According to the New York Federal Reserve, Americans’ credit card debt has reached a staggering new record, surpassing $1.2 trillion for the first time. This troubling milestone has sparked concerns about the financial wellbeing of millions of consumers. As the cost of living continues to rise, many households are relying more on credit cards to pay for basic necessities, contributing to these record debt levels. In this article, we will examine some of the factors behind the alarming rise in credit card balances, and how bankruptcy can offer relief for those overwhelmed by credit card debt.

Higher Balances with Higher Interest Rates

One of the primary drivers of the recent surge in credit card debt is the combination of rising balances and increasing interest rates. Credit card companies have been charging higher rates in response to Federal Reserve actions aimed at controlling post-Covid inflation. According to Investopedia, interest rates on credit cards currently range from 19.36% to 29.74%. The average interest rate on credit cards has climbed significantly, now hovering around 24.20%. This means that, for consumers who carry balances month to month, the cost of borrowing has become significantly more expensive.

As balances continue to grow, the burden of high-interest rates compounds financial strain. For many people, making just the minimum payment may not be enough to keep up with the accumulating interest. This leads to a cycle of debt that becomes increasingly harder to break free from. More and more Americans are finding themselves trapped in credit card debt, unable to pay down principal amounts due to the skyrocketing costs of interest. More consumers are just paying the minimums due on their credit cards. Generally, no one pays the minimum on their credit cards because they want to. This is a sign that these debtors are financially struggling and heading toward a potential default on their payments. It also means that they may be sacrificing necessary purchases such as prescription drug medications and cutting back on grocery items to cover the minimum required for credit card payments.

Beyond interest rates, another factor affecting the increase in credit card debt is post-Covid inflation, which over the past few years has seriously affected the cost of living. As prices rise, often, many consumers do not change their spending habits until it is too late. Instead, they rely on their credit cards to absorb the additional cost. If they are not paying their credit card balances in full every month, their debt begins to increase as the interest charged on the cards accumulates. Eventually, this debt can become overwhelming.

Credit Card Debt is Dischargeable in Bankruptcy

In you are struggling with debt and are finding your credit card balances overwhelming, you may want to consider filing for bankruptcy. Credit card debt is typically dischargeable in bankruptcy. When a bankruptcy petition is filed in Bankruptcy Court, a debtor receives an automatic stay that stops debt collection activity, and at the end of the case they obtain a fresh start. Individuals can have their credit card debt eliminated through two different chapters of bankruptcy, Chapter 7, or Chapter 13.

If a debtor qualifies, Chapter 7 bankruptcy allows debtors to discharge most debts, and receive a fast fresh start. The process requires filing of a petition with the court that includes schedules that detail a debtor’s creditors and assets, as well as their income and expenses. When filing for Chapter 7 bankruptcy, a debtor can protect their assets, up to the statutory limits of the exemptions available to them. In New York, with the allowable exemptions, most bankruptcy cases are considered to be no asset case. Depending upon the particular facts of the case, most debtors can protect a certain amount of equity in a home, vehicle, their household goods, life insurance policies, and all of their retirement accounts. At the end of the matter, which typically lasts 4-6 months from the filing, a debtor receives an order from the Bankruptcy Court that eliminates their dischargeable debts. Once the bankruptcy process is complete, a debtor is debt free and in a good position to rebuild their credit, which can happen quite rapidly.

If Chapter 7 is not an option, either because the debtor has too much income or they have a non-exempt asset that they wish to protect, Chapter 13 bankruptcy may be available as a means to eliminate credit card debt. It involves a Court-approved repayment plan that is typically five years long but can be shorter. During the duration of their plan, the debtor pays a bankruptcy trustee monthly payments that will be distributed to creditors after the plan is approved by the Bankruptcy Court. Additionally, in some circumstances, a debtor may only be required to pay back a percentage of unsecured debt to creditors.

If you are struggling with making your credit card payments, it is important to consult with an experienced bankruptcy attorney to find out your options instead of enrolling in a risky debt settlement program. First, an experienced bankruptcy lawyer will adequately explain your options and review a household budget with you. In addition, from our experience with clients who have tried such settlement programs, they do not protect enrollees from creditors or stop debt collection calls or lawsuits. The “programs,” which are really not even programs often charge as much as 20-25% percent of the balances owed (not on the balances saved) for their services. Most significantly, when you factor in their fees and the balances that are still required to pay off, there are often very little actual savings. Lastly, they often do not advise enrollees of the possible negative tax consequence of debt settlement for the forgiveness of the debt, whereas there is no negative tax consequences from debt discharged in bankruptcy.

Contact The Law Offices of David I Pankin

If you or someone you know is struggling with credit card debt, now is the time to take action. At the Law Offices of David I. Pankin, P.C., we have almost 30 years of experience helping debtors obtain a fresh financial start through bankruptcy. Contact our offices today to schedule a free consultation at (888) 529-9600 or by using our online contact form.

More Information: https://www.newyorkfed.org/microeconomics/hhdc