Struggling with Credit Card Debt? Get the Relief You Need

We all use credit cards. It’s almost impossible to function in our daily lives without it. Some of us are better at handling this type of debt than others.

Did you know that the average balance for consumers is $5,315, and overall, Americans have over $807 billion in outstanding debt across almost 506 million card accounts, and 95% of adults have an open credit card account?

Signs You Need to Seek Debt Relief

You don’t need to have $50,000 in credit card debt to know that you’re in trouble. There are a couple of telltale signs tell you that it’s probably the right time to seek debt relief.

First is when you have no chance of repaying all unsecured debt within five years. Unsecured debt includes credit cards, medical bills, utility bills, and other credit without any collateral.

Second, the debt amount totals half or more of your gross income. These scenarios should prompt you to seek a debt relief option.

What You Need to Get Started

Before you decide on a strategy, you’ll need to do some homework.

  • Calculate which fees you’ll pay. If you decide to try to do it yourself, you’ll need time to research negotiating tactics and contact your creditors. Balance transfer credit cards could include a balance transfer fee from 3% to 5%. And a debt consolidation loan could involve origination fees and a high APR.
  • Request debt validation. If you’ve been contacted by debt collection agencies, ask them to send your a debt validation letter to ensure that the information they have is accurate.
  • Make a list of which credit card issuers, creditors and debt collectors you’re currently paying, and how much. If your debts are in collections, make sure your payments are being sent to the right place. Use this information to figure out how much you can afford to pay each month.
  • Research any tax implications. If your debts are settled or you file for bankruptcy, there could be ramifications.

Choose a Debt Consolidation Strategy

Debt consolidation combines high-interest credit card bills and rolls them into a single monthly payment at a lower interest rate. Paying less interest saves money and allows you to pay off debt faster.

Keep in mind that your credit score will probably take a hit, at least in the short term.

After assessing your financial situation, you’ll need to decide which strategy is best for you. You have a few options.

  • Do-it-yourself debt settlement
  • Debt settlement company
  • Credit counseling
  • Debt consolidation loan
  • Bankruptcy

Do-It-Yourself Debt Settlement

Debt consolidation is a great DIY option. Debt consolidation is when a borrower takes out a new loan and then uses that loan to pay off the individual debts.

You will need reasonably good credit to avail of this, plus an adequate cash flow. The key benefit of this method is that it is free. But this plan requires a commitment to repayment and is not a license to binge spend when you see paid off credit card balances.

Make sure to get a handle on the fees you will be paying. A credit card debt relief settlement plan can take between three and five years to complete.

Doing it yourself involves only you and the creditor. Do-it-yourself credit card debt relief saves you money in two ways. You won’t have to pay a cut to a third-party debt settlement company, and if you’re good at negotiating, you won’t have to repay the full amount of your debts.

Don’t use the maximum amount you can afford as a starting point, and be prepared to be patient. And remember, creditors have no obligation to settle, so find out what their policy says.

Debt Settlement Companies

Debt settlement companies make you stop paying the creditors as they negotiate your interest rate and pay your creditors on your behalf. You pay 50% to 80% of the balance, and you are tagged with late payments that get reported to the three major credit reporting companies. Your credit could take a hit because you’re deliberately not making monthly payments. On the other hand, debt settlement companies are experienced at negotiating with creditors and may be able to get you a better deal than you’d negotiate on your own. They’ll set up a payment plan, and you’ll make the monthly payment directly to the debt settlement company, so you only have to keep track of one set monthly payment.

Pros of Debt Settlement Programs

  • You will pay less than what you owe
  • If the creditor is willing to negotiate, you can have a quick resolution to your problem
  • It can stop calls from collection agencies and creditors
  • It can help you avoid bankruptcy

Cons of Debt Settlement Programs

  • There’s no guarantee the creditor will negotiate or accept your offer
  • Late fees and interest will accrue each month until you reach an agreement
  • There will be service fees and late payment fees
  • If the debt settlement is over $600, then the about of debt forgiven is considered taxable income

Looking for a debt settlement company? Check out our top recommendations.

Nonprofit Credit Counseling (Debt Management Plan)

Sometimes, knowing where your money is going and where to cut back can be the key to your debt relief. Debt Management Plans are usually set up by a nonprofit credit counseling agency that negotiates with your lender in lowering the interest rates to help resolve your debt. You still pay the total amount of the principal, so your credit isn’t as poorly hit as with debt settlement. Don’t miss a payment, or the creditors will nullify any concessions you had.

Nonprofit debt consolidation companies work with your credit card lenders to lower your interest rate and help you make timely payments to eliminate your debt without taking out a loan.

They help you with credit counseling and sign you up for a debt management plan to help bring and maintain a healthy financial position.

Pros of Nonprofit Debt Consolidation

  • Your credit score is not a factor because it is not a loan
  • Lower rates mean lower monthly payments
  • Credit counselors help set a budget
  • They provide you with financial education to keep this from happening again

Cons of Nonprofit Debt Consolidation

  • If you miss a payment, the creditor can cancel the agreement.
  • There’s a one-time setup fee, usually between $50 to $75, and an average monthly payment of about $30-$32.
  • You will need to stop using all credit cards, but you can keep one for emergencies.

Find a nonprofit credit counseling agency.

Want to learn more about credit counseling? Check out this video:

Debt Consolidation Loan

A debt consolidation loan takes out a one lump-sum loan to pay off all the other creditors. It is meant to lower your interest rate and reduce your debt faster.

Pros of Debt Consolidation Loans

  • Loan interest rates should be lower than credit card rates
  • You can use loans to pay off multiple forms of unsecured debt, even including medical debt and student loans
  • One monthly payment means lower risk of late fees or overdrafts

Cons of Debt Consolidation Loans

  • Eligibility and interest rates will depend on your credit scores
  • There isn’t much flexibility with loan repayment plans.
  • You will have to incur loan origination fees

How It Works

  • List all the unsecured debt and totals you owe, principals owed, and interest rates you’re paying
  • Check your credit score, and if necessary, try to improve this before taking out a loan to get the best rate possible
  • Figure out the current interest rates you are paying on your cards versus the loan rate. If you have bad credit and the interest rates don’t save you any money, you might be better off not taking the loan. You will also want to factor in the loan origination fee as part of the whole debt package
  • Apply to at least three lenders. Check banks, credit unions, and online lenders and compare rates and loan terms
  • Use the loan money to pay off each debt and start with the one with the highest interest rate

There are even special debt consolidation loans for borrowers with bad credit, and for those who are serving in the military.

Bankruptcy

If all else fails, bankruptcy should be your last resort. Your credit will take a hit for the next 7-to-10 years, depending on the type of bankruptcy you file. If paying your debt takes more than five years to pay off, this may be a chance at a fresh start.

There are two primary types of bankruptcies: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 is a liquidation bankruptcy wherein individuals and businesses can file. There is no repayment plan, unlike in Chapter 13. A Chapter 7 bankruptcy can erase many types of consumer debt, the most common are credit card debt and medical bills, including car loans, payday loans, and utility bills. These are known as dischargeable debts.

This filing type removes all unsecured debt except student loans, government taxes, child support, and alimony.

A Chapter 7 bankruptcy is also able to discharge back income taxes. When you file for Chapter 7, the IRS is contacted, your credit card debts are immediately cleared, and wage garnishments cease. It is known as an automatic stay.

When you file Chapter 7, you’ll have to sell off your non-exempt assets to pay your debts. Anything determined by the court to be unnecessary to maintain a minimal standard of living is considered exempt.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is known as a wage-earners plan. Chapter 13 is for someone with a regular income who repays all or part of their debt through a repayment or installment plan over three to five years. Chapter 13 is used by individuals, including those self-employed.

There is no income requirement, but the debt must be below a certain amount and stay on your credit report for seven years. Chapter 13 is a good option if your income is above the median for your state and family size or if you have a home you want to save from foreclosure.

These bankruptcies will decimate your credit scores and history for at least seven years.

Plan to Pay the IRS

Settling the debt can be a huge relief no matter which route you choose. Keep in mind, however, that you may need to pay taxes on the debt settled. Most canceled debt is taxable, and you are taxed on any forgiven debt. It counts as taxable income because the debt written off is often reported to the IRS.

There are a Lot of Scammers Out There

The most obvious sign of a debt consolidation scam is if the person or company offers to help get rid of your debt, by first paying them a fee upfront. Cease all contact and file a complaint with the Consumer Financial Protection Bureau, the Federal Trade Commission (ftc.gov), and your state attorney general’s office.

Debt Relief Can Make Things Worse

The caveat is many people who enter into debt relief programs fail to complete them, and you can end up with debt more significant than when you started.

If you don’t follow through with your debt relief program, you could be worse off.

Make sure you have all the lenders, principal balances, interest rates, and minimum monthly payment information before deciding which credit card debt relief program to enlist in.

For instance, if you deal with a debt settlement company and stop making the minimum payments, your contract with the third-party settlement company will end and your interest rate will revert to what it was before joining the program.

Other Debt Solutions

Here are other solutions that may fit your situation better.

Credit Card Balance Transfers

Credit card balance transfers move high-interest rates outstanding debt into a lower interest rate credit card to another lender. Some credit cards can have great introductory rates that allow you to transfer up to 75% to 80% of the total credit line to save you some cash. You’ll have to pay a balance transfer fee that can range from 3% to 5% of the total amount transferred.

Take On a Side Gig

The gig economy is exploding. Sign up to deliver food, drive for a rideshare company, or become a professional shopper. Got a special skill? Start an Etsy or eBay store and sell your wares.

Ask for Overtime

Ask your employer if there are any overtime opportunities and express interest in working some additional shifts.

How to Check Your Credit Report and Credit Score

Credit cards come with a lot of advantages, and your credit score and credit report are what lenders use to determine your eligibility and worthiness as a borrower. These reports will dictate your loan rates, amounts and terms.

Your payment histories, credit balances, or any movement in your credit history gets reported to the big three credit reporting companies: Experian, Transunion, and Equifax.

There are multiple sites where you can learn your credit score for free.

Then, pull a free credit report from all three credit bureaus and review them yearly. If you find any errors that could be dragging down your score, dispute them.

Does the Government Help with Credit Card Debt Relief?

No, but programs are available to help you with student loan debt, not credit card debt. The government only provides oversight and regulation for debt relief services.

The Credit Card Debt Relief Act of 2010

The Credit Card Debt Relief Act of 2010 prevents debt settlement companies from charging hefty fees even before completing the deal. It only allows the company to charge enrollment and settlement fees but no others and other consumer protections.

Learn more about the Debt Settlement Consumer Protection Act of 2010.

Credit Card Forgiveness Act of 2020

Many credit card companies offered financial relief to customers impacted by the coronavirus pandemic.

But, to take advantage of any of these relief programs, you need first to contact your credit card to request financial assistance formally. Many were also offering emergency forbearance, which allowed you to make reduced payments, skip a payment, and perhaps temporarily reduce your interest rate.

The Uniform Debt Management Services Act

The Uniform Debt Management Services Act is a national effort to provide some uniform rules to govern consumer credit counseling services and debt settlement services.

The act provides comprehensive statutes providing rules for registration requirements, bond requirements, certification requirements, disclosure requirements, and penalties for non-compliance.

The U.S. Department of Justice

The Department of Justice is committed to ensuring a safe and fair marketplace in your state. They help consumers with complaints, prevent fraud, enforce consumer protection laws and invest in consumer education.

Here’s a list of credit counseling agencies approved by the Department of Justice.

The Bottom Line

Credit card debt can keep you up at night, particularly when you know you simply have too much. Don’t lose hope. There are some solutions to get credit card debt relief. Study each option provided and explore the solutions that may best fit your predicament.

It can be as easy as setting up an appointment with a credit counselor who helps you set up a budget and assesses where you have wasteful spending, all the way to hiring a bankruptcy attorney.

FAQs

Do I Need an Attorney for Bankruptcy?

The answer is almost always yes. Bankruptcy laws are complex. They will size up your financial circumstances and help you figure out which filing you should do, especially if you are trying to protect certain assets. Most laypeople would have no idea how to navigate the complicated court system, much less keep up with the bankruptcy law.

How Can I Stop a Debt Collector from Calling?

Know your rights. Tell them they are not allowed to call your place of work and that you are not allowed to receive calls at your place of work. Tell them that they cannot contact you at your home address and phone number.
To stop a debt collector altogether from contacting you, you will need to send a certified return receipt letter to the collection company to stop corresponding with you. Make sure you keep a copy. From this point on, they have to stop reaching out to you. They can only contact you if they plan to file a lawsuit against you. If you have an attorney, notify the debt collectors to direct all correspondences to your legal counsel.
If they catch you off guard on the phone, it can be as simple as saying, “I prefer to pay the original creditor. Give me your company name and contact information and I will send a cease-and-desist letter.”
Ensure you document all correspondences with your account number and the dates and times the collections agency contacted you.

Is There Pandemic-Related Debt Assistance?

Many financial institutions support The Coronavirus Aid, Relief, and Economic Security (CARES) Act. They urge all consumers who are in distress due to COVID-19 to contact their lenders to find a reasonable accommodation. Every situation is unique, and each lender will assess each case uniquely.