Because the options available to eliminate problem credit card debt are limited, I often find it more productive to use a process of elimination to help determine what would be the best debt solution. Most readers will find they can narrow down the list of debt solutions to one, or perhaps two, using the same process I have used during one on one consultations for more than a decade.
People tend to have a bias toward a particular debt relief solution, or even contempt toward some of the options available (cough… bankruptcy). Researching and choosing the option that will work for you is not a great place for emotion, or even preconceived notions. There are tens of thousands of websites, and probably more than a few thousand finance writers out there, so no shortage of coverage about debt relief. Most suggest avoiding bankruptcy at all costs, which is just silly.
There is also an extraordinary number of web sites and columns that raise HUGE concerns about debt settlement, but provide little detail about settling credit card debt, or the benefits. Perhaps they do not know much about it, or are too lazy to cover the topic in the detail needed to inform their readers, and maybe it’s a little of both.
I suggest checking your emotions and biases at the door. The numbers are unemotional and without bias, so I suggest working with your household income and expenses first. Using your current monthly cash flow as a qualifier will help you to eliminate debt relief options you cannot afford.
Along the way you may recognize that some debt solutions offer you a way to accelerate getting out of debt and moving on with your financial future more quickly.
Calculating your debt relief options.
Add up all sources of income you have on a monthly, quarterly and yearly basis. Next, add up all of your debts. Include all unsecured debts like credit cards and all secured debts like a mortgage or car payment. You will also want to itemize all monthly expenses such as insurance, utilities, groceries etc. Don’t forget about quarterly and annual expenses such as property taxes.
Tip: You cannot fully grasp the best way to resolve your debts until you have completed this task.
When you have completed adding up your bills, separate the monthly payments you may be making toward unsecured accounts (like your credit cards) then add up all other monthly expenses and calculate the total. How does the total amount of monthly expenses without credit cards and other unsecured bills (personal loans, medical bills) stack up next to your monthly income? What amount of money is left over after subtracting your monthly bills from your monthly income (remember – do not include credit card and other unsecured debts)?
The amount of money you have left after all typical necessities are taken care of can be referred to as your debt solution fund. The amount of money in your monthly debt solution fund is what you should start with when evaluating which debt option can best apply to your unique set of current circumstances – weighed beside your personal and family goals over a 2 to 5 year time frame.
Simplified outline for comparing debt payoff funds with available solutions.
Let’s assume you have $20,000.00 in unsecured credit card bills. You have $300.00 left after all your bills (other than the credit cards) are paid. A consumer credit counseling agency offering a debt consolidation plan will typically be able to get your monthly payments on the 20k of credit card debt reduced to an average 2.1% of your combined balances. With this type of debt consolidation your new monthly payment would be estimated at roughly $400.00 each month. You do not have $400.00 left over to keep up payments on the credit cards. You can now eliminate a credit card consolidation service from your list of debt solutions.
Next in the process of elimination is to consider debt settlement for someone with the above amount of credit card debt, and monthly cash flow, as a way to avoid bankruptcy.
Debt settlement plans are typically sold as an affordable way to save the $300.00 monthly in an escrow account until enough is saved up to settle with creditors.
Let’s assume the $20,000.00 can be settled for $10,000.00 (it is not unusual to cut balances in half with debt negotiation). In order to save up the 10k at a rate of $300.00 a month it would take about 33 months. In this simplified example, debt settlement appears to be an option that could work.
There is far more to the debt settlement process to understand before you should decide whether to pursue this option. You can learn a great deal more about debt settlement solutions starting with the intro to negotiating your debt.
If credit counseling is taken off the table as a mathematical impossibility, and debt settlement is later eliminated as unworkable, that leaves us with bankruptcy.
Chapter 7 bankruptcy is not an end solution, but more a beginning.
An uncomplicated chapter 7 bankruptcy can cost between $1,500 and $2,000. Let’s assume your bankruptcy will have a total cost of $1,800 from start to finish. With $300 available you will be able to pay for the chapter 7 bankruptcy in 6 months.
If you simply can no longer meet your required monthly minimum payments, or have already missed payments, you will typically focus on debt settlement or bankruptcy as workable debt solutions.
Combining basic math with all that you will learn throughout our free online education, you will be in the best position to make informed decisions about options for debt relief. I already mentioned that there is a great deal of misinformation and bias about different debt intervention options. But when you distill your current situation down to what you can do vs. what you heard you could or should do, you can better filter out incomplete information and the biases that abound.
It is also important to understand that a good amount of the coverage in the media about workable ways to get debt relief are the result of companies offering one or the other solution. That kind of bias is hard to avoid when you are researching what you should do about your debt.
The credit score bias to avoiding bankruptcy.
Many will have a concern about debt relief solutions and the credit report and credit score impacts of each. You may be wondering how long it will be before you can access fairly priced credit products again.
Combining credit reporting and scoring concerns with your current financial abilities (the math) may cause some readers to rule out bankruptcy. But once you understand the cost benefit of bankruptcy and dispel some of the myths about how different debt relief strategies affect your credit, you may find chapter 7 bankruptcy to be a mathematical winner.
You may also learn that bankruptcy would actually provide you access to fairly priced credit products in a time frame consistent with your goals, and sooner than using either a credit counseling service, or by settling your credit card debt.
Being broke because morally you should try to pay your debt.
Here is an example of how math is a better argument than the morality of debt and money made by people who are not in your shoes, and are otherwise clueless about many debt relief details.
Let’s say you have already missed credit card payments and would barely be able to afford to enroll with a credit counseling deb consolidation service. You should be concerned that even though your monthly credit card payments are lowered, and penalties have been removed, you would be one unexpected expense away from not being able to meet the now lower monthly amount due.
The debt consolidation approach seems like the moral and ethical thing to do, but you are spread too thin. The math may suggest you could qualify for credit counseling, but you would be one flat tire away from not making your monthly payment and getting dropped from the plan. Regardless of the preference to pay back what you owe, other factors suggest debt settlement or bankruptcy would be the more logical choice.
Consider that less than a third of people that enroll in a credit card consolidation program through nonprofit agencies actually complete them. Much of the failure and drop out rates with debt consolidation are because people want to pay back what they owe, but cannot. Many should not try to consolidate credit card bills, but so many thousands ignore the math until it cannot be avoided.
Narrowing down which debt relief solution will work for you is not complicated or difficult. We highly recommend reading through our debt relief program in its entirety. You can participate in the comments at the bottom of every article, or can start right here by posting questions and concerns at the bottom of this page in order to get feedback about the debt relief options you want to understand better.