The guy with an old debt asked if bankruptcy or debt settlement would cause greater damage to his “credit”.
The money advice columnist gave the right answer to the wrong question.
She got it backwards. So did the man with the question.
She advised that bankruptcy was more damaging given that the nagging debts were already three years old and would drop off his credit report in four years, whereas bankruptcy would show for seven to ten years from the bankruptcy filing.
Right, assuming that your credit history is the important issue.
But your credit record is a sideshow in life.
Dealing with old debt
I would challenge the question the way the guy phrased the question in the first place.
When you look at the alternatives to debts you can’t pay, I think the first concern should be for your balance sheet.
Which of the alternatives makes you better off NOW, not when you want to incur more debt in the future.
For the man writing in about settling a $13,000 debt for $5,000, I would have a series of questions that didn’t center on his ability to get new credit.
- How old are you?
- Do you support others?
- Do you have any emergency savings?
- How are you doing on retirement savings?
- Got health insurance?
If he is young, single, and employed with a bit of money in the bank, perhaps paying $5,000 to make eliminate a $13,000 debt is a good deal.
If he’s middle aged, supporting children or aged parents, and living paycheck to paycheck, I would be inclined to suggest there are better uses for $5000. At the most basic level, put it in an IRA, and your creditors can’t take it.
If he’s approaching retirement and looking at a future of reduced income and with little need for future credit, chances are that there are crying needs for that $5000 other than dealing with an old debt.
It’s not about the credit score
As you can see,settlement versus bankruptcy is not just a matter of which impacts your credit record more negatively.
The decision needs to take in your ability to spend money on old debts when faced with current and future demands on your assets.
It’s all backwards to think that protecting your credit record is the central issue..
Image courtesy of Flickr and Luke Montague.