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How to Get Rid of Credit Card Debt
Americans are drowning in credit card debt, and combined with unemployment, mortgage adjustments, wage cuts and other economic pressures, many have become insolvent. As a result, there has been a lot of news recently regarding debt settlement programs, debt "management", credit counseling and bankruptcy as options to help debtors get out from under a seemingly insurmountable amount of debt.
Risky Options
Debt settlement and debt management companies have been springing up left and right over the past few years. While these type of debt relief may work, many of the companies involved are getting into a lot of trouble with state and federal governments for unscrupulous business practices or outright illegal behavior. Recent lawsuits brought by state governments have forced many of these companies to shut down and many of the businessmen running them have been sent to jail.
As a result, it's always in the best interest of a debtor to talk to a lawyer about legal, effective options for eliminating credit card debt. Most attorneys working in this area can offer two options, both of which function vary differently.
Debt Settlement vs. Bankruptcy
The law provides that an attorney can offer a financially distressed debtor two options for relieving credit card debt as well as all other secured and unsecured debts. Bankruptcy and debt settlement are very different legal approaches to essentially the same goal. Eliminate debt and give debtors a way to start over.
While bankruptcy is the much more effective option, sometimes debt settlement may be a better fit. Below you can see the main differences highlighted.
Bankruptcy
Bankruptcy is the most effective means of getting rid of credit card debt, while offering the petitioner protection from creditor harassment and lawsuits. The two main types of bankruptcy offer either a one time debt discharge, or an option to create a 3-5 year repayment plan designed to pay back only as much debt as the petitioner can easily afford, based on available income after monthly expenses.
Chapter 7 bankruptcy is best for debtors with low or no income, and eliminates all unsecured debts such as credit cards and personal loans. The process take about 90 days, after which the US Bankruptcy Court discharges debts and provides debtors a "fresh start".
Chapter 13 bankruptcy is best for debtors with regular income, and can also be used to stop a foreclosure and save their home. During a chapter 13 bankruptcy proceeding, a repayment plan is created based on the debtors disposable monthly income, and allows the petitioner to get very low monthly payments to cover secured debts as well as credit card debt. If the income is not sufficient to repay some credit card debt, then the debt will be discharged just like a chapter 7 case.
Debt Settlement
Debt settlement is a way for debtors to force their creditors into accepting a much smaller amount of money in return for eliminating the claim. While debt settlement does work, it is not protected by any laws but rather, it provides a way for an attorney to negotiate with creditors on behalf of their client.
Debt settlement works by having an attorney create a trust fund into which the debtors deposits a specific amount of money each month. During this time, the credit card companies and other creditors involved will not receive any payments. The problem is, creditors are free to pursue legal action against the debtor for non-payment. This means, after several months of building up capital in the trust account, lawsuits will likely be filed against the debtor. His or her attorney will have to defend or postpone the lawsuits long enough to build up a sufficient amount of money in the trust fund.
After some time, usually 7-12 months, the attorney will take the lump sum of cash saved in the trust account, and attempt to "settle" the claims with the creditors. Generally speaking, the attorney will shoot to settle the claims for around 30% of the total debt owed.
How to Make the Right Choice
Most of these types of attorneys will be able to offer both services, so there is no financial incentive for them to pursue on avenue over the other. Even so, bankruptcy is almost always the better choice for someone drowning in debt. It's overseen by the US court system, and provide much more relief, more options and fewer risks compared to debt settlement.
However, bankruptcy does carry with it a "stigma" that scares a lot of honest people off. While both bankruptcy and debt settlement will have a negative impact on a debtors credit score, bankruptcy has been ingrained in peoples minds as a "last resort" over debt settlement. This is not always the case.
Ultimately, both options have advantages and disadvantages. If you are thinking about pursuing one of these two options, talk to a lawyer to find out which option might work for you. The only way to make the right decision is to explain your case to an experienced attorney and get advice and guidance regarding your options.