Have $50,000 or More in Credit Card Debt? Here's How to Get Rid of It

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If you feel like you are drowning in credit card debt, you are not alone. According to the Urban Institute, "Americans have increasingly been relying on credit cards to make ends meet, with 6 in 10 adults, or 60%, using credit cards to buy groceries in 2023."

So yes, credit card usage is on the rise, especially in this era of higher inflation. And one of the main problems with credit card debt is the difficulty you'll find trying to pay it off. People use their cards, often pay only the minimum due, balances grow, interest rates don't go down, and so the debt load increases.

Back when I practiced bankruptcy law, credit card debt was by far the main sort of debt with which my clients were burdened. Often, a Chapter 7 bankruptcy was the best answer for them, but not always. There are in fact three viable options in most cases when people have excessive credit card debt.

Let's see what they are.

1. Chapter 7 bankruptcy

Confession: I am a big believer in Chapter 7 bankruptcy. Many laws do not work as intended or desired, but Chapter 7 mostly does. The bankruptcy code says that the purpose of a Chapter 7 is to give people a "fresh start" and that is usually exactly what it does.

Doesn't that sound nice, a fresh start?

It does so by wiping out unsecured debt, like credit card debt, while allowing you to retain secured debts, like mortgages and car loans. And to allow for that fresh start, the procedure lets the debtor retain assets (up to a predetermined limit), such as cars and some home equity; the amounts vary by state.

The bankruptcy process takes a few months and is pretty painless. It also stops all creditor interaction and harassment during that period.

So the pros of filing for bankruptcy are debt relief, peace of mind, speed, and debtor protection. The downsides are that your credit rating will take a wallop for a year or two. But given the many benefits, that is a fair tradeoff to many people.

2. Negotiated settlements with creditors

There are times of course when bankruptcy is not the best option. It could be that you have too many assets and don't want to lose them, or that you don't want people to know what you are going through (bankruptcy is a public filing, after all). In that case, negotiating with your creditors might be the way to go.

I did this for many clients, and depending on the circumstances, it can be quite effective. While you won't get off without paying anything, paying a dime on the dollar is not unheard of. And so is paying $0.50 on the dollar. And so is the creditor saying no.

The difference usually is what sort of leverage you have. If the credit card company or the debt collector thinks you have assets it can get, it has little incentive to negotiate with you.

But if it concludes you are an "empty pocket," then often the company will conclude something is better than nothing. And if your creditors think you will just file Chapter 7 if they don't work with you, then you really are in pretty good shape for a negotiated settlement.

The only caveat is that they will almost assuredly want lump-sum payments. If you agree to settle for, say, $5,000, you better have it on hand. They will not want to wait for you to pay off your debts every month for a year or two.

So here, the upside is debt relief, no bankruptcy filing, and likely less negative impact on your credit. The downside is a need for a lump-sum payment, and the possibility that the IRS may consider the forgiven debt to be "income" (only the IRS would call getting out of debt "income," right?).

3. Consider a debt management plan

A final option, and usually not the best one, is a debt management plan (DMP.) A DMP is a structured repayment program typically offered through a nonprofit credit counseling agency. With a DMP, you make a single monthly payment to the agency, which then distributes the funds to your creditors. The agency may also negotiate lower interest rates and fees on your behalf.

So the pros are getting to make one payment, and probably for less than you owe. But the downsides are:

• Monthly fees you'll pay to the agency.
• Your credit card accounts will be closed.
• You will be paying that debt off for a long time with your DMP, just as you would anyway.
• Your credit rating will take a big hit.

See? Probably not the best option.

Bottom line

Dealing with a significant amount of credit card debt, be it $50,000 or more, is a challenge. The good news is that you have options to get out of debt.

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