I was asked this question by the family friend the other day. The kid is 27 years old, educated, works for some Chase Commercial division downtown, makes $110,000 a year and has debt collectors calling. Besides he has other debt. He had good credit for 7 years. Started building in college sophomore year. After graduating he managed the credit well for some 3 years and had high scores, supposedly in low 800s. Things spiraled south then. His deferred student loans came due, the condo association fees kicked in (builder paid them for 2 years), the adjustable mortgage went up a bit, and on the top of it he had to take a 20% pay cut. So before that pay cut he was banking close to $138,000. Now he owns close to $26,000 in credit card debt which collectors hold, plus another $8,000 which is still with original creditors, I don’t think for too long. His student loan payment is $927 per month, then of course, housing expenses that amount to some $3,200 monthly. He has one of those flashy BMW crossovers which adds some $800 a month, eats out at least 3 times a week and that is besides lunches, enjoys Chicago nightlife every Friday and Saturday, and buys expensive cigars.

Certainly, his credit score is low, somewhere around 600 now. He was basically asking me for advise – should I pay debt collectors, pay credit cards, declare bankruptcy or what? He told me that he does not feel like paying to debt collectors because of what they do and who they are. Then he decided that paying his regular credit cards off does not make sense either, because he missed payments and his credit is already bad, so if they go to collection agencies, it will not do much harm. So his inclination was to declare bankruptcy, Chapter 7 of course.

I told him that with his salary, Chapter 7 may be hardly an option, and he very likely has little choice but pay his credit cards and try to settle with debt collectors. I also explained him that even if he qualifies for Chapter 7, student loans will be virtually impossible to discharge. More than likely, he will settle for Chapter 13 bankruptcy which is a glorified debt consolidation and repayment plan. Then I mentioned Illinois wage garnishment and advised him to check statute of limitations. Finally I offered the kid some sound advise in a very straight forward manner, and by the time I finished, he was not happy he ever asked me,
– try to rework your student loans, talk to your lenders and they may offer you a few pretty neat options
– get a second job to make up for the 20 percent salary cut
– stop eating out, smoking expensive cigars and buying stuff
– stop going out for a few months
– get rid off that BMW, he lives downtown and can walk to work

Once he lives like this for a month, I told him, he would see how much money he would save. Then he would need to start paying off credit card debt in earnest using the money saved from following these simple steps. As far as debt collectors, he should try to settle with them.

I also recommended him to read this blog and other sources. Specific posts were,
Paying off debt fast – how to pay off credit card debt quickly
Debt reduction debt relief pyramid
Negotiate credit card debt
Negotiate credit card settlement
Debt relief options and solutions
Debt collection settlement letter

Things were going more or less smoothly, until mentioned his beloved BMW. I thought I saw some flashes of boiling rage. I even took a step back. I also realised that this kid does not like reading. And he has some sort of MBA from Kellogg School of Management which is probably in top ten business schools in the country. What a joke.

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