Got a lot of debt, but no leftover income after all of your bills? Here's what to do about it.

Jessica writes: I’m a 23-year old undergraduate student with tons of debt that is all in collections. I only make $50 a month plus room and board as a residential assistant. I feel overwhelmed because I just can’t do anything about it right now. Do I have any options?

You’re in a tough spot all right. Collections agencies are merciless, will have no sympathy that you don’t have any income, and will make your life a living hell until your debts are resolved one way or another. Assuming the debts are unsecured (from credit cards), you have two options:

  • Find another source of income, negotiate with the collections agencies, and pay them off
  • Declare bankruptcy

Repaying your debts: Morally speaking, finding a way to repay your debts is preferable. Even if you can take a part time job nights or weekends to make an extra couple hundred a month, you may be able to use that keep the debt collectors at bay. Furthermore, I’d consider looking for additional income anyway to avoid going into anymore debt. A monthly income of $50 is hard to live on, even when your room and board is paid for.

The fact that your debts are in collections is bad in some ways, but good in others. It’s bad because these debts are marked as “in collections” on your credit report, which will hurt your ability to get new credit for years to come. The good news is: Collections agencies purchase your debt from your creditors for a fraction of the original amount. Therefore, they may agree to settle the debt for less than you originally owed. They won’t concede this easily, but if you are persistent in telling them you want to pay the debts, but are working with a very limited income, they may listen.

Bankruptcy: With your limited income, you’ll qualify for Chapter 7 bankruptcy, which will discharge your unsecured debts. It’s not free though: Expect to pay $300 to file the papers in federal court, and $1,000 or more in attorney’s fees. Plus, Chapter 7 bankruptcy can stay on your credit report for up to 10 years.

If you absolutely cannot find additional income, bankruptcy is probably the way to go. You’re young enough that you probably won’t lose many—if any—assets in the liquidation process and, if you get this debt and bankruptcy behind you now, your credit history will be clear again in your early thirties.

A note about student loans: Any federal student loans (such as Stafford or Perkins loans), will not be discharged in bankruptcy, and there are dire consequences for not repaying these debts. Defaulting on federal student loan will make you ineligible for federal benefits of any kind including social security, Medicare/Medicaid, and more.

As long as you’re still a student, these loans should be deferred (i.e., you don’t owe any payments). If you left school and went back, for example, you may have to let your lenders know so they can suspend the payments.

You’re in a sticky situation, but taking action on your debts in one way or the other is the right thing to do. Ignoring them will only create more headaches down the road. Good luck!

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About the author

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David Weliver is the founder of Money Under 30. He's a cited authority on personal finance and the unique money issues he faced during his first two decades as an adult. He lives in Maine with his wife and two children.