If you ask me to loan you money – and I verbally agree, then the maximum interest I can charge you under Michigan law is 5%. If we reduce an agreement to writing, the maximum is 7% absent a business purpose and requisite affidavit. MCL §438.31. From a historical perspective, these limits were imposed to preclude legalized loan sharking. A nice thought, except the Commerce Clause and the banking lobby trump state law and the result – we have interest rates on credit cards up to 32.9%, not to mention late fees and over-limit fees.

Suppose you have $80,000 of credit card debt at interest rates of 20%. This means you pay $16,000 per year in interest on the debt and make minimum payments of typically 2.5% of the balance or $2,000 per month ($24,000 annually). Let’s assume you’re making $175,000 per year, with a marginal federal rate of 35% and a state rate of 4%, for a total of 39%. At that tax rate, you need to earn $39,344 per year before tax to net the $24,000 per year required to make the minimum payments on the cards. This means of your respectable $175,000 income, you are paying 22% of your gross income each year simply to service the credit card debt. This is financial cancer. You should adopt a strategy of preserving future income for retirement. Investing $24,000 annually –at $2,000 per month into 401(k)/IRA accounts between two spouses will yield a boatload of cash for retirement. Assume an average return of 6% over 20 years, compounded monthly. In 20 years, the retirement accounts’ aggregate value equals $924,085.

What does this say to you? It says to me that millions of people will make the mistake of wrestling with credit card debt for the next 20 years. Sure – you may eventually pay off the cards and feel some pride in your lifelong 700+ FICO score. But what will you have in 20 years when it comes to retirement? The answer – nada. The interest costs incurred for these years will usurp the opportunity to save money for retirement. Instead, if you can get rid of the debt – take a short-term hit on your credit, and then put the same $2,000 per month away for retirement – the result will yield a solid retirement fund to draw upon in your later years.

The plan requires analysis. You must evaluate whether bankruptcy is the best alternative. If not, an analysis must be made as to any tax consequences arising from the cancellation of indebtedness – which the tax laws deem as “income” absent an exception. If bankruptcy works, it is often the least costly and fastest solution – but households with significant income are not likely eligible for a Chapter 7 discharge. Though Chapter 13 may be viable, the cases typically run for 5 years.

Many times, debt resolution is the best alternative. Under this strategy, we endeavor to take the monthly payment stream presently being used to service the debt (in this case, $2,000/month) and endeavor to resolve all of the debt, inclusive of legal fees, within a budget of 12-24 months. This process involves settling the debts with the creditors. In this arena, you need to know the lender’s true (endgame) settlement posture both pre and post-suit and the extent that you can leverage better settlements through aggressive discovery – something uncommon in credit card litigation but, similar to most litigation, essential to better outcomes.

Bottom line – go back to the premise. If credit card debt is cancer, you need to treat the disease. Doing nothing is the worst possible option.

If you would like more information, contact us today at (888)235-4357 for a FREE Consultation, and we can help you find your best solution.