Identifying a suitable way to eliminate unsecured credit card debt can seem like an insurmountable obstacle, but this needn’t be the case. If expenditure exceeds income and/or credit is becoming a way of life, action needs to be taken to address this imbalance.
Whilst the easiest way to clear debt is to settle it in-full each month, this isn’t always possible. This could be because of involuntary unemployment, an over-time freeze, a period of poor health, divorce or a range of other personal circumstances beyond the control of the individual.
Eliminate Unsecured Credit Card Debt
When seeking a card credit debt settlement strategy, consider a Debt Management Plan, filing for bankruptcy or a debt settlement program. These debt relief programs seek to either reduce the principal (the amount owed) and/or make monthly repayments more affordable.
How Debt Free Plans Affect a Credit Score
A debt solution involves defaulting on the terms of a credit agreement so part of a FICO credit score (the largest part) will fall. However, 25% of a FICO score is based on the individual’s income-to-debt ratio. Reducing the principal will actually improve this part of a debtor’s credit score.
The majority of individuals who enter a debt relief program have already missed and made late payments on their credit agreements. Unless an income and expenditure imbalance is addressed quickly, the problem will only get worse.
Filing for Bankruptcy
An individual can eliminate unsecured credit card debt by declaring personal bankruptcy. Chapter 7 is a debt-free plan that doesn’t require monthly payments and takes just 4 to 6 months from start to finish. However, this credit card debt settlement strategy isn’t suitable for everyone.
The Bankruptcy Abuse Prevention and Consumer Protection Act reformed the laws in 2005. Filing under chapter 7 is now only possible when the debtor’s income is below the median for their state. Those with non-exempt assets (a valuable collection, second home etc) are likely to find that filing under chapter 13 or an alternative debt free plan provide a better option.
Debt Management Plan
Whilst there is no reduction to the principal, this plan can be used to gradually eliminate unsecured credit card debt at an affordable rate. After a budgetary analysis by an intermediary, a monthly payment will be agreed upon. This payment is then disseminated to creditors on a pro rata basis.
This debt-free plan will help to alleviate much of the stress associated with owing money, but it doesn’t clear debt nearly as quickly as filing for bankruptcy of a debt settlement program. Repayments are likely to be necessary for a number of years.
Debt Settlement Program
It is possible to reduce the principal by up to 50% and pay-off the remainder over a 12, 24 or 36 month period. The term of this card credit debt settlement strategy can be extended, but this is not advised as it decreases the likelihood of creditor acceptance.
Beware of providers that front-load charges (ask for them up-front) as it will increase the amount owed. Only deal with companies that are prepared to accept their fee (typically 15% of each payment) from monthly contributions.
Debt Settlement Vs Bankruptcy
- Chapter 7 bankruptcy will show on a personal credit report for a period of 10 years. A debt settlement program will display for 7 years.
- Filing for bankruptcy is the only debt solution available to those who can’t afford to offer creditors a monthly repayment. It also allows someone to become free of debt in the shortest period of time.
- Debt solutions (other than personal bankruptcy) are not made public.
- It is not possible to file for bankruptcy under chapter 7 twice in any 8 year period. However, this doesn’t preclude the debtor from choosing chapter 13.
It is possible to eliminate unsecured credit card debt and improve affordability with any of the above programs. It remains advisable to become debt-free with credit counseling as it allows the debtor to examine all of the different options before proceeding. Expert advice is critical.