Eliminate Credit Card Debt the Right Way

So you have some credit card debt that needs to be eliminated? Well these days, just about everyone does. Unfortunately, all the scammers and rip off artists know it, too. Commercials on television, ads in magazines, on the radio, on the internet, and spam emails to your inbox all promise easy, fast ways to get rid of your debt quickly and easily.

So how can you know who to trust, and which methods of getting out of debt will actually help rather than hurt you? The truth is, some debt elimination methods will damage your credit while others may not, or may only hurt you minimally. Some forms of "debt relief" will actually leave you worse off than ever before!

Luckily for you, I'm going to explain to you some of the common methods you can use to get out of debt, and show you the pros and cons of each. There is no right or wrong solution for everyone; each person's situation usually determines what the best option is. Read on to find out what the best option for you is!

The most common ways to eliminate your debt are bankruptcy (both chapter 7 and chapter 13 for individuals), credit counseling and/or debt management plans, debt consolidation loans (including credit cards), and debt settlement. Again, some methods are better than others, so let's figure out what will help you the most...and hurt you the least.

Many people who are desperate and trying to find a way out of debt stumble across something online, or maybe hear something from an acquaintance or friend, about ways to legally cancel or eliminate the debt.

The reasoning seems to vary slightly, but most of these arguments say something along the lines of the banks are a fraud, or the contract and debt you incurred is somehow not legal.  They usually include some convoluted reasoning about you being a corporation or entity and basically say that, if you contest the debt in court, it will be deemed as invalid.

When you come across information like this, RUN AWAY!  This is absolutely a scam.  Debt "novation" and debt cancelation are just things cooked up by scam artists and conspiracy theorists.  Trying any of these means to tackle your debt will only result in you falling deeper into debt and damaging your credit.

The only way to truly wipe out your debt without paying is through Chapter 7 bankruptcy, also known as liquidation.  

Bankruptcy is often a controversial topic to many consumers in debt. Many people still feel that there is a stigma attached to filing for bankruptcy, and feel that it is somewhat shameful or embarassing. Others feel that bankruptcy is an easy way to get out of debt without having to pay their creditors.

The truth is, bankruptcy is a good LAST RESORT when you are struggling with debt. When you truly have no hope or way out of debt, bankruptcy can give you the fresh start you need with your personal finances. You will, of course, have to deal with the negative consequences of filing as well.

There are two main types of bankruptcy for individuals (and couples): Chapter 7 and Chapter 13. Chapter 13 involves a reorganization of debt and a repayment plan. Chapter 7 involves "liquidation" and a wiping out of debts. Under the new bankruptcy laws of 2005, you must pass an income test in order to file for Chapter 7 bankruptcy.

You should seriously take a look at your budget and finances before considering filing for bankruptcy. I would also recommend speaking to an accredited, non profit credit counselor first. A credit counselor will look at your debt and also help you map out your income and expenses. The counselor may even be able to get you a lower payment through a debt management plan (discussed later).

You should look for any ways to reduce your expenses and/or earn extra income to help fix any gaps in your budget. You should also think about any assets you have that you may be able to sell. Again, a good credit counselor should be able to help you explore all of your options and may come up with suggestions you never thought of. If there is absolutely no way to change your budget to help you repay your debt, even at a lower debt management payment and after exhausting all of your other options, then and only then should you begin considering bankruptcy.

A bankruptcy can give you a fresh start and wipe out much or all of your debt burden. Most people will not have to worry about losing much or anything at all in the way of assets (I am not giving legal advice, you should speak with a qualified attorney in your state for legal advice!).

Bankruptcy will also stay on your credit report for up to 10 years, and is also public information. This will make it difficult or impossible to obtain (or refinance) a mortgage or car loan. Any credit you do qualify will be very expensive to you. Having a bankruptcy could also affect your insurance rates and even your ability to get certain jobs.

One option that is advertised over and over, seemingly everywhere you look, is debt settlement. Settlement is also known as debt negotiation or even debt elimination. While it is advertised under many different names by many different companies, the services is basically the same.

Debt settlement companies promise to reduce your credit card debt by as much as 50%. Most promise to do this without damaging your credit in the long run.

Some of these companies are an outright scam and will take your money and run. However, even the more "legitimate" debt settlement companies can cause major problems for you.

When you work with a settlement company, you make monthly payments to them that they simply hold on to (minus the very large fee that they take). In the meantime, your creditors do not receive a dime! You rack up fees and interest, and you could even be sued for your debt. You will probably also receive a ton of collection calls as well.

In the end, the settlement company is supposed to settle your debt and pay your creditor. But quite often, the company will not reach a settlement with the creditor. When this happens, you are left to deal with the mess, including the added finance charges and fees. In other words, your credit is ruined and you owe even more than you did originally.

Working with a settlement company to pay off your credit card debt is very rarely a good idea. The only way it could possibly be a good idea is if all of your debts are already with collection agencies. However, even then, you could settle the debt on your own and avoid paying thousands of dollars to a settlement company.

Another common method of dealing with debt is to consolidate your credit cards.  Most people consolidate with a home equity loan, a personal loan, or a credit card.  You must have very good credit for this to be an option for you.

If you go this route, make sure that all loan and/or transaction fees are reasonable and that your new interest rate will be permanantly low.  If you do not save enough in after considering interest and fees, this is probably not worth it for you.  If you do not have good credit, it is probably not even possible for you.

Another potential option is a debt management plan, which can be offered through a non profit credit counselor.  With debt management (or DMP), you could get lower interest rates and get rid of some of your fees.  Your payments will be consolidated into one low monthly payment, and you could be out of debt much, much faster.

Once again, while this option offers some great benefits, a debt management plan is not for everyone.  If you have the means to get out of debt on your own, especially if you have plenty of extra income (after you pay your expenses) and you have low interest rates already.  The main drawback of debt management is that your credit card accounts will be closed.