$100,000 in credit card debt sounds like a shocking number to most people. The first time a client told me they had $100,000 in credit card debt I remember a feeling of shock too. As I proceeded through my years as a debtor attorney I dealt with a great number of such cases. Most of these runaway credit card debt cases revealed common habits that got the people to a point where usually bankruptcy remained as their only option. I'd like to examine some of these circumstances and hope that you avoid ever starting down the road leading to this type of financial meltdown.
Oftentimes, total financial disaster begins very innocently. You have a credit card or two, your credit record contains no flaws and life rolls along just fine. Maybe you spend too much for a large item you shouldn't have using your credit card or maybe you had something happen that caused a short term cash shortfall. In any case you find yourself looking at a credit card bill and pondering over where to find the cash to make even the minimum payment. Amazingly, in what seems like a miracle at the time, a credit card cash advance check comes in the mail. Perhaps the advance check links to a new credit card or it might be one you already have. The advance check could carry high interest or no interest at all. None of this matters, the facts remain that you could not make a payment on your own and you used a credit card cash advance to float the original debt longer. Many people feel this represents a positive event, the credit card companies must be very smart folks and if they think you should have a new credit card and cash advance checks they must know the right thing. The crisis passes and the debtor continues spending beyond their means or other underlying financial problems go unresolved because the new credit pays for the old credit. The cycle continues until that credit line reaches its limit. What the credit card companies don't know it that you have been using one line to make payments on another. They just see your good payment history and so they send you yet another offer for more credit. The new credit averts dealing with the real issues and the cycle goes on. At some point, usually when things have progressed so far nothing but bankruptcy can help, the debtor seeks help from a counselor or attorney. The time to seek professional help starts with the first time you can not make a payment. Using credit to pay credit proves too often to lead to disaster.
You want that new wide screen TV, but you can't afford it. You have a credit card with more than enough of a credit limit. Why not just get it now and pay later? I once had a professional business associate proudly explain his philosophy that he never minded paying for things he could get today with tomorrow's dollars. About a year later he declared bankruptcy. Credit and credit cards have their place in your life and can certainly be useful tools when handled properly. Can you afford that item but want to pay it all in 30 days and get some rewards points? Great! A major purchase that may take 6 or even twelve months to pay off, but you have done a specific cash flow analysis and know you can easily make the monthly payments, could be fine. Purchasing things because you want them and you can charge them, a recipe for danger. Credit cards should not be used for things you can not afford and credit cards should not become substitutes for long term loans. In general, if you can't afford it, don't buy it with a credit card.
When a person loses a job or if they have not even gotten a job yet out of college, they may have accumulated a stack of credit cards with some serious credit limits. I have seen people live off of their credit cards as if the credit lines were money in the bank. In the end they run up so much debt they can not dig out. It's one thing to use a credit card for a short term emergency. It's quite another to plan to live off of your credit lines for 6 months or more. If for some reason you find yourself in a position where you have no other option but to live off your credit for a short period of time, don't live like a rich person. Change your habits for spend only what you absolutely need just to get to the point where you get things in order again and can pay the debt back.
Some people had the privilege of a great high paying job with lots of benefits from a strong company. In today's world these jobs don't come with the lifetime commitment they may have a generation or two ago. People get fired, laid off or companies move, go out of business or outsource their job overseas. Compounding the obvious financial impact of losing a good job can be the lack of vision in recognizing a realistic future. Someone can follow the rules of good budgeting and only spend and charge what they can afford given the income they had been used to, but if that level of income will never return changes must be made. This caution goes far beyond changing one's credit card usage. I have seen people refuse to accept a lower paying job when a job paying their former salary for their skills will never happen. Their unemployment runs out, their savings runs out, they use up all their credit and when they finally accept that their former level of income shall never return it's too late. Other changes may need to take place too. A person may need to convert to a cheaper car or even a more inexpensive home before payments they could once handle eat them alive. Do a realistic assessment. For some people an even higher paying job lies just around the corner. For others not coming to grips with the truth can make a bad situation much worse.
Try to keep in mind the relationship between your credit card spending and the longevity of the item you buy with your credit card. Purchasing things you take longer to pay for than the item's useful life can compound into a downward spiral. Let's take a simple example of groceries you eat in a week, if you put them on a credit card and pay the bill over 6 months by the second month you need more food but you still owe money from last month. In six months even if you paid off the first month's bill you owe five more and still have to eat next month. This happens with hard goods too. A computer you plan to pay for over 5 years but needs replacement after 3 or an auto repair you need 4 years to pay for but the vehicle only lasts 2 more. If the answer comes out that you can't afford that computer, have to junk the car or must eat less fancy food you will be happier in the long run if you change your spending before you end up at the bankruptcy lawyer's office.
Credit cards work well for short term debt and short term cash flow tools when used properly. Credit cards should never be used as a substitute for long term loans. Even if you can make things work in the near term, interest rates may kill you in the long run. This warning includes examples such as not buying cars with credit cards, not financing home additions with credit cards and not financing businesses with credit cards.
When used correctly credit cards represent a terrific convenience, but when used improperly they can destroy someone with a strong financial position. Pay attention to these cautions and do not abuse the credit card privileges granted to you by the banks. Try to pay your balances each month, when you can't or you have used your card for a responsible larger purchase make as large a payment as you can toward the balance each month and always pay the minimum by the due date. This does not mean if you have larger issues you should pay your credit cards instead of your mortgage, you can read more about that in the article 'Who to Pay When You Can't Pay Everyone'. Spend wisely, don't get near your credit limits, if in doubt be conservative and you and your credit cards may have happy futures ahead.
Nothing contained herein should be construed to constitute advice for your personal circumstances. This is intended as a peripheral exposure to the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws or their alternatives. Whether or not you should file a Chapter 7, Chapter 13 or any bankruptcy, will vary depending on your personal circumstances and should only be undertaken after careful consideration, analysis and after consultation with an attorney experienced with such matters. These pages may contain information and rules peculiar to the Commonwealth of Massachusetts.
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The most recent update of this page occurred May 1, 2007.