Eliminating Credit Card Debt: Bankruptcy vs. Alternatives

Is bankruptcy your only option for eliminating credit card debt?

No--debt settlement and debt consolidation are both viable options, each (like bankruptcy) with its own pros and cons.

Debt Settlement: Paying a Debt for Less Than It's Face  Value

Debt settlement is when a creditor agrees to accept less than full payment as full payment of the debt. A creditor may agree to this if they believe that what they are being offered is more-or-less the most they are likely to be able to recover, even were they to sue. (The creditor will often accept less than the maximum they might potentially be able to recover, in order to avoid the costs and delays of a lawsuit.) When successful, debt settlement reduces how much is owed, saving the debtor money. However, it is voluntary on the part of the creditor--creditors are under no obligation to settle debts.

Debt Consolidation: Replacing Old Debt with New

In debt consolidation, one or more older debts are paid off with the proceeds of a new loan, taken out at more favorable terms. For example, if a debtor owes $35,000 on credit cards, he could take out a debt consolidation loan (home equity loans are very good for this) to pay them off, trading old debt for new. The advantage is that the new loan may be at a lower interest rate, or may be payable over a longer period of time, reducing the monthly payments.

However, no debt is actually eliminated, and the process can increase total indebtedness. The increase could be the result of loan origination fees, or because extending the payment term of a debt--paying it over a longer period of time--will increase the total interest paid.

Bankruptcy

Bankruptcy is a legal mechanism for eliminating debt and getting a fresh start. There are two types of bankruptcy for consumers:

• Chapter 7, in which assets are sold (liquidated) for the benefit of creditors, and any remaining debt is discharged, (eliminated)
• Chapter 13, in which a 3 - 5 year payment plan is developed by the court, under which the debtor will pay as much as possible, after which remaining debts are discharged

Bankruptcy eliminates debts, and also puts at least a temporary halt to collections efforts. However, it puts substantial limitations on debtors, forcing them to liquidate assets or live according to a court-ordered budget.

Talk to a Lawyer for Advice

A knowledgeable attorney can help a debtor understand the pros and cons of each option as they apply to the debtor's own unique situation. The attorney can also help the debtor carry out the chosen option, such as by negotiating with creditors to settle a debt, or filing for bankruptcy.