Credit Card Debt: A Curable Addiction

Trying to get out of credit card debt is like trying to get over a drug addiction. Getting into credit card debt is fairly easy—it makes you feel good to buy things. Then your balances start to creep up higher and higher until you’re paying $50 a month ($40 of which might be the minimum) just so you aren’t totally maxed out. Pretty soon your minimums are so high, and you have so many, that you don’t have cash for gas and groceries each month, so you have to put those things on credit cards, too. Eventually, you will max out, and you may not be able to get any more credit because your debt to income ratio will be too high. You might even have accounts that are past due, and collection agencies contacting you about it. That’s when you realize you’ve spiraled out of control and you don’t know what to do.

At this point you may be considering debt settlement to relieve some of the burden. And I might agree with you, but only after you’ve explored other options that are less damaging to your credit, like getting a debt consolidation loan or talking to someone at a consumer debt relief company. And you should always consider credit counseling. I’ve said it before and I’ll say it again—debt is a symptom of a bigger problem that needs to be addressed. Otherwise, you might find yourself back in a similar situation in the future. Now, back to debt settlement.

Debt settlement is when a creditor (or creditors, as is the more likely scenario), agree to accept less than you owe to consider your debt paid in full. Sounds great, right? In theory—yes, but if you do this it will have a negative effect on your credit score and can lead to you owing taxes on the forgiven debt.

Now, look forward a few years. Let’s say you made it out of debt and you’re in the process of rebuilding your credit when an old debt rears its ugly head in the form of a debt collector who’s trying to collect on a long-forgotten debt. This debt collector may or may not be legit, or he may be trying to collect the debt from the wrong person. In either case, you need to make sure that debt was really yours to begin with. Under the Fair Debt Collection Act, you have the right to send a debt validation letter to this collector, and they are required to respond within five days to confirm that the amount they are collecting is what you actually owe to the creditor. A word of warning, however: if you request a debt validation and it’s a debt you legitimately owe, you run the risk of making the creditor angry, and they may step up their collection efforts. Use the debt validation letter sparingly, and don’t use it to buy time. If you’re using it to buy time, chances are you aren’t fully “reformed,” even if you are out of debt for the most part at this point. (Remember that credit counseling I talked about before? Just sayin’…)

And don’t forget, if you want the protection of the law from debt collectors and you need to start over as quickly as possible, you should also consider consulting with a local bankruptcy attorney who is licensed in your state.