Managing credit card debt might resemble putting out a fire. As soon as you extinguish one flame, another appears. You eventually simply want to escape the fire.
Many people believe that declaring bankruptcy is the best option since it allows them to avoid paying their debts.
Can you actually pay off credit card debt without making a payment, though?
Yes, in a technical sense. You may.
In all likelihood, the response is no. Not at all.
Let’s discuss the “technical” solution, which we do not advise, I must add.
You technically have the option to cease making credit card payments and hope that your state’s statute of limitations runs out before the card company, or more likely a debt collection agency finds you.
The statute of limitations in most states is between four and six years, which is a concern. In that period, your creditors may sue you for failing to make payments, and you would probably lose.
That would include a court ruling against you for the amount owing, court expenses, maybe associated attorney fees, possibly associated interest or late payment fees, and, well, you get the idea. At your own risk, do this. Again, we don’t advise trying since it can wind up being a mistake you should avoid when paying off debt.
return to reality now No, you cannot truly eliminate credit card debt without making payments.
You may actually get rid of credit card debt by filing for bankruptcy. However, the answer is still no if you’re wondering, “How can I pay off credit card debt without paying anyone anything?”
Well, if you passed away, you could. However, even in that case, credit card issuers are still entitled to at least a portion of your inheritance as payback.
Additionally devastating to your credit score, bankruptcy remains on your credit record for 7–10 years, making it available to potential lenders. If you wish to borrow money to buy a vehicle or a house, you will eventually pay more – perhaps a lot more.
There is no free lunch, which is a fundamental economic principle that applies to getting out of debt. Nothing can be obtained for free.
Take heart if you’re upset to find that bankruptcy is not a free option. The expenses might be thought of as a deposit for a new beginning that will transform your life.
According to the Administrative Office of the U.S. Courts, 772,646 bankruptcy petitions were filed for the year that ended on March 31, 2019. Many people who you would never think to be broke have found bankruptcy to be a decent alternative.
Walt Disney filed for bankruptcy, did you know that? Abraham Lincoln, Willie Nelson, and Elton John all agreed.
Lincoln technically did not file since there was no such thing as bankruptcy in the 1830s. Lincoln was nonetheless compelled to pay back creditors over a 17-year period when the general business he owned in Salem, Illinois, slipped into debt.
If you choose to file, you would not be alone. However, you must be aware of the financial repercussions and how to lessen them.
Exist Alternatives to Bankruptcy?
Yes, but they unquestionably are not free.
Debt Settlement is one option. Your goal is to pay less than what you owe, preferably a lot less, so you engage a lawyer or a debt-settlement business to negotiate with your creditors on your behalf. After making a single lump sum payment, everything is finished.
That sounds great, but there are several significant problems.
First off, not all businesses will even consider debt settlement, and there is no legislation requiring any business to do so.
You will still pay a portion of your debt if they are willing to bargain. Advertisers claim that while you might only have to spend cents on the dollar, it’s preferable to budget for a quarter on the dollar. As in, pay three of them, or 75% of what you owe.
The debt settlement organization will further charge you 15% to 25% of the money you save. And on your subsequent tax return, the government will tax that as income.
It can take up to three years to complete the procedure. Your credit report is ruined.
At least you are still alive.
A debt management strategy is an additional alternative. Your debt is consolidated by a nonprofit organization, which also bargains with creditors for cheaper interest rates. You now have a single, smaller monthly payment than you had previously.
Although it’s a better alternative than debt settlement, debt management involves a cost, a three- to the five-year procedure, and full payment of your credit card balance.
That brings up bankruptcy once more.
Which Is Better Chapter 7 or Chapter 13?
Chapter 7 bankruptcy is probably your best choice if you want to pay as little as possible to your creditors and attorneys. The trustee is chosen by the court to liquidate your non-essential possessions and transfer the cash to your creditors.
You present the court with a plan to repay your debts in three to five years when filing for Chapter 13 bankruptcy. You’ll probably give the credit card company anything back with either strategy. Simply said, it will be less than the initial sum.
Typically, filing costs for Chapter 7 are $335 and Chapter 13 is $310. You’ll be released from responsibility considerably sooner and your expenses will probably be far less overall if you file for Chapter 7.
Although it is not required, it is advised to have legal representation because bankruptcy rules and procedures can be challenging.
The cost of a Chapter 7 lawyer is typically $1,250, however prices vary by region. The Chapter 13 filing fee ranges from $300 to $3,000 on average.
What Negative Effects Can Bankruptcy Have?
The impact on your credit score is severe.
It’s likely that your score has already declined if you’re thinking about filing for bankruptcy. However, if it remains within the “excellent” range of 700, it may decline by 100 to 200 points.
Why is that relevant?
When you apply for a loan, your interest rate will be largely influenced by your credit score. You pay less the better your score is, the lower the rate.
Consider the scenario where you desire a $200,000 mortgage with a 30-year fixed loan. A credit score of 700 would be eligible for a 4.392% interest rate. With a 620, you would receive 5.759%.
The first one indicates a $1,001 monthly payment. The second one would need a payment of $1,168.
You would incur about $70,000 extra in interest costs over the course of 30 years as a result of your lower credit score.
The simple line is that declaring bankruptcy does not grant you debt freedom. No such card exists.
But bankruptcy is the quickest and cheapest route out if your pile of credit card debts has you feeling like you’re imprisoned in a burning house.
Remember that it can prevent you from purchasing a real home for a very long time.