Recently there has been a lot of news regarding a debtors options for eliminating or reducing debts such as credit cards and personal loans that are not secured by any property. Some people are under the impression that if you stop paying your bills, your creditors will somehow just "give up", or settle the debt for a fraction of the value of their claim. Not gonna happen.
Stop Paying, Get Sued
If you stop paying your credit card bills, you're going to get sued plain and simple. Worse, they can garnish your wages in order to get their money back. The fact is you signed a contract stating you accept liability for the repayment of any credit extended you. If you default on that promise, your creditors have many legal rights to force you to pay them back.
The Reality
Now, all that being said, the reality is that most creditors do not want to deal with prosecuting lawsuits, so there is some grey area for negotiating alternatives to debt repayment or settling a claim for less than it's value, but there are always consequences.
First off, most credit card companies will not negotiate anything until the account has become way past due, so you will have to stop paying your bills and you will have to deal with harassing letters, threats of lawsuit and eventually notification of suit.
Once this starts happening, you can potentially negotiate some type of debt forgiveness, and maybe get away with repaying only 30-40% of your debt. The rest of the debt will be written off as an expense by the creditor.
Uncle Sam
One creditor that you can't negotiate with is the IRS. If you have some amount of debt forgiven, it is considered as income for which you will have tax liability. That's right, you have to pay taxes on forgiven debt. This little fact often comes as a shock to people who thought they "beat their creditor" and got away clean. You think you're in the clear, then you get hit with a tax liability of several thousand dollars.
Now if you try to file bankruptcy, it's too late. You've already repaid debt that you could've eliminated completely, and IRS claims are not dischargeable in bankruptcy. You can see that while it may sound appealing at first, it's a slippery slope that can end up costing you more in the end.
Bankruptcy
When you decide to file bankruptcy, you are protected by the US Court from any creditor lawsuits, collection attempts, letters... They can't even call you. Most cases will end up eliminating all unsecured debts, so you have to repay nothing. If you own a home, you have options to build a monthly payment plan that will allow you to stay in your home, and in some cases, even lower your mortgage payment. Creditors lose all legal powers to collect money form you, and you get your slate wiped clean. Even wage garnishment is stopped.
Now, bankruptcy is not without it's consequences. Your credit score will take a hit for year or more, but if you are in over your head anyway, your credit is probably going to go downhill fast no matter what you do. (See also Should I File for Bankruptcy).
If you're considering options for eliminating debt, talk to a bankruptcy lawyer. Even if you don't want to file bankruptcy, an attorney will be able to offer you other options while protecting you from creditor lawsuits.
