Too Much Credit Card Debt– What Are Your Options?

By: Gilbert Dizon

 

As a Consumer Bankruptcy Attorney, I am often revered lower than one’s Dentist. But like a Dentist, I’m often asked to provide my services as a last resort because that client could no longer stand their financial situation causing the stress and pain that they are going through. However, just as a Dentist advises one to regularly floss, brush and to take other preventative measures to avoid any future dental issues, I advise people to take preventative measures such as putting together a monthly household budget and sticking to it, setting aside an emergency fund and keeping track of their total debt to avoid any future financial issues.

While a large percentage of bankruptcy filings are due to medical- related debt or the loss of employment, I am seeing more often in this economic climate, that people have a lot of credit card debt, and they are struggling with paying down those balances because they can only afford to pay the minimum monthly payments, if anything at all. By making only the minimum monthly payments, it is very likely that it will take that person several years, maybe even decades, to pay off their credit card debt depending on the balances and interest rates on those credit cards. If you find yourself in this same predicament, keep reading because it’s time for your annual check up and to learn what options may be available to you.

Debt Consolidation

One of the first options that people consider is debt consolidation. Every so often, you may see a story on the news or on the Internet about someone successfully paying off their credit card debt through a debt consolidation program.

However, more often than not, people who have tried debt consolidation programs have either been scammed or have only been able to negotiate payments with some of their credit card companies, leaving them back at square one with the ones that did not agree to the debt consolidation plan. There are many debt consolidation companies out there, but beware as many of those are scams. However, there are some legitimate debt consolidation programs, so be sure to do your research or ask your local bank for a recommendation. But as a rule of thumb, if one of your credit card companies does not agree to the debt consolidation plan, then debt consolidation is not the answer.

401k

I am often asked by prospective clients whether it is wise for them to use their 401k to pay off their credit cards. A distribution from a 401k will result in taxable income plus a 10% penalty. Since paying off credit cards will not qualify for a hardship distribution under the IRS Regulations, it would be foolish to take a distribution from a 401k to pay off credit card debt because of these ramifications. A better alternative might be to take out a loan against 401k if your plan allows you to. The advantage of a 401k loan is that there will be no tax ramifications or penalties, but the loan must be paid back with interest.

Payday Loans or Vehicle Title Loans

When people fall behind on their bills, they often look for other avenues to borrow money to pay bills, whether it is by asking for a loan from family or friends, or by taking out a loan such as a Payday Loan or a Vehicle Title Loan. Whatever the source of the loan, this is what is known as “Borrowing from Peter to Pay Paul” and is never recommended because this will only put you in a worse position with more debt and likely very high interest rates.

In Illinois, as there are no usury laws prohibiting the amount of interest rates, many of these Payday Loan companies charge very high interest rates. Likewise, Vehicle Title Loan lenders will do the same thing, except in the event that you default on their note, they can repossess your vehicle.

Chapter 7

As a last resort, many people consider filing Chapter 7 or Chapter 13 Bankruptcy, depending on their overall financial situation. A Chapter 7 will discharge credit card bills, medical bills and other unsecured debt. Whether or not a person will qualify for a Chapter 7 will depend on their total household income and allowable expenses compared to the median income and allowable expenses of a similar household in their geographical area based on IRS guidelines. This is known as the “means test.” If one’s household falls below the median income level, they will qualify for a Chapter 7 (assuming that they do not have any unprotected assets beyond what is protected under the Illinois exemptions). If their income is above the median income level, there is a presumption that they will not qualify for Chapter 7, but that presumption may be overcome under certain circumstances.

Chapter 13

Assuming that the presumption cannot be overcome and they cannot qualify for Chapter 7, a Chapter 13 repayment plan is their best option. A Chapter 13 repayment plan allows them to pay a portion of (or all of) the unsecured debt over a period of 3 to 5 years. I’m often asked, “If I have to repay back my debt thru a Chapter 13, what’s the point of even filing for Bankruptcy?” My answer is threefold: (1) A Chapter 13 is a Court approved repayment plan, meaning the credit card companies have very little say in the terms of the repayment plan; (2) Upon completing the Chapter 13 in a maximum of 5 years, that person will be debt free as opposed to never being debt free; and (3) A Chapter 13 will result in a substantial savings because the repayment plan typically provides no interest on the credit card debt and the repayment plan may only require that they repay back pennies on the dollar. So once the Chapter 13 plan is completed, the balance of the credit card debt is discharged.

Estate Planning

If you have not had your Estate Plan drafted, now is a great time to do so. However, keep in mind the old proverb “Don’t be penny wise and pound foolish” when planning your estate plan. Estate planning is a very complex area of law which no lay person should do on their own. And, if you think you are too young to plan your estate or that you don’t have enough property or assets to plan your estate, think again. Life is unpredictable and it’s best to be prepared for the inevitable, no matter how old you are and no matter how much property and assets that you have.

Seek Professional Assistance

Whether your financial situation is stable, strong or in need of adjustments, don’t hesitate to seek professional assistance. Consult with your financial advisor to review your investment and savings strategies. Consult with your CPA or Tax Attorney to review what you should be doing to reduce potential tax liabilities. If you have not had your Estate Plan drafted, consult with an Estate Planning Attorney to discuss your Estate Planning needs. And, if you are struggling paying your bills, don’t be afraid to consult with a Bankruptcy Attorney to see if that is an option for you.

Gilbert R. Dizon is the Managing Partner of the Chicagoland law firm of Dizon Law LTD. He has over 20 years experience in Estate Planning, Bankruptcy, Business Law and Real Estate. His law firm has offices in Geneva,Wheaton and Aurira, Illinois and the firm’s other areas of practice include Family Law, Personal Injury, Traffic, DUI and Criminal Defense. For more information, please visit www.DizonLawLTD.com or call (630) 761-5670 for a free consultation.