By: Jeena Cho, San Francisco Bankruptcy Attorney
Clients frequently ask me “Jeena, how do I get out of credit card debt without filing for bankruptcy?”
My answer is simple.
1. Stop accruing more credit card debt.
2. Earn more money.
3. Stop spending.
4. Reduce all expenses down to bare essentials.
5. Take the extra money and pay off your credit card debt.
The response I get is usually something like “but I thought I can just settle my debt.” I’ll then ask “how much money do you have available for settlement?” The answer is typically “zero.”
Why It’s So Hard to Get Out of Credit Card Debt
The biggest hurdle in getting out of credit card debt is this - you’re spending more than what you earn. By charging, you are subsidizing your income with your credit card. So, if you accrued $20,000 in credit card last year, you’ve essentially increased your standard of living by $1,700 per month.
Unfortunately, in order to repay that $20,000, you have to earn more than $20,000 because the income you use to repay the credit debt comes from taxable income. Assuming you’re in the 25% tax bracket, you’d have to earn $25,000 or more to repay the $20,000; and this covers only the principal.
Let’s say you earn $80,000 per year and your net income is $50,000. In order to repay the credit card debt, you not only have to adjust your standard of living to live without further credit but you have to reduce your spendings even further to create disposable income.
Doing The Math: Get Out of Credit Card Debt
Assuming you want to repay your debt in full in 2 years, you’ll need to reduce your expenses by $833 per month plus interest! ($20,000 debt / 24 months = $833 p/mo.) If you have a high interest credit card, say 23% interest, your monthly payment would be about $1,050.
In my example, by charging $20,000 in one year, your spending power went from $50,000 to $70,000. However, in order to get out of credit debt in two years, you have to live on $37,400. That’s a huge difference to go from having $70,000 to spend down to $37,400. This “buy now, pay later” allure of credit created a culture addicted to spending.
If you want to get out of credit card debt, it’s important to consider your entire financial situation and determine if repayment is possible. Coming up with a plan of action can save you from going deeper into debt and exhausting your money.
About Author: Jeena Cho is a San Francisco bankruptcy attorney. She works with individuals and small businesses in overwhelming debt in finding a solution to their debt problem.
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