Divorce And Credit Card Debt Repayment Options
By Tracy Achen
Are you on the edge of financial ruin thanks to your divorce and credit card debt left over from your marriage?
One of the unfortunate aspects of getting divorced is that it's often hard to pay all the bills on just one paycheck. And if the two of you had a lot of joint credit cards during your marriage, you may find yourself responsible for paying off balances that you didn't run up.
If you are struggling just to get by, what are your options for handling the lingering credit card debt after divorce? Here are some ideas to consider, along with how each can impact your future credit.
Establish Your Own Repayment Plan
You don't necessarily have to have loads of extra cash to pay off your debts. You just need to have enough left over from your paycheck to pay a little extra on one credit card bill each month. For example, if the minimum payment required is $90 and you can spare an extra $20, you will send in a $110 payment. The trick is to continue paying $110 each month (regardless of the minimum due) until the debt is paid off. Then you apply that $110 to the minimum payment on the next balance, again keeping the amount you pay each month the same. For example, $110 + $50 minimum payment = $160/month.
- Pros: This system has the snowball effect and your balances will start to go down really quickly as you pay off one credit card and apply that amount to the next.
- Cons: If you fail to stop using your credit cards, it will be hard to ever pay the balances off.
- Impact on your credit: As you pay off the balances on each credit card, your credit score will improve as the percentage of available credit you have increases. It's important not to cancel a credit card once it's paid off because it will decrease the amount of available credit, which in turn will decrease your credit score.
Home Equity Line of Credit/Consolidation Loan
If you received the house in your divorce and have some equity built up, you have the option of doing a home-equity loan to consolidate your credit card bills.
- Pros: The interest rate on a home equity line of credit is often much less than that charged by credit cards, so you will end up paying much less in the long run.
- Cons: By using your equity line of credit, you are basically replacing your unsecured debt with a secured loan. What this means is that if you fail to make the payments on your consolidation loan, you could end up losing your house.
- Impact on your credit: Shouldn't adversely affect your credit, especially if you pay off the credit card balances and discontinue using the cards. Some people advice canceling the accounts, but this can actually drop your credit score.
Consumer Credit Counseling
If you have less than $10,000 in unsecured debts, you might consider using a consumer credit counseling service. These companies can help you get your finances under control by developing a budget and repayment plan that is realistic for your situation. They can also act as a go-between with your creditors, often negotiating lower interest rates and smaller minimum payments while you are working with the credit counseling service. With this option, you make one payment to the counseling service and they distribute the money to your different creditors.
- Pros: Using a consumer credit counseling service can help you get everything under control while you are getting back on your feet. They seem to be a little more reasonable about what you can realistically pay each month on your debts as compared to the credit card companies.
- Cons: Takes longer to pay off your debts than other methods and you need to verify for yourself that your debts are being paid according to the agreement.
- Impact on your credit: While you are enrolled in the service, your credit may suffer a little because your creditors may show that you are participating in a credit counseling service. But, this is much better than showing a lot of late or delinquent payments if you try to handle the debts yourself.
With this option, you basically hire a settlement company to negotiate with your creditors to reduce the total amount of debt owed. Most settlement companies require individuals to have more than $10,000 in unsecured debt to qualify for their program.
- Pros: You only have to make one payment to the settlement company instead of all the different credit card companies and the total amount of debt owed is often reduced. Additionally, most debt settlement plans enable you to pay off your debts in 2 to 4 years.
- Cons: The settlement company often charges a percentage of your total debt as reimbursement for their services. You'll also have to pay taxes on the amount that your debts were reduced by. For example, if you had $12,000 in debts that were reduced to $8,500, you will owe taxes on the $3,500 difference.
- Impact on your credit: You credit score will be hurt while the debts are being negotiated. Once your obligations are paid off, your credit will start to improve within a year or two.
You can find companies that will help negotiate with your creditors either in the phone book or online. Be sure to check with the Better Business Bureau and read online reviews before signing any paperwork to verify you'll be working with a reputable company.
This should be your last option when it comes to getting rid of your credit card debts after divorce. Due to the stricter bankruptcy laws, not all people qualify to have all their debts wiped out with a Chapter 7 Bankruptcy filing. If you don't qualify for Chapter 7, you will need to file for Chapter 13 Bankruptcy. Under this method, you'll have to participate in a credit counseling program and have to work out a repayment plan to pay off your creditors.
- Pros: If you qualify for Chapter 7 bankruptcy, most of your debts will be erased, enabling you to have a fresh start. Also, creditors can't continue to hassle you after you've filed for bankruptcy.
- Cons: Bankruptcy doesn't discharge all debts. Obligations that aren't usually affected by a bankruptcy filing include taxes, alimony, child support, student loans, etc. If you file for Chapter 13, you'll have a 3-5 year time-frame in which to catch up on your delinquent accounts.
- Impact on your credit: Filing for bankruptcy can damage your credit score for 7 to 10 years, making it hard for you to qualify for future loans.
Before you choose a method for paying off your credit card debts, be sure to do your homework. If you choose an outside company, check their standing with the Better Business Bureau to insure that you are working with a dependable company.
For more information on surviving your divorce and credit card debt, use the tips from the following articles:
Managing Your Money
Divorce and Credit Card Debt