Repair Your Credit | Bankruptcy? (Pt. 5)

Consider the consequences

You know what you’ve gotten yourself into. Your debts are very real, and it will take effort and negotiation moxie to get your finances to a better place. Now begin to “Repair Your Credit!” CLICK HERE if you missed part four of this article. If you don’t keep up, your credit cards will come alive at night and nibble at your fingers. No credit repair in the world can replace a good set of digits.

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First, negotiating down your debt will not immediately enable you to finish paying off what you owe and walk away with a spotless credit rating. Your credit score will be negatively affected for a period of seven to ten years before the black marks finally drop off your credit report.

Therefore, you must take careful consideration of your future financial plans. If you are already defaulting on payments, your credit is already blemished. Late payments of 30, 60, and 90 days have already been reported to the credit bureaus and will hurt your FICO score for at least 36 months before they disappear.

The big question for you then would be, “is it worth it?” Depending on your debt load, it may be.

Bankruptcy may be your best option

Another thing to consider if you have chosen to negotiate your debt down is how much will you still owe once the debt is renegotiated. It hasn’t gone away; you still owe. How long will it take to pay off the new balance?

Whatever debt is forgiven during the negotiations is looked at as “phantom income” by the IRS. Sounds spooky, but it’s true. You could be looking at a large tax bill for your “forgiveness.” In some cases, this could even change your tax bracket, which could be a disadvantage depending upon your situation. Surely you want to avoid an IRS bill that you can’t pay. If you get in trouble with them, little things like debt consolidation and credit repair will be the least of your worries. Audits, court hearings and jail time are as painful as they sound. And the people in the joint are very real, not phantoms…

Not fun, but sometimes necessary

Also, if the amount of the renegotiated balance you owe on your credit card debt is 50 percent or more of your yearly income, it may be just better to claim bankruptcy. This is not something to take lightly. But the fact is this: your credit is going to be marred for years. If it will take longer than 7 to 10 years to pay off your renegotiated balances, then bankruptcy may be your best option. It will disappear from your credit report in the same amount of time. The only difference is that you won’t be burdened by all the debt while you’re waiting and working to repair your credit.

Bankruptcy is not fun to think about, but it may be the best thing you can do for both yourself and your family. Once it’s done, you will be building your credit again from scratch. Learn from your past mistakes and move on. Then CLICK HERE for the next chapter in “Repair Your Credit.”