How Excessive Credit Card Debt Leads to Bankruptcy

For many people, excessive credit card debt is what leads them into bankruptcy. There are a number of ways in which it’s “bad” debt that leaves a credit card user with few options.

What is Bankruptcy?

Bankruptcy does not mean you’ve run out of money. Nor does it mean you don’t own valuable assets. Bankruptcy is the result of a cash flow problem: the amount of money coming in each month is less than the amount that has to be paid out, whether for living expenses or debts.

Why Credit Cards are “Bad” Debt

Credit cards are often at higher interest rates than other debt. At a time when a mortgage or home equity loan might be 4 – 6%, it’s not uncommon for credit cards to accrue interest at 9% - 12% or higher.

Also, credit cards often have various fees and penalties attached to them, such as late payment fees. They may also have their interest rates increase in the event of late payments or defaults.

In addtition, since credit cards are usually used for consumer debt or for entertainment (e.g. eating out and vacations), most credit card debt does not result in assets that can be sold if necessary to raise money; credit cards produce costs, not investments.

The Credit Card Death Spiral

Low minimum monthly payments are a trap: paying them hardly make a dent in debt. (It takes years to pay off debt paying the minimum.) What usually occurs is that while paying the minimum or close to it, someone accumulates several tens of thousands of dollars of debt. At some point, something happens and they miss payments or stop being able to make the minimum. Penalties come into play: interest rates increase, late fees are imposed, and possibly the debt comes due. All of these increase the monthly debt obligations beyond what the debtor's cash flow can support.

How an Attorney Can Help

Ideally, you should never get yourself in a position where credit card debt is out of control. But if this happens—and sometimes it happens for perfectly understandable reasons, such as medical costs or living expenses while unemployed—a lawyer can help. First, the attorney can review the credit card agreement and make sure you’re not being taken advantage of; for example, that you’re only paying those late fees or charges that you should. Second, the attorney can help you determine if bankruptcy would be a good option for getting out from under the debt and making a fresh start.