$35,000 credit-card hole has one brutal catch for borrowers
MarketWatch’s Moneyist says bankruptcy may be a last resort, while debt-management plans often mean closing the cards.
By Frankie Delgado · News Reporter
3 min read
A reader carrying $35,000 in credit-card debt asked MarketWatch’s Moneyist whether bankruptcy, debt settlement or a debt-management plan would do less damage to their credit. The answer from columnist Quentin Fottrell was blunt: the debt is already serious, and keeping the cards open may be part of the problem.
The reader, who signed the question “In Debt,” said high credit utilization is currently the only negative mark affecting their credit. They said they were weighing a credit-counseling agency or hardship program, but were hesitant because many debt-management companies require people to close credit-card accounts or restrict card use.
Fottrell wrote that a debt-management plan may not directly slash a credit score, but it can still affect a credit file. Under such a plan, he said, the borrower must close all credit cards, which reduces available credit and can raise the credit-utilization ratio, temporarily pushing the score lower.
He also said bad credit can affect more than borrowing. According to Fottrell, a poor score can hurt a person’s ability to get a loan, rent a home or qualify for some jobs.
The math on minimum payments
Fottrell said the reader’s $35,000 balance is more than four times the average credit-card balance. He warned that minimum payments would leave the debt hanging around for decades.
Most card issuers calculate minimum monthly payments at roughly 1% to 2% of the balance, plus interest, Fottrell wrote. At a 22% annual percentage rate, paying only the minimum on $35,000 would take more than 20 years and produce more than $40,000 in interest, according to his analysis.
Trying to clear the same balance in about three years at that APR would require payments of more than $1,300 a month, he wrote.
Bankruptcy comes with a long tail
Fottrell described bankruptcy as a last resort, especially where debt payments and expenses exceed income. He said Chapter 7 bankruptcy can wipe out most unsecured debt for people who qualify and typically affects a credit score for 10 years.
Chapter 13, by contrast, restructures debt into a repayment plan lasting three to five years and generally affects a score for up to 10 years, according to Fottrell.
He also noted that Chapter 7 does not mean every asset is up for grabs. A primary home, car and retirement accounts are exempt from liquidation, he wrote. Other assets may be included in the bankruptcy estate, including expensive jewelry, art, vacation homes, rental properties, bank accounts, stocks and cryptocurrencies.
Fottrell added that life-insurance proceeds and property-settlement payouts received within 180 days after filing Chapter 7 are also considered part of the bankruptcy estate.
Where to seek help
Fottrell urged caution around for-profit companies that offer to negotiate debts. He pointed instead to nonprofit options, including the National Foundation for Credit Counseling, which can help create a budget and repayment plan, as well as American Consumer Credit Counseling.
He also mentioned credit unions for members and Debtors Anonymous, a 12-step support group.
The core warning was not subtle: a debt-management plan and bankruptcy both carry consequences, but Fottrell said either may be better than allowing a $35,000 credit-card balance to keep growing.
This story draws on original reporting from MarketWatch.