$70,000 Credit Card Debt

Let us explore your options for resolving your $70,000 credit card debt.

The four primary concerns for most consumers carrying significant debt loads are:

1. Size of monthly payment and ability to make it
2. Time to debt freedom
3. Total cost to pay off the entire debt, and
4. The credit rating impact of the resolution program

Evaluate each approach or tactic relative to your prioritization of these factors.

Since there are a variety of debt resolution options, including credit counseling, debt negotiation/debt settlement, a debt consolidation loan, bankruptcy, and other debt resolution options, it is important to understand each option and then pick the solution that is right for you.

Credit Counseling

A Consumer Credit Counseling Service (CCCS), is one specific type of debt management plan. It is a very common form of debt consolidation. There are many companies offering credit counseling programs. In a CCCS program, you make one payment to the CCCS firm and it then distributes payments to your participating creditors. CCCS firms negotiate lower interest rates with your creditors. By obtaining interest rate concessions from your lenders or creditors, more of the payment you make each month goes to the principle balance, thereby speeding up the time it takes to become debt free. Because the program lowers interest rates, it less effective for someone whose interest rates are already low.

It is important to understand that in a credit counseling program, you are still repaying 100% of your debts, plus some interest. Often, in Consumer Credit Counseling program, the size of the payment is not significantly lower than your current monthly minimum payments you are sending to your creditors. This means that if you are having trouble making your current payment, a CCCS program may not be right for you. The program demands that you make a timely payment each month. If not, you could end dropping out of the program without having resolved the debt problem.

A high percentage of people who enroll in a CCCS program drop out. On average, most credit counseling programs take around five years. Although most credit counseling programs do not impact a FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report and affects your credit rating. Unfortunately, many lenders look at enrollment in CCCS program as akin to filing for Chapter 13 bankruptcy. In both cases you needed the assistance of an outside firm to re-organize your debts.

In your case, a CCCS program will almost certainly cut your interest rates, and may be a viable option if you can afford the monthly payment.

Debt Settlement

Debt settlement, also called debt negotiation, is a form of debt consolidation that reduces your total debt. Savings can be as much as 50% and debt settlement programs will significantly reduce your monthly payments. Debt settlement programs are geared for people who have a financial hardship that makes it so they either cannot pay their bills or are about to start falling behind. Debt settlement programs typically take three years to complete.

It is important to keep in mind, however, that during the life of your debt settlement program, you are not paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 bankruptcy. The trade-off here is a negative credit rating versus saving money.

Debt Consolidation Loan

Many people think first of a debt consolidation loan when seeking debt consolidation. It is really the only true consolidation, where the original debts are paid off by a lender who assumes the new debt. The most common forms of debt consolidation loans are home loan refinancing, taking out a second loan on a home (or a home equity line of credit) or, obtaining an unsecured loan. Since the credit crunch occurred, obtaining an unsecured loan at a reasonable interest rate has become difficult or impossible. In a debt consolidation loan, you exchange one loan for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high-interest unsecured debt.

It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation. If there is ever a chance that you cannot afford the new mortgage payment, you put yourself at risk of foreclosure! In the case of a debt consolidation loan, most mortgages are 30-year loan, which means that the total cost and the time to debt freedom could be very high, but the monthly payment will be lower than other options and there is no credit rating impact.

You mentioned your home is valued at $450,000 and you have a $322,000, 15-year 4.3% mortgage. You have a loan to value of about .72 if the home value you mentioned is accurate today. Assuming you have a good or excellent credit rating and a stable employment history, you may be able to qualify for either a home equity loan (a second mortgage), or a cash-out refinance. If the lender allows you to cash-out up to 80% of your home value, then you would net about $40,000. Unfortunately, that leaves $30,000 remaining of your credit card debt.

Bankruptcy

Bankruptcy may also solve your debt problems. A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort. Bankruptcy is a public matter. You need to stand in public and declare that you are unable to pay your debts. Notices are published and your credit report will show that you filed for bankruptcy for at least seven years. Since the most recent federal bankruptcy reform went into effect in 2005, it is much harder to qualify for Chapter 7 bankruptcy.

It may be the case that a Chapter 13 bankruptcy will be the only one available. In a Chapter 13 bankruptcy, a person’s debts are reorganized. The debts are repaid, according to the terms established by the bankruptcy court. Chapter 13 bankruptcies usually run three to five years. If you are considering bankruptcy, I encourage you to consult with an experienced bankruptcy attorney in your state.

Default

You may be curious what may happen if you do nothing. If you stop paying your unsecured debts, creditors have the right to collect the debt. First, you will likely receive collection calls and letters from the creditor directly. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.

Third-party collectors are known to be much more aggressive in their collection tactics than original creditors, so do not be surprised if the calls become more persistent, or even threatening. Thankfully, the Fair Debt Collections Practices Act established rules that govern the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules. If you know your rights, you can protect yourself from improper creditor contact.

In some cases, when all other collection efforts fail, a creditor will decide to file a lawsuit against the debtor. This is not a frequent occurrence, but it is within a creditor’s rights and a possibility about which you should be aware. If one of your creditors sues you, the court will likely issue a judgment in the creditor’s favor. Depending on your state’s laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, place a lien on your property, or take other action to enforce its judgment.

Regarding a credit report, defaulting on a debt damages a credit score severely. In addition, default is a warning flag for many lenders, who will refuse to deal with a potential customer with a default on their record. As a result doing nothing and allowing default is a poor option for most consumers.

401(k) Distribution

I have a strong personal bias against taking 401(k) or IRA funds, which you set aside for your retirement, to pay consumer debt. First, if you are less than 59½ years of age, you will pay a 10% penalty tax. Second, because IRAs and 401(k)s are pre-tax funds, you will pay income tax on the distributions. Third, retirement funds are exempt from bankruptcy and levy, so the funds are off-limits to creditors.

Here, you mentioned a $45,000 IRA. After the penalty tax, assuming you are less than 59½ years of age, you will be left with $40,500, which is taxable. Going this route you are more than $30,000 short in retiring your $70,000 credit card debt.

Summary

Although there are many forms of debt consolidation, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high unsecured debt and poor credit may want to explore debt settlement or debt negotiation. However, each consumer is different, so find the debt consolidation option that fits for you.

Lastly, here are four fast tips for your own quick debt consolidation evaluator:

1. If you have perfect credit and have equity in your home, then consider a mortgage refinance.
2. If you can afford a healthy monthly payment (about 3 percent of your total debt each month), your interest rates are a problem, and you want to protect yourself from collection and from going delinquent, then consider credit counseling.
3. If you want the lowest monthly payment and want to get debt free for a low cost and short amount of time, and you are willing to deal with adverse credit impacts and collections, then evaluate debt settlement.
4. If you cannot afford anything in a monthly payment (less than 1.5 percent of your total debt each month), then consider bankruptcy to see if Chapter 7 might be right for you.

Bills.com makes it easy for you to apply for traditional forms of debt relief.

Recommendation

I dislike liquidating your IRA or 401(k) in general, and specifically in your case because it does not retire your debt. You could combine IRA or 401(k) liquidation with a mortgage refinance, but in that situation you have wiped out your retirement savings and burdened your home with additional debt.

Default is not a good option for you given the facts you provided. CCCS may be a viable option if you can match your expenses to your new lower income and can afford the payments. If you cannot afford the monthly CCCS payments, then debt settlement is a good option, and is preferable to bankruptcy from a credit score perspective.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com