If you’re reading this article, you are probably one of millions of Americans struggling to get out of credit card debt. Unfortunately, the credit companies haven’t made it easy to do so in the past, with their minimum payment revolving credit accounts, late fees, and over-limit fees. Fortunately, Congress eliminated many of those abusive fees with the passage of the Credit Card Accountability, Responsibility and Disclosure Act in 2009. The new regulations, enforced by the Federal Reserve Board, raise the level of information that must be provided to consumers regarding their credit accounts. In signing the bill, President Obama declared that finally “we’re putting in place some common sense reforms.”
For consumers accustomed to the typical amortized payment schedule of a car or home loan, it was easy to assume that the minimum payment required by most credit card providers was similar in effect – make the payments on schedule and within a reasonable period of time the debt would be paid off. The reality was quite different. The minimum payments included almost no principle, so that consumers paying only the minimum would take many years, even decades, to pay off the credit balance.
In its announcement of the new Act, the Federal Reserve provided the example of a consumer who owed $3,000 on a credit card account and was paying 14.4% interest. A typical minimum payment before the new law would have been about $90 and, if that’s all the consumer paid, it would take 11 years to pay off the balance. If, instead, the consumer added only $13 per month to that minimum payment, the debt would be paid in 3 years.
The drastic changes under the new regulations are a step in the right direction to help safeguard consumers against unfair lending practices now and in the future. Still, many consumers are unaware that there are also several options that can help them legally get out of credit debt they’ve already accumulated.
Use Additional Assets to Pay Off the Balance and Get Out of Debt
Have you considered every possible source of funds that could be accessed? Many people actually do have the resources to pay off debt, but they overlook financial assets that could be used. If you have a retirement account, such as an IRA, Roth IRA, or 401(k) plan, it’s possible to liquidate all or part of it to get out of debt. While one should not usually touch retirement accounts, if you are paying more interest on the debt than you are earning on the investments, this might be a wise option.
Use great caution and analyze your situation carefully before choosing this option, however, because taking funds out of retirement instruments will incur significant taxes and penalties for early withdrawal. You may want to consider this only if you can completely wipe out your debt with just a portion of your retirement money. If your debt is so large that all your retirement money would only pay down part of it, you could remain in the same debt situation while jeopardizing the financial stability of your retirement.
There are also non-traditional routes for borrowing money that can be used to pay off debts in full. Obviously, this option means you would still have debt, just to a different creditor(s); however, it could salvage your credit score and buy you time to earn more money.
One option is to borrow funds from family members. Another is micro-lending, a recent innovation. Originally developed to spur entrepreneurship in developing countries, micro lenders advanced small sums of money to people living in poverty to provide a means to build a better life. Today, the term also includes a larger loan to one person comprising small amounts of money from many people. Interest rates are often negligible due to the lenders’ altruistic motivations.
There are also companies offering personal loans and payday loans that do not require collateral, but be aware that the interest charged is often excessive. Other potential sources of additional funds that could be used to pay off credit card debt include selling assets, such as a second car or jewelry, or taking on a second job.
Get Out of Credit Debt with a Consolidation Loan
Most consumers overwhelmed with debt owe more than one creditor. In addition to credit card debts, you might owe on a mortgage, car loans, and student loans. A debt consolidation loan is used to pay off multiple creditors and replace those monthly payments with one lower payment. The consolidation loan does that by either applying a lower interest rate than the effective average interest rate you were paying or by extending the payment terms over a longer period. However, consumers should be aware that a lower interest rate is the best way to get out of debt, because extending the payment terms is likely to cost more in interest by the time the debt is finally paid in full.
Consolidation loans are available from several sources, including banks, credit unions, and savings and loans. Also, your largest creditor may be more motivated to provide additional funding than other lenders, since they have the most at risk if you are forced to default on your debt. Another type of consolidation loan uses the equity in your home as collateral to secure a low interest rate.
Use Debt Settlement to Get Out of Credit Card Debt
Although frequently the subject of bad publicity, debt settlement is the only solution, other than bankruptcy, that actually lets you legally not repay debt in full. Using a debt settlement strategy, you essentially negotiate with creditors to accept less than you owe in return for an immediate lump sum payment. The strategy is only possible for consumers that are close to defaulting on their debts since the credit card companies will only consider settling for less if they understand there is a very real possibility they could receive nothing at all if you file bankruptcy.
According to an academic study conducted by Dr. Terry Clower (University of North Texas) and Dr. Bernard Weinstein (Southern Methodist University), debt settlement offers “the most immediate form of debt relief available to consumers in today’s tenuous economy.” Their research indicates that settlement should improve the debtor’s chances of having a sustained economic recovery.
If you have significant assets that are not exempt from seizure under bankruptcy rules, the credit companies may be unwilling to settle for a partial payment, or may only offer a modest reduction in the balance owed. If, on the other hand, you have no assets that can be seized or wages that can be garnished, the credit companies may be eager to accept your offer. In many cases, consumers can eliminate up to 60% of their unsecured debts through the settlement process.
Bankruptcy Will Absolutely Let You Get Out of Debt, at the Cost of Your Credit Score
Most people consider bankruptcy the option of last resort because of the consequences it has on one’s credit score; however, for some people it may be the only option. Title 11 of the United States Code (the Bankruptcy Code) provides two options for consumers. Filing under Chapter 7 wipes out all debt and Chapter 13 creates a debt repayment program; however, after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted, Chapter 7 filings have become more difficult.
Much like the credit counseling agencies, under Chapter 13 bankruptcy courts review your current income and expenses to calculate how much money you can afford to pay creditors each month. However, the courts have the power to reduce or even eliminate interest paid on debts in order to facilitate repayment, whether the creditor agrees or not.
On the other hand, for consumers who are seriously in debt and without a reasonable possibility of repayment, no other debt relief program can match the savings provided by Chapter 7 bankruptcy. Consumers can choose the protections offered by the federal statute or opt for their state’s rules if they produce a more favorable result.
Getting out of debt takes work but it’s not impossible. Discover which debt relief options and strategies will work best for your financial situation.