Perspectives
Credit Card Crisis: A Debtor’s Dilemma
Most Americans have used credit cards in some form or fashion – especially for vacations, car repairs, and sometimes for everyday expenses when money is tight. Unfortunately, these payments add up and, for many, become quite a financial hardship. What are your options in this situation?
First, of course, you can keep making the minimum payments as you have contracted to do. This will protect your credit and prevent you from being sued.
Second, you can talk to the bank that issued you the credit card and negotiate. Banks do have discretion to offer a more affordable payment plan or even reduce the principal balance owed. Unfortunately, banks rarely do this unless you are both in a serious financial hardship and in default on your payments. To settle an account and get some principal forgiven, the banks usually require a lump sum payment. There is no guarantee in any situation that the creditor will offer you a deal.
Third, you have the right to dispute the debt at anytime, because of the federal Fair Debt Collection Practices Act. If you dispute a debt, you have the right to demand verification of the debt, including the total amount due. If the creditor cannot provide verification, the debt must be wiped clear. Also, you have the right to demand that the disputed debt not be placed on your credit report after notification of the dispute unless a judgment is obtained against you.
Fourth, you can stop making the monthly payment. Usually, a credit card company will initially request the payments and late fees for multiple months until you’re caught up on the payments. At some point, however, the bank will exercise its right drafted into virtually all credit card contracts to “accelerate” the amount due upon default, and demand payment on the full balance plus late fees and interest.
Eventually, the creditor will also file a lawsuit against you, and will probably obtain a judgment against you. The collection laws of the state where you live determine the collection actions that can be taken against you, once a judgment is obtained. In most states, a judgment results in an automatic lien against any real property that you own, meaning you can’t sell the property without paying the judgment to get the lien lifted. Also, a judgment means that a percentage of your wages can be garnished, and non-protected property of yours can be seized, by the judgment creditor. There are limited exemptions from wage garnishment based on financial hardship that usually include, but are not necessarily limited to, the following:
A. If you receive public assistance;
B. If the only income you receive is social security;
C. If the garnishment would place your family income below the federal poverty line.
Fifth, credit card debt is dischargeable in bankruptcy. Therefore, if you qualify for bankruptcy the debt can be discharged. To qualify for a bankruptcy, there are some requirements. You have to pass the “means test,” for one. Also, you can’t file for a bankruptcy within the “waiting period” after you have received a prior bankruptcy discharge.
So, even if you’re in the midst of a credit card crisis, you still have options. Determining the best choice for you is what I refer to as the “debtor’s dilemma.” What is best for one person is not necessarily going to be the best for another. Be sure to consult with a financial planner and legal counsel regarding what is best for you and your family, in light of your individual situation.