My client sat down and sighed deeply. He had a plastic bag which he emptied on the desk. Mostly unopened mail, you just knew who they were from. “I don’t know what to do”, he said. “I’ve tried to borrow money to pay off these debts, but the banks turned me down, even the payday loan guys have turned me down”. He was interested in getting an unsecured debt consolidation loan, to pay off existing debts, and hopefully clear his negative credit report at the same time.
It had to be an unsecured loan, because he didn’t have any real estate or other collateral to offer the prospective lender. He income was average, but not enough to service his debts that kept growing. Further, his credit report indicated, recent delinquencies, proof that his economy was under stress, and getting worse.
Of course banks and other lenders he approached turned him down, which was depressing, but turned out to be a good thing anyway, since it was this predicament that brought him to our office.
Had a lender actually lent him money, he wouldn’t have achieved his objectives anyway, but would have simply ended up further in debt than he already was, and this is the reason why:
Unsecured debt consolidation loans provide no tax benefits. They are usually high interest loans, higher than the credit card loans that they will replace. In effect, you just move the debt from one lender to another, and add loan costs on top. Paying bills does not rehabilitate your credit standing either. If before, you had a collection, or delinquency, upon payment it will only change the rating from “collection” to “Paid collection”, or “Current, was delinquent”. That really doesn’t help, unless your debt to income ratio has dramatically improved.
There is a way to repair your credit, but just paying the bill is not the solution. In fact, as long as you still owe money, you have negotiating leverage. Once you have paid, you have nothing. In the case of my nice middle-aged gentleman, it turned out to be purely hypothetical, since he didn’t have the money to pay the existing loans, or for that matter, any new loan either. What he had, was accumulated credit card debts, growing at the rate of 22 % annually, to the point where he couldn’t even service the interest. It’s truly amazing, that at an interest rate of 22%, the principle will double within 4 years, if you only pay minimum payments. So before long, the $20,000 will become $40,000. Incredible, isn’t it?
I recommendation to this gentleman was to give up being nice, and consider the advantages of bankruptcy. I explained that he was really past the point of no return, since monthly minimum payments each month was more than he could manage. In his case, the bankruptcy would actually help his cash flow, and speed up his ability to re-establish credit. His current debt to income ratio was way too high, ( a term banks use). And more importantly, he couldn’t afford to pay them.
The bankruptcy did meet his objectives. He got rid of the debt, immediately qualified for a new unsecured visa card with a $1,000.00 line of credit, He also opened a new (secured) visa card, eight days after his bankruptcy was finalized. By following our recommendations on credit repair, he will rebuild some credit again within a year or so, if he can show a regular income. More importantly, he discharged $20,000, enabling him to save a little instead. What is it they say? Money saved is money earned!!!
Call the Law Offices of Paul Mendoza Allen and get the relief you deserve. Consultations are free, but you must make an appointment. Two offices conveniently located to serve you. Glendale: 818-334-5445, 818-552-4500 or Cerritos: 562-356-9931, 562-865-4480.
Attorney Paul Mendoza Allen – Honest Answers – Real Solutions.
(This article is for information purposes only, and does not necessary reflect the company’s opinions and views on general issues. We make no warranty, prediction nor representation, nor do we assume any legal liability for the completeness of any information and its effect on any case. Each case is different and results depend on the facts of each case. Consult with and retain counsel of your own choice if you need legal advice.)