How I Avoided Bankruptcy

I put myself through four years of college at a private university (at the time I thought it was a better education than a state school, but now I realize there isn’t much difference in the real world unless we’re talking about Yale or Harvard or something!). By “putting myself” through college, I mean, I took out loan after loan, and put the difference between what the loans would pay and what I still owed on credit cards.

I graduated with close to $60,000 in school loans (about half are privately funded loans rather than federal loans), and a good $15,000 in credit card debt. Don’t ask me how I was able to keep getting approved for higher limits and more credit cards, but it wasn’t that difficult to do. I’d ask, I’d receive, I’d spend. As a college student, I prided myself in using credit cards only for college related expenses, thinking it made it “good debt” – while friends were using their credit cards and parents’ cards to charge their entertainment expenses. Either way- debt is debt and I was in trouble.

I was working full time for a government office, but my pay wasn’t anything exceptional and certainly not enough to cover living expenses and the loan payments and credit card payments. I was late on the bills simply because there wasn’t enough money to go around once all of the education loans came due; and to top it all off, I started a family just a few months after I graduated. Yes, I realize this was poor planning (or lack of planning?!) but it’s how it happened.

My expenses were increasing (new baby), but my income was decreasing (staying home with baby). I got a work-at-home position as an administrative assistant (no daycare needed), and supplemented it with writing jobs, but with $75,000 in debt and living expenses – I was still in trouble. My husband worked full time and made an average salary, but he had racked up debt and expenses from years of not really caring about whether he paid his bills or not!

We had to do something. Bankruptcy was considered and thrown out because you can’t write school loans off with a bankruptcy. Since the bulk of the debt was school loans, we didn’t think it would be very helpful in the long run to further damage our credit and file bankruptcy since we’d still have the $60,000 in school loans to deal with, and our living expenses.

My husband had a mortgage, and so he attempted to reduce his own expenses (cards in his name gotten before we got married, small loans, vehicle loan, etc) by refinancing his mortgage to include most of his other expenses. In the process, he was talked into taking the property and school taxes out of escrow for the “lower” monthly payment on the house – not understanding he’d still have to set aside $60 a week in order to have the money available for the taxes when they came due. So the consolidation of his debts with the mortgage refinance actually caused us to pay MORE per month than we had been paying previously!

Our next attempt to salvage the money situation was to use a loan from his 401K to pay off credit card debt. Having been an avid reader of personal finance blogs for several years now, I understand that 401K loans aren’t the best use of the money – but it seemed our only option. The interest we would save on paying off the credit cards with the 401K loan made it worthwhile to us to take from the retirement fund. Plus, when you repay a 401K loan, you pay interest on the money borrowed – which is also deposited into your 401K (so you basically pay yourself back with interest!). We probably lost money on the investment side of the 401K by having less in the retirement account, but I’m certain we probably gained in the long run by paying off credit cards that were at 20% interest or more!

We have sort of learned our financial lessons, although we’re still a long way from where we’d like to be. When we added to our family with our second child, I had a difficult pregnancy that put me on bedrest for awhile – reducing my income temporarily and making it difficult to keep up with the school loan payments (again). The federal loan programs allowed me to defer the loan payments for a few months, but my private education loan through Wells Fargo did not offer a deferment program or any other alternative payment method for this difficult time, and charged my loan off when it was 91 days late as per the contract I signed when I was 19 years old. This of course, further damaged my credit, and the only way to get this loan out of collections is to either pay it in full (about $24,000 right now, after the company added close to $8,000 in fees and such immediately before charge-off), or make payments for years until it’s paid off – but during which time Wells Fargo will not update my credit report to reflect the payment status and so my credit score will not improve by making payments.

We rarely use credit cards, but when we do we pay them off within a month or two of using them. I think the point I’d like people to take from this post, is that even when you think bankruptcy is the only answer- reconsider. If you have retirement, a way to consolidate, or a family member willing to help you get your act back together again, you will probably be better of using these alternative resources rather than filing bankruptcy.