Understanding your credit card and other debt before choosing your best option to eliminate the complete debt problem.
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Understanding your credit card and other debt before choosing your best option to eliminate the complete debt problem.

Before designing a master plan to get out of credit card debt you need to understand the legal characteristics of credit card debt, and how your situation fits into your all your personal finance circumstances including other unsecure bills, secure obligations, credit, legal proceedings and your individual  goals. Each type of debt, the amount of the debts, your own income and assets and come together to create a particular picture that ultimately brings about the answer for the proper solution to help achieve debt relief. Once your credit card debt answer seems clear these specifics drive the timing of the implementation of your plan, which we will discuss here too. While people with credit card debt often share similarities, no one should ever just decide on a debt reduction plan because it sounded good on a TV commercial or their friends recommended it. Only by learning about the debts first can you proceed to the next step of intelligently evaluating the options to erase credit card debt and when to use them.

Credit Card Debt Almost Always Represents Unsecured Debt

Credit card debt stands as our topic today, so let’s start there. Technically most credit cards represent unsecured debt. In basic terms that means you owe the money you borrowed when you used your credit card buy something or take a cash advance, but that in the event you fail to make a payment the collection activity and lawsuits provide the bank’s only recourse. A bank and their fancy lawyers hunting you down before a judge may sound daunting but compare that with secured debt. Take a car loan as an example of secured debt. The lender not only maintains the right to proceed in court, but in addition you granted them certain rights in the collateral securing the obligation. In this case you agreed to allow them a lien on the car you bought with the money from the auto loan. Therefore, on top of a summons saying you need to appear before a judge for the money you owe, one morning you could wake up to find your vehicle repossessed without warning or court orders because you let payments fall behind. In unusual cases card charges qualify as secure debt too. The typical consumer circumstances that most frequently feature this exception occur while shopping at Sears specifically using a Sears credit card. Reading the fine print reveals Sears gets a secured interest in the goods you buy with their store credit card. In chapter 7 trustee meetings I’ve seen attorneys for Sears not only go after items like large appliances and lawn tractors but stoop as far as requesting the return of golf clubs, tires and car batteries. For more on this subject read the secured vs. unsecured debt FAQ.

The place of credit card debt amongst all the debt in your life

Take a look at all of your debt, absolutely all the money you owe to everyone. Put it all into categories, the secured, the unsecured debt, the debt you already got behind on, the debt still current and keep track of both the balances and the minimum monthly payments due to remain current. At this stage try to not only get the feel for your entire debt scenario but particularly which debt may drive your decisions or overshadow the others. For some people their credit card debt dwarves everything else while for many even a high level of credit card debt pales in scope to mortgage debt problems.  

Use this opportunity to review your income as well. Think not only about what you make now but predict the future if you can. Do you expect a raise or a layoff? Is your spouse about to land a job or lose a job? Are other financial life changes around the corner? Anyone who jumped directly to this article should review the piece on personal spending for people with credit card debt to make sure they truly understand their personal budget before proceeding.

Personal Credit Score Prior To Implementing A Credit Card Debt Reduction Plan

A prerequisite for any attack on credit card debt includes knowing your personal credit score prior to selecting a debt relief method. Many choices for credit card debt elimination destroy your credit. On the other hand, if your credit already sunk near the bottom of the scale even dramatic ways to get out of debt potentially increase your credit score. While knowledge on this matter must come into the decision, your credit alone must not drive the entire process. The same holds true for similar personal preferences. Many people come in looking for debt advice but insist they do not want to ruin their good credit; others take offense to bankruptcy while some even insist they must pay back all debt in full. While you need to know your credit score at the start of the process and anyone with good credit should make every attempt to keep their credit score high, for some everyone can read the writing on the wall and not a single option allows their good credit to remain intact moving forward. So a proper credit score analysis involves knowing your current score, understanding how each option could change that score from your starting point and for those with good credit will any options allow your high score to remain. To get your credit score find a link at the Understanding Your Credit Score FAQ. Should you face a situation where you must sacrifice a high credit score know you will not languish with bad credit forever. Many options exist to rebuild credit in a few years. When you complete your credit card debt elimination get help from our free credit improvement course.

Establishing Goals For Secured Assets And Credit Cards

 With your list of secured debt from an earlier section you developed a list of assets used as collateral for debt. Examine the list and review which you want to keep. The normal knee jerk reaction comes back as “I want all of them”, but resist that temptation and take a moment to explore abandoning one or more. Perhaps you own a car worth $10,000 covered by a $20,000 loan and a payment more like a house, moreover it needs a new transmission and it no longer fits your growing family. You might live in a nice house but the neighborhood went downhill so fast every other house now sits boarded up and going next door for a cup of sugar means making the request to hookers or crack dealers. While you explore an individual secured asset get a feel for the importance of each in your life. Would you give up your cars to retain your home? Bring your credit card debt into this process at some point too. Could you afford the mortgage if you stopped paying the credit card bills? I’m not saying you need to give things up, but you do need to examine those options.

While thinking of assets review your holdings from the lenders point of view. What do you own they might want to seize? Stocks, bonds, property with equity, perhaps even future assets like an inheritance or potential legal settlement. While a creditor maintains no rights to a future asset now, you need to think about these items both to insure you protect them in the future and because they could potentially influence both your decisions on <which debt options will suit your needs> as well and the timing of implementing those options.

The credit cards themselves come into play here too. For those who might still emerge from their debt relief plan without the banks canceling all of their credit cards, does that stand as a goal or a temptation they should avoid? Let me take a second to stop people from following a popular thought on this subject. Do not pay off a credit card with current debt just so you can have a credit card on the other side of your relief plan especially if you elect debt settlement or bankruptcy. Let all of your credit cards participate in your debt reduction plan and obtain a secured credit card for your daily credit card usage as you reestablish credit after you get out of your current debt. For more information on who should avoid credit cards see the previous article on changing consumer spending habits. Let learn more about the benefits of a secured credit card and why it makes a better choice for people with existing debt or apply for a secured card at the Secured Credit Card FAQ.

Bankruptcy Exemptions – Keeping assets after bankruptcy

Many people start off with the misconception that anyone filing for bankruptcy loses everything including their cars and homes. While for certain bankruptcy filers this does hold true, many debtors file for even chapter 7 liquidation bankruptcy and still keep all of their possessions. With our topic today as credit card debt this becomes even more important because the majority of bankruptcy filings mainly for credit card debt I saw emerged as “no asset” cases where the debtor received a discharge for all of their debt and retained all of their property.

Let’s examine the general concepts behind how this works. While a bankruptcy indeed requires a debtor to subject all of their assets to the scrutiny of the bankruptcy trustee, some assets earn exemption status and people may keep the exempt assets. For many people the trustee awards all assets exemption and thus the debtors keep everything. The exact exemptions available for you depend on if your state allows a choice of exemptions including the federal bankruptcy exemptions or your home state bankruptcy exemptions.  

For folks with credit card debt about to evaluate their potential solutions, imagine how things might play out in bankruptcy court if you filed chapter 7 bankruptcy and repeat the process for chapter 13 bankruptcy. While the exemption situation might remain the same, the opportunity to keep your home marks the main difference when performing chapter 7 vs chapter 13 analysis. Despite the fact that in a chapter 7 you will get no protection for your home from the court, those with the combination of a full exemption on the property and current mortgage payments most often find they keep their house. Read more about exemptions and keeping a home even with a liquidation bankruptcy in the chapter 7 FAQ.

Particular Unsecured Debt Ineligible For Certain Debt Help Solutions

 Not all unsecured debt receives the same treatment through some of the various debt elimination processes even though the technical status of unsecured debt remains the same. Most notably find credit card and most medical debt available for discharge in bankruptcy as well as debt settlement options. Many private loans like personal loans from friends, family or non-banks may be discharged in bankruptcy court but almost never gets settled for a discount like credit card debt. Don’t forget that wiping out some of these personal debts with a bankruptcy might mean destroying relationships too. For the most part, student loans may not be discharged in bankruptcy but payments on student loans may be consolidated to ease cash flow problems.

Before a full evaluation of the debt relief choices know how each applies to your own debts. Basic questions and answers about bankruptcy might reveal that a complete discharge in chapter 7 sounds perfect, except that most of your own debt comes from student loans making bankruptcy a poor selection. Debt settlement might get your attention until you understand all of your personal loans from Uncle Edgar can’t be settled and without those loans your debt remains too small for any debt settlement company to work with you.

Credit Card Debt Response Timing - Status Of Legal Actions By Creditors And Unique Personal Transactions

 Although you maintain no control over how aggressively a creditor decides to proceed against you in the court system, exactly where they stand in the process must be a part of the element of timing in terms of when to implement a debt relief procedure as well as influencing exactly which methods might work given the legal status of a case.

Many people panic when either collection actions start or a lawsuit begins, but depending on how you plan to address your credit card debt your reponse might trump the creditor activity making their exact procedure meaningless but the relative timing important. Let’s look at a standard case and follow a typical timeline. In the beginning you paid your credit card bills on time, your credit report score remained high and cute little birdies sang outside your window. At first things get just a bit tight and you make your credit card payments 20 days late. Consumers who never made a late payment in their life might panic at this stage, and it might appropriately mark the perfect time for a wakeup call and moment of reflection, but other than incurring a late fee it means nothing, not even a black mark on your credit report. Nothing improves and soon credit card debt falls 40 days behind. Credit scores now reflect trouble and by 120-175 day late on bills you likely earned the designation of “bad credit” and calls from the card company asking for payments fill your answering machine.

The next key stages come in the 6 to 12 months after you stopped making payments on credit card debt including collection agencies contacting you, charge off of the debt and legal action. Things get overwhelming and depression from your debt can occur but keep things straight and in prospective. Even professional collection company threats do not count as legal action; it’s just a more aggressive way for the bank to get paid. An account being charged off does not mean you no longer owe the money; think of it as an accounting note from the bank to itself, an extra black mark on your credit and no other significance or change in the money due from you to the bank. A charge off does mark an important point in our timeline because most creditors only engage in debt settlement discussions after the charge off of a debt, in fact this area of our timeline highlights the best opportunity to try debt settlement.

At some point the bank moves the account from collectors to attorneys and they bring you to court. The process takes a while, but the longer it goes on the harder a settlement gets and the more other debt options drop away until only bankruptcy remains. Eventually the creditor wins in court and gets a judgment against you. Now you see the vultures circling above you. If you still fail to pay the judgment or reach a settlement the creditor may try to attach your property or garnish your wages. Especially if you think you can keep your home in the long run or if you might have some equity, these actions finally force your hand. If an attachment remains on your property long enough, a few months is all, the attachment will stay there no matter what you do. Up until that time a bankruptcy serves to discharge your credit card debt and render everything the bank did as useless, but failure to file bankruptcy until after an attachment sits on your property past the applicable preference period means your bankruptcy may discharge the personal debt, but the bank’s lien remains on the property as secured debt moving forward.

Just as the bankruptcy court maintains the right to wipe out the banks attachment from your credit card debt a few months after it happens, they can recall other transactions you may not want erased. Think about a person about to go bankrupt who owes their parents $20,000. They do not want their mother and father hurt, so they pay them back. Filing bankruptcy within the preference period following that payment allows the court to seize the money back from the parents and distribute it more evenly amongst all the creditors, so you might want to wait to file if you made preferential payments and do not wish them rescinded.

Charges you made on your credit cards influences timing too. Things you paid for while in contemplation of bankruptcy may not end up discharged and in extreme cases your whole bankruptcy discharge could end up denied or you might even be looking at criminal charges. If you even think you might fall into this group you need to evaluate waiting until enough time passed from the questionable purchases before filing. And for those reading this before such charges, if you think bankruptcy might be an option, do not accrue any more charges starting this instant.

Specific State Laws Regarding Credit Card Debt

Depending on where you live certain unique state laws or interpretations of federal laws may need to play a part in your credit card debt solution selection. Certain states make it very difficult to carry out a debt settlement; these include Kansas, North Carolina and Wisconsin. Other states offer more regulation like New York and New Jersey. California bankruptcy trustees earned a reputation for tougher enforcement of alleged fraudulent credit card charges than in other venues. Try to learn what might be unique in your own state and that includes learning about your states homestead laws and bankruptcy exemptions as discussed above. Some may garner this information at the next stage when speaking to a <debt settlement professional> or bankruptcy attorney

Solve The True Root Cause Of Credit Card Debt Problems Before Implementing A Solution

Just because things with your credit card debt situation look bad you should not jump directly into committing to a specific debt elimination technique, even assuming a correct assessment and proper solution selection, until you addressed and solved the causes of your problems. We just finished talking about various reasons for adjusting the timing of your attack, but perhaps the most important concerns making sure you eliminate the chances for a repeat of the trouble or a continuation of an ongoing problem.

Perhaps you ran up bills when you lost your job, but you still don’t have a new one and things continue to get worse. For some people medical problems started the debt issues, but a return to good health remains far away. Maybe you stopped incurring daily charges but you might still need to avoid foreclosure or you already lost your home and know you owe a large mortgage deficiency but you don’t know yet if the bank plans to pursue you.

In general, we talked about your entire personal financial situation as a picture, but for some people that remains to fully develop or stands as an unfinished canvas. Besides the fact the final chapters of your debt story could change the way in which you might like to tackle it, some options only come with one shot. You do not want to be one of those sad cases of people who really need a bankruptcy, the kind of situation where a chapter 7 would eliminate all of their debt and allow the start a fresh new life, or a foreclosure situation where a chapter 13 could facilitate their saving their home, but the bankruptcy laws prohibit their petition because they filed an earlier case that they really did not even need.


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