09 Oct I have $27,000 in credit card debt. What are my options?

Q. I’m trying to avoid bankruptcy. I have a $27,000 in credit card debt and a $5,000 car loan. The credit cards are offering to take a smaller payment and write off the rest. What does that mean for my credit and will I really owe taxes on some of that?
— Worried

A. While filing for bankruptcy may seem like a drastic idea, it can be a strategy to help you get back on your feet and start fresh.

Without knowing all the details of your case, though, we don’t know if you qualify for bankruptcy.

That means you should sit down with a bankruptcy lawyer.

There are some items for you to consider.

First, your income and asset levels are important, said Karra Kingston, a bankruptcy attorney in Union City.

“Twenty-seven thousand dollars is a lot of debt for someone who makes $30,000 to $70,000 per year,” Kingston said. “However, if you make $100,000 per year, paying it off may be doable depending on your other monthly expenses.”

If you decide to go the debt settlement route, Kingston said, you should be cautious.

When creditors work with debtors who are not represented by an attorney, many times these settlements are in favor of the creditor, she said.

“You should also keep in mind that many debt collectors or credit card companies won’t want to settle with you,” she said. “When you are represented by an attorney, these companies are usually more willing to settle and offer better settlements to avoid extra litigation costs.”

Further, she said, once you do settle these accounts you will have to claim the forgiven amount as taxable income. This means that you may get hit with a large tax bill at the end of the year, Kingston said.

Filing a Chapter 7 bankruptcy can be a better option if you qualify.

“Some advantages of filing for bankruptcy are that you can begin saving money, you won’t be taxed on any of the debts that are discharged and you can start fresh,” Kingston said.

Many people are under a misguided impression that they will never get credit again once they file for bankruptcy. This is simply false, she said.

“Credit card companies are willing to extend new credit to people who file for bankruptcy because they realize they have no debt and can’t file for bankruptcy again for another eight years so it’s less of a risk,” she said. “Companies will begin sending secured cards as soon as the bankruptcy is over.”

Kingston said you can have perfect credit within two years of filing for bankruptcy.

So make sure you meet with an attorney before you make any decisions.

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This story was originally published on Oct. 9, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.