How to Eliminate Credit Card Debt

Credit cards can be both a life saver and a nightmare. When used appropriately, credit cards can act as a buffer for necessary purchases in between paychecks, but a few missteps can result in balances that refuse to go away.

In January of 2010, consumer debtors were carrying $864,424,700,000 in revolving debt. That's EIGHT HUNDRED SIXTY BILLION dollars. Between the 114 Million households in the US, that's almost $8,000 per household in revolving monthly unsecured debt.

It's no wonder many Americans are unable to make ends meet every month and looking for ways to get out from under that nearly one trillion dollars. So what options are there?

Options to Reduce or Erase Credit Card Debt

Reduce Credit Card Debt

There are a two common options to reduce the amount of credit card debt that must be repaid, and both have significant risks.

Debt Forgiveness

The first option is "debt forgiveness". You may have heard this term before and it basically means your credit card company takes some amount of cash from you, usually around 30% of the balance and "forgives" the rest.

The problem is, that "forgiven" debt is written off as a tax reducing expense by the bank. The IRS will then determine who "profited" from that expense. The "forgiven" debtor, in turn, is sent a letter from the IRS saying they now owe a few thousand bucks in taxes. This can come as a shock to many people who were not informed of this little detail by their creditor.

Debt Settlement

Debt settlement is a service that an attorney can offer clients, but it can be rather complex, time consuming and stressful for the debtor. On the positive side, when done correctly, it can offer a way to reduce the amount of debt that must be repaid while avoiding potential tax complications later on. Here's how it works:

1. A Trust Fund is Established

The attorney will set up an interest bearing trust account on behalf of her client into which monthly payments will be deposited.

2. Stop Paying Credit Card Payments

This step is where the potential trouble begins. In order to build up the requisite sum of cash for the settlement, payments must be diverted from credit cards into the trust account. This step may take upwards of 16 months, during which time the credit card accounts are allowed to go into default.

3. Deal With Legal Actions

During the payment period, the credit card companies and banks are not being paid a dime, and it is only a matter of time until they begin to take legal action to collect their money. First are phone calls and letters, then threats of lawsuits, followed shortly by the lawsuits themselves. This can be a trying time for the debtor, but his or her attorney should be able to delay and fight off the actions long enough to build up the lump sum of cash.

4. Negotiate a Settlement

Once enough cash has been saved up in the trust account, the attorney will contact the creditors and offer a lump sum settlement in return for the removal of the claim. This process is usually fairly quick, but there is always the possibility that the creditors will refuse and pursue legal action instead. At that point, bankruptcy is a likely option. Otherwise, the debt is settled and the process is done.

Eliminate Credit Card Debt Completely Using the Courts

Bankruptcy carries with it a certain stigma that most people try to avoid at all costs, but no other option can offer what bankruptcy does. Once bankruptcy has been filed, no creditors can call, file suit, or otherwise try to collect any money or property. Everything from that point forward is handled by an attorney, the bankruptcy trustee and the court.

What Happens to Credit Card Debt?

In most bankruptcy cases, credit cards and other unsecured debts are the first to get wiped out. Credit card companies must adhere to any court orders, so once the debt is discharged, there's no risk for the debtor of future lawsuits or tax implications, it's just gone. Other debts, such as car loans and home loans are handled differently depending on how the debtor elects to handle the property.

Won't Some Property be "Liquidated"?

In a chapter 7 bankruptcy, it is possible that non-exempt assets can be sold off to repay some of the debt, but in practice, most bankruptcy petitioners will keep all of their property through their states exemptions, redemption and reaffirmation agreements or trustee abandonment. Good bankruptcy attorneys have a lot of legal strategies to eliminate all unsecured debts while protecting their clients’ property from the bankruptcy estate.

Talk to an Attorney to find out if bankruptcy or debt settlement could help you get out from unmanageable credit card debt.