What happens to credit card debt if you become disabled?

When you're healthy and earning an income, some credit card debt is not too alarming. You can probably keep up the payments and even pay off the balance in a reasonable time with no problem.

If you have a permanent disability and credit card debt, however, the problem can suddenly seem insurmountable. You probably don't have much room in your budget for paying off significant debts when you're on disability income. If you are sick or injured, you may feel you have no choice but to put medical expenses and other costs on your card, which could make the problem worse.

You may have heard some people say that you don't have to pay your credit card if you become disabled. Unfortunately, credit card debt forgiveness is not guaranteed. Credit card companies and other lenders are not obligated to erase your debt if you become disabled. However, banks do take a practical approach to debt resolution, especially when a cardholder's financial situation changes drastically. They have hardship plans in place for situations such as these that can include credit card debt forgiveness.

If you're facing a new disability it's important to take appropriate steps to deal with your debts as soon as possible. Here are some do's and don'ts for handling your debts:

How to deal with credit card debt if you're disabled

  • Make a list of your debts. The first, most important step toward dealing with any debt is to face it head on. It's often not as bad as you think. Even if it is, you need to know where you stand so you can make an effective plan to deal with it. A spreadsheet program is great if you know how to use one, but paper lists are fine, too.
  • Determine how much money you can use for debt payments. Make a monthly budget that includes your disability and other income, as well as your baseline expenses, such as rent, food and utilities. You may also have savings, things you could sell, or other asset you could use to bring down your balances. Don't touch your retirement accounts or drain your emergency fund to pay off debts, however. Use a credit card payoff calculator to see how you could pay your balance down in different scenarios.
  • Pay your credit card debts if you can. When you list your debts and the assets you can use to pay them, you may find you can still pay them off, or at least keep paying the minimum amount. If that's the case, paying off your debts may be the best choice. By making payments as agreed, your credit score shouldn't be damaged, and you'll still be able to use your credit cards if necessary. And you can focus your energy and resources on paying down debts instead of on trying to negotiate the balance.
  • Contact your credit card companies. You might be asking yourself "how can I get old credit card debt forgiven?" If you cannot keep up with your payments because of disability, call your bank and tell the service representative you need to talk to someone about a hardship plan. "Hardship" is an industry code word for your situation and will help you get to a person who can help you. If you participate in a credit card hardship plan, you will have to stop using your account. However, you may get a significantly lower interest rate, lower monthly minimum payments, or in some cases even a period of deferred payments or a credit against finance charges you paid in the past. You may need to prove to your credit card companies that you are disabled; for example, by providing copies of documentation from your employer and physician. Continue to communicate with your credit card companies whenever your financial or health situation changes significantly.
  • Use the "debt snowball" method to pay off your debts. Whether you use a hardship program or not, you can use the tried-and-true debt snowball method to eliminate debt. Take the list of debts you made in the first step and organize it starting with the account with the highest interest rate. If two accounts have similar rates, put the one with the lowest balance at the top. After you pay your minimum payments every month, put as much as you can on the debt at the top of the list, until it is paid off. As you pay off debt and reduce the amount you're spending on interest expense each month, you should have more money available to pay down your balances -- thus the "snowball" effect.
  • If your accounts may go to collections, be sure to keep disability and other protected income separate. By federal law, debt collectors can't garnishee your disability income and your Social Security benefits. However, if you mix your protected income with unprotected income, such as your spouse's wages, they may put a lien on the whole account, and your money may be garnished. Although you can appeal to a judge, you may not have access to your money in the meantime.
  • Protect yourself from harassing phone calls. As you deal with your banks, you may find some are great to work with, while others may punt your file to third party collectors who can range from sweet to nasty. You can request that collectors stop calling you, but many get around that rule by sharing your phone number with colleagues and competitors. Stress from harassing calls won't help your financial situation -- or your health. Consider using a service like Google Voice (it's free) that can block collectors' calls. Just set up a "whitelist" for the phone numbers you don't want to send directly to voicemail.
  • Get help. If you're too ill to deal with your debts, you need a relative or other responsible person to help you sort them out. You can also get free credit counseling from a non-profit agency affiliated with the Financial Counseling Association of America.
  • Consider bankruptcy as a last resort. Bankruptcy is certainly not an easy way out of debt. You lose a good deal of control over your money by filing for bankruptcy, you must do considerable paperwork, and a bankruptcy stays on your credit report for up to ten years. You don't get to choose which debts get paid, or how much each creditor gets. In addition, not all of your debts may be eliminated in bankruptcy. On the other hand, bankruptcy laws were created to help people in situations where paying off debts is otherwise nearly impossible. A credit counselor can help you decide if bankruptcy may be a good solution for you.

What not to do when dealing with debt and disability

  • Don't panic or ignore your debts. It's especially difficult when you have health challenges, but ignoring debts only makes them worse. The late and overage fees start piling up, and the interest rates may skyrocket. If you continue to ignore your debts, you'll start to receive calls from collectors, and you may even be sued. You're far better off facing your debts, no matter how hard that seems.
  • Don't keep spending on your card. Every time you use your card, you're promising to repay the amount spent. As soon as you know you will have trouble paying off your cards, you should stop adding to your balances.
  • Don't use costly or unscrupulous debt relief companies. You don't need someone to be a go-between for you and your credit card companies. You can talk to your banks yourself, without paying someone else. Avoid companies that tell you to stop making your minimum payments, especially if you don't want your credit history to be trashed.

Disability challenges require many adjustments in your life. Don't let unresolved credit card debt add to your stress at this time. Make a plan to get organized and deal with your debts so you can focus on taking care of your health and your well-being.

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