About Credit Card Debt Elimination

Credit card debt potentially creates financial problems lasting years. Finance charges and other fees make it impossible to pay credit card debt quickly through minimum monthly payments. That prompts some people to search for faster alternatives. Several options are available, with some more extreme than others. Credit card debt elimination can harm credit scores, but most people with excessive credit card debt already have poor credit or are willing to accept lower scores as a trade-off.

Debt Management Plans

Debt management plans are directed by credit counselors approved by the U.S. Department of Housing and Urban Development. A commitment lasting four or five years is required, during which time the credit counselor takes full control of your finances by creating a new budget based on income and expenses. You must send a lump sum check to the counseling agency each month to pay all credit card debt. A monthly management fee is also required. Throughout the program the counselor will contact your card companies to negotiate lower interest rates and reversal of some finance charges and fees. The goal is to eliminate or greatly reduce credit card debt during the plan.

Debt Settlement

Debt settlement resolves credit card debt for less than the full balance. SmartMoney reports that card companies will settle delinquent accounts for 20 to 70 percent of the balance, with settlements around half the balance common. Usually, card companies will offer to settle once the account becomes three months past due, with charge-off likely after six months. A charge-off is an internal accounting term indicating that the account has been closed. However it does not eliminate the debt. After charge-off, bad debts are usually sold or assigned to a debt collection agency. Savings achieved through debt settlement is often treated as income by the Internal Revenue Service, potentially leading to a higher tax bill.

Bankruptcy

Bankruptcy is a last resort for most people burdened by credit card debt. It is the most effective means of eliminating credit card debt but also the most damaging to credit. Bankruptcy information is reported on credit reports for 10 years, while other negative credit information, such as charge-offs, are reported for seven years. Chapter 7 bankruptcy, considered the simplest form of bankruptcy, wipes out credit card debt in just a few months. Income limits, which vary by the state, prevent many people from qualifying for Chapter 7, however. Everyone is eligible for Chapter 13. Chapter 13 requires a payment plan of three to five years, with any remaining credit card debt eliminated at the end of the bankruptcy.

Self-Service

Most debt management strategies are easily self-directed except for bankruptcy. Debt settlements are negotiated by contacting card companies directly. The Federal Trade Commission recommends that people manage their own credit card debt elimination when possible. The experience often is empowering -- and less expensive than credit counseling or for-profit debt settlement firms.