How to Deal with US Credit Card Debt
Debt Management Plan, Debt Settlement or Filing for Bankruptcy?
May 15, 2009
The U.S. Congress Joint Economic Committee stated that revolving consumer debt, which consists mainly of credit card debt, amounted to $950 billion. This meant that 13.9% of disposable income went towards servicing card debt. It is important for US consumers to seek guidance from a credit counselor in order to decide whether a Debt Management Plan, filing for bankruptcy or debt settlement is the correct option for managing and writing-off credit card debt. The right decision will help to minimise money problems.
Why Credit Card Debt is Difficult to Escape
According to Tara Siegel Bernard of The New York Times: "If you carry $10,000 on a credit card with an 18 percent rate and make only the minimum payment (say, 1% of the balance plus interest), it will take 32 years to pay it off- for a grand total of $24,834. That does not count late fees or over-the-limit charges." Also, the temptation is always there to spend more and create new credit card debt when family finances are tight.
Control Credit Card Debt with a Debt Management Plan
A single monthly payment to a credit counselor is disseminated to creditors on a pro rata basis. Rick Phillips, vice president of debt management plan services at Consumer Credit Counseling Service of Greater Atlanta, stated that: "A Debt Management Plan doesn't reduce the balance, but one of the big advantages is that the interest rates go down, usually significantly." The majority of plans clear credit card debt within three to five years.
How Filing for Bankruptcy Removes Credit Card Debt
Filing for bankruptcy under chapter 7 allows a consumer with income below the State median to write-off all credit card debt in just three to six months. Consumers that wish to protect non-exempt assets, such as a second home, can clear debt within three to five years with chapter 13. Monthly payments need only be affordable and any remaining credit is cleared in-full. It is sensible to consult a specialist bankruptcy attorney before proceeding with this debt solution.
How Debt Settlement can Clear Credit Card Debt
Debt settlement is different to a Debt Management Plan as it seeks to write-off up to 50% of credit card debt. However, fees of up to 15% mean that 'real' savings are much less. The front-loading of fees can also mean that creditors harass clients' for repayment as they receive only a minimal amount for a number of months. FICO scores will also plummet, although they can be improved within a few years provided other monthly credit commitments are maintained.
Whether debt settlement, filing for bankruptcy or a Debt Management Plan is the right option depends largely on disposable income and non-exempt assets. Those with unmanageable credit card debt should consult a credit counselor in order to decide which debt solution should be used to alleviate money problems.
Sources
Bernard, Tara Siegel. (15 May, 2009) "Weighing the options with credit card debt." The New York Times.
U.S. Congress Joint Economic Committee. (May 2009) "Vicious Cycle: How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the Recovery."
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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