Point of No Return

By Donald A. Hayes, Attorney at Law


Everyone has a certain amount of credit card debt. In my practice I encounter people with credit card debt anywhere from $10,000 to over $100,000.The minimum payments due on a balance of $20,000 is approximately $600 or 3% of the balance. The minimum payment varies with each card issuer, but 3% is normal. Assuming a 22% interest rate, $366 of the $600 you pay goes toward interest. If your late on your payment, add another $25 or so. So if you do the math, when you are late, making a minimum monthly payment of $600 only reduces the balance by $209! And if you have used the card at all in the last 30 days you may be going into the hole each month even though you are making a payment of $600 a month! It=s easy to see why credit card balances never seem to go down, despite your making regular monthly payments.

Now, the example I have used is based upon a balance of $20,000. In my own legal practice I would say that the average balance owed by my bankruptcy clients is around $50,000. With $50,000 owing, the minimum monthly payment would be around $1,500. For many people $1,500 is a house payment! The difference however is that you are not using the $1,500 to pay for housing and you are not building equity. In fact, you cannot even deduct the interest you pay on your tax return; what a waste. Thirty years ago we had a society consisting primarily of one income households. Back then the conventional wisdom was to scrimp and save, often doing without and making sacrifices, before purchasing that new television set, car or vacation. Then there was a shift in our society to two income households in order to get ahead. Today not even a two income household is sufficient for many people to make ends meet, let alone to have some of the creature comforts we all desire. Instead, we have all grown accustomed to relying on credit and credit cards to fill the gap between income and expenses.

However, for many people who owe large balances on their credit cards, if they make the minimum payment each month there is never enough money left over for the things they want to do. These same people are forced to continue to borrow on their cards, if they have any credit available, to make ends meet. The vicious cycle is repeated over and over each month and the debt load is like an 800 pound gorilla which never goes away. Each individual reaches what I call a Apoint of no return@ somewhere along the line. That is, given their income and current expenses for necessities of life, they will never in their lifetime ever be able to pay off their credit cards. As a rule of thumb, it will take more than 10 years to pay off only $10,000 making minimum monthly payments. So they march on in a state of denial pretending that by making the minimum payment they will be alright. Sooner or later however, the credit limit runs out, or they suffer a job loss, or some other unanticipated setback occurs. Then their personal financial house comes tumbling down like a house of cards. Our nation has reached this point of no return some years ago with its 5 trillion dollar debt. Fortunately for the government, they always have the ability to borrow.

For most people however filing bankruptcy is the only answer to get out of debt.