Credit card debt: what to do if you can’t pay

Financial struggles can cause serious stress. If you have debt that you can’t afford to repay, you might feel anxious or embarrassed. You might even feel ashamed or afraid to talk to someone about it. 

Facing the situation is better than ignoring it. Many creditors are willing to work with you if you find yourself in a situation where it’s difficult or impossible to meet your obligations. They understand that sometimes, even if you intended to repay your debts in full, circumstances might prevent you from being able to do so. 

Let’s discuss some options for handling your credit card debt when you can’t pay.

What do we mean by “get rid of credit card debt without paying in full”?

We mean that you pay the credit card company back less than what you owe, and they accept it as full and final payment. 

When you charge something to your credit card, the credit card company expects you to pay back the entire amount, plus interest. So is it legal to get out of credit card debt without paying in full? Absolutely, if you're getting out of credit card debt using legal means. 

That's not the same thing as charging up credit card balances and never paying anything. In that case, your credit card company could sue you for the debt. Getting sued for credit card debts can open you up to some pretty tough consequences. If your credit card company wins the case, it can garnish your wages or take money from your bank account. Not to mention, your credit score is likely going to take a nosedive.

The better option? Exploring ways to resolve credit card debt without having to pay back the full amount you owe. 

Ways to get rid of debt without paying it all off

Now that you know it's possible to get out of credit card debt without paying in full, how do you do it? 

There are three paths that can lead you out of credit card debt for less. 

Chapter 7 bankruptcy

Chapter 7 bankruptcy, also known as a clean slate bankruptcy, allows you to walk away from certain debts without paying anything. (Some debts, like child support, may not be included.)

When you file a Chapter 7 case, you're essentially telling the bankruptcy court and your creditors that you can't afford to pay. You can file Chapter 7 for credit card debts as well as other debts, such as medical bills, personal loans, and even car loans (you’d have to surrender the vehicle, but you wouldn’t owe any more money on it). Creditors are required to participate in your bankruptcy case. They can’t decline or opt out.

The court reviews your financial situation, including your debts, income, and assets. They are looking for your disposable income (your income minus necessary expenses like groceries, transportation, utilities, housing, and insurance). Because they don’t meet its stricter eligibility criteria around income, some people don't qualify for Chapter 7 bankruptcy. If you can afford a monthly payment, you'll be directed to Chapter 13 bankruptcy instead.

If the court finds that you truly can't pay, it wipes the slate clean of your debts that qualify to be included. Officially, it's called getting a discharge. 

There's something of a catch, since you might have to give up some of your assets to repay your creditors before your remaining debts can be discharged. This is called liquidation. Basically, the court won’t allow you to walk away from your debts if you own things of value that can be sold to pay off or pay down your debts. What you have to give up, if anything, will depend on which state you live in. Things you’re allowed to keep are called bankruptcy exemptions.

Bankruptcy exemptions

You never have to give up the home you live in if you’re current on your mortgage. This is called the homestead exemption. But most states limit how much equity you can keep. Equity is the current market value minus the amount you still owe on your mortgage.

For example, in Queens, New York, you can keep $179,950 in equity. If you have more equity than that, or if your home is paid off, you might have to sell or mortgage the home to pay off your creditors.

In Alabama, only $16,450 in equity is protected. In Texas, there's no limit on the amount of equity you can keep, but there’s a limit on acreage.

There are limits on your other assets too, like cars and jewelry. And just like the homestead exemption, these limits vary by state. So you’ll need to look up bankruptcy exemptions where you live or discuss your situation with a bankruptcy attorney.

Chapter 13 bankruptcy

If you don’t qualify for Chapter 7 bankruptcy, you might qualify for Chapter 13. Instead of paying nothing to your creditors, you agree to a payment plan. The court decides how much of your debt you need to pay back. In a Chapter 13 bankruptcy, you don't have to sell off your assets.

If the court approves your plan, you'll have three to five years to pay off your debts. If you’re low income, you’ll pay for three years. If your income is higher, you’ll pay for five years. 

Although you don’t have to give up your assets in Chapter 13, their value will be considered when the court decides how much you have to pay. Also, if you have a lot of assets but not much income, you might not be allowed to file Chapter 13. 

Once you complete your court-approved payment plan, any remaining debt at the end of the plan is forgiven.

A Chapter 13 bankruptcy might be preferable to Chapter 7 if you have property you want to keep or if you don't qualify for Chapter 7. For example, you might consider Chapter 13 if you're behind on other debts, like a mortgage, and you'd like a chance to get caught up so you don't lose your home. Like in Chapter 7, creditors in a Chapter 13 bankruptcy are required to participate.

Some Chapter 13 filers don’t end up saving money. More than half of Chapter 13 filings fail. And since you have to pay court fees and attorney fees regardless of whether your debt is forgiven, more than half of Chapter 13 filers actually end up losing money compared to just paying the debts off themselves.   

Bankruptcy and your credit

It goes without saying that bankruptcies are viewed negatively on your credit report. You might not be able to get any new loans or credit cards for the first few months after your case is discharged. A Chapter 13 bankruptcy stays on your credit report for up to 7 years, and a Chapter 7 filing can stick around for up to 10 years. 

Those negative impacts fade with time. And bankruptcy can provide immediate relief from credit card debt since it can stop creditor lawsuits in their tracks. 

Debt resolution 

Debt resolution means negotiating with your credit card companies to accept less than the full amount you owe. 

For example, say you owe $5,000 to your credit card. You could ask your card issuer if they'd be willing to accept $3,300 to consider the debt paid. If they agree, the remaining $1,700 in debt is forgiven. 

Sounds simple, but there are a few things to know about negotiating debts:

• Credit card companies might not negotiate if you're still current on your account and making at least the monthly minimum payments.

• Your credit card company isn't obligated to negotiate. 

• You'll need money to pay the negotiated amount. 

• Canceled or forgiven amounts may be considered taxable income by the IRS unless you’re insolvent (your debts are greater than your assets).

Anyone can resolve debts on their own, or you can hire a professional debt resolution company. Debt resolution professionals work on your behalf to come to an agreement with your creditors and may make the negotiations easier. They have existing relationships with creditors, which may result in better settlement terms than you could get on your own.

Debt resolution and your credit

Debt resolution can impact credit scores, but scores tend to recover more quickly and more fully after debt resolution compared to bankruptcy. Most consumers who resolve debts have stopped making regular payments to their creditors. Collection accounts and defaults have a negative impact on your credit profile. When you successfully resolve a debt, the creditor may report it as “settled.” Settled is less favorable to your credit score than “paid in full”—but better than unpaid accounts in collection or default. As your debts are resolved, your credit health can start to improve.

Keep in mind that your indebtedness is a big component of your credit score. In other words, focus on dealing with your debt. Solutions that directly and quickly address your debt issues can set you up for healthier credit scores over time. 

Other options for making your debt more manageable

If you're still able to pay at least the minimums and you're not behind yet, it's worth looking into ways to make debts easier to manage. 

There are two ways you can do it:

• Debt consolidation loan. When you get a debt consolidation loan, you're borrowing a lump sum of money and using it to pay off other debts. You then make one payment to the loan each month. You might consider a debt consolidation loan if you qualify and it helps you simplify your finances and lower the interest rate on your debts. You don’t have to give up your credit cards after paying them off with a debt consolidation loan, but you’d want to have a plan to avoid charging them back up and ending up with even more debt.

• Debt management plan. A debt management plan or DMP is a structured plan for paying off your credit cards in full. DMPs are managed by nonprofit credit counseling agencies, which are funded by creditors. You make payments to the agency, which distributes the funds to your creditors. A DMP could help you get out of debt faster than doing it on your own, while potentially saving money on interest and fees. Generally, you’d need to agree to stop using credit while you’re in a DMP.

Neither of these options will reduce your debt. But you can at least ease some of the strain on your budget and make managing multiple debts easier.