Charging Necessities? Time to Consider Bankruptcy

charging necessities to credit card

It can be hard to recognize when your financial situation has gotten bad enough that you need professional help. If you find yourself paying for necessities, like groceries, gas or prescriptions with credit cards, it is almost certainly time for you to consider talking with Steidl & Steinberg about filing for bankruptcy.

So many of our clients are in this position when I initially meet with them.  They pay the monthly minimum on their credit cards faithfully, but so much of their income is eaten up by the credit card payments that they have to turn right back around and use the little available balance freed up by the payment to pay for basic living expenses.

Despite the fact that some people may think they have their debt under control as long as they are able to make their minimum payments, nothing could be further from the truth.  With the high interest rates on credit cards these days, it would take 15-20 years to pay off a large balance on a credit card by only making the minimum payment.  Also, if creditors suspect you aren’t a good credit risk, they will lower your available limit down to your balance, ending your ability to continue the pay and charge routine.

How Can Bankruptcy Help?

This is an endless destructive cycle that will likely only be broken if you have a sizable improvement in your income or you file for bankruptcy. As much as we’d all like to think that next big raise or promotion is right around the corner, it’s just not in the cards for most of us.

Depending on what type of bankruptcy you qualify for, you can eliminate your credit card debt or get help restructuring it in a way that will allow you to be able to afford your living expenses.  You can meet with an attorney at Steidl & Steinberg for free to learn about your options.

Let’s do away with thinking that paying the minimum payments on your credit cards is winning.  Do you want to still be paying for that lunch at McDonald’s 20 years from now? I don’t think so.

Bankruptcy vs. Debt Settlement – Part 2

bankruptcy, debt settlement, credit card debt, steidl and steinberg


If you missed Bankruptcy vs. Debt Settlement Part 1, please check out that blog entry first. Our last installment described a likely scenario in which “John” would offer $4,000 to ABC Bank to settle a credit card debt of $10,000. This seems like a great deal, right? Maybe, but there are a lot of hidden issues that one needs to be aware of when settling debt in this manner.

Problems with Debt Settlement

The first issue is that the banks will generally not take payments on the offer they have made or accepted. They want their money now! So, John will probably have to have the $4,000 paid to the bank within a day or two of this agreement.

Second, and this is extremely important, the $6,000 that John will be “saving” is now taxable as income to him by the IRS. Yes, ABC Bank is going to send a “1099 Debt Forgiveness” form to the IRS for $6,000 and at the end of the year John is going to be hit with a tax bill from the IRS as having $6,000 in income that he never paid taxes on. This can get really ugly, especially if you are settling large amounts of debt!

Finally, many individuals will get these lump sums to settle the debt from their retirement accounts such as a 401k or an IRA. Again, there can be some pretty major tax consequences to taking money from a 401K or an IRA especially if you are below the requisite retirement age.

By the Numbers

So, with that in mind, let’s take John’s situation and put some estimated numbers on this settlement proposal and see what it looks like. John has offered to settle his $10,000 credit card debt with Bank ABC for $4,000. After consideration, ABC Bank has accepted his offer but they it in a lump sum want the cash within one week. John doesn’t have $4,000 on hand and must withdraw it from his IRA.

John is only 45 years old, so he has to pay a 10% penalty for an early withdrawal. He also is in the 15% tax bracket for tax purposes to he has to account for that when he withdraws the money. What this means is that in order to get his hands on $4,000 to use for payment to ABC Bank, he actually needs to take about $5,300 and send $1,300 of that to the IRS for the 10% penalty and 15% income tax. So, now John has his $4,000 (which he spent an additional $1,300 to get) and he pays it to ABC Bank.

Unfortunately, at the beginning of the next year, he receives a 1099 Debt Forgiveness form from the IRS in the amount of $6,000. Now, when John does his taxes, he must pay income taxes on that $6,000. Remember that John pays income taxes to the IRS at a rate of 15%, so he must pay in an additional $900 to the IRS than he otherwise would have had to pay.

Credit Score Impact

All in all, John paid $6,200 in lump sums to settle the $10,000 debt that he had with ABC Bank. Still not a bad deal, but wait… it doesn’t end there. The next time John checks his credit report he is going to see an entry by ABC Bank that says something along the lines of “debt settled for less than what was owed.”

This is going to drive down John’s credit score significantly and will stay on his report for seven years. According to lenders that I have spoken with, having a settled debt on a credit report is almost as bad as having a bankruptcy reported to the credit bureaus and in some instances it is even worse.

As you can see, a lump sum settlement isn’t always as cut and dry a solution to an outstanding debt as it may seem. If you find yourself in a situation similar to John’s, give us a call and see how we can help. Bankruptcy could be the answer. Steidl & Steinberg has over 30 years of experience in helping people solve their debt problems.

Bankruptcy vs. Debt Settlement – Part 1

debt settlement, bankruptcy, debt, creditors, chapter 7

There may not be two more widely misunderstood concepts amongst the general public than the concepts of “bankruptcy” and “debt settlement.” However, before weighing the pros and cons of each, it is important to first lay out some parameters for the discussion:

    1. When discussing bankruptcy in this post, I am speaking only of a Chapter 7 bankruptcy. This is the type of bankruptcy in which unsecured debts (like credit cards) are liquidated and eliminated without any payment from ongoing income.
    2. In discussing “debt settlement,” I am NOT speaking of the companies that you hear advertising all day long that take your money and make payments to the credit cards companies after taking an exorbitant fee and promising things that they cannot deliver. In this discussion, I am speaking only of a scenario in which you work directly with a creditor in an attempt to make a payment arrangement that is outside of the contractual limits. A good example is an individual who makes a lump sum payment of $2,500 to settle a $6,000 credit card debt.

Choosing Debt Settlement

So, with those assumptions, let’s first look at the benefits and drawbacks of settling a debt outside of a bankruptcy case. This can be done best by taking a very common example and breaking it down.

John owes $10,000 on a credit card to ABC Bank. He doesn’t think he is going to be able to keep up with the payments and wishes to attempt to work something out with the Bank.

First, in almost all cases, the bank will not work with you unless you are already delinquent with payment. Why is that? The banks do not believe that there is any incentive to take less than what they are owed if the payments are actually being made.

Next, a bank will almost never make long term payment arrangements at a reduced rate and a reduced payment amount. Again, why is that? Because the banks have been burned so many times by making these deals and not getting the negotiated payments, that all that has been accomplished on their end is a delay in getting the debt to a lawyer who can file a lawsuit.

What Can Be Done?

So, getting back to the above example, what can John do to get this debt taken care of? Well, the one thing that most banks will accept is a lump sum payment in satisfaction of larger debt. So, once John becomes delinquent in payment, John could offer $4,000 to settle the $10,000 balance.

Will the bank accept this? They very well might. Generally, banks are willing to settle a balance for someone between 40% and 60% of what is owed. John needs to be very wary though. There are some hidden problems that can arise from what seems like a really great deal.

What are these hidden problems? Check out Part 2 of Bankruptcy vs. Debt Settlement.

Top 5 Reasons Why People File for Bankruptcy

Reasons File Bankruptcy


Steidl & Steinberg has helped over 50,000 people with debt problems for over 30 years. During those 30-plus years, certain patterns have emerged when it comes to things that trigger someone to file for bankruptcy. Below are the top five reasons we have found that drive someone to have to file for bankruptcy protection. This is not a scientific list but just our general impressions based on a whole lot of experience. Please note this list is not in any particular order.

2) Job Loss or Loss of Hours

Rare is it that someone can plan for job loss. Usually, it just happens. Whether you are laid off, or your employer closes up shop, or you have no idea why, it often comes out of the blue. Job loss often leads to extended periods of vastly reduced income. In this scenario, one of two things often occurs. First, you are now unable to pay your existing debts due to the reduced income. With the job it was fine, without the job it becomes impossible. Second, you need to use credit to survive during the period of reduced income and you get into debt. The kids need to eat and have a place to live. Sometimes in this scenario credit is the only option. Eventually, the amount of debt can mount to the point where a bankruptcy is necessary.

2) Illness

Illness is a big one. Medically induced bankruptcies occur in general because of very large medical bills that cannot be paid or the loss of income due to being off of work for extended periods of time. Recently, bankruptcy cases due to medical reasons have decreased for a number of reasons, but this is still easily in the top five.

3) Divorce, Separation, or Loss of a Spouse or Significant Other

Going from two incomes to one is rough. Instead of having two joint incomes for one set of expenses, now there are two separate incomes for two separate sets of expenses. Payment of debts with only one set of expenses wasn’t an issue but with two sets of expenses it sometimes becomes impossible. On top of that, in a contentious divorce, the legal fees can be very high and large lump sums are often necessary. While I said  this list was not in any particular order, this may be number one.

4)  Sheriff Sale of Home

Many bankruptcy cases are filed to halt a sheriff’s sale of a home residence. Many times a bankruptcy case is filed the day before the sale is supposed to take place! Once a sheriff’s sale of a piece of real estate takes place, there is nothing that can be done to overturn it. You can’t unring the bell. Specifically, Chapter 13 cases give a homeowner the ability to halt a sheriff’s sale and make payments over time to catch up on the back payments.

5) Business Failure

A failed (or failing) business can cause major problems for business owners for reasons that are pretty obvious. Decreased income, inability to pay business debts, all can lead to a bankruptcy filing either by the owner of the business or the business itself. Often times, both.

There you have it. The top five reasons that we see at Steidl & Steinberg that cause people to file for bankruptcy. If you are faced with a situation like this, and have debts that are causing problems, feel free to gives us a call to discuss your options.