Credit Card Debt Relief Programs
In this article, I will distill what I learned while representing clients in thousands of bankruptcy and debt defense lawsuits. I am expressing my opinion distilled from almost twenty years of representing clients needing debt relief.
Table of Contents
- Debt Consolidation Loans for Credit Card Debt
- Credit Card debt relief using debt settlement companies
- Chapter 7 and Chapter 13 Bankruptcy as effective debt relief programs
- How I think you should pick among different debt relief options
- How does debt settlement affect your credit score?
Debt Consolidation Loans for Credit Card Debt
There are many debt relief options for eliminating credit card debt- debt settlement programs, debt consolidation loans, balance transfers, debt resolution programs, debt defense, credit counseling services, Chapter 7 bankruptcy, Chapter 13 bankruptcy, credit management… the list goes on.
Some types of personal loans and mortgages are marketed as debt consolidation loans. Yes, these are loans meaning they are a form of debt, just like credit card debt packaged and marketed to persuade you to get one and pay creditors some more interest.
Debt Consolidation Loans
These debt consolidation loans are marketed as a convenient debt management plan because they substitute all your credit card payments with one debt consolidation loan payment, often with a lower interest rate. So far, so good – you get a debt consolidation loan with a lower interest rate that you can pay off within a few years.
I am not a fan of these programs because they essentially encourage you to incur debt to pay off debt. The reality is that once you pay off your credit card debt with a debt consolidation loan, you will likely be able to use your credit cards again. And people often do start using their credit cards once their balances are paid down to zero. It’s something that I repeatedly observed over the years. It is easy to fall right back into the credit card debt trap you were trying to escape. It could be that unplanned car repair or the unexpected medical bill that gets you to use the paid-off credit cards. Getting a loan to pay off other loans could backfire. Your focus, in my opinion, should be to pay off debt without incurring new debt.
Debt consolidation loans secured with real estate
In essence, with this type of debt consolidation loan, you are attaching initially unsecured credit card debt to real estate, perhaps your home. So if you default on the debt consolidation loan, the debt consolidation loan company can theoretically foreclose on your property; whereas, had you left the credit card debts as credit card debts, your property would not be pledged as collateral for the credit card debt.
In summary, think long and hard about getting into new debt to deal with the debt you already have. Often debt consolidation loans don’t serve their intended purpose, and borrowers end up using the paid-off credit cards again, ending up with a debt consolidation loan payment plus new credit card debt payments. Consider debt consolidation loans if you have an iron will, have money saved up for emergencies, and are in complete control of your financial situation. Otherwise, look away from getting into debt to pay off credit card debt.
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Credit Card debt relief using debt settlement companies
Debt settlement companies negotiate credit card balances and interest rates with credit card issuers. They depend on credit card companies voluntarily accepting a lower balance. They charge you a fee for contacting your credit card companies and negotiating on your behalf.
I am unaware of a specific law that forces credit card issuing financial institutions to accept a lower balance as a settlement of the full amount of debt owed. Credit Card companies may or may not accept the debt settlement companies’ offers. They may or may not be willing to forego some interest charges. If they do not agree with the settlement offer, the debt settlement companies are not in a position to force the credit card companies into a specific repayment plan. Credit card companies do not have to work with a debt settlement company, and that’s often an issue. When a specific credit card company is unwilling to settle, there often isn’t much a debt settlement company can do. The entire program depends on the credit card companies voluntarily accepting settlement offers. As you may imagine, such settlement offers are not always accepted by credit card companies.
I have also noticed that using debt settlement companies could increase the likelihood of getting sued by credit card companies. Here is how. Usually, when you start using a debt settlement company, you make the debt settlement monthly payment instead of paying your credit card payments. Essentially by not paying your credit card debt payments, you are defaulting on those credit card accounts hoping that the credit card company enters into a settlement agreement with you through the debt settlement company. Again the credit card company is usually not obligated to settle for an amount less than owed in normal circumstances. And once you default for nonpayment, your credit card company can sue you. It happens all the time.
I often see clients enrolled in a debt settlement program sued by one of their credit card companies. Enrolees were instructed to pay the debt settlement company instead of paying their credit cards, which means that they were instructed to default on their credit card accounts. Once in default, a credit card company can sue regardless of a debt settlement program enrollment status.
Many debt settlement companies market themselves as credit counseling agencies. Some are even nonprofit credit counseling agencies. Their employees are called credit counselors, credit coaches, and alike. I’d use a nonprofit one, but the information they provide is easily available online.
Dave Ramsey and other “tighten your belt and pay off credit card debt-type” debt relief programs
These debt solution programs tell you to become intense about paying off credit card debt by reducing your expenses and increasing your income. I like these programs because they instill habits necessary to stay debt free. Do it if you can tighten your budget and increase your income to pay off your credit card debt. You probably don’t need a credit card debt relief program. If you have enough disposable income, I recommend reading “Your Money or Your Life,” a book by Joe Dominguez and Vicki Robin, available on Amazon. Put their debt elimination techniques into action; you should get results.
Chapter 7 and Chapter 13 Bankruptcy as effective debt relief programs
Chapter 7 Bankruptcy. Unlike any other debt relief program, a successful Chapter 7 bankruptcy wipes out most unsecured debt, including credit card debt, because the law says so. Unlike other debt settlement programs, it typically does not involve negotiation with credit card companies. It’s a powerful and effective solution. You can read more about it in our article discussing Chapter 7 bankruptcy. Get a comprehensive consultation from an experienced bankruptcy attorney in your area. It’s often free, and you will likely get a lot out of it.
Chapter 13 Bankruptcy. You have a repayment plan to pay off your credit card debt. In many chapter 13 payment plans, credit card debt is discharged fully or partially. It could also be a good solution for IRS debt. Please read our article about Chapter 13 bankruptcy to find out more.
How I think you should pick among different debt relief options
First – get a credit report and compile a complete list of all your creditors with accurate balances. Don’t entirely rely on a credit report since not all debt is reported to credit reporting agencies. Go through possible duplicate reportings and see if any of your credit card debt was transferred to a debt buyer like LVNV Funding LLC or Midland Credit Management. Add any creditor that is not on your credit report. Now you have a complete list of your creditors and the debt balances to satisfy.
Second- Honestly, reflect on how you ended up with unmanageable credit card debt. Was it due to an unforeseen event or situation like medical issues, divorce, or depression? Was it because you tried to help your friends and family financially to your detriment? Or was it because you don’t keep track of your income and expenses and spend without a budget? Suppose your case falls within the latter two categories. In that case, it is important to change your money management habits by a) educating yourself from reliable sources and b) putting your knowledge into action through consistent practice to get rid of your credit card debt. Go to the fourth point below. If you ended up with credit card debt for an unforeseen situation, consider the third point below.
Third- Are you facing foreclosure, garnishment, or a creditor lawsuit? If you do, then you probably need protection from your creditors. They are aggressively coming after you, and you should consider bankruptcy options that protect you, your family, and your belongings. Remember, bankruptcy laws could protect you not because your creditors will voluntarily cooperate but because the federal bankruptcy laws will require them to follow rules that could protect you.
Fourth- Do you have enough extra cash to negotiate and pay off your debt? If you do, then a Dave Ramsey approach to paying off debt is a good option. Get a second job, sell off unnecessary belongings, tighten your budget, become intense about paying off debt and go for it. If, on the other hand, you do not have and cannot come up with extra cash to pay off your debt without causing significant hardship to yourself and your family, then consider chapter 7 or chapter 13 bankruptcy.
Credit card debt relief options I do not recommend
Balance Transfers
You may get a lower interest rate on your new credit card, but the old card may stay active. You will have two cards and could use both if needed. Your focus should be reducing credit card debt and not getting new credit.
Debt Consolidation Loans
Why get into debt to pay off credit card debt? The lower interest rate is often a trap.
Home equity lines of credit to pay off credit card debt
Paying off credit card debt with a loan that uses your house as collateral is often madness. You are changing an unsecured debt, a debt that offers the least amount of recourses for debt collectors, to secured debt, a debt that jeopardizes your home if unpaid. Forget about the lure of a lower interest rate. Don’t listen to the financial gurus on TV praising second mortgages and home equity lines of credit for paying off credit card debt. It’s better to have credit card debt, that is, unsecured debt, than having a mortgage on your home.
Debt Settlement Programs to pay off credit card debt
Debt settlement companies contact credit card account issuers and ask if they will accept a lower payment amount/balance/interest rate. You can do this yourself. Call your credit card companies and ask them if they are willing to work with you. If possible, get your repayment arrangement with your credit card companies in writing. Also, remember that the chances of getting sued increase if one of your credit card companies is unwilling to participate in the repayment program.
Getting a debt consolidation loan from credit unions
Credit Unions loans are cross collateralized. This means that if you have a checking, saving, credit card account, car loan, etc… with the same credit union, they are all linked, and if you default on one loan, you could be defaulting on the rest of your accounts as well. In short, credit unions have extra leverage that regular banks don’t have to collect from you. A credit union could collect money from your bank account if you default on a loan owed to the same credit union.
Tips for picking the right credit card debt relief programs
Beware of scams!
If anyone promises you anything too good to be true, it probably is. Do not pay a lump sum upfront to anyone other than reputable lawyers to deal with your debt.
Beware of debt settlement program Guarantees
Nobody can predict the future, and debt settlement companies can’t force credit card companies to lower high-interest rates or reduce the total debt owed by a specific measure. Reality is much messier and unpredictable. You should become very suspicious if any debt relief company makes such guarantees.
Hiring a Lawyer.
If you are hiring a lawyer, make sure that they are licensed to practice law in your state. Don’t let your guards down just because a debt settlement company uses the word law or law firm. Go further and find out if they employ actual attorneys licensed to practice law in your state. Also, inquire if they will represent you if one of your credit card companies sues you. It’s best to hire an attorney with experience in debt defense field in your area.
Do some math for yourself before starting googling for debt settlement companies.
There are no easy solutions. Add up all your income and expenses. See which expenses you can cut and which ones you can’t live without. Next, see if you can increase your income. Then deduct the total of your necessary expenses from your total net income. How much money do you have left to use for debt settlement? Do you have enough surplus to negotiate with your credit card issuers?
Nonprofit credit counseling organization.
Probably nonprofits that do not charge for their credit counseling and debt solution services are better than for-profit ones. Be sure that the credit counseling organization you are considering is properly accredited as a nonprofit organization. Consider if you need their services in the first place. Don’t look for a magic solution. It’s not there. Educate yourself first.
How does debt settlement affect your credit score?
The consensus is that debt settlement impacts your credit because you pay only part of the debt, possibly with a lower interest rate. So yes, it probably impacts your credit history, but not as much as not paying your credit card debt.
My suggestion is to focus on eliminating your credit card debt the best way possible since credit scores can be rebuilt.
Hooman is a 18 year bankruptcy veteran from Georgia. He recently relocated to Texas to aid people on their path to financial recovery. During his time away from the office he finds peace in art, writing,
teaching, and traveling.
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