Credit card debt can be very difficult to deal with, particularly if you are struggling to pay other household bills. While it is possible to legally stop paying your credit card bills through bankruptcy, there are other debt relief options, including debt consolidation loans, credit counseling and negotiating with credit card companies.
Consequences of Nonpayment
While it might be tempting to stop making payments on your credit cards, you should be aware that doing so can have serious financial and personal repercussions:
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- Your credit score will go down, which can make it harder for you to take out any kind of a loan and get credit in the future. It may also hamper your ability to get a job. Credit scores can also affect insurance premium rates.
- Late fees and interest will be added to your balance. If the credit card company charges off your account and send it to a collection agency, that collection agency might add its own fees as well. This means that you will eventually end up with a much larger debt.
- The credit card company or a debt collector may sue you for the balance, which could result in a court judgment against you. Once that happens, the creditor can ask the court to levy your bank accounts, garnish your wages and seize other property that you own to satisfy the debt.
Because not paying your credit card balances is likely to make your financial and personal situation worse, not better, it's a good idea to seek alternatives to nonpayment.
Negotiate with Credit Card Companies
One option for reducing your debt or making it more manageable is to contact your credit card companies directly and ask them to work with you. They might be willing to remove over-limit or late payment fees or reduce your interest so that you can get caught up on payments. Many top credit card companies are willing to work with cardholders who have run into financial difficulty.
Consolidate Your Debt
If your credit score is still reasonably good, you may be able to qualify for a debt consolidation loan or a credit card with a promotional interest rate. These options allow you to clear your card balances and then pay off one larger debt at a lower interest rate.
This approach can have its dangers, however: It's important to not run up more debt on your paid-off cards. This approach also doesn't work for those whose poor credit makes them ineligible for a new card or loan. As this article in Forbes notes, consolidation is best suited for someone whose financial issues are due to temporary stressors, such as a short-term job loss or an unexpected expense.
Seek Credit Counseling
Credit counselors provide assistance in assessing your financial situation and explaining your debt relief options, according to the Federal Trade Commission. Credit counseling is required if you are considering bankruptcy, and the counselor can tell you what to expect if you go that route. The counselor may also be able to assist you in developing a budget. If bankruptcy is not a good option, the credit counseling agency might offer a debt management program: You would send one payment to the agency each month which then forwards the funds to your credit card companies.
File for Bankruptcy
If fully re-paying your credit cards is not a realistic option, you have the option of filing for bankruptcy. A bankruptcy allows you to ask the court for protection against your creditors. If you opt for a Chapter 7 bankruptcy, your assets are liquidated and distributed to creditors and your eligible debts are discharged by the court. In Chapter 13 bankruptcy, you enter a three- or five-year debt repayment plan that is supervised by the court: At the end of the plan, any remaining debt is discharged.
There are different qualifications and limitations for each type of consumer bankruptcy. An attorney can advise you on what type of bankruptcy you qualify for and which is most appropriate to your situation. While it is true that bankruptcy will lower your credit score, many people find that they are able to rehabilitate their credit and can begin qualifying for a mortgage within a few years of their discharge, according to Experian, a major credit bureau.