Dealing with debt

Long story short, i went back to university and obtained an engineering degree. I had been working part time for about two years, and the final year i took the whole year off just to finish the degree as fast as possible, taking 16-17 hours both semesters. Obviously this wasn’t particularly great for my income to debt ratio.

Fast forward to today and not only am i’m back to doing the same job i was doing (#worthit) making the degree a complete waste of time, but now am making 17.5% less that i was when i started. I had expected to graduate into a job that would give me something like 2.5x my income to my secured and unsecured debt (this doesn’t include my home payments); my income is only 1.65x my debt now, and so now almost all my after tax income goes to debt servicing. I realized a couple months ago i find myself in a debt trap.

So here are my options:

  1. Find a job in the degree. This seems about 0% likely, so isn’t on the table, though i keep looking.
  2. Advance in my current position. This seems about 90% certain, and i should increase my income back to where i started a few years ago in a couple of months (so my debt to income ration goes back to 2x).
  3. Take debt consolidation help. I’ve contacted some credit counseling companies randomly. I’m very skeptical and wary of this path, but at least i could reduce the interest rate to something manageable. The problem is that they would close all of my credit cards and send me back 20 years in credit and status; basically i’d be starting all over again. Just a couple of years ago i had an 820 credit score; this could plummet my score down to below 600. You could argue that with interest rates so low it doesn’t really matter all that much.
  4. Refinance my home and take out enough equity to pay off the debt. This would save my credit score and fix a lot of problems but would leave me holding a note that could very, very easily be underwater in value a couple of years.
  5. Declare Chapter 11. Laugh maniacally as i’ll never buy a house or car again for 7 years and hope that i’m not living out of said car before then.

I’ve basically never had debt before in my life and i find it extremely annoying this is eating up all my disposable income for nothing to show for it. At least i have job right now. Anyone have suggestions or insights?

While looking for the job, getting the raise seems like the best plan. Your raise would mean paying off all the debt in about four years, on top of whatever you’re managing now. That’s doable.

You mentioned credit cards; do you have the option to do a consolidation loan at a credit union? They won’t screw you and you could get the interest rate down quite a bit from a typical CC. It’s just a standard unsecured loan with the stated purpose being to pay other debts. You won’t have to close the credit cards so you’ll keep your history. I agree with staying away from debt reduction places that advertise themselves.

Also, if cash flow is the main concern, can you hit your smallest balance first until it’s gone? E.g. if you’re paying $100/mo on $2500, it might be worth focusing on that to free up that $100 even if a $10,000 credit card charges more interest. Depending on your personality and risk of unexpected expenses, that might help you feel more in control.

Also, there are payment deferment options out there for COVID if you are in an immediate crunch.

This I don’t understand. If you owe say $150k on your house and have $50k in CC debt are you less “underwater” than if you owed $200k on your house and zero other debt? I don’t see the drawback to effectively turning the CC debt into a secured loan - that’s going to be a much lower interest rate, right?

Frankly I don’t understand why you racked up the debt in high-interest form anyway?

Closing costs and etc will add five grand as well.

You’re never going to find cheaper money than a mortgage right now. I’m closing on a refinance at 3.000% myself. It’s the lowest rate since they started recording them in 1973. And of course the interest is tax-deductible.

We’re in the middle of a global pandemic, everybody forced to stay at home, 20%+ unemployment, dogs and cats living together, crude oil hit negative $34/barrel last week, generally armageddon. Rates are low.

As you noted, credit counseling results in about as big a hit to your credit rating as a bankruptcy. The question is, what do you plan to purchase with credit in the next few years? A car loan, for example, will indeed cost more. That will be a factor in whether you will want to take a short-term hit to your credit rating, assuming you can avoid it.

One thing you didn’t note was what proportion of your debt was student loans. Those are pretty much impossible to discharge through bankruptcy, and the lender (in most recent cases the US Gov’t) has no incentive to negotiate. It may actually be easier to negotiate a tax debt at this point.

Regarding a refi, think long and hard before turning unsecured debt into secured debt. The interest rates on unsecured debt are higher for a reason – there’s more risk of not being repaid. In bankruptcy, unsecured lenders will take a haircut or get nothing, and secured lenders will get paid or take possession of the security (ex: car, house, and in Sears’ case, anything you might have bought with their card like your fridge. They were notorious for intervening in BR proceedings, but they are gone now). Anything not covered by the value of the security becomes unsecured debt and they are on equal footing w/ all unsecured lenders.

For some folks, going into bankruptcy proceedings is a moral issue, and they are loath to do it. Someone in that position can put themselves in a real hole before succumbing to the inevitable. A person can go broke with a soft landing or a hard one. Soft: stop all debt payments except for those giving you immediate value, tolerate the debt collection calls, stay liquid and maintain maximum flexibility. Hard: pay everyone equally until you run out of cash for everything, including the necessities of life and expenses that let you earn a living, such as car & insurance payments. In the event of BR, lenders can complain that one debtor might have been favored over another, but the necessities of life will always take precedence. Don’t drain yourself dry just to feel like you were fair to all your lenders, it’s just business.

If BR is deemed to be an option, Chapter 13 is for debt renegotiation, Chapter 7 is for liquidation, and is means-tested for eligibility. Debt collection is subject to an automatic stay during BR proceedings. You didn’t say which state you live in, they can very greatly in what can be excluded from BR liquidation. For example, in Texas, you can exempt your homestead, one vehicle per spouse, 2 firearms, etc. Or you can go with the Federal exemptions. Folks w/o a lot of holdings outside of their own house & car can find most of their stuff exempted. Take a look at nolo press’ site if you are curious.

Well that’s certainly true, don’t get a loan against your house if you aren’t sure you’ll pay your monthly nut. If you can, it’s the cheapest money you’ll find.

You didn’t see like you were gasping for breath so bankruptcy seemed like overkill, but if you’re really in trouble it does make sense.

I live with someone who is in that reality and 7 years is nothing. It’ll pass. The amount of time for a negative like that really won’t matter if this is the difference between making it or being homeless, right? Unlike the charming saying, you don’t always get to pick your battles. You are where you are so you do what you must.

Are you married? Does she work? Can you do something part-time to add to your monthly income right now? Can she? Are there things you can cut out of your monthly budget? Things at the house that you don’t use that you can sell?

Refinancing is hot right now in all honesty. That could be the ticket to ease things a bit.

We refinanced a couple of years ago, and got a good rate, though not quite like today’s. Best move we ever made. Paid off credit cards, shortened the time to pay off the house, and moved the mortgage servicing to a much friendlier bank.

Have you gone through the personal finance 101 stuff? e.g. listing your income and expenses, figuring out what you can cut, paying down high-rate loans first, etc. etc. Like what @Skipper was saying. (I don’t mean to patronize you, just not sure where you are based on your post. You seem pretty financially literate but (1) you never know and (2) even plenty of very smart people end up with too much* credit card debt.)

  • too much cc debt = any at all (if you can afford it)

Here, here. Even not-as-smart people like me end up with heavy credit card debt. In late college I thought it was like free money, living of the salary I’d never even made yet (and wouldn’t for many years.) I was crippled with debt during the worst paying time of my career and I promised I’d not get behind the curve again. But I did, some 10 years later. And I paid things down, again. And I promised again I wouldn’t get behind the curve.

So far so good, this time.

It’s a slippery slope. Like you said, without being able to visualize a budget or visualize saving or financial plans, it’s really hard to curb yourself from using something so easy as a credit card, in your wallet, just waiting to be whipped out. The entire credit and loan industry feeds on the fact that most of us in America think it is normal to have high amounts of debt.

You don’t mention any figures but you could consolidate credit card debt onto a new 0% balance transfer card or two. This can work, and save you money even if there’s a 0.5-1.5% fee. I’ve done this myself in the past.

However, take note of the following:

Do not use the card(s) once you’ve done this. Lock them away without making note of the number. Close your other cards down and burn them. Do not take out more cards. Make your minimum monthly payments without fail and top up as much as you can afford each month. Budget and eliminate as much luxury as you can stand to. Do not fall into the trap of trying to save money right now, it’s a false economy until after you’ve paid off your mortgage. Anything you can spare you put into paying off your debts ASAP.

Best of luck.

I agree that it is most important to pay off CC debt. Mortgage debt can be different–it depends on what you do when you save the money. There’s a good chance you can do better with the money in the market (long term) than paying down the mortgage, if your rate is low and you get tax breaks on it.

Psychologically, I’d say to focus on the CC debt–that needs to get paid off, without question. The mortgage debt may seem too high to pay off in a reasonable time frame, so don’t necessarily get discouraged about it.

I’ll look into credit union loans, that’s not a bad idea, thanks!

I ran on CCs to pay for tuition and living expenses once my cash started getting low for this very reason, because i knew student loans couldn’t be discharged, and because my cost of living was/is pretty low and i expected to be making enough excess income to be able to pay off the cc’s in about a year. Instead I ended up making less than I started with which blew my budget projections out (effectively about half my expected income). The only time the student loans made sense is if had always intended to pay them off slowly over a long period of time because of their low interest rate - in that case not getting them would have been a mistake.

I specifically paid for tuition on credit cards just to be able to declare bankruptcy if necessary, though certainly that would not be ideal. Of course since the degree has had a negative effect on my income (not to mention the hundreds of thousands of lost income opportunity cost + tuition) I could probably sleep at night without too much guilt. But you’re right that i don’t really want to turn unsecured debt into secured debt.

The way i think about these possibilities is:

Debt management kills my credit but has no out-of-pocket cost. Refinancing trades unsecured for secured debt and may be scary in a couple of years but otherwise is sort of “cost free” unless I try to move. Second or tertiary loans may not even be possible because my debt / income ration right now is over 50%.

There’s also the “go back to square one”, sell the house and move back in with relatives, which is probably combined with one of the options above. I could probably pay off the debt from the sale and just, I guess, save up money again like a kid. Since I don’t really have to do this - i’m not in danger of defaulting on any debt - liquidating my current life to pay off debt is not particularly palatable… Personally i’d be more inclined to declare Chapter 13 but it is an extreme possibility. The debt management companies I’ve contacted haven’t provided me documents detailing the terms, and i’m not sure if the debt is secured by my current property or not; trading unsecured debt for secured debt at even a low interest rate is effectively the same thing as refinancing from my point of view.

Looks like you are weighing all of your options and being realistic about the process. I’m sure you’ll navigate it as best you can.

Credit unions are the bomb. They lack a profit motive and therefore offer you much better rates. I don’t really understand why consumers use big banks instead of big credit unions.

Scrounge like a maniac to pay off your credit cards, and kick yourself in the balls for using them.

Once your interest rates on remaining debt is below 5%, put aside 10% of your gross for the rest of your life, regardless of income or job (make that 10% or more). Change your living arrangement if necessary.

Easier said than done though, undoubtedly.

My personal approach was to marry a woman with rich parents. But so far it hasn’t really paid off.

For #1 vs #2, It might help if you can share a bit more about what field you are in right now and what kind of engineering roles you’re looking for to help assess the tradeoffs.

Also, are debt:income ratios you shared all after-tax? I wonder moving your student debt into an income-based plan will help alleviate some of the pressures there.

Our credit union here has great policies on fees (essentially none) and good rates on loans, but deposits aren’t as competitive as something like Ally (1.5%).