of unsecured debt; $200K home mortgage and $113K for rental property mortgage
VINCENT:
Ok, on second thought, don’t listen to the idiot attorney. They don’t tell you this in their ads on TV but credit counseling isn’t really non-profit and from a credit perspective is WORSE than filing bankruptcy.
DO NOT under any circumstances engage in consumer credit counseling. Unless you would like to see your credit destroyed and you want things to get worse. If your appointment is with the guy who told you to get into consumer credit counseling, cancel the appointment and find someone else. Consumer Credit Counseling cannot do anything for you that you cannot personally do. The difference is, if you do it, following my instructions, it won’t destroy your credit. They will……….and quickly. You can kiss that 660 goodbye and sleep all warm and cozy for the next 7 years knowing that your credit is worse than it had to be because of CCCS because that is how long their crap will show up on your report on each and every tradeline that they handle for you. Lenders hate to see CCCS on a credit report. You will recover from a bankruptcy and foreclosure faster than you will from CCCS. One of those dirty little secrets no one tells you about.
You said you cannot refi because you need a 680. I want to see the tri-merge credit report that the lender pulled. Email it to me. They were required by law to provide you with a copy. If they didn’t, call them and tell them to email you a PDF.
Getting a 20 point bump is nothing, especially if you don’t have any derogatory credit. Most loan jockeys and mortgage monkeys are totally incompetent and don’t know the first thing about credit restoration or credit improvement. 20 points is nothing. If I can see the tri-merge, I can tell you what to do to get there within a few weeks.
And, by the way, again, even if you could, you are NOT filing bankruptcy on $70k in revolving debt when you make $150k per year. That is asinine. The BK attorney is looking for a paycheck, not for what is in your best interest.
So, the key here is:
1. Increase the credit score to qualify for the refi, assuming you have the equity to cover closing costs and the rate and payment reduction justify the refi. Any idea what the value of the primary residence is? If you have sufficient equity, you can use it to pay off some or all of the credit cards.
2. Re-negotiate the interest rates with the credit card companies (this is all that CCCS is going to do) to lower the payments
3. Look into some balance transfers that provide a period of low or zero interest, then take the savings and apply it to debt elimination
4. Increase income- I will show you how
5. Increase liquidity- It is time to start looking around the house at all of the “stuff” you have accumulated that you don’t need or use that you can sell on Craigslist or eBay. I guarantee you, you have thousands of dollars worth of “stuff” that you aren’t using and won’t miss that you can turn into quick cash.
6. Eliminate any and all unnecessary expenses and apply it to debt reduction—excess cable TV packages, gym memberships you aren’t using, whatever
Make sense?
In her particular case, this was the first step to credit debt elimination. She isn’t dealing with derogatory credit yet, but is headed in that direction quickly thanks to some bad advice by a bankruptcy attorney.
As always, please ask your questions regarding credit restoration and provide comments in the comment box below so all of our readers can benefit.
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