Credit Card Debt: FAQ's

Credit cards offer an efficient and easy means of making purchases that otherwise might be impossible without fast access to credit. While responsible credit card usage can be a cost effective and fast way to manage large purchases, credit card debt can quickly get out of hand, especially in situations where a job loss or income reduction forces people to rely on credit cards for daily purchases.

Here are some FAQ’s regarding credit card debt and legal solutions for managing out of control credit card debt.

How do I recognize a credit card debt problem?

It can often happen very quickly, but generally credit card debt problems quickly get out of hand once a debtor begins approaching insolvency. Once the minimum monthly payment becomes the regular payment, it’s time to start thinking about solutions for getting out of the debt.

Making minimum monthly payments towards credit card debts barely covers more than the interest, so it is a revenue stream for credit card companies rather than debt repayment for a debtor.

What legal options are available to deal with credit card debt?

There are a variety to ways to deal with excessive credit card debt, and the proper solution often depends on the amount of debt and the monthly income available to pay towards it.

For situations where credit card debt vs income is relatively low, debt consolidation is a good idea. By consolidating all high interest credit card debt into one, low interest loan, monthly payments can go towards more of the principle debt instead of credit card interest.Other, more severe situations call for more powerful tools. Especially in cases of job loss, medical issues, or income reduction, debt settlement or bankruptcy should be considered as an option.

How does credit card debt settlement work?

Debt settlement is the process of allowing credit accounts to become delinquent while building up a lump sum payment. It can be a lengthy and painful process, but is often a choice of debtors who have become insolvent and would rather not pursue bankruptcy protection.Debt settlement works by having an attorney set up an interest bearing trust account into which the debtor makes a monthly payment instead of paying off debt.

During this time, which can take up to 18 months, the creditors are not being paid, and will begin filing lawsuits to collect their money. The attorneys job is to delay and defend these suit long enough to allow the trust account to grow large enough to settle the debts.Once enough cash has been accrued, usually around 35% of the amount owed, the attorney will attempt to settle the outstanding debts in return for a lump sum payment. While this method of debt relief can work, the creditors are not legally bound to accept less than full payment, and can refuse and continue to pursue legal action.

Are their tax consequences of settling credit card debt?

Yes, as with any form of debt negotiation, the debt “forgiven” by the creditor will be written off as an expense. The IRS will then consider the forgiven debt as income, and tax the debtor appropriately.

How does bankruptcy handle credit card debt?

In the vast majority of personal bankruptcy cases, credit card debt is discharged, the debtor retains no liability for repayment, and there are no tax consequences. As far as credit card debt is concerned, the person petitioning for bankruptcy protection get’s a clean slate.

If I file bankruptcy, will my credit be ruined?

After the bankruptcy discharge, the petitioners credit report will include line items for every debt accrued that was discharged in bankruptcy. Effectively, instead of a line with a credit account and an outstanding debt amount, the line will read “discharged in bankruptcy”.Bankruptcy does have a negative effect on credit, but it is not as devastating as many people believe. Many bankruptcy petitioners are getting credit cards, car loans and mortgages six to twelve months after bankruptcy. Without the bankruptcy discharge, the petitioners likely would not be able to afford taking any new loans.

What’s the best way to get advice regarding debt settlement and bankruptcy?

It is important to talk to an attorney regarding these legal solutions. There are many companies that claim to be able to settle credit card debt for pennies on the dollar, but many of these companies are suspect at best.

Getting Legal Help

Always talk to an attorney about your options first. An attorney is bound by laws of ethics and client interest, so debtors will know their best interests are being considered.