Credit Card Debt Relief: What Are My Options?
Here are 5 approaches to consider
Financial setbacks like unexpected bills, medical issues, or losing a job can lead to falling behind on credit card payments. There are a few ways you can manage credit card debt. To make the best-informed decision, it’s important to know your options inside and out. At the end of the day, knowledge is your most valuable asset.
Contact Your Lender
First, try reaching out to your creditors to see if they’ll work with you. According to the Consumer Financial Protection Bureau (CFPB), “some creditors might be willing to...waive certain fees, reduce your interest rate, or change your monthly due date to match up better to when you get paid, to help you pay back your debt.”
Third-party debt relief programs are also available.
Credit counseling services are provided by organizations that are usually non-profit and, per the CFPB, “can advise you on your money and debts, help you with a budget, and offer money management workshops.”
How it works: The CFPB names a few examples of what credit counselors can do:
- Advise you on managing your money and debts
- Help you develop a budget
- Help you get a copy of your credit report and scores
- Organize a ‘debt management plan’ to pay down your debts.
Keep in mind: You can find credit counseling organizations in your area through:
Debt Management Plan
A credit counselor can also help you setup a debt management plan.
How it works: As the CFPB explains,
- “You make a single payment to the credit counseling organization each month,” and they send monthly payments to your creditors on your behalf.
- Typically, while you’re enrolled in this agreed upon payment plan, your “creditors will not pursue collection efforts or charge late fees[.]”
Keep in mind:
- Credit counselors “usually do not negotiate any reduction in the amounts you owe.”
- Even if they’re a non-profit organization, credit counselors may charge fees for their services.
- Be sure the credit counselor you choose is a reputable, accredited and certified one you can trust to manage payments on your behalf.
Per the CFPB, debt settlement companies are “[u]sually...for-profit companies that charge a fee for their services.” You’ve probably seen them advertise their services on TV or online.
How it works: As the Federal Trade Commission (FTC) describes it:
- Debt settlement companies offer to “negotiat[e] with your creditors to allow you to pay a ‘settlement’ to resolve your debt—a lump sum that is less than the full amount that you owe.”
- Debt settlement programs typically ask you to “set aside a specific amount of money every month in savings...and transfer this amount every month into an escrow-like account to accumulate enough savings to pay off any settlement.”
Keep in mind: The CFPB advises consumers to examine their agreement very carefully to understand and prepare for any potential cons that may come with the pros. For example:
- “Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate...a settlement.”
- In the meantime, late fees and interest can still accumulate and “cause your original debt to increase.”
According to the U.S. Federal Judiciary, bankruptcy is a federal court proceeding that “helps people who can no longer pay their debts…by liquidating assets to pay their debts or by creating a repayment plan.” There are two primary types of personal bankruptcy: Chapter 7 and Chapter 13.
How it works:
- The FTC explains that “both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities.” Here’s how they differ:
- With Chapter 13 bankruptcy, “the court approves a repayment plan that allows you to use your future income to pay off your debts during three-to-five year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.”
- Chapter 7 bankruptcy “involves the sale of all assets that are not exempt. Exempt property may include cars, work-related tools, and basic household furnishings.” These exemptions vary by state.
Keep in mind:
- The FTC notes that “personal bankruptcy does not erase child support, alimony, fines, taxes, and some student loan obligations.”
- “Filing fees are several hundred dollars,” and varying attorney fees will cost extra.
- “Bankruptcy information...stays on your credit report for 10 years.”
- The FTC maintains that “although bankruptcy is one option to deal with financial problems, it’s generally considered the option of last resort.”
Knowledge is Your Most Valuable Asset
To make the most well-informed decision, research every debt relief option backwards and forwards, inside and out. Read every line of fine print. Ask all the questions you want. Know every potential cost and outcome. So that whatever you decide, you can confidently move forward with a plan that’s right for you.
We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.