Will you be in credit card debt forever?
If you’re carrying cedit card debt and only paying monthly minimums, you might be in for a long, expensive haul. Let’s say you owe $20,000 in Visa bills (which is close to the average for California). The rate for your debt can be as high as 24.9% . Paying the minium payment on your credit cards will keep you in debt for more than 20 years and you’ll end up paying far more than you borrowed, about five times more.
$111,000 of payments on a $20,000 loan…
To give you a fighting chance, we’ll say your rate is a little lower, at 23.9%. If you’re making your minimum monthly payment of $400, you’ll pay off the debt in a little over 23 years and you’ll have paid a whopping $91,000 in interest. That means you’re paying a total of $111,000 on a $20,000 loan!
What are your options?
So, what are your options? You could just continue to make minimum payments and contribute more where you’re able. You could also make larger payments in order to pay off the loan faster. If you could pay $500 each month, you’d pay off the entire debt in just under 7 years and only pay $20,000 in interest . That’s a significant improvement on a $91,000 bill, but you’re still paying $40,000 for your $20,000 debt. Even if you double your payments to $800, you’ll still pay $8,000 in interest.
The Chapter 13 bankruptcy option
There is another option – filing for Chapter 13 bankruptcy. Filing for bankruptcy is a serious decision, but $111,000 is a serious bill. When you file for Chapter 13 bankruptcy, you make payments for five years toward your unsecured debt (your credit card bills along with medical debts are unsecured). At the end of five years, the remaining debt is discharged, or forgiven.
If you filed for Chapter 13 bankruptcy, your monthly payment would be approximately $425 for a $20,000 debt. You’d pay that every month for five years, for a total of $25,500. Then the rest of your debt will be discharged. Instead of paying $111,000 over 20 years, you pay $25,500 over 5 years. Your monthly payment doesn’t necessarily go down, but you save more than $85,000 and 15 years of your life.
If you’re behind on payments for other loans, such as for a home or car, those will be worked into your Chapter 13 plan as well. If you’re up to date on payments, those loans won’t be affected.
When you’re struggling with credit card debt, filing for bankruptcy may be far less expensive than keeping up with the minimum payments on credit cards.
Image from Flickr user seishin17
Barry Edward Borowitz is the founding partner of Borowitz & Clark, LLP, a leading bankruptcy law firm that represents clients petitioning for bankruptcy protection under Chapter 7 and Chapter 13 of the bankruptcy code. Mr. Borowitz has been practicing bankruptcy law exclusively for more than 15 years. View his full profile here.