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ItalianPrincess1217's avatar

Is it generally better for your credit score if you pay off old debts or if you file for bankruptcy?

Asked by ItalianPrincess1217 (10256 points ) January 19th, 2014

I have a lot of old, unpaid debts. I estimate my debt to be around $14,000. Most of these were credit cards I opened when I was 18. I was irresponsible with them and I maxed them out only to find out I was unable to keep up on the monthly payments. I’m 26 now and have no active credit cards. I have heard that after 7 years the debt comes off your credit report. If this is true, some of these debts will soon be coming off.

I am considering my options. I could file chapter 7 bankruptcy or I could start tracking down all of these debts and paying them off one by one. My main goal is to repair my credit within a few years. I know filing bankruptcy will severely impact my credit but will bankruptcy look worse on my credit than having unpaid debts from years ago that are settled out/paid off?

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11 Answers

zenvelo's avatar

Better to pay off. Bankruptcy puts a big mark on you credit report, no one wants to get left holding the bag when you opt out of your debt. Bankruptcy takes the legal obligation away, but does not clear your record.

jca's avatar

Bankruptcy is never good for a credit rating. You won’t get credit for at least 7 years.

bolwerk's avatar

Pay them off selectively and carefully. I agree with others that bankruptcy is a bad idea, and I doubt you need it at this point anyway. I assume you are in the USA.

First of all, get a copy of all your credit reports. You are entitled to a free copy every year from each agency. See what is actually on the report, don’t speculate. It sounds like you’re speculating. Everything should have an expiration date on it, so you’ll know where you stand with all your debt.

Second, you probably don’t want to just pay off old debt. As soon as you pay something, the clock resets (or at least the creditor can reset it). This may not be a big deal if you’re close to the start of 7 years, but it kinda sucks if you’re near the end. What you want to do is send a “pay for deletion” (Google how to do this) offer by written certified letter. Make sure you get in writing that the debt will be removed from your credit report if you pay and keep records of all your correspondence. Say you do not acknowledge you owe the debt, but play it like you’re willing to pay up to put the matter behind you.

Finally, if some is coming off soon anyway, perhaps you may as well let it expire. It’s up to you to decide when you are willing to let the clock reset because some creditors may not want to remove the debt from your reports.

bolwerk's avatar

Of course, if you send pay for delete letters to creditors, the clock is working against them. For debts that are expiring soon but not soon enough, maybe try this tactic: write a letter offering half of it in exchange for removal. I believe the collection agencies buy the debt for pennies on the dollar, so they often don’t mind taking a big write-down on the face value anyway.

Pachy's avatar

Bankruptcy may look like an easy way out but it’ll play havoc with your credit for years and years! If at all possible pay off your debts. Try calling the debtors and asking them to reduce the interest. This may not be successful, but it will show them that you’re trying to do the right thing. Be sure to put all contact with debtors in writing, and when/if you start paying down the debts, start with the smallest debts and work upwards.

RealEyesRealizeRealLies's avatar

“I was irresponsible…”

Well, filing bankruptcy is not a path to responsibility. It is the ultimate irresponsible act. Wouldn’t it be great if everyone in the world were responsible for their own actions?

Filing bankruptcy DOES NOT ruin your credit. You’ll get offers for dozens of loans right after completing the bankruptcy process. It’s true. But understand that the only loans you’ll qualify for are extreme high interest loans. It’s doesn’t ruin your credit. It ruins your ability to secure low interest credit. Not a good thing for someone trying to become more responsible.

I wish you the best.

YARNLADY's avatar

If you are capabil of paying your debts, that is what you must do. You have an obligation to repay people/companies who took a chance on you and loaned you money. It is only through responsible payment of debts that lenders are able to provide services.

Pachy's avatar

It’s true, as @RealEyesRealizeRealLies says, that bankruptcy doesn’t “ruin” your credit forever, but it most certainly screws the heck out of it for a very long time, plus, it’s an long and demeaning process. Consider it a last resort, and before you do it, I suggest you talk to a financial adviser to learn all the ramifications.

I also suggest not continuing to beat up on yourself by calling yourself irresponsible. Yes, you went into debt, but you’re in a very large crowd of people who made the same kind of credit card mistakes—including ME. But you want to get out of the hole, and that IS responsible. I applaud you for seeking input and wish you good luck. From experience I can tell you the day you pay off all your debts—and that day can come faster than you think—will be a grand one.

JLeslie's avatar

I would not declare bankruptcy. To be able to sleep soundly at night I would want to pay the debt. If it is in collections you might be able to pay a lower amount, because collection agencies buy the debt at a lower cost. I’m not sure how that all works. Probably you need to have the cash ready to pay in full to get the lower pay off.

If it is true it will fall off your credit in 7 years, I have heard the same, but I don’t know for sure, and the debts are all 7+ years, you certainly can just let it lie, it’s a matter of conscience. They loaned you a ridiculous amount of money considering your age and I assume you had a very low income at the time. They made bad business decisions. Still, I would pay it.

ItalianPrincess1217's avatar

I would never be able to pay off the full amount of each debt because of all the interest and fees they’ve accrued over the years but I worry that taking a settlement doesn’t look good on credit reports. And if I can’t afford the full amount of debt and taking settlements will hurt my credit more anyway, I thought maybe bankruptcy would be the better option. Of course I feel I have a moral obligation to repay all the debt. I’ve never heard of the @bolwerk but that’s definitely something I will look into.

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