Debt consolidation, relief or just get out of debt all generally state the goal; now let's specifically examine the solutions to eliminate credit card debt as well as other consumer bills. Armed with a complete understanding of your credit card debt, the personal spending habits that cause debt problems and the top reasons people need to file bankruptcy because of credit card debt you may look at how each of these relief options fits with your personal finances and select the best debt solutions for you. Think of all of these potential credit card debt solutions as a large group of job applicants or Miss America contestants, at this stage you must evaluate every one and then <narrow solutions down given your own circumstances(next chapter)> to the finalists. From there you should set up free consultations with a professional skilled in each reduction method you selected and make sure your final choice for a solution to help reduce debt truly fits the bill. Finally, implement the solution selected and get out of credit card debt!
Some points regarding these credit card solutions apply to almost all of them, so let's review those before exploring the special traits of each one. While a consumer advocating any of these solutions for themselves would not violate any laws, it rarely counts as a smart idea. Ask yourself these questions: Would you defend yourself for murder? How many times have you worked as a debt professional to gain what you wanted from creditors? Are you very familiar with all aspects of the laws for your chosen solution? Is the undertaking of a plan to eliminate your debt the kind of thing that will make no difference as you proceed through life and a potential failure will have no effect on you or your family whatsoever? Are you an expert in the preparation of the documents needed to accurately portray the debt situation in order to achieve the best result? Do you maintain long standing relationships with the settlement departments of your various creditors? Would remove your own appendix?
Selecting a credit card debt solution should not revolve around what sounds best or what you would like to do; a good elimination plan must represent something you see through from start to finish. A debt settlement may look perfect to you, but if you can't really afford to complete a settlement plan you must find a method you don't like as much but stands a higher chance of success. With many of these credit card solutions changing course partway into a program or dropping out of a system might result in all of the time and money invested in the failed attempt lost forever without benefit. Make sure whatever method you select counts as something you will carry through until it's finished in terms of payments. In addition make sure you qualify to use the solution before you start. Anyone can file a chapter 7, but it's only once you find yourself in the middle of the proceedings that the court decides you don't meet the standards and forces you into a chapter 13 or dismisses the case. You need to know in advance of starting a credit card bill solution if its particular rules will allow you to complete it regardless of payments.
Besides the fact that making yourself an informed consumer always serves you well, it becomes especially important when finalizing a credit card debt solution because much of your contact with a service provider will come from a person with a vested interest in signing you up for their particular product. Of course, people develop a natural preference for the method they work with each day, but the danger here runs far deeper. Many of these companies make money even if you fail partway through the procedure. So if they kept you in their program for a while they made money and that's all some care about. Occasionally you will talk to salespeople on commission whose income depends on how many people they enrolled, not how many they signed up who truly belonged in the system. Almost all of these credit card debt solutions offer free consultations, but treat all of them with a grain of salt and make sure you are doing what you feel makes sense to you, not the method with the best sales pitch. Very few companies perform an independent analysis of which credit card debt help solution fits your personal financial situation best so you need to be sure you understand the facts and can sift through what makes good sense for you and what needs to be ignored as sales puffery by a contact more concerned with promoting their own service than figuring out what will work best for you.
The descriptions below give you very basic information about each credit card debt elimination solution. When you find one that sounds like if might meet your needs proceed to all of the materials in the links providing more information.
Debt settlement emerges as one of the most popular non-bankruptcy solutions to get out of credit card debt and one of the most appropriate for many debtors. To sum up this popular solution in a few words, you pay the creditor a fraction of what you owe and they forgive the rest. Some people pay their settlements all at once but many more enroll in a program that disperses the debt settlement process out over a number of years. Outside of bankruptcy solutions, debt settlement stands as the most aggressive method of getting out of credit card debt and medical bills usually saving the consumer 40% to 80% from the original debt due.
The emotional trauma of credit card debt becomes almost debilitating for some and crossing the line into bankruptcy seems unbearable. Debt settlement allows for a serious reduction in credit card debt and medical debt balances without the psychological scars, court scrutiny or labeling that accompanies bankruptcy. For people with larger incomes, debt settlement may even yield a better result than a chapter 13 could achieve.
Credit score destruction that goes hand in hand with credit card debt settlement gives rise to major objections to this solution, but for those who already claim bad credit a debt settlement might actually help <improve your credit>. For those who face future bad credit as a result of every realistic move forward it make no difference, but for people with good or excellent credit with an option to avoid a bad credit score settlement should only come into play when the debt levels rise to the point the consumer feels to offset in credit makes up for the reduction in debt. For example you should not ruin your credit if a debt settlement saves you $750, but if you could erase $75,000 in debt you might elect to eliminate all that debt now and rebuild your credit later.
Chapter 7 Bankruptcy
A liquidation bankruptcy under chapter 7 of the US Bankruptcy code provides for the discharge of all debt owed by the consumer as long as all those filing bankruptcy meet all conditions. For the typical chapter 7 case filed because of credit card debt the consumers generally receive a full discharge of debts while retaining all of their assets. Note, however, that to a certain extent this occurs because attorneys only allow people to file a chapter 7 where they feel a full discharge of debt without loss of property will stand as the outcome at the end of the bankruptcy case.
Before you get too excited that a chapter 7 makes the perfect solution for anyone with debt lets dig deeper. A typical consumer fitting the chapter 7 bankruptcy mold perfectly might start trying to find a bankruptcy lawyer because they owe $40,000 in credit card debt, maybe even another $5,000 in medical bills. They charged the debt up over a year ago and have not used the credit cards or paid the bill since. Without the credit card debt they can just about squeeze by with no money for savings if they pay the rent and food and regular expenses including a car worth $7,000 they owe $6,000 for on a note to the bank they never missed a payment on. Let's break down the elements that make this a good chapter 7 bankruptcy. Start with some significant debt. Bankruptcy represents a very powerful weapon, one you may only call upon once every eight years, and so you don't want to use it unless you have enough debt to warrant it. Since they made no credit card payments in a year we can bet they already have bad credit. Even with their debt discharges they would end up with almost no free cash flow, if this were not the case they would need to file chapter 13 instead. With their car as the only significant asset, and the equity in the car so low it earns exemption, they should not lose any possessions. The time between card use and filing should eliminate any fraud questions preference payments.
Let's quickly look at situations not suited for chapter 7 bankruptcy. People in mortgage trouble or car loan trouble will not find chapter 7 helps save their secured assets. Those holding assets with so much equity they exceed the exemptions may calculate a discharge would not be worth the cost or loss of property. People with income well over $100 per month beyond their expenses may see themselves converted from chapter 7 to chapter 13 by the court anyway.
Consumers with mortgage arrearage and foreclosure trouble most often make use of chapter 13 bankruptcy, but many people with credit card obligations will find chapter 13 a great tool as well. In a nutshell, chapter 13 brings all of your assets and debts into the bankruptcy court, stops creditor actions against you, and allows you to significantly reduce debt by reorganizing payments of old bills at a reduced balance over a 3 to 5 year period. Chapter 13 bankruptcy works best for credit cards in one of these situations:
1. Foreclosure situations where significant credit card debt reduction would allow for a successful reorganization plan.
2. Reorganization plans that will cost less than a consumer might pay out in a debt settlement negotiation.
3. High debt cases where the consumer fails the chapter 7 means test.
People in a chapter 13 find their financial lives split in two. Moving forward from the bankruptcy filing they pay all expenses and continue everyday activities with their money as if nothing happened with certain exceptions such as consumers may not take on any more debt unless the bankruptcy court approves. As for all of their past debt, their bankruptcy lawyers help put together a reorganization plan. In a typical case credit card debt might garner treatment of a ten cents on a dollar payout, with the ten cents split over a three to five year period. In an example with numbers figure starting with $50,000 of personal credit card debt, the chapter 13 bankruptcy plan reduces the debt to $5000 with payments of $83.33 made for 60 months. On top of that you must pay a trustee fee and the bankruptcy rules may require payments to complete the plan in three years or that you pay more than ten cents on the dollar.
Chapter 13 stops foreclosure in its tracks and provides a means for homeowner to retain their house over creditor objections. As long as you put together a plan approved by the bankruptcy judge and you never miss a plan payment you almost guarantee a defeat over foreclosure. For consumers with large credit card debt this becomes the best method to achieve debt relief on both the mortgage and credit card fronts, particularly when a reason for mortgage default started from an inability to pay both the credit card debt bills and the home loan. Many debtors find that the reduction of credit card debt payments from a chapter 13 reorganization plan allows them to resume timely house payments even without any adjustments to the terms of the mortgage.
Non-Profit Credit Counseling
As much as I feel the term debt consolidation ends up used almost generically to describe any debt elimination solution, debt consolidation might best apply to non-profit credit counseling from a vocabulary point of view. When enrolled in a non-profit credit counseling program all of a person's credit card debt goes though a debt management system administered by the non-profit agency. The consumer makes only one payment each month to the credit counseling service making paperwork simpler. In addition to distributing money, the non-profit credit counseling agency negotiates interest rate reductions with each credit card company, sometimes as low as zero percent interest. With the lower interest consumers gain the ability to pay off their credit card debt in an accelerated way and hopefully avoid going deeper into credit card debt. A special advantage to note involves the counseling aspect, especially the better non-profit credit counseling agencies, spend much more time on personal budget counseling and help with spending habits than the other debt solutions. For many their credit card debt grew too large for a simple interest rate reduction to help achieve debt elimination, but for those with a lesser degree of credit card debt trouble it might represent the perfect solution. Non-profit credit counseling usually allows a person to improve credit scores faster too.
Debt Consolidation Loan (secured)
Years ago TV commercials bombarded consumers touting debt consolidation loans as a miracle cure, good riddance to those days. While this type of solution works well for a select few, it temps even more with a dangerous option they should avoid. Start by understanding what a secured debt consolidation loan means from a legal point of view. Call it a debt consolidation loan, or a home equity loan, or a line of credit, most times these loans represent a second mortgage on your home. You need to understand the difference between secured debt and unsecured debt and furthermore that paying off credit card debt with proceeds from a secured deconsolidation loan based on home equity converts your unsecured debt to secured. This illustrates the danger: A consumer with high credit card debt examines potential solutions and opts for a home equity debt consolidation loan. With the mortgage payments current chances looked good that had the debtor filed a chapter 7 bankruptcy they could have discharged all credit card debt and kept their home. Instead they take the funds from the debt consolidation loan and pay their credit cards down to zero. In a year or two of continued bad spending habits the credit card debt once again reaches the maximum levels allowed on the cards. This time no more equity exists in the house and at the end of a gut wrenching budget session with a bankruptcy attorney the consumer realizes that they really can only afford their standard living expenses and the original first mortgage. At this stage the option to erase the original credit card debt through a bankruptcy no longer exists because it got converted to secured second mortgage debt, and without the ability to pay it they end up unable to stop foreclosure.
Home equity debt consolidation loans work best with these elements present:
Consumers still maintain good credit.
Personal income and/or net worth stand so strong that paying credit card debt in full may emerge as the only option and a secure debt consolidation loan makes paying in full easier.
Secured debt consolidation loan interest rates allow significant savings over credit card rates or other options.
Debtor earns enough income that payments for the new debt consolidation loan never come into doubt.
Unsecured debt consolidation loans remain elusive, especially in the tough credit environment after the bank crisis situations in 2008 and 2009, but they deserve a mention for those who find a debt consolidation loan an available solution for their credit cards. In a way, unsecured consolidation loans come in two flavors, one for people with great credit scores and one for people with fair to poor credit.
Consumers with great credit may gain approval for an unsecured debt consolidation loan in amount up to $50,000 or even $100,000. These loans remain reserved for only those with the very best credit. When granted, these loans may come with a relatively high interest rate. While you indeed consolidate all credit card debt into one payment, these loans don't offer the best solution for most people. If you boast that high a credit score take an extra look at the balance transfer option. If you look hard enough you might even find an unsecured debt consolidation loan with a 0% interest teaser rate, just remember the rate goes up if you don't pay it off before the rate expires and that each advance might incur a 3%-5% fee.
While people who need money with fair or poor credit always look for unsecured personal loans, such loans make exist but can be very hard to find and get approved for. Even when a <bad credit> consumer receives an offer for an unsecured consolidation loan the rates may look very high and the level of loan offered very low.
For all unsecured debt consolidation loans you should follow same rules as outlined for the secured consolidation loans above.
Zero Interest Credit Card Balance Transfers
If you need to <improve your credit score> cross zero interest balance transfers off your list, but for consumers with great credit, better discipline and solid cash flow this might be the best debt help solution of all. Once again, this best serves those whole may need to pay their credit card debt in full, but in some cases it allows for treatment of the credit card debt much more like a non-profit credit counseling solution.
Before starting a credit card debt solution utilizing balance transfers you need to make sure you qualify as a candidate and develop a master plan. Start by looking at the same rules outlined for people seeking secured debt consolidation loans. In essence, the balance transfer option to eliminate credit card debt really acts like a debt consolidation loan with one main difference being it comes with no scheduled payments, so you must figure that out and stick to it. And to the extent balance transfer to erase debt mimics non-profit credit counseling, credit card balance transfers lack any of the consumer spending counseling services, so you must put yourself in charge of that critical element. Now you see why I mentioned the need for discipline. You stand as your own advocate with this solution, no professional help and no one to keep you on track, leaving you as your own savior or enemy depending on your actions.
Begin the debt solution evaluation process by figuring how much you can really afford each month to pay down your credit cards. Use the home budget calculator to make sure of your estimated payment's accuracy and read the article on what bills to pay first to make sure you do not divert money to paying off credit card debt that could lead to larger trouble like pushing you to look next for foreclosure help. It only makes for more problems to fool yourself into using a monthly relief payment you won't be able to afford each and every month. Trying for a larger monthly debt reduction payment ranks as the best goal, but don't go over what you can afford or increase the credit card debt payment to the point you stop paying more important bills.
For those still begging to learn more because 0% interest transfer sounds like your perfect debt solution go to the debt calculator for determining the number of months needed to pay off a debt balance and see how long it would take to pay off your credit card debt at zero percent interest. For a full zero percent interest balanced transfer you don't need an official debt calculator just divide your total credit card debt by the amount you can pay each month and figure how long it would take to reduce your debt completely. Some consumers may be using this program with a low interest transfer like 1.9% or 3.9% where using the how long it takes to get out of debt calculator becomes an essential tool. If your answer came back around 6 months to pay off your credit cards balance transfer might well be your best solution, 6-12 months looks good but not great, 12-24 months possible but not strong. If it would take over 24 months to pay off your cards using a zero percent transfer option you should look at other debt relief solutions.
Armed with these numbers get a <list of credit cards offering 0% APR> or other low rates and see how long the introductory rate lasts. In theory debtors who need more time can do another balance transfer, but that can turn out to be a dangerous method because you get no guarantee you can find another low interest credit card to transfer the balance to when you might need it in the future.
Get your new credit card, transfer the balance, make your payments and if you do what you promised yourself the credit card problem vanishes. Be sure not to use either card for new purchases and it's even better to cut up or cancel the old card to prevent temptation. Never use this solution unless you know for sure your consumer spending habits are under control.
Special Credit Card Debt Solution For Consumers On A Fixed Income
Many consumers never thought of this credit card debt solution while other might not even call it a solution, but it marks the best way to deal with debt for many people with limited means on a fixed income. The super fast explanation goes like this: Your lawyer tells your credit card company that your assets and income all qualify as exempt from judgment under the law, and as such, any effort to bring suit against you or collect money serves as a pure waste of time and resources on their part. Most of the time the bank listens to the attorney's advice and leaves the consumer alone, resulting in relief from pressure to pay. The credit card debt still exists, but both sides ignore it.
Figuring out if this solution works best for you marks the first issue, in addition you need to find an attorney to do the work. We start with a fast easy self diagnosis, are you on a fixed income? You must than examine any supplemental income. People on social security with a hefty pension will not qualify for this debt treatment. To know exactly where you stand look at the laws in your specific state. In Massachusetts for example, a long list of fixed income sources and public benefits qualify as exempt, Social Security income should be exempt in all 50 states. In addition up to $218 of other income per week might get an exemption.
Most potential candidates for this option lost their incomes and own no assets, a larger problem comes when looking for help. This is not like trying to find a bankruptcy lawyer, no one advertises these services and no attorney really wants these cases. Most times the consumer cannot afford the legal fees. So not only does the debtor need to find someone familiar with these types of cases, they must find an attorney willing to handle the case pro bono (free) or at a deep discount. You can start looking at debt lawyers or bankruptcy attorneys but you may need to call several to discover a helping hand.
Unlike chapter 7 bankruptcy where a court orders the creditor to discharge all debt, the bank's option to give up on their debt collection activity for this special fixed income debt solution rests completely with them. No law will force them to cease collection activity of leave you alone. In the end they maintain the right to drag you through the court system even if in the end they get nothing.
Pay Credit Card Debt In Full
We talked already about debt consolidation loans and credit card balance transfers that allow consumers to pay their credit cards in full with easier terms, but what about just paying the entire balance in full? When you think about it a bit, well over 90% of credit card debt gets this treatment from the person owing the money. Figuring out if paying credit card debt in full looks like the right solution to help your situation begins with one easy question: “Do you have the money to pay the credit card debt in full?” Those best suited to pay credit card debt in full would answer that question with a laugh and a reply like “Oh yeah, I've got more than enough to pay my debt, I just don't want to if I don't need to.”
Some debt requires you pay in full in order to keep your job or keep a personal relationship. Federal student loan debt must be paid in full by law. Credit card debt almost never falls into these categories so that consumers who truly need help will not end up forced to pay in full as a solution.
Last but not least, doing nothing about credit card debt may remain the most popular solution at least for some period of time. The burden of credit card debt brings with it emotional trauma and depression. Denial causes some consumers to freeze and look for no help or to hide their head in the sand and ignore the situation. Other people simply don't recognize a problem in the early stages, especially those with spending problems or addiction. While these things result in most instances of doing nothing about credit card debt they almost never make for a good reason to continue the path of doing nothing as your best debt solution.
In limited cases doing nothing about debt actually emerges as the best way to help you eventually become debt free. The most common situation involves people with credit card debt nearing the statute of limitations. Doing nothing becomes a short term solution when the future looks too unclear to form a decision on a long term solution. People with medical issues who don't know yet if they will regain their health or their situation might remain chronic could fall into this group. Other times doing nothing works as a temporary solution, like for a person who knows they need a chapter 13 but their bankruptcy attorney wants to do some planning and no creditor looms forcing the timing of the filing.