Erase Credit Debt: Is It Really That Easy?

[junglebeast]

We've all heard the advertisements that claim they can get rid of your credit debt if it's 10,000 or more...and I know a few friends-of-friends who supposedly had massive credit debt that was just erased.

Is there really an established procedure for this? Is it that easy to rip off the credit companies? What are the repercussions? I'm only curious.

 

[russ_watters]

Is there really an established procedure for this? Is it that easy to rip off the credit companies?

Absolutely: it's called bankrupcy.

What are the repercussions?

Near complete loss of credit rating for seven years.

 

[Pengwuino]

Although maybe this isn't the case anymore, but you would usually be approved for credit from certain companies after only a couple years. The interest rates approached infinity however .

 

[mgb_phys]

A lot of them simply re-mortgage your house so you swap expensive credit card debt for cheaper secured (on your home) debt.
Of course if you don't pay - you lose your home

 

[Moonbear]

A lot of them simply re-mortgage your house so you swap expensive credit card debt for cheaper secured (on your home) debt.
Of course if you don't pay - you lose your home

That's my understanding. They don't erase debt, they just pay off the credit cards and consolidate your debt into one big home equity loan type thing. So then your credit cards are all cleared up and you can run up a bigger debt.

I don't know how people end up $10s of thousands in debt on credit cards anyway. How do you not realize you couldn't pay off last month's bills, so maybe you shouldn't be spending on anything but bare essentials this month? I could see someone getting socked with $5000 that they can't pay off right away...maybe the furnace dies the same month the transmission falls out of the car and you don't have the cash to pay that all up front, but then you know you need to cut out all the frivolous extras and perhaps downsizing on the house, taking in roommates to share costs, or watching the food budget more carefully if you can't pay that off in a year's time.

 

[arunma]

My recommendation for erasing credit card debt is to pay it off, and then STOP SPENDING. It seems that people accumulate debt when they start believing that they're entitled to stuff that they can't afford at their income level. What I do is use my credit card to buy only the things that I can afford, and then pay my bill in full at the end of the month. That way the credit card company doesn't get to charge me any interest, and I get to collect interest on money I've already spent. I don't think a credit card company has ever even made a dime off of me.

 

[junglebeast]

A lot of them simply re-mortgage your house so you swap expensive credit card debt for cheaper secured (on your home) debt.
Of course if you don't pay - you lose your home

Ah, ok...that's one of the things I was curious about.

However I have heard instances of the debt being simply erased. I know of a friend of the family's who, after being hassled over his large debt for years, finally struck some kind of a deal in which they agreed to ignore all of his debts. I think he was given a clean slate after a couple years.

I don't even use a credit card anymore. When I did own a credit card, I tried to be quite responsible about only spending the money I had...why would I spend money I didn't have if I couldn't pay it back?

Despite my intentions, due to a miscalculation I ended up over spending by a couple thousand dollars, and I decided that there was no purpose in having a credit card which is just an accident waiting to happen. Now I just use a debit card. It seems to have no disadvantage (except perhaps that I'm not continually "building credit" by using it).

 

[mgb_phys]

Now I just use a debit card. It seems to have no disadvantage

In some countries you are charged for each transaction on your account (typically only 25c or so).
If you are paid monthly and go overdrawn at the end of the month by using a debit card you might be charged $100 fee and very high unauthorised overdraft interest rates, if you use a credit card AND pay it off you don't pay anything.

 

[turbo]

Now I just use a debit card. It seems to have no disadvantage (except perhaps that I'm not continually "building credit" by using it).

If you have set up payment programs using that card, you have probably given your creditors unfettered access to your savings and checking accounts. Is that what you want?

If you want to use a debit card, you should allow that card access to only a small portion of your assets so that unauthororized uses can be limited. Please talk to a representative at your bank, and try to arrive at some understanding. If you move (physically or virtually) you should hook up with a doctor to monitor your health, and you should hook up with a banker to monitor your wealth. You can find a mechanic, etc down the road, but you NEED professional guidance in these areas, ASAP.

 

[Pengwuino]

However I have heard instances of the debt being simply erased. I know of a friend of the family's who, after being hassled over his large debt for years, finally struck some kind of a deal in which they agreed to ignore all of his debts. I think he was given a clean slate after a couple years.

I have heard of companies erasing part of peoples debts but never the whole thing. The thinking was to make the debt manageable since it was likely the person was going to go into bankruptcy and they company would be out the whole debt.

 

[Moonbear]

I have heard of companies erasing part of peoples debts but never the whole thing. The thinking was to make the debt manageable since it was likely the person was going to go into bankruptcy and they company would be out the whole debt.

Same here. It doesn't make any sense to erase the whole thing, but a lot of sense to strike a deal to get a partial payment to get something rather than nothing. Then you're at least a bit further ahead than if they file bankruptcy and you get nothing anyway. For example, a company might get someone to pay down the principle on the debt and forgive some or all of the interest (though, depending on how long someone takes to pay off a loan, maybe that's what happens...they've actually paid back the original purchase price a few times over through the interest payments, and what's remaining is just the compounding interest...then it might be worth cutting them loose to run up a new debt).

 

[cristo]

Now I just use a debit card. It seems to have no disadvantage.

If you use a credit card properly, then you can make money; pay for something on a credit card while the money you would use to buy it is in a savings account. A month later, pay off the credit card bill and you will have made a month's interest on that money.

However, the main benefit (at least in my opinion) of using a credit card is the protection you get. In this day and age, it's difficult to predict whether the company you've just bought your holiday off (say) is about to go bankrupt. If they do, then your money is automatically protected if you use a credit card but not if you use a debit card. I also use a credit card for most internet transactions for the same reason.

 

[Pengwuino]

If you use a credit card properly, then you can make money; pay for something on a credit card while the money you would use to buy it is in a savings account. A month later, pay off the credit card bill and you will have made a month's interest on that money.

Doesn't that only work in the unlikely situation your interest rate on your CC is less then the rate on your savings account?

 

[Greg Bernhardt]

Doesn't that only work in the unlikely situation your interest rate on your CC is less then the rate on your savings account?

If you pay on time then there is not interest. cristo is saying you'll get a month's worth of interest at most.

 

[cristo]

cristo is saying you'll get a month's worth of interest at most.

Yup; sure, it might not be a massive amount you'll earn, but as my gran used to say "look after the pennies, and the pounds will look after themselves"

 

[Pengwuino]

Ah, you got me tripped up by saying "a month later". I was thinking a month after you got the bill .

 

[Loren Booda]

In short, what are the new laws limiting bankruptcy in the U.S. compared to, say, a decade ago?

 

[TheStatutoryApe]

Ah, ok...that's one of the things I was curious about.

However I have heard instances of the debt being simply erased. I know of a friend of the family's who, after being hassled over his large debt for years, finally struck some kind of a deal in which they agreed to ignore all of his debts. I think he was given a clean slate after a couple years.

There is usually a statute of limitations on debt retrieval. This does not stop collections agencies from trying to come after you for the money. It is possible that they are simply "getting rid of" debt that is no longer legally owed anyway.

There is a similar scam where a company will contact yiou and tell you that there is money owed you by the state held up in red tape and that they can get it for you for a small fee. The reality is that you can get the money for yourself for free just by filling out a form that the state will supply you.

 

[gravenewworld]

While it is true that people should live within their means and should be responsible for their debts, credit card banks contribute a significant amount to the problem of the debt burden. Credit card banks make all of their money on late fees and interest, sometimes they skew the field so that they make it almost impossible for a lot of people to pay off their debt.

Why should a credit card bank be allowed to jack up interest rates on previously accumulated debt?

Why should a customer be charged outrageous over the credit limit fees when the bank could easily help out the consumer and simply deny the transaction in the first place if the consumer reached their credit limit?

Why should banks be allowed to allocate all payments to lower interest rate balances first before higher interest rate balances are paid off?

Consumers should use credit responsibly, but lenders should also lend responsibly. Banks shouldn't be giving college students who have no jobs credit cards with $10,000 credit limits

 

[NeoDevin]

Why should a credit card bank be allowed to jack up interest rates on previously accumulated debt?

Why should a customer be charged outrageous over the credit limit fees when the bank could easily help out the consumer and simply deny the transaction in the first place if the consumer reached their credit limit?

Why should banks be allowed to allocate all payments to lower interest rate balances first before higher interest rate balances are paid off?

Because that is all included in the contract you agree to when you get the credit card. If you don't like the terms they offer, don't use their service. For the first, instead of getting a "floating rate" credit card, get one with a fixed rate. For the second, usually if you contact the institution they will set this option upon request. The third bugs me too, I'm pretty sure you'll find it in your credit agreement, which you should have signed. The obvious reason that they do this is that banks are in business to make money, and they make more money off of the higher interest rate balances than the lower interest rate ones.

lenders should also lend responsibly. Banks shouldn't be giving college students who have no jobs credit cards with $10,000 credit limits

Banks are in business to make money. If they didn't expect that the person will be able to eventually pay back then credit, they wouldn't have given it. If the customer doesn't pay back the money, the bank eats that loss (either directly, or indirectly through insurance).

Just remember, when you're dealing with a business, their legal responsibility is to maximize profit for the shareholders, not to look out for the customer's best interests. That's your responsibility, not theirs.

 

[cristo]

Why should a credit card bank be allowed to jack up interest rates on previously accumulated debt?

For the same reason that they can decrease interest rates on savings accounts!

Why should a customer be charged outrageous over the credit limit fees when the bank could easily help out the consumer and simply deny the transaction in the first place if the consumer reached their credit limit?

Better still, the consumer could accept some level of financial maturity, check their balance once in a while, and ensure they do not go over their credit limit! (By the way, if you run over your credit limit as a one off, credit card companies usually waive the fee).

Why should banks be allowed to allocate all payments to lower interest rate balances first before higher interest rate balances are paid off?

This is a bit of a dodgy one, but then again all the details are there in the terms and conditions; it's not like you don't know what's happening!

Consumers should use credit responsibly, but lenders should also lend responsibly. Banks shouldn't be giving college students who have no jobs credit cards with $10,000 credit limits

That doesn't happen over here in the UK; in fact, it's quite the opposite. As a graduate student, I'm not allowed a credit card with a limit over about £700 since I don't have a real salary. It's pretty annoying, but then I just get around it by having several cards!


Anyway, I know that lots of people moan about credit cards being unfair, and unarranged overdraft charges on current accounts ripping people off, but I'm not really against them. After all, if the banks keep making their money off the people who don't follow the rules, then at least it means they won't introduce charges for bank accounts or credit cards anytime soon!

 

[Pengwuino]

Just remember, when you're dealing with a business, their legal responsibility is to maximize profit for the shareholders, not to look out for the customer's best interests. That's your responsibility, not theirs.

Legal responsibility? Not so much as far as I know. However they are responsible to their shareholders above anyone else indeed.

 

[TheStatutoryApe]

Legal responsibility? Not so much as far as I know. However they are responsible to their shareholders above anyone else indeed.

I think that the issue may be overplayed somewhat but it is true that companies have a legal responibility to do what is in their power to benefit shareholders. Even if a company runs a successful business that takes care of its customers and gains in value they could be said to have broken the law if they have intentionally acted in a way that reduces the potential benefit to the shareholders.

 

[Vanadium 50]

Why should a credit card bank be allowed to jack up interest rates on previously accumulated debt?

Because you agreed to that when you applied for the card.

Why should a customer be charged outrageous over the credit limit fees when the bank could easily help out the consumer and simply deny the transaction in the first place if the consumer reached their credit limit?

Because you agreed to that when you applied for the card.

Why should banks be allowed to allocate all payments to lower interest rate balances first before higher interest rate balances are paid off?

Because you agreed to that when you applied for the card.

All that stuff in fine print in the application? It's important.

 

[gravenewworld]

Because you agreed to that when you applied for the card.



All that stuff in fine print in the application? It's important.

The same terms and conditions agreements that hardly anyone understands? Congress has had issues with this time and time again:

http://www.consumersunion.org/pub/core_financial_services/004292.html

Like the report says, when 35% of credit card holders are being charged late fees, is it really because 35% of all cardholders aren't paying on time, or because a lot of people simply have no idea what is going on? 35% is a pretty high number of people who are "not paying on time".

Even Ben Bernanke has criticized credit card banks' terms and conditions for basically being incomprehensible:

In May, working jointly with the Office of Thrift Supervision and the National Credit Union Administration, the Board issued proposed rules under the Federal Trade Commission Act to address unfair or deceptive practices for credit card accounts and overdraft protection plans. Credit cards provide a convenient source of credit for many consumers, but the terms of credit card loans have become more complex, which has reduced transparency. Our consumer testing has persuaded us that disclosures alone cannot solve this problem. Thus, the Board's proposed rules would require card issuers to alter their practices in ways that will allow consumers to better understand how their own decisions and actions will affect their costs. Card issuers would be prohibited from increasing interest rates retroactively to cover prior purchases except under very limited circumstances. For accounts having multiple interest rates, when consumers seek to pay down their balance by paying more than the minimum, card issuers would be prohibited from maximizing interest charges by applying excess payments to the lowest rate balance first. The proposed rules dealing with bank overdraft services seek to give consumers greater control by ensuring that they have ample opportunity to opt out of automatic payments of overdrafts. The Board has already received more than 20,000 comment letters in response to the proposed rules.

Like Bernanke said, just because something is disclosed doesn't necessarily make it transparent.

 

[Pengwuino]

Wait wait, so you're saying if someone agrees to something that they don't understand and is too complex for them, they're off the hook?

How many people do you honestly think take the time to read the fine print with anything? I know of people who don't even know how many credit cards they have let alone the terms on each.

Maybe I'm just completely irrational and easily taken for a fool, but I don't agree to something when I don't understand what I'm agreeing to.

 

[gravenewworld]

Because that is all included in the contract you agree to when you get the credit card. If you don't like the terms they offer, don't use their service. For the first, instead of getting a "floating rate" credit card, get one with a fixed rate. For the second, usually if you contact the institution they will set this option upon request. The third bugs me too, I'm pretty sure you'll find it in your credit agreement, which you should have signed. The obvious reason that they do this is that banks are in business to make money, and they make more money off of the higher interest rate balances than the lower interest rate ones.

I wasn't talking about "floating rate" cards, but more of something along the lines of "retroactive interest rate changes" which are changes to interest rates on previous balances for basically little to no reason at all.

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/21/AR2009032101840.html

Banks are in business to make money. If they didn't expect that the person will be able to eventually pay back then credit, they wouldn't have given it. If the customer doesn't pay back the money, the bank eats that loss (either directly, or indirectly through insurance).

Just remember, when you're dealing with a business, their legal responsibility is to maximize profit for the shareholders, not to look out for the customer's best interests. That's your responsibility, not theirs.

And that's one of the reasons why the subprime mortgage crisis happened. Because lenders were not lending responsibly and were not looking out for the consumer.

It isn't true that banks only lend to people if they think they can pay them back. See Ninja loans (part of the subprime crisis):

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/30/AR2008053002554.html
http://www.washingtonpost.com/wp-dyn/content/article/2007/03/13/AR2007031301733_pf.htmlWhat did the banks care if the customers who couldn't afford their mortgages defaulted? The banks could take over through foreclosure and still make a profit since the housing market was supposed to keep going up and up and up. Credit banks believed they could profit whether the borrower could pay it or not. Well guess what? The housing market crashed and the banks were left with worthless foreclosed houses from people they lent to who couldn't afford their mortgages.

 

[gravenewworld]

Wait wait, so you're saying if someone agrees to something that they don't understand and is too complex for them, they're off the hook?

How many people do you honestly think take the time to read the fine print with anything? I know of people who don't even know how many credit cards they have let alone the terms on each.

Maybe I'm just completely irrational and easily taken for a fool, but I don't agree to something when I don't understand what I'm agreeing to.

No not at all. What I am saying is

1.) Consumers should live within their means and pay off debt they accumulate as long as they are given full information about their credit.

and

2.) Lenders should lend responsibly and be fully transparent. Disclosure does not equate to transparency.
It shouldn't take a degree in finance to understand the terms and conditions of your credit card. There have been literally dozens of hearings in Congress over the past 10-15 years about consumers not being able to understand credit card agreements.

 

[gravenewworld]

http://www.consumeraffairs.com/news04/2007/03/senate_credit_cards02.html

27th Grade

Sen. Levin

In preparation for today's hearing, Levin charged the Government Accountability Office to prepare a report on the industry's rates and fees. That report revealed that credit card disclosures are written at a "twenty-seventh-grade level."

"I can only assume that one would need -- after 12 years of grade school and four years of college -- a four-year medical degree, a five-year PhD and a two-year MBA to fully grasp those particular provisions," Coleman said.

See pg 43 from the GAO's report.

http://www.gao.gov/new.items/d06929.pdf

In addition to the average reading level, certain portions of the typical disclosure documents provided by the large issuers required even higher reading levels to be understandable. For example, the information that appeared in cardmember agreements about annual percentage rates, grace periods, balance computation, and payment allocation methods required a minimum of a fifteenth-grade education, which is the equivalent of 3 years of college education. Similarly, text in the documents describing the interest rates applicable to one issuer’s card were written at a twenty-seventh-grade level. However, not all text in the disclosures required such high levels. For example, the consultant found that the information about fees that generally appeared in solicitation letters required only a seventh- and eighth-grade reading level to be understandable. Solicitation letters likely required lower reading levels to be understandable because they generally included more information in a tabular format than cardmember agreements.

It's actually quite laughable considering the fact that most people in the US read at an eighth grade level.

 

[Pengwuino]

See pg 43 from the GAO's report.

Page 38 of the actual document

 

[cristo]

Maybe I'm just completely irrational and easily taken for a fool, but I don't agree to something when I don't understand what I'm agreeing to.

Nope, I'd say this was an entirely rational response.


It seems like the major problem is not that the credit card terms and conditions are too complicated (even if they are), but that consumers agree to something that they either don't understand, or don't bother to read, or both.

 

[Pengwuino]

It's actually quite laughable considering the fact that most people in the US read at an eighth grade level.

Yes the average cardholder being able to read at a junior high level is quite laughable indeed . The report summarized:

However, the assessment by our usability consultant found that the disclosures in the customer solicitation materials and cardmember agreements provided by four of the largest credit card issuers were too complicated for many consumers to understand. For example, although about half of adults in the United States read at or below the eighth-grade level, most of the credit card materials were written at a tenth- to twelfth-grade level.

Ok there is something horribly wrong if federal action is needed to help consumers if they can't understand high school-level documents. This certaintly doesn't take away from the fact that if people don't understand a document, they shouldn't sign it.

 

[gravenewworld]

Yes the average cardholder being able to read at a junior high level is quite laughable indeed . The report summarized:
Ok there is something horribly wrong if federal action is needed to help consumers if they can't understand high school-level documents. This certaintly doesn't take away from the fact that if people don't understand a document, they shouldn't sign it.

Did you go on to read further in the GAO report? Just because people should be able to read at a 12th grade level doesn't change the fact that most people can't. Read further on the sections on Poor organization and Formatting and Excessive Complexity and Volume of Information. Even if you are able to read at a higher level, simply the way in which terms and agreements are laid out and how important information is buried in redundant or useless information can still make it difficult to understand. I especially like the part how one credit card bank buries fees and penalty information along with how they calculate variable rate in case the Wall Street Journal ceases to publish. One of the four major issuers disclosed fees and rates in one document, but then provided how those fees and rates were determined in an entirely separate document. Common sense would tell you to put it in all one thing.

The content of typical credit card disclosure documents generally was overly complex and presented in too much detail, such as by using unfamiliar or complex terms to describe simple concepts. For example, the usability consultant identified one cardmember agreement that used the term “rolling consecutive twelve billing cycle period” instead of saying “over the course of the next 12 billing statements” or “next 12 months”—if that was appropriate. Further, a number of consumers, consumer advocacy groups, and government and private entities that have provided comments to the Federal Reserve agreed that typical credit card disclosures are written in complex language that hinders consumers’ understanding. For example, a consumer wrote that disclosure documents were “loaded with booby traps designed to trip consumers, and written in intentionally impenetrable and confusing language.” One of the consumer advocacy groups stated the disclosures were “full of dense, impenetrable legal jargon that even lawyers and seasoned consumer advocates have difficulty understanding.” In addition, the consultant noted that many of the disclosures, including solicitation letters and cardmember agreements, contained overly long and complex sentences that increase the effort a reader must devote to understanding the text. Figure 14 contains two examples of instances in which the disclosure documents used uncommon words and phrases to express simple concepts.

Should consumers sign agreements that they don't understand? No. But it doesn't change the fact that it happens everyday. Show me 1 or 2 credit cards that don't have terms and agreements with complex jargon and horrible formatting like what was laid out in the GAO report. Pretty much all credit card banks do it and they do it because they know that if they can make it difficult for the consumer to understand they can make a mint off of penalty fees and interest rate hikes. What happened to the good old days (like in the 80s) when a lot cards worked easily and worked pretty much in the same fashion--flat interest rate near 20%, simple terms, and almost little or no fees at all?

 

[GeorginaS]

I've not heard of credit card debt being erased other than in bankruptcy. Some people I know have negotiated to have interest charges stopped so they could get the principle paid down, but then they forfeited their cards afterward.

Ah, Despite my intentions, due to a miscalculation I ended up over spending by a couple thousand dollars, and I decided that there was no purpose in having a credit card which is just an accident waiting to happen. Now I just use a debit card. It seems to have no disadvantage (except perhaps that I'm not continually "building credit" by using it).

There are loads of advantages to having credit cards in this day in age. Lots of stuff simply can't happen without them, such as renting a car, or making online purchases that you might not otherwise be able to make. They are perfect for emergencies and should be limited to those situations where you need one to make something happen or you're caught off-guard with an expense.

The problem is that most people view credit cards as money they own just waiting to be spent. Then they run into trouble. But they truly are becoming more and more of a necessity in our world.

 

[mgb_phys]

Should consumers sign agreements that they don't understand? No. But it doesn't change the fact that it happens everyday.

Here is the EXPLANATION of the small print of a type of mortgage that was popular in the US - can you imagine what the legal small print read like, and can you believe any of the customers understood it?

http://www.calculatedriskblog.com/2007/03/tanta-negative-amortization-for.html