Millions of Americans are struggling with Credit Card Debt. In today’s challenging economy many are finding themselves over their heads due to reduced income, loss of job, or simply because the credit card companies have raised interest rates to the point where the consumer can’t keep up with minimum payments.
If this has happened to you, don’t panic. Start by educating yourself on the options available to you. The options listed below, assume that you are facing a financial hardship and that you are struggling to make your credit card payments:
Option 1: Consumer Credit Counseling:
- You hire a Consumer Credit Counselor to negotiate with your creditors and lower your interest rate.
- 100% of the debt is repaid, plus interest, plus monthly fees to the credit counselor fees.
- The Credit Counselor is paid by the credit card company for any debt that they recover. This may cause conflict of interest.
- Takes 5 – 7 years to get through the program.
- It will impact the credit in some way. Normally, you will not be able to get new credit while in credit counseling.
Option 2: Debt Consolidation:
- This is a new loan where the credit card debt is “bundled” or consolidated into a new debt.
- Normally the interest rate is lower
- Typically, the lender is protected by some kind of collateral such as a house or a car. If payments are not made in the future the collateral may be foreclosed on or repossessed.
- Many banks have tightened lending standards, making this option very difficult to qualify for in today economy.
- Historically, most consumers continue to use credit cards after a debt consolidation. In many cases the debt is right back at high levels.
Option 3: Making Only Minimum Payments:
- This method could take decades and cost tens of thousands of dollars.
- If you add additional debt, you will never be debt free.
- Often interest rates rise and the consumer ends up in more debt.
- When interest rates rise, payments increase. This viscous cycle pushes many consumers beyond where they can afford to make even minimum payments.
Option 4: Bankruptcy
- Protects some assets but not all. Under Chapter 7, you start over, debt free. the bankruptcy reform act of 2005 made it very difficult to file for Chapter 7 bankruptcy.
- Significant damage to credit could last 10 years. Can also limit future employment opportunities including professional licensing.
- Under Chapter 13, debt is repaid back over a period of typically 5 years. You are obligated to the court.
- Seek legal counsel if you are considering bankruptcy. Legal fees run several thousand dollars or higher.
Otpion 5: Debt Settlement/Negotiation
- Reduces debt by negotiating with your creditors to repay less than what you owe.
- Saves money and time.
- Will impact credit while in program, but like a bankruptcy. Credit can be rebuilt after all debt is settled.
- Typical programs last 2 – 3 years.
- This is often a smart financial decision for consumers who are suffering financial hardship.
There is no one size fits all when it comes to getting out of debt.
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