Is Credit Card Debt Settlement Really Effective?

Why Chapter 13 Bankruptcy is a Better Debt Solution

May 7, 2009

Should a US consumer choose credit card debt settlement or chapter 13 bankruptcy? Find out whether debt settlement companies are making financial difficulties worse.

US consumers turn to credit card debt settlement services and chapter 13 bankruptcy when financial difficulties set in. In a report provided by TransUnion, credit card delinquency rates were highest in Nevada (1.74%) and lowest in North Dakota (0.67%). In the last 12 months, 18 million US citizens have failed to make their monthly payment at all, according to the National Foundation for Credit Counseling.

What is the Objective of Credit Card Debt Settlement?

The objective of credit card debt settlement is to negotiate with creditors in order to agree to a more affordable repayment plan. In doing so, they attempt to write off up to 50 per cent of outstanding debt. Payments are made directly to a debt settlement company rather than the card provider. Administrative fees for managing the service are taken directly from contributions.

Whilst credit card debt settlement can potentially save a consumer up to 50 per cent, management fees reduce this saving. The real saving is less than would be achieved with chapter 13 bankruptcy because providers charge 15 per cent of the cumulative debt as a front-loaded fee. Management charges are paid before the credit card debt so overall indebtedness initially increases.

Delinquent accounts that have been sold to collection agencies are most suited to credit card debt settlement. This is because debt is sold cheaply for 20 to 30 per cent of the amount owed; an offer of 50 per cent equates to a profit. Situations where the card provider is still pursuing the debtor may intensify creditor harassment, not to mention lower a credit score. US consumers with non-exempt assets, such as a second home, may be better off seeking court protection with chapter 13 bankruptcy.

Why Choose Chapter 13 Bankruptcy in Preference to Credit Card Debt Settlement?

According to the American Bankruptcy Institute, the number of consumers filing for bankruptcy exceeded 1 million during 2008. Whilst the majority filed for chapter 7 bankruptcy, many consumers opted for chapter 13 bankruptcy rather than credit card debt settlement. This is not only because they were able to keep non-exempt assets, it is because they were afforded court protection from creditor harassment.

US consumers with non-exempt assets that they wish to protect may wish to write-off debt with credit card debt settlement. The majority of consumers are likely to be better served by pursuing chapter 13 bankruptcy. Credit scores are affected in the same way, but the debtor enjoys full court protection from further collection activity.

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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