What Is The Best Credit Card Debt Relief Method?

Posted in Debt Help
Posted by Rebecca Martyn, CPA, CGA, CIRP - LIT

credit-card-debt-relief-updatedCredit card debt is one of the most challenging debts we see every day.  People get caught in a cycle of credit limit increases, new credit card offers and using credit card debt to pay for living expenses. The next thing you know, they’ve accumulated thousands on their credit cards and are looking for debt relief.

If you are looking for credit card debt relief, you have several options that can help you pay off your debt. Each differs in terms of monthly payments and the impact they will have on your credit report. Some will have you out of debt sooner, others will take a little longer. Which will work for you depends on your situation. That’s why talking to a licensed professional is a good idea. We can help you take the steps you need to get relief from the constant struggle to balance your credit card debt payments and your budget.

Here are a few credit card debt relief options to consider:

Tackle Your Credit Card Debt On Your Own

Many are relieved to know that they can work their way out of credit card debt on their own. The key is to have a well thought out debt reduction plan; starting with the development of a household budget. You need to be strict with yourself to find ways to cut back on your spending and funnel the savings into debt repayment.

You can help pay off your debts sooner by negotiating better terms with your credit card providers. If your payments are current and your credit score is not too low, they may work with you to find a lower interest debt option. A lower interest rate means more of your monthly payments are applied to the balance owing, ultimately saving you money.

If the credit card companies won’t lower the interest rate themselves, you may be able to achieve the same result with a debt consolidation loan. If you have equity in your house or other assets you can use as collateral, you may be able to consolidate several credit card debts into one new home equity or debt consolidation loan. You will need to continue to budget for debt repayment since you will still owe money.

Paying off your debts on your own has the least impact on your credit score in the long run. The first step is to catch up on any payment arrears; constantly missing payments or paying less than your minimum payment will do more harm to your credit. Once you do catch up, continue to apply as much as you can each and every month to paying down your credit card debt.

Talk To A Credit Counsellor About A Debt Management Plan

A Debt Management Plan (DMP) is an agreement to pay back your debt, worked out between yourself and your credit card company, with the help of a credit counselling agency.  This type of program offers a couple of key advantages.  You can consolidate several small credit card debts into one monthly payment and you get relief from interest charges and penalties, as long as you are making your plan payments.

A DMP works well if you only have credit card debt and your balances are not so overwhelming that you can’t pay them off.  Payback will likely take between three and five years, depending on the amount of your debt. Keep in mind that a notice that you are participating in a debt repayment program will appear on your credit report and will remain there for two years after your payments are successfully completed.

It is important to know that while a debt management plan will help you deal with small credit card debts, it will not deal with other forms of unsecured debt including tax debts, student loans and payday loans.  Also, if you can’t afford to pay back your debt in full, it will not provide you with the debt relief you need.

Settle Your Debts With A Consumer Proposal

Depending upon the severity of your situation, you may need to opt for a more formal solution that will not only provide you with debt relief, but will also provide legal protection from actions taken by your creditors.

A consumer proposal, unlike a DMP, is a legal form of debt settlement filed with a trustee in bankruptcy.  Because it is a debt relief program governed under the Bankruptcy & Insolvency Act you gain several added features:

  1. All wage garnishments, collection activities and other creditor actions are automatically stopped as part of the process.
  2. In addition to interest relief, you can actually negotiate to pay back less than the amount you owe.  This makes a consumer proposal, in many cases, less costly than a debt management plan.
  3. It deals with all of your debts. No matter the size of your credit card debt or what type of unsecured debts you owe, if they are dischargeable in a bankruptcy, they are dischargeable by filing a consumer proposal.

For many, a consumer proposal is the most financially beneficial form of debt relief. You can negotiate payments that you can afford and you will be debt free in three to five years. Because you settled your debts, a note will appear on your credit report that you are in a consumer proposal and will remain on your report for three years after you complete your payments.

You will notice that we did not include using an agency or debt settlement company as a form of credit card debt relief.  This is because many agencies provide questionable services in exchange for high fees. We have all too often had individuals contact our office after working with a ‘debt relief agency’, only to find out that the program did not help and they are now worse off than when they started.

If, And Only If Necessary, File For Bankruptcy

Bankruptcy is an option if your debts are so overwhelming that you can’t afford to pay them back and you can’t make an arrangement with your creditors through a consumer proposal. While it may seem like an extreme solution, doing nothing and continuing to struggle with credit card debts for years is not an option either.

Although a bankruptcy will appear on your credit report for six years after your bankruptcy is completed, you need to compare the choice to your alternative.  Filing bankruptcy can eliminate your credit card debt, and assuming this is your first bankruptcy, you may be discharged within nine months.  You can then immediately begin to rebuild your credit worthiness because you are no longer balancing old debt payments. You need to compare the advantage of eliminating the debt payments sooner against continuing to struggle on your own.

If you need help choosing between these debt relief options, give us a call.  We offer a free, confidential consultation where we will discuss your situation and help you choose a solution that will work for you.

bankruptcy or consumer proposal