Put an End to Your Credit Card Debt

End Credit Card Debt Now

For individual consumers, there are basically two types of bankruptcy that are available: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Both Chapters enable individuals to permanently discharge (eliminate) their unsecured debts (credit cards debts, medical bills, bank loans, payday loans, finance company loans, and certain tax debts). However, they do so in very different ways.  Alternatively, you might decide that debt settlement is in your best interest.  Regardless, you must take action, and the first and most important act is to meet with a lawyer that specializes in bankruptcy and debt settlement to help you choose your course.

Chapter 7

While a Chapter 7 will wipe out all of your credit card debt, it is not without limitations.  First and foremost, you must “qualify” for Chapter 7 relief.  The standards for qualifying vary by location and take into account your income over the last six months, and certain expenses (some real and some based upon federal standards).  This “qualification” process is commonly referred to as the “means test.”

Once qualified to file for Chapter 7, only those credit card debts that are nor incurred by fraud, false representations or false pretenses are dischargeable.  In other words, your credit application must have been truthful, and you did not simply “rack-up” the debt on the credit cards with the intent to later file bankruptcy or simply not pay.

More often than not, if you qualify for Chapter 7 bankruptcy, it might very well be your best course of action.  First, the process is short — usually less than 145 days.  Second, most Chapter 7 bankruptcies filed in Texas are “no-asset” cases.  That means no property is seized by the trustee.  The Debtor keeps all of his property.  Third, unlike debt settlement, there are no tax consequences associated with the discharged debt.

Chapter 13

Chapter 13 is most commonly used by people looking to stop a foreclosure or resolve certain tax obligations.  Nonetheless, many people who do not qualify for Chapter 7 will file Chapter 13 to resolve their credit card debts.  A chapter 13 bankruptcy will usually last 5 years and requires the Chapter 13 debtor to make monthly payments to a trustee who in turn distributes those monies to the Debtor’s creditors.  This process is controlled by a Chapter 13 plan that is drafted by your attorney and intended to take into account your unique financial situation.

The Chapter 13 plan is intended to require you to make payments in an amount that you can afford.  It is NOT intended to require you to make payments in amount that is sufficient to pay your credit card debt in full.  In fact, most Chapter 13 plans only pay a small percentage back to the holders of credit card debt.  Chapter 13 is often a great way to resolve your financial challenges if you do not qualify for Chapter 7.

Debt Settlement

In lieu of bankruptcy, debt settlement is a great alternative.  You may not qualify for Chapter 7 and you do not want to be in bankruptcy for 5 years under a Chapter 13 plan.  If that describes you, give serious consideration to debt settlement.

The down side of debt settlement is the Debtor must have access to sufficient funds to actually settle the debt at a discount.  Common sources of capital are retirement funds and family members or friends.  However, be mindful of the costs associated with debt settlement including the cost of capital.

As the funds to facilitate the debt settlement often come from retirement funds their can be significant tax consequences associated from the withdrawal.  Further, absent certain exceptions best discussed with an accountant (see here for discussion), debt forgiveness is a taxable transaction.  In other words, the amount not paid beck to the credit card holder is treated as taxable income.