Eliminating Debt Without Paying: Fact or Fiction?

    Paying credit card bills can feel like fighting a fire. You put out one flame and another pops up. Eventually, you just want to get away from the flames.

    A lot of people think the best way is by filing bankruptcy, mainly because they can escape without paying their bills.

    But can you really get rid of credit card debt without paying?

    Technically, the answer is yes. You can.

    Realistically, the answer is no. You can’t.

    Let’s deal with the “technical” answer, which I must say we do not recommend.

    Technically, you could stop paying your credit card bill and hope the statute of limitations in your state expires before the card company, or more likely a debt collection agency, catches up to you.

    The problem there is the statute of limitations is somewhere between four and six years in most states. Your creditors could take you to court for non-payment in that time and you likely would lose.

    That would mean a court judgement against you for the amount owed, court costs, possibly attorney fees and maybe interest or late payment fees and … well, you get the picture. Try this at your own risk and again, we don’t advocate you try.

    Now, back to reality. No, you really can’t get rid of credit card debt without paying.

    Bankruptcy indeed lets you escape credit card debt. But if you’re asking, “How can I get rid of credit card debt without paying anything to anybody?” the answer is still: You can’t!

    Well, you could if you dropped dead. But even then, credit card companies are entitled to at least partial repayment from your estate.

    Bankruptcy also devastates your credit rating and stays on your credit report for 7-10 years for future lenders to look at. That means you’ll eventually pay more – sometimes a lot more – if you want to borrow money to buy a car or a house.

    The fact is a basic economic law applies to escaping debt – There is no free lunch. You can’t get something for nothing.

    But if you’re disappointed to learn there is no free bankruptcy, take heart. The costs can be viewed as a down payment on a fresh start that will turn your life around.

    There were 772,646 bankruptcy filings in the 12-month period ending March 31, 2019, according to the Administrative Office of the U.S. Courts. Bankruptcy has been a good option for millions of people, some of whom you’d never expect to be broke.

    Did you know Walt Disney filed for bankruptcy? So did Elton John, Willie Nelson and Abraham Lincoln.

    Lincoln didn’t technically file because modern bankruptcy didn’t exist in the 1830s. But after the general store he ran in Salem, Illinois, went into debt, Lincoln was required to repay creditors over 17 years.

    You’d have plenty of company if you decide to file. But you need to be aware of the financial consequences and how to minimize them.

    Are There Options Besides Bankruptcy?

    Yes, but they’re definitely not free.

    One route is debt settlement. You hire a lawyer or debt-settlement company to negotiate with creditors in an effort to pay less than what you owe, presumably considerably less. You make one lump-sum payment and are done with it.

    That sounds good, but there are serious drawbacks.

    For openers, some companies won’t even consider debt settlement and there is no law forcing any company to settle your debt.

    If they will negotiate, you’re still going to pay part of your debt. The advertisers say you may only have to pay pennies on the dollar, but better you should count on quarter on the dollar. Like three of them, as in pay 75% of what you owe.

    On top of that, the debt settlement company will charge you 15% to 25% of the amount saved. And the government will tax that as income on your next tax return.

    The process could take as long as three years. Your credit score is destroyed.

    But at least you’re not dead.

    Another option is a debt management plan. A nonprofit company consolidates your bills and negotiates lower interest rates with creditors. You make one monthly payment that is lower than the combined payments you were making.

    It’s a better option than debt settlement, but the debt management company also charges a fee, the process takes three to five years and you pay your credit card bill in full.

    That brings us back to bankruptcy.

    Which Is Better, Chapter 7 or Chapter 13?

    If you want to pay the least to creditors and lawyers, Chapter 7 bankruptcy is probably your best option. In that, the court appoints a trustee to sell your non-essential assets and distribute the net proceeds to creditors.

    With Chapter 13 bankruptcy, you offer the court a plan to repay your debts in three to five years. With either plan, you’ll probably pay something back to credit card companies. It will just be less than the original amount.

    Filing fees are usually $335 for Chapter 7 and $310 for Chapter 13. The advantages of Chapter 7 are you’ll be off the hook a lot sooner and overall costs are likely to be much lower.

    You don’t have to have a lawyer for either proceeding, but bankruptcy laws and proceedings can get complicated, so it’s advisable.

    The average attorney fee for Chapter 7 is $1,250, though that varies by market. The average fee for Chapter 13 is $3,000, but that also varies.

    What Are the Downsides of Bankruptcy?

    It’s an anvil on your credit score.

    If you’re considering bankruptcy, chances are your score has already nosedived. But if it’s still in the “good” range of 700, it could drop 100 to 200 points.

    Why does that matter?

    Your credit score is a major factor in determining the interest rate you receive when you apply for a loan. The better the score, the lower the rate, the less you pay.

    For example, say you want a 30-year fixed loan on a $200,000 mortgage. A credit score of 700 would qualify for an interest rate of 4.392%. A score of 620 would get 5.759%.

    The first one means your monthly payment would be $1,001. The second one would translate to a $1,168 payment.

    Over 30 years, that lower credit score would mean you’d pay almost $70,000 more in interest charges.

    The bottom line is bankruptcy is not a Get Out of Debt Free card. There is no such card.

    But if all those credit card bills make you feel like you’re trapped in a burning house, bankruptcy is the quickest and cheapest way out.

    Just remember, it could keep you from owning a real house for a long time.

    Author

    Max Fay
    Staff Writer

    Max Fay is an entrepreneurial Millennial whose thoughtful writing shows he has a keen eye on both. Max has a genetic predisposition to being tight with his money and free with financial advice. At 25, he not only knows what an “emergency fund” is, he already has one. He wrote high school and college sports for every major newspaper in Florida while working his way through Florida State University. That experience was motivation to find another way to succeed financially and he has at Debt.org. Max can be reached at mfay@debt.org.

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