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When under a heavy debt load many people turn to bankruptcy to resolve their financial problems. In some instances this is their only option but for many Americans with outstanding credit card debt Bankruptcy is not a necessity.

Generally, most people consider personal bankruptcy a last ditch effort reserved for people who are out of options. It can stop a wage garnishment, halt foreclosure proceedings and end collections calls. While effective there are several long-term consequences that most consumers should avoid.

Bankruptcy will negatively impact your credit for 7 to 10 years. It can also keep you from obtaining credit in the future, such as auto loans, student loans and mortgages. In some instances it could even prevent you from applying for or accepting certain jobs.

While we cannot give you legal advice or recommend whether or not to file bankruptcy we do know that not everyone can file for Chapter 7, which is what most people think of when they discuss bankruptcy. When filing Chapter 7 your qualified debt is legally discharged (exemptions include student loans, child support, income tax etc). However with recent changes to bankruptcy laws many working class Americans do not qualify for Chapter 7 and instead have to file Chapter 13.

Chapter 13, also known as re-organization, puts you on a 3 to 5 year re-payment plan that the court determines for you based on a “means test”. This test uses the average income and the average expenses for the area you live in to determine how much you can afford to pay to your creditors. Instead of looking at your actual financial situation they use a government test to look at how much money you should have left over every month and then dictate how much you will pay.

Bankruptcy is also costly. When filing bankruptcy you have to hire an attorney and pay court costs. It can easily add up to a few thousand dollars just to get started.

When you add up the costs associated with filing, the long-term damage to your credit and the inflexibility of the process anyone can see why bankruptcy is such a big decision.

There are other solutions what will do less, long-term harm to your credit and get you out of debt on a payment that you determine.


Many homeowners see a home equity loan or a second mortgage as a way out of financial burden. While it is a viable way to eliminate credit card debt there are some things to consider. First of all, you should view your home as a long-term investment. When you buy a home the home’s value will slowly increase over time. This gradual increase is your profit on your investment. It is this profit, or equity, that you can borrow from to pay-off debt. However you should consider the major flaw when using a home equity loan to pay back unsecured credit cards: You are transforming unsecured debt into secured debt.

Credit cards are open, unsecured accounts. If you lose a job or encounter other financial difficulties and you stop paying your credit card bills there is little they can do to you but when you stop paying your mortgage it can lead to foreclosure and you can lose your home.

If you have $20,000.00 in equity on your home and you use that to pay back $20,000.00 of unsecured credit card debt you have essentially turned unsecured debt into secured debt and you have used your most valuable asset to guarantee the loan. Now that unsecured debt is secured by your home.

You should reserve the equity in your home for important things like major home repairs and remodeling, your retirement or paying for your children’s education.

There are other methods for dealing with credit card debt.


When struggling with overwhelming credit card debt some consumers turn to Credit Counseling. Sometimes referred to as Debt Consolidation, credit counseling companies often label themselves as non-profit organizations. Their goal is simple: Reorganize your debt based on preexisting terms supplied by the credit card companies. While they are supposed to help lower your interest rates and give you a smaller payment it is not always the case. Because they use very stringent guidelines provided by the credit card companies they are inflexible and do not cater to each client’s individual needs.

There is no qualification process to enter a Credit Counseling program. The counselor simply gathers your information, enters it into a computer and then dictates to you what your interest and payment will be. Your hardship or unique situation is not a factor. In some cases your interest can actually increase and your payment may not even go down!

The Credit Counseling Company will then collect your payment each month and redistribute it to your creditors but they do not use the entire payment to pay your bills. Your new payment will include a monthly fee of up to $50.00 that the credit counseling organization will collect for doing what you can do on your own. They also receive a kickback from the credit card companies called “Fair Share.” Basically, the major banks and credit card companies pay them for enrolling people in their program.

While enrolled, your creditors will report to the credit bureau that you are in a debt management program. This will lower your credit rating and it is a signal to potential lenders that you are struggling financially and may be a high-risk debtor.

Finally, while you are in the program, your balance will continue to accrue interest and you will pay back the full amount of the loan or credit card balance. No potion is waived or forgiven.

In short, credit counseling is expensive, time consuming, damages your credit and offers little relief.

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