At what point do you declare bankruptcy? We’re really in trouble.
-- moonburst37
Five figures of student debt plus a car loan plus credit card bills (who hasn’t paid for groceries with plastic?!) plus mortgage multiplied by two spouses equals you feeling buried in bills. But don't file for bankruptcy if there's any way you can avoid it. Borrow from your parents, make some lifestyle changes, work from home, whatever -- bankruptcy is a last resort. Far from wiping your slate clean, you actually have a huge black mark on your credit. It’ll torpedo every application for a credit card, car loan, school loan (remember those kids who’ll want to go to college one day?) -- even stupid stuff like cell phones and movie rental memberships. Sounds harsh, but it’s true. Even employers check credit reports, and declaring bankruptcy all but screams “Irresponsible!” Plus, if your income is over a certain amount post-Chapter 7, you still have to pay certain types of bills.
Lenders would far rather see that you’re making payments on your mountain of debt instead of you filing for bankruptcy. If you really can’t make it work, visit a bankruptcy lawyer first -- a legit one will consult for free and help you weigh all the factors.
Can I use one loan to pay off all my student loans -- federal, private, subsidized, and unsubsidized?
-- kelsnotchels
If you’re having trouble making payments, absolutely. When done right, debt consolidation can often lower your monthly payments, decrease your interest rates, and spread out your payments.
But you can’t consolidate any time you want a better rate -- the law allows you to only do this one time, so make sure you’re getting a good long-term deal. Some floating (aka changing) rates are lower than fixed ones, but they only last a few years before a way-higher fixed rate kicks in.
Shop around and get at least three rates. Most loans move with the Federal Reserve’s interest rate, so if you think the Fed rate is about to move up, hurry and consolidate. Good places to start: your bank, Sallie Mae, and the U.S. Department of Education Direct Loan Program.
Is it better to use our tax return to pay down debt or build up our savings?
-- Ncbelle
Unless you have some magical savings account with a higher annual return than any of your loans (credit card, mortgage), pay down your debt. Say you put $1,000 in savings. You might make $30 off of that in a year, but you’ll also owe an extra $100 on a $1,000 debt that’s been racking up interest. Your net profit: -$70. Bottom line: Route your return to whichever debtor is charging you the highest interest.
We got a notice from a collection agency for a debt from years ago. How do we know it’s not a scam?
-- indygrl07
The new breed of thief uses your credit history to send you bogus bills from former accounts. If you get a weird bill, contact the collection agency in writing and ask to see documentation of your debt. (Mention the “Fair Debt Collection Practices Act” in the letter.) The company that transferred your account to them will have passed on the corresponding proof. The collection agency has 30 days to respond, and if they don’t, they can’t bug you anymore.
[Nestperts] Brett Graff, former government economist turned financial reporter; and Dan Solin, author of The Smartest Investment Book You'll Ever Read
-- The Nest Editors
See More: Getting Out of Debt , Bankruptcy