Devil’s Advocate: Keep your cash, blow off debt

Just to be clear, I have nothing but respect for everyone who faces the financial music, tightens their belt, and pays off their debts. But in these scary economic times, dare I say there are certain situations when it’s better to hoard cash rather than pay off consumer debt in preparation for a personal armageddon? So it’s time to play Devil’s Advocate to conventional sensibilities…

A fairly straightforward way to look at it is “I can put all my extra money towards my debt, and if I lose my job, I’ll just charge the cards back up.” Well, you can’t charge your rent/mortgage or your health insurance premiums – you need cash in the bank for those. Also, credit card companies often check your credit report monthly for any excuse to jack your rate up – unemployment is one of those excuses (and I’m referring to Discover, circa 2001).

Plus, it’s really hard to feel any obligation to a network of troubled banks that have gotten a big ol’ bailout, won’t even report what they’re using the money for, and renege on their promises not to jump our interest rates. When the vastly overpaid suits take our money in so many ways and say “F you”, why turn down a perfectly valid opportunity to say “F you” right back?

Know what happens when you stop paying your credit cards? Well, my parents did this in late 2003 in anticipation of getting their application for bankruptcy approved — after I made calls to their 5 cards to see if they’d reduce the interest rate to make it manageable. American Express Blue agreed to drop them from 20% to 15%, and no one else would budge. Any feelings of guilt for not trying harder to avoid bankruptcy vanished. Upon stopping payment, one of the card issuers actually increased my mother’s limit (she was near the max on all cards) and declared her missed due date a “payment holiday”. The others doubled her interest rates to 30-35%, and the second month they increased her minimum payment due to 20% of the balance.

I know the bankruptcy laws changed shortly after my parents declared, but assuming you’re within the new income criteria (which may be overturned…it’s been mentioned in Congress), here’s the #1 thing you need to show the judge in order to succeed in your petition: that your financial circumstances have changed for the worse. It’s best to hire a lawyer rather than save a few hundred bucks and file on your own, because they pick up on the things that would get you rejected.

Here’s my (admittedly non-professional) advice to those of you who are flying close to the wind financially, could not survive more than 2 months of unemployment, and feel your job is at serious risk…

– Don’t put any leftover money towards your debts. This way, if you get laid off, you’ll be able to pay things as normal for as long as possible. 

– While “payment holidays” are less than ideal, see if you can get most of  your credit cards to do this for you. It buys you time without hurting your credit score, as I understand it.

– Got a student loan? Call up and find out what kind of hardship deferments/allowances are possible. By the way, this is the one kind of debt that doesn’t get discharged during bankruptcy, because otherwise every 22yo who didn’t want to buy a home until they were 30 would declare.

– No job, savings are nearly gone, and unemployment benefits barely cover the essentials? Time for your free consultation with a bankruptcy lawyer before the next round of CC payments are due. If she gives your situation the green light, then you’ll need to pay her up front ($700-1000, depending on the filing fees in your state). Then…

– Stop paying your credit cards. In fact, what the hell, charge them up to the limit if you’re not already there – that’s the real “F You”. My mom didn’t do it on purpose, but my little sister (uninsured, age 24) needed eyeglasses and a tooth pulled, and the car needed a major repair…total $2000. By the way, would you believe I got the max-out-the-cards advice from my then-accountant? Let your ethics and/or need guide you on that one. For the record, my mother paid medical bills (a few hundred dollars’ worth) even though she didn’t have to upon being declared bankrupt. It just didn’t sit well with her not to.

– Don’t worry about your credit score. Chances are you’re not in a position to qualify for a mortgage anyway, and it’s not even realistically on your 7-year horizon, especially now that there’s no such thing as “sub-prime”. Want to know how bad that whole sub-prime thing really was? My mom is still 2 years away from having the bankruptcy disappear off her record, and her credit score is 620. Mortgages were being made for people with scores in the 500’s.

Feel free to leave any additional tips – serious or otherwise! – in a Comment.