Bankruptcy Vs. Settlement Credit Card Debt
There are several ways to remove credit card debt including bankruptcy or a settlement with your credit card company. Each method has its own advantages and disadvantages. Ultimately, the best solution in dealing with your credit card debt may be your financial viability in other sectors of your life. If your credit card debt is just a part of a larger financial meltdown, bankruptcy may be the better option over a debt settlement.
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Credit Card Debt in Chapter 7
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Credit card debt in Chapter 7 bankruptcy is expunged by the court meaning you are not obligated to repay the debt and your creditors are barred from pursuing you for payment. Before your debts are forgiven, a court appointed trustee liquidates your non-exempt assets to pay down as much of your debts as possible. This means you could lose assets like your automobiles, home, place of business and even personal items such as jewelry. Chapter 7 also closes your credit card accounts. This hurts your credit score across the board because you basically have no credit when emerging from Chapter 7 bankruptcy.
Unsecured Debt in Chapter 13
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Chapter 13 bankruptcy allows you to restructure your unsecured debt like credit cards and your secured debt such as a home loan to pay it down over a three- to five-year period. The difference with Chapter 13 is none of your assets are sold off by the court to pay your debts. As long as you make timely payments in accordance with your court approved debt repayment plan, your creditors are barred from taking actions against you to reclaim your assets. At the end of your repayment period, any debt remaining is expunged by the court. Your credit card accounts will more than likely be closed as a result of Chapter 13 bankruptcy which can negatively impact your credit score. You may be able to work out an agreement with your lender to reinstate your spending privileges, once your bankruptcy is successfully completed, which can help to rebuild your credit rating.
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Reaffirming Bankruptcy Debt
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You may also elect to reaffirm certain debts while your bankruptcy is in process by the court. If you choose to reaffirm a debt you remove it from the bankruptcy process and agree to repay the debt as normal. Debt reaffirmation is an opportunity to secure better repayment terms with a credit card company such as a lower interest rate. This can make payments more manageable and allow you to emerge from the bankruptcy process with some credit intact. Your credit cards would otherwise be canceled or frozen depending on what chapter of bankruptcy you filed under. Reaffirming debt also allows you to keep the account which open which can actually help your credit score as you pay down the balance.
Credit Card Settlement
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Credit card settlement is an agreement between you and your credit card company to make a one-time payment on your debt and have the remainder forgiven. A settlement with your credit card company can allow you to pay as little as half the balance on your account with your credit card company reporting to credit bureaus that your account is paid off. The problem with credit card settlement is if the amount forgiven by your credit car company is greater than $600 you are required to report it as income on your taxes. Your credit account is also closed once the settlement is reached. This can hurt your credit score if you have a lack of open credit accounts.
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