Part 2: Experts answer your credit, debt questions

Here’s the second installment of answers to your credit and debt questions from CredAbility, an Atlanta nonprofit that helps consumers.

Please return Wednesday for the next group of answers.

Q: Over the past few years, the value of my home has dropped from $112,000 to $70,000 or less. Some of the foreclosures in the neighborhood sold for $25,000 to $40,000. My credit score, when I purchased my home six years ago, was 742. Now it is less than 500 because my bank dropped my credit limit on the card from $18,000 to $5,000, because I stopped using the cards.

I have considered bankrupcy or debt consolidation to eliminate the debt. The value of the home will possibly never be recovered in equity. I want to know if debt consolidation or bankruptcy should be considered. Thank you for your assistance.

A: We can’t give legal advice, but someone in your situation probably should speak with a credit counselor at a nonprofit agency before taking an action as drastic as bankruptcy. One of the first things a counselor will ask you is what your goals are. For example, if your goal is to stay in your home and you can afford the monthly payments, you should focus on paying down other debts and not worry about equity. Many of us owe more on our homes than they are worth on paper, but you haven’t lost anything unless you sell.

People who don’t want to stay in their homes and believe they owe more than they can sell for should seek legal advice. Make sure the advice includes information about the effect a bankruptcy will have on creditworthiness and your ability to buy a house in the future. If you would like free credit counseling from a nonprofit agency you can schedule an appointment with CredAbility by calling 800-251-2227.

Q: I have several credit cards on which I do not carry much of a balance. I usually charge and pay off a couple of hundred dollars a month just to keep them active. I have a 15 year credit history, exclusive of these cards, so I do not really need them to bolster that aspect of my credit rating. Would it reflect better on my credit report if I closed the accounts to show that there’s no worry that I’m going to run up more debt? Or does it look better to have them open to lower my debt-to-credit ratio?

A: The answer really depends on how much trouble it is for you to manage the cards the way you are now. Generally, having credit cards with a low debt-to-limit ratio is a positive. But if it feels like you are constantly juggling and having to work hard to keep track of payments, then you might want to make things easier.

Instead of closing any of the accounts, just use two of the cards and put the others away in a safe place. Pick the ones you’ll continue to use based on the best rewards deals, or your relationship with the bank. It’s possible when you go a long period of time without using a card that the bank will close that account. But that isn’t likely to do much damage to someone who has used credit carefully.

Q: I took out a loan for $3,000 back in 2004 and it went into default in 2005. The account has been charged off. During the last five years, the total for that loan has ballooned to over $6,000, due to interest and fees. If the loan is charged off, then why is it still accruing interest? My credit score is being affected by this charge off.

On all of my other accounts, I have paid on time for over 3 years now, but my credit score is only in the high 500s. I would like to buy a home within the next two years and I would like to know what my options are to resolve the debt.

A: It sounds like the original debt wasn’t truly charged off. If it was, you should get a record of that from the original lender and dispute the current collection efforts. Assuming the debt was not charged off, the first thing we would advise is to determine who the owner of the debt is. You should be able to do that by getting a copy of your credit report. You can get a free one at: www.annualcreditreport.com.

Once you determine who is reporting your debt to the credit reporting agencies, you should contact that company and try to work out a repayment plan. The amount of repayment is often negotiable and you could start by offering to repay the original amount of $3,000. Once you have repaid the debt, ask the party you repaid to furnish you with a letter confirming that, so you can forward it to the credit reporting agencies. This is a long process, but one you can complete in two years.

Link to Part 1 answers

- Henry Unger, The Biz Beat

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4 comments Add your comment

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Kurt Thomas

January 25th, 2011
10:32 am

1st off, debt can be given to an outside agency in georgia and interest and penalties can be applied over time with a written contract by an agency. The original debt may be charged off by the original lender but with a written contract with a 3rd party to collect on it, the interest and penalties are added and can be per georgia law!

People, if you don’t file BK, then you are liable for these type of charges! Get involved in a re-payment plan process before a few years go by and see the debt go up thousands! If you are trying to buy a car or a house, the debt company has YOU buy the b*lls not the other way around! They do not have to accept less than what is legally owed period! You may can work a settlement out but that settlement would still have to be accepted by the original lender who obtained a 3rd party to work their paper if a contract is between the agency and original lender. I’m a operations manager at a collections company…i know!

If you close out your credit cards it drops your fico score down! I would never close a revolving account. You can always pay it off and not use the card. The credit card company likely will close the account at some point. This does not hurt your score as closing it yourself would. The best thing to do if your credit cards are in collections with a third party is to settle. You possibly can get a settlement that reduces your interest and principle. It just depends on who your original lender is and how much are they willing to forgive in terms the debt. They DO NOT have to accept any offer given period!

The state of georgia is not debtor friendly. This is a state where your paychecks can be garnished, liens placed on your property, liens placed against your vehicle and liens against your bank accounts as well in some cases. It’s never wise to ignore credit card debt. It could only cost you more money down the road vs what you defaulted on from the start! I have been in this business for 18 years now and i see people refuse to pay or just avoid and then they get upset and call when they are garnished or liens placed against their homes. These days, the creditors are serious about getting their money back folks.

We should all try our best to honor what we signed our good name to in reference to loans. Credit is everything to many of us. When you can’t get a loan to get gum out of a bubble gum machine, then you will understand how important credit is in your life. If you can’t pay the money back after exhausting legit money sources such as co-sign loans,friends,family,co-worker or equity lines then you should file bankrupcy because these creditors will file judgements all day and recover the money involuntarily if needed. Bankruptcy is a long painful road but can shave your assets and you from being garnished. Try a re-payment plan first and then during tax season maybe you can pay a lump sum settlement or take a large chunk of the debt away in a larger payment on what you owe. Tax season is a great source to pay debt if you have a decent refund coming that is. I hope this is helpful for some of you. God bless and good luck!

innocent bystander

January 26th, 2011
10:13 am

Kurt – in my opinion you stated this very well! I think you said it best with “we should all try our best to honor what we signed…”. I know ‘circumstances arise’ for a lot of folks, but at the same time I truly think there are a lot of people that have no clue how to ‘manage’ their credit! If they really did, more people would be living within (or below) their means! A course of “real life economics” should be a MANDATORY class in all high schools and a passing grade REQUIRED for graduation!!

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