I got my first credit card when I was 18 and a freshman in college. It was a Purdue Employees Federal Credit Union card with a 17% APR and a $3,000 or $5,000 or $10,000 credit line. Whatever it was, it was more money than anyone in their right mind would lend to an 18-year-old.
But it was okay. I’m a responsible person; I pay my bills. I had a few hundred dollars of savings from high school and graduation, and second semester I got a part-time job on campus. I used the card for this cool new website called Amazon, where you could buy any book you wanted from the comfort of your dorm room. I occasionally used it at the bookstore or somewhere else on campus. At that time, debit cards were still the way of the future (not the present), and my credit card was easier than writing a check for big purchases. I paid it off every month.
Over the next six years, the credit card went from being a small convenience to a way of life. I dropped out of college, moved across the country with a guy, and married him. We were variously well employed, unemployed or underemployed. It was the late ’90s—jobs weren’t hard to come by—but we were both young and didn’t always make the right decisions; quitting jobs that were annoying was a bad habit of mine in particular. We used the credit card to smooth over the rough patches. We ate out too much. We bought things we didn’t really need. Credit was cheap. Even with my unsteady income, I was bombarded by offers of 0%, 1%, 2% credit (an intro rate, but still, even regular rates were low) and four- and five-digit credit lines. I put some college classes on a credit card. I used a balance transfer check to pay off my $4,000 car—why would I make payments on a 15% APR car loan when I could pay it off with 0% for life?
Then we got divorced, and the credit card became both a lifeline and a ball and chain. We never had joint accounts, so I kept “my” debt and he kept “his.” My total was about $10,000 in debt and no savings. I quit my job, moved back across the country, got an apartment, and started looking for a job. I found a temp job within a few weeks, and a good full-time job after about six months. I was only completely unemployed for less than a month, but that and moving were incredibly expensive. I had to put everything on my credit card—gas and hotels for the three-day drive, food, all the little things I had to buy when I moved into the new place. Even after I got the full-time job, I couldn’t keep up with payments. At that time, minimum payments could be less than the monthly interest. On some cards, I was making payments each month, but my balance due was continuing to rise. As the balance continued to rise, so did the minimum payments. The payments were taking up so much of my budget that I couldn’t live without the credit. But I was also approaching the maximums. I was no longer getting credit card offers.
Eventually it happened. I missed a payment. Whatever they wanted from me—$100, $200, $300—I didn’t have it. And I didn’t have enough credit to juggle things, to pay off one card with another. The APR that had crept up but was still reasonable, between 10% and 15%, shot up to 30%, and at the same time hit me with a late payment fee. Between the interest and the late fees, I hit my credit limit and got a fee for that. The whole house of cards (ha!) began to crumble. Once I had missed payments on a couple accounts, the other creditors got wise and also increased my APRs. The reality was stark. A free debt counselor laid it out for me: I did not make enough money each month to pay rent and also pay my credit card bills. If I could eliminate the credit card bills, I could set up a budget and live within it, but as long as those bills were there, there was no way to make progress on them.
What to creditors do when you stop making payments? They send you lots of things on pink paper and/or printed with red ink. They freeze your credit. They start calling daily. They’ll call you at work if you have provided them your work number. I was never harassed by a collector, mostly because I never answered the phone unless I knew who was calling.
Eventually they will sue you for the amount you owe them, and the court will garnish your wages if they need to.
I knew about bankruptcy in the abstract. It’s what you do when you can’t pay your debts. It’s what companies do, often a year or so before they go out of business. It’s how you lose at Monopoly or the Game of Life. It’s the end. You lost. I was 26.
I talked to a credit counselor. His name was Greg, and I really liked him. He explained that you can make deals with creditors. When they think they’re never going to get their money back, you can offer to pay back some fraction of it (in cash), and they will often take you up on it. If I would stop paying my credit cards and instead send a few hundred bucks each month to his company, they would gather it up, and when they had enough to make an offer to one of my creditors, they would. What will happen to my credit, I asked. Your credit will be shot. All your accounts will be well overdue, and those months of being overdue will stay on your credit report for years.
My brother is a bankruptcy attorney in another state, but he was almost the last person I talked to about this. Essentially, what I wanted to know from him was whether my situation was bad enough for bankruptcy. He said that when your revolving debt exceeds your annual income—and mine was right on the money, $30,000—it’s considered a fairly dire situation. I needed to find a lawyer.
I found someone local, had my brother check their credentials, and made an appointment for a Saturday morning. I had a list of questions about bankruptcy—how bad would my credit really be? Would my parents find out? Would my ex-husband find out? But what I really wanted to know was, Does this make me a bad person for taking the easy way out?
Like divorce lawyers, bankruptcy lawyers do not judge. They don’t care how you got into the mess. Maybe I thought Terry (my attorney) would be like my dad—he’d sit me down, squint hard at me, and ask how on earth I accumulated all that debt, and why did I let it get to this point, and how could I be so irresponsible. Maybe I wanted that. Maybe I wanted to be beat up a little bit, and then for him finally to say, well, now bankruptcy is the only way out; you have no choice. Instead, he asked how much debt I had ($30,000), how much I had in assets ($0), and how much my income was ($30,000). Based on that, yes, I could file for Chapter 7 bankruptcy, and I could expect all my debts to be discharged.
Unlike divorce lawyers, bankruptcy lawyers only take cash payment, and they insist upon being paid in advance. You can hardly blame them. I made a payment that Saturday and would make a few more over the next few months; when I had paid the legal fee of $1,500, they would get my filing together and represent me in bankruptcy court. I had to collect up a bunch of paperwork—all my credit card statements, bank statements, and pay stubs. And I had to do one other thing. I had to stop paying the credit card bills.
In order to file bankruptcy, you have to be 90 days overdue on all the debts you want to discharge, and funnily enough, I had still been trying to pay them. The debt was still out there, but beginning immediately, I was not making payments.
This was a big letting go moment. I had to stop paying my bills. Even the ones I wanted to pay—I had a couple small medical bills, and I didn’t want to screw my doctors over. But the court must see that you haven’t been paying anything to anyone. You must not favor any creditor over the others.
There was one exception: my car. I did not have to give up my car, and I was able to keep making payments on it.
Once I dealt with being a bad person who doesn’t pay her bills, the relief on my monthly budget was incredible. I had been living so lean trying to make the payments that it was easy to pay rent, power, cable, etc. and then use my debit card for food and household items. When I was out of money, I simply stopped buying things until my next paycheck.
I filed in July (well, my lawyer did), and creditors have 90 days to challenge your claim of bankruptcy. They might say, Hey! You have 80 acres of prime real estate in Connecticut! Don’t tell us you can’t pay your debt! Or, It hardly seems fair that you stopped paying Citibank a year ago, but you’ve been making payments on your Chase card all this time. They won’t say, “Did you really need that vacation in 2002?”
After 90 days, my debt was discharged in October 2006. Poof. A fresh start. I kept my job, kept my car, kept my apartment. Also, creditors can’t touch your 401(k), and though mine was paltry, it was still mine.
Needless to say, bankruptcy is bad for your credit score. I think right after the discharge, my credit score dropped to the 400’s. I was flying without a net for a little while in the sense that I had NO credit, but that eased quickly. Within a few months, I was getting offers for “recovery” cards with terrible APRs and annual fees. Within 6 months, I had an offer for a $300 card with no annual fee, and I took it. Within a couple years I had another card from my credit union. I get offers in the mail now like normal people, although the APRs are usually very high. I pay off my cards every month.
I was also able to get students loans two years after the filing, when I decided to resume work on my bachelor’s degree.
I don’t apply for the Old Navy or Marshall’s card to save 20%, because it’s embarrassing to get turned down, and I do still get turned down sometimes when I apply for a card, even if I was “preapproved.”
My car is paid off, and luckily I won’t need to replace it for a few years.
Lastly, real estate. I have since remarried, a wonderful man with plenty of his own debt, a good salary, and a spotless credit report. (My credit history doesn’t affect his credit report.) He was able to buy a house, but I’m not on the mortgage. (I have been assured that if he dies I will inherit the house, or if we divorce I am entitled to half the real estate assets. It wouldn’t matter right now anyway, because we are upside-down on it.) However, if I were single, I can’t imagine I would be able to buy a house.
Bankruptcy stays on your credit report for 10 years. In three more years, it will roll off, and then as far as I can tell my credit report will be clean again.
Lily Stevens wishes she’d read this when she was 27.