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The Federal Reserve says that American consumers are in hock to the tune of $2.75 trillion. That may sound like a lot, but it does not even include debts for housing like mortgages. No sir, we’re just talking about money spent on everything else, like the stuff we buy to fill up our houses and garages.
Much of that debt is on credit cards, of course, because who doesn’t love the convenience of plastic? According to the experts, we will probably add nearly $50 billion of debt to our trusty credit cards this year alone – adding to the $80 billon or so that we racked up in 2011 and 2012 (as we restrained ourselves and cut back because of the bad economy). Those figures are really too big to get your head around, though, unless you make your living as an economist or mathematician. Breaking it down to a more manageable size that’s easier to relate to, the average household in the USA owes more than $15,000 in credit card debt.
Inevitably, every year tens of thousands of people saddled with unmanageable credit card debt declare bankruptcy – but it does not necessarily mean that their credit card problems go away anytime soon.
The Bush Era Bankruptcy Overhaul
One of the first major pieces of legislation that President George W. Bush signed into law was a bipartisan bill that made it much more difficult for Americans to eliminate their credit card obligations in bankruptcy court. Before that big change it was possible to accumulate debt with your plastic, declare bankruptcy, and have it essentially wiped away so that you could get a fresh start. The legislation – the most sweeping overhaul of bankruptcy law in a quarter century – was eight years in the making, and the credit card industry spent gobs of money paying Washington lobbyists to help push it through Congress.
Court Ordered Repayment
Nowadays, in the era following that seismic shift in policy, you can still declare bankruptcy, but you may very well wind up paying at least part of, and maybe all of, your credit card debts. Under Chapter 13 bankruptcy, for example, the judge will typically set up a repayment plan for you to pay back your creditors a little at a time. That usually requires you to make a certain minimum payment each month for about three to five years. For people who have particularly low income and hardly any assets, Chapter 7 bankruptcy may be an option. Under Chapter 7 you may be able to wipe out your credit card debts – but that’s only because most of your financial assets have already been gutted.
Sneaky Planning Can Backfire
Sometimes clever cardholders decide to take shelter of bankruptcy, but first they go ahead and max-out their plastic. They reason, as long as they are going bust they have nothing to lose. That’s not necessarily how it works, though, and this kind of strategy can totally come back to haunt you. Credit card companies and bankruptcy judges are already aware of this tactic, so if you run up your credit card bills to buy expensive items or you take out cash advances in the months’ right before declaring bankruptcy, that behavior may be interpreted as fraudulent. To defend yourself, you’ll have to provide convincing proof that you really did plan to repay those charges and weren’t planning on ducking out of them through bankruptcy. That can be a hard sell to a skeptical judge and if the court doesn’t buy your alibi then you will most likely be ordered to pay back the credit card company in full.
Picking up the Pieces
If you have already endured bankruptcy then the next challenge is to rebuild your credit. If you are able to open and maintain a bank account, that’s a good starting place. Talk to a loan officer at the bank and explain to them that you want to intentionally start rebuilding your credit. They should be able to advise you step-by-step on ways to do that such as opening a secured credit card account or taking out a small consumer loan that you can easily repay on time. You may also qualify for a department store or gas station charge card. These cards won’t work at other places that accept plastic, but they can be a decent entry level alternative. The goal is to acquire cards from merchants or banks that report to the major credit bureaus and then start borrowing limited amounts and quickly repay them. After a track record of successful borrowing and repayment is established, your credit score will start to rise and you’ll be able to graduate to a conventional credit card like a MasterCard or VISA.
Cards for People with Bad Credit
There is a whole category of credit cards for people with bad credit. Most of these are secured by cash as prepaid cards, although some of them are full-fledged cards. The danger is that you may pick the wrong plastic, one that charges exorbitant fees, or picking a prepaid card that won’t help you build credit at all. That could lead you back into messy debt as you unnecessarily spend lots of money that you cannot afford through monthly maintenance charges, ATM fees, and so forth. Searching for the most reasonably priced plastic can, however, be a real hassle. One of our bloggers recently explained that she had to search through more than 5,000 words of small print just to locate the fee schedule of one particular card. That’s roughly equivalent to reading 20 pages of a really boring book.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.