According to the Federal Reserve, the total outstanding credit card debt carried by Americans reached a record $951 billion in 2008. Newsflash…….its becoming a major problem.

John Colwell wrote an excellent post this week detailing the financial toll that paying the minimum monthly on credit cards can take on your wallet over the long haul. The bottom line is this: would you be able to afford your mortgage or car loan if your lender was charging 18-35% interest? Could be a poor example as many Americans are having difficulty meeting all of their debt obligations at “reasonable” interest rates, but you get the idea…….paying back principal is one thing, but paying only interest for years and years and getting nowhere makes no sense.

How can the credit card companies expect you to survive while charging clearly usurious rates of interest? They don’t. Any company that charges usurious interest rates doesn’t expect to be paid back, they expect to keep you in a revolving cycle of debt. That’s how they make their money. As the interest rates charged by credit card companies increase, as the US Airways of the world and every department store known to man continue peddling high interest credit cards to their customers, as unemployment continues to skyrocket…..credit card problems will continue. As a bankruptcy attorney, I routinely meet with clients who simply cannot afford their credit card payments. They feel stressed and stuck. What are your options for getting out of credit card debt?

At a basic level there are three:

1. Pay off the debt…….yes I’m serious. If you have liquid assets available to cash in, it may be wise to pay off the entire balance and move on. As the previous paragraph will indicate, I realize this is not possible for most readers. Especially in a recession, most Americans can barely afford the minimum payments on credit cards.

2. Work with a debt settlement or credit counseling company. Be Careful. I would highly recommend meeting with a reputable bankruptcy attorney before taking this step. In my opinion, debt settlement may be a solution for a consumer who is for some reason unable to file for bankruptcy. Debt settlement companies have a reputation for aggressive, sometimes misleading advertising. Results vary widely. Keep in mind that in most cases, you will pay a debt settlement company on a monthly basis while they amass a “war chest” of funds to pay a one time payment to your credit card lender, theoretically in full satisfaction of the debt. While this war chest is being accumulated, your debt remains outstanding, interest may continue to accrue and your credit continues to deteriorate. Likely there will be no refund of their fee if settlement is unsuccessful.

Further, the debt settlement will only happen if your lender agrees to accept less than 100% of the debt which they are not obligated to do. There is no magic formula that debt settlement companies employ. They offer your lender something and bank on the fact that because you are in serious default, the lender is expecting to get nothing. Something is better than nothing, so the lender may agree. If you have numerous lenders, debt settlement becomes even more difficult. Three out of four credit card companies may agree to a reduced principal balance while the fourth company sues you for non-payment and garnishes your wages.

If a lender does agree to a debt settlement and agrees to forgive your credit card debt, be aware there are significant tax consequences. Credit counseling and ebt consolidation may be able to help lower interest rates, however, you will still be responsible for a payment each month.

3. Bankruptcy. Filing for bankruptcy will eliminate unsecured debt such as credit card debt, old taxes and medical bills. For families that are in severe financial distress, this option provides an opportunity to free up major cash flow. Imagine how much money you could save on a monthly basis if you eliminated ALL credit card balances. Money that is thrown away paying credit card companies interest can be diverted to the mortgage, groceries or used as disposable income. Your credit card lenders will not have a choice as to how much you will pay to “settle” the debt, instead the balances will go to zero. You will owe nothing. Once the bankruptcy case is filed, the credit card companies will be prohibited from calling you or contacting you for any reason. Any previous court judgments will be wiped out……completely. In addition, contrary to common misconception, there is a good chance that you will be able to keep all of your property through the bankruptcy process. Most clients that I represent are able to exempt all of their assets from creditors. Fact is this: bankruptcy has helped millions of Americans get out of credit card debt for good……..if you have questions consult a local bankruptcy attorney.

John O’Connor