According to Nerd Wallet, the average American consumer credit card debt has increased more than 7% from December of 2018 to December of 2019 and almost 37% in the past five years.
More worrisome is that aggregate outstanding credit card debt is at a staggering $466.2 million being carried over month to month.
If you have acquired significant credit card debts, the option of filing for personal bankruptcy may be a practical solution; so long as you fully analyze your financial picture, and take into account your short and long-term goals in the process.
Benefits of a Chapter 7 Bankruptcy to Reduce Debt
When debt becomes insurmountable, it acts like a sieve, draining resources before they can be turned into assets like savings or retirement funds.
Through a properly filed Chapter 7 petition, the filer gains the following benefits:
- Outright elimination, or discharge, of your unsecured debts and some other dischargeable types of debt.
- The Automatic Stay which immediately stops all debt collection efforts –including mortgage arrears, all collection phone calls, demand letters and lawsuits.
- By using bankruptcy exemptions, many filers can go through a Chapter 7 without losing any of their property.
- While the initial impact on your credit score is significant, reducing your debts through the discharge means you’ll soon begin improving your credit rating.
How to tell if your credit card debt is too high to manage
Experts agree when it comes to knowing “how much is too much credit card debt?” —it’s not about the total amount owed, but how well you’re managing making your payments on time.
Once it becomes impossible to make more than the minimum payments due on your accounts, That’s a good sign it’s time to take a hard look at your finances.
Another red flag is if you can’t remember the last time you looked at your credit card statements, and you do not know what your current balances are. This signals that you are mentally resigned to no longer being able to manage your debts.
If you still need a by-the-numbers method, you can calculate your debt-to-income ratio: [Total recurring monthly debt / gross monthly income].
The ratio is expressed as a percent, but be aware that there is no percentage that is considered “safe” or healthy, because everyone’s situation varies widely.
By-the-numbers example Rent/mortgage, $1,200 + Car payment, $350 + Credit cards, $350 = $1,900 monthly debt. Gross monthly income is $4,800.
$1,900 / $4,800 = 0.396 DTI or 40%
Some financial advisors like to see a DTI of no greater than 36% to signify sound financial health –but again, everyone is different and while it’s helpful to keep an eye on your DTI ratio, it can’t tell you a whole lot.
That said, if your DTI is 40% or higher, this means your debts are approaching half your monthly income, and since your take-home is actually less, you may be headed toward real trouble.
To consider all of your options toward resolving high credit card debts, you may consider filing for Chapter 7. Feel free to give my office a call so we can talk about finding the right solution for your specific situation.