Bankruptcy, Debt Settlement and Damage Points for Your Credit Score

I have clients who can’t continue to make their credit card payments and seek a debt solution.  Often one of the questions they have is what the real number impact is on their credit score. The answer was in given in generalities or on a scale one options less of an impact than another. Now FICO has released real world numbers for debt solutions and their impact on your FICO score.

Before I give you the numbers, I want to emphasis that for some debtor’s the impact on their FICO score  is irrelevant. If your debts are unmanageable, and your ability to repay them not likely, your credit score is not your primary concern.  And let’s be honest, the most important costs for you cover are the basic; food, shelter, auto, medical and let’s hope; personal sanity.  No matter what these FICO credit numbers offer, your financial life is not over and can be rebuilt over time.

FICO Damage Points for Actions of Bankruptcy and Debt Settlement

Once again my motto rings true, “Debt Settlement is the least amount of damage to your credit for the greatest financial gain.”

Garnished Checking Accounts

What is the quickest way to have your income reduced by 20%? Wage garnishment.

Wage garnishment for a debtor is a way of extracting monies owed, directly from your paycheck from a debt judgment. In other words before you receive your pay the monies owed to your credit card company can be paid directly, up to 20% of your income. Most debtors can’t survive on a 20% reduction in pay. It’s is not realistic in our current pay check to pay check America.

Wage garnishment is serious, painful and difficult to correct once it is executed. It is the worst case scenario I discuss with my clients. I urge my clients to address their debts and match them to a debt program before they are served with a lawsuit.  Once you are served in a lawsuit you are unable to enter a debt program.

Here is how one of my clients’s narrowly avoided a wage garnishment. I will obscure some of the information in generality to maintain my client’s anonymity.

My client, let’s call him John had accumulated a large credit card debt with a well known bank, and was starting to fall behind on his payments. The debt was a result meeting his basic living expenses with his credit cards as he recovered from an illness. The late notices, fees and collection calls started to increase and John inability to pay grew larger with every passing month. John was referred to me by the time he was 60 passed due from his last payment. The deadline was looming for John, if he did not chose a debt program quickly. John chose a debt program that was within his budget and 30 days after he entered the program, he was served with a lawsuit. If John had waited 30 days more he would have been unable to enter a debt program. Much to John’s relief, he was able to avoid wage garnishment that would have rendered him unable to pay his mortgage, meet his utility bills and care for his family’s basic needs.

Often my clients will ask me, “How long until I am sued for the debts?”  Unfortunately no one really knows the answer.  Lawsuits are now being filled in mass with the assistance of technology, as credit card companies have grown increasing impatient.

Stop wage garnishment for your debts, before being served.

Pay Down Your Debts and Conserve Cash

Much of the financial advice that has flooded our nation’s newspapers can be summed up in two action steps; pay down your debts and conserve cash.

Most of us have a finite amount of money to work with each month. How can these two goals tackled at once?

One approach is to set aside a percentage of your income monthly and save for an emergency fund, while finding extra income to add to your debt payments. But what if you only have a set amount of income over your bear minimum living expenses? Do you save it or use it for debt?

I recommend to my clients to save the cash and pay down the debt. There are a number of programs available for consumers who want to have their emergency fund built while they rid themselves of debt. The programs are designed with the client’s specific financial goals and needs in mind. I have seen programs for clients that were able to save from a few hundred dollars a month and more. Most clients are able to eliminate their debt within 36 months. The increase in cash flow enables the client to create a rapid savings for emergencies all within their current income. These programs give client’s are reset button, and place them on the road to sound financial footing.

Hidden Cost of Bankruptcy

Consumers who are over loaded with debt and chose to file bankruptcy may not know the hidden life time cost. First you have to stand in front of a judge and declare publicly that you have failed to manage your finances. The information is a public record. I have had clients who have sought other remedies than bankruptcy for this very reason. One client was a professor at a local college and was concerned his finances would harm his career advancement. Another client was in the financial field and would lose his license for his profession, if he sought bankruptcy. These clients were midlife and had built successful careers that bankruptcy would either limit or destroy.

Clients who are new in the fields of their chose and young, below mid life, may be attracted to bankruptcy as a debt relief option due to the appeal bankruptcy offers as a fresh financial start. Often these clients cannot predict how bankruptcy will limit their careers. According to the US Department of Labor the average adult changes careers three to seven times in their life time.

If you have ever declared bankruptcy you are ineligible for a career in the financial field such as stock brokers, insurance agents or mortgage brokers. In addition anyone who needs a government clearance would be ineligible due to a bankruptcy. An example is anyone one in the armed forces or an engineer whose company has landed a government contract and the engineer and has had a bankruptcy. Bankruptcy can also follow to your retirement years. Consumers who retire after a long career and chose to start a business will find themselves shut out of obtaining a Small Business Loan from their local SBA, Small Business Association. The bankruptcy is seen as a failure, no matter what the cause of the great financial stress.

Educated and Responsible and Bankrupt

This is a great article in USA today about how educated and responsible middle class American’s are filling for Bankruptcy.

http://www.usatoday.com/money/perfi/general/2009-11-19-bankruptcy19_CV_N.htm?POE=click-refer
It is unfortunate that many believe that bankruptcy can solve your financial woes. The effects of bankruptcy is, it often increases your financial stress and permanently damages your credit. In this article the person wanted to start a business and invested all of her capital in the process. New starts up businesses are known for sucking up capital. Now that she has declared bankruptcy in an attempt to protect herself from her creditors, she has poisoned her ability to receive future venture capital. The consequences of bankruptcy can be unseen, when you are in the filing stages.

Many potential investors will not even read a business plan that has been presented by someone who has declared bankruptcy. The recent show on ABC’s “Shark Tank” highlights this fact, as a capitalized investor with billions looks at a man presenting a business plan, which has declared bankruptcy and says “you’re toxic”.

The best way to handle an unmanageable debt load is to seek professional help with an advisor that can give a number of recommendations.