File Bankruptcy or Settle Debts After Credit Cards Have Charged Them Off?

file for bankruptcy or settle credit card debt?

A reader sent in this question:

“In the financial picture if you get into trouble, is it better to go chapter 7 bankruptcy or settle your debts once the credit cards have charged them off???”

I would need to know more about the situation to answer such an important question.

If the only financial difficulty is paying credit card debt then there are many more options other than filing bankruptcy.

However, if there are other extenuating circumstances – or much more debt – then maybe bankruptcy is the answer.

file for bankruptcy or settle credit card debt?

What would I do if I couldn't pay credit card minimums?

If I found myself in this situation then my answer is to settle credit card debt after they have charged them off, not file bankruptcy until all my options have been exhausted.

However, it would be irresponsible for me to answer this question without explaining how (in detail).

So let me try to answer it with a scenario:

Let’s say I’m living paycheck to paycheck and just can’t make the monthly payments. I’ve cut back on all expenses I can, negotiated my phone plan to almost nothing and sold a bunch of stuff on CraigList. Yet I’m still behind on my credit cards.

People who find themselves in this scenario likely have more than one credit card per adult (you know, to help “bridge the gap” when things first got tough). Let's pretend there are 3 credit cards in the household:

  • Credit card #1: $1,000 balance, minimum payment $40.00
  • Credit card #2: $5,000 balance, minimum payment $200.00
  • Credit card #3: $15,000 balance, minimum payment $600.00

That’s $840.00 in minimum payments!

Before filing for bankruptcy I would…

There are five steps I would take before talking to a bankruptcy attorney:

STEP 1: The first option I would try is to NEGOTIATE LOWER INTEREST RATES with the credit card companies. Get the rates as low as they will agree to.

STEP 2: The second option would be to try to NEGOTIATE A WORKOUT PLAN or request a grace period for a short period of time while getting my budget back in line. Note: This will cost you more in the long run – but it’s cheaper than bankruptcy.

STEP 3: If they don’t budge, or I could get a lower rate elsewhere, then I would SURF TO A NEW, LOWER RATE CARD. Note: You MUST cut up all credit cards and never use them again or this does not work!

If I can’t surf the cards and can’t workout a new payment plan/grace period then I’m restricted to the next two options:


If I don’t have enough to make the minimum payments then my next step is to, well, not send them any money – because I don’t have any to send!

I would choose to make the minimum payments on as many debts as I could first.

NOTE: This opens the floodgates to collection calls and it’s not going to be fun – but not being able to pay my bills isn’t fun either.

or STEP 4b: Use a PRO-RATA PLAN. This is where you send a portion of what you can to all your creditors.

Recap of our example above:
Credit card #1: $1,000 balance, minimum payment is $40.00
Credit card #2: $5,000 balance, minimum payment is $200.00
Credit card #3: $15,000 balance, minimum payment is $600.00

Let us pretend I can only send a total of $300 out of the $840 total minimum payments, then I could ration it out:

Credit card #1 is 4.7% of required minimums, so send $14.20
Credit card #2 is 23.8% of required minimums, so send $71.50
Credit card #3 is 71.4% of required minimums, so send $214.30

I would send the payments in along with my budget. They don’t care but it will make me feel better about my situation because I’m trying to do all I can.

NOTE: This will likely trigger some kind of fee (underpayment penalty). It’s not a permanent solution and we are already past the point of maintaining a clean payment history.

Which leads me to the next step:


At this point the creditors are desperate to get their money. They might be prepared to issue a lawsuit and garnishee your wages. Before that happens – and even after that happens – I would try to negotiate a settlement.

I would save up all the money I could and offer it to one of them – preferably the smallest balance card – as “settlement in full” for the entire balance. If they agree then they need to send me a letter or email stating that this completes our agreement.

I scrounge together $500 and offer it to Credit Card #1 ($1,000 balance). If they agree then I mail them a money order or cashier’s check. Heck, I would overnight it just to be done with it!

Then I would scrounge together some more money from overtime, cutting my cable bill, or even ask friends and family for a gift (not a loan!) to tackle Credit Card #2.

Be prepared for things to change

Credit Card #1 might not agree to settle, so offer the $500 to Credit Card #2. Who knows, they might just take it!

Also, the debts might be sold to a collection company. Good; now you have a new person you can negotiate with!

While working this plan you might be served letters from a law firm. At first they will be threats. Use this to your advantage by trying to negotiate a settlement.

Wait, we aren’t done yet. Even if you do get served papers, you have the opportunity to use that date as a negotiating point. “Look, Mr. Credit Card #3, we have a court date on February 3rd. You can spend the money on lawyer fees and get a little money out of my paychecks or we can set something up right now. I’m trying really hard to honor our agreement – is there a way we can keep this from going to court?”

Creditors want their money. They are required to go through procedures and steps to collect what they are owed. When the agreement is broken because we don’t make our payments, they need to do what they need to do. However, they have people inside who can make deals and offer us grace. It takes patience and a lot of “on-hold time”, but they are there. You just need to do the work to find the right solution.

These are the steps I would take to avoid bankruptcy.

Saving my Christian conscience

One final note: As a Christian, I feel responsible to pay all my debts in full. Some of the strategies above make it seem like I’m trying to dodge my obligations. I’m here to tell you: If a credit card company takes fifty cents on the dollar it’s because they agreed to change the contract. You are now under a new obligation that they agreed to.

To avoid ever having to go through this mess, I beg you to please write down all your monthly expenses and point any un-assigned dollars to paying off a debt. Then, repeat this every month. It is how my wife and I got out of debt and paid off our house early.

You can do it to!

Find out more about my course that fosters communication between spouses, makes every dollar work harder, and helps you pay attention – not interest:

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How To Have A Safe Conversation About Money With Your Spouse
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