Balance Transfer or Bankruptcy?

According to CNBC, Americans haveracked up more than $1 trillion in credit card debt. That represents an 8.1% increase over the past year. The average consumer has more than $6,000 in credit card debt.

More people are turning to credit cards to pay for daily living expenses, including groceries and utilities. At the end of the month, they can’t pay their entire balance, so their debt pile grows.

Let’s talk about a popular strategy for reducing debt and keeping your head above water: balance transfers. A balance transfer is one method to pay down debt quickly by reducing the interest rate. When done right, a balance transfer frees up extra cash, which debtors can funnel toward their debt. CallResolve Law Firm to speak with a San Diego bankruptcy lawyer about your financial situation.

What is a Balance Transfer?

A balance transfer essentially involves rolling debt from one credit card onto another. Balance transfer offers are immensely popular with some credit card companies, as a way to encourage people to take the plunge and open a card.

Balance transfers often come with favorable introductory rates—sometimes as low as 0%. The rate lasts for only a certain amount of time, usually 12-18 months.

A person can transfer a $4,000 balance from a card with a 26% APR onto a new card which has 0% interest for 18 months. This is a good way of paying off a credit card balance because less of your monthly payment will go to interest.

Are Balance Transfers a Good Deal?

It depends on your circumstances. That’s the answer to any financial question, but it especially applies to balance transfers. Here are some considerations:

1. Can you pay off all the debt during the introductory rate period? For example, you might transfer $4,000 to a card which offers 0% for 18 months. But you can only pay $50 a month on the debt. You certainly will not pay off the $4,000 before the introductory rate ends. At that point, you’ll probably go back to paying a much higher interest rate.
2. What happens to unpaid debt at the end of the introductory period? Some credit card companies will apply the higher APR to the entire debt, not simply what remains at the end of the introductory period. If that happens, then you are not getting any further ahead.
3. Virtually all credit card companies charge a balance transfer fee. You don’t get to transfer your debt for nothing. Instead, the fee is usually around 4-6% of the balance, so you must consider that, as well. If you transfer $4,000, you could easily pay 4% of that ($160) as a fee.

In our experience, a balance transfer is not a good deal if you can’t pay off the entire balance by the time the introductory interest rate period ends. Instead, you’re just shuffling money around—and likely falling deeper into debt.

Should you choose this option, you also need to find a card that offers a favorable interest rate. Some don’t—so don’t simply grab at the first card that offers a balance transfer. Some companies have an introductory rate which might be 10% APR or even higher.

Should You Just File for Bankruptcy?

Again, it depends on your overall debt profile and finances. Admittedly, a Chapter 7 bankruptcy is a quick and efficient method of eliminating credit card debt. In a matter of months, you can completely eliminate most unsecured debts, including credit card debt.

However, there are some situations where Chapter 7 doesn’t make sense:

1. Your income is too high. Congress limited this bankruptcy to those who truly need it. You’ll need to pass a means test to qualify. This test looks at your income and expenses and compares them to the state median. If you don’t qualify for Chapter 7, you can try for a Chapter 13, which is more cumbersome and takes longer (3-5 years).
2. You have non-exempt property you don’t want to lose. In exchange for discharging your credit card debt, the bankruptcy trustee can take and sell non-exempt property. California’s exemptions are complicated, but it’s possible to lose your home or most of the equity as well as other assets.
3. Most of your debts aren’t eligible for discharge. The bankruptcy code doesn’t allow debtors to discharge certain debts, such as family law obligations (child support, alimony) or any drunk-driving related lawsuit or fines. If those represent the bulk of your debt, then bankruptcy is possibly the wrong choice.

You should contact an attorney to delve in greater depth about your situation. There are also timing issues.

What Are Other Options?

Maybe neither a balance transfer nor bankruptcy is right for you. In that case, debtors have some options:

• Debt management. You can work with a credit counselor to come up with a debt management plan. The counselor will likely negotiate with your credit card company for a lower interest rate or a reduced monthly payment. Often, the company closes the card while you try to pay off your debt. But you can avoid bankruptcy and possibly get some breathing room.
• Debt settlement. You can negotiate a settlement for your debt, typically by making a lump sum payment. The credit card company then writes off the unpaid debt in exchange for getting something. This is sometimes a realistic option.
• Default. If you simply ignore the debt, then your creditor can sue you in court. Once they win a case, they can put a lien on your property or take other action, like levying a bank account or garnishing wages. If you don’t fear default because you have no assets, then Chapter 7 might be perfect for you.

Schedule a Free No-Risk Consultation with Our Firm

Balance transfer offers show up in mailboxes all the time. Distressed consumers should think twice before applying for a balance transfer card. You might end up thousands of dollars deeper into debt and with more sleepless nights. Instead, bankruptcy could be the right choice for you. Call Resolve Law Firm to learn more about how to efficiently deal with credit card debt.