Deciding on Options to Eliminate or Reduce Credit Card Debt

Deciding on Options to Eliminate or Reduce Credit Card Debt

By the truest definition, consumers seeking to eliminate credit card debt have only one option; completing the process of a Chapter 7 Bankruptcy. In that situation, all credit card debt is discharged (eliminated) with the debtor carrying no obligation of making any further payments. There are several options for consumers which reduce debt or interest rates and then set up payment plans to pay off credit card balances. These options for the reduction and eventual payoff of credit card debt vary by degree of success, availability, and terms. They are:

Debt settlement The basis of a debt settlement process is the reduction credit card balances via negotiation with the credit card companies and the subsequent establishment of a payment plan for the borrower to make payments on the reduced balances. The process starts with the accumulation of funds in a trust over the first several months of the plan. Initial negotiations with the creditors usually start within six to eight months. A growing issue with debt settlement programs is that borrowers who enroll in them often have problems with making their monthly payments and ultimately drop out long before the plan's completion. This presents two problems for debt settlement enrollees. The first problem is that much of the money paid into the program over the first several months is paid out as commissions and fees leaving a small fraction for the borrower to recover. The second is that dropping out of a debt settlement program leaves most or all of the credit card balances outstanding, especially if the borrower drops out within the first nine months. Many leave their programs having paid handsomely for commissions but are no closer to reducing their debt balances.

Debt consolidation Prior to the recent economic upheaval, credit card and other unsecured debts could be paid down using a new unsecured vehicle carrying a lower interest rate. Under this type of scenario, a borrower could dedicate a higher portion of the payment toward reducing principle instead of paying interest. Since the disappearance of these unsecured vehicles, the only option at present is to roll the debt into a loan secured by an asset, like a second mortgage. Trading unsecured debt for secured debt isn't a great idea, considering that the borrower would be at risk of being foreclosed if they miss too many payments.

Chapter 13 A Chapter 13 filing results in the development of a court approved payment plan, much like a debt settlement. The debtor runs the risk that if one payment is missed the bankruptcy is discharged and the filer loses all the protections provided by the bankruptcy.

Chapter 7 bankruptcies seen through to the end of the process offer the complete elimination of credit card debt. To see if a Chapter 7 will yield the best results for your personal situation, be sure to consult an experienced bankruptcy attorney.

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