Let’s talk credit card debt

I realize that this is a blog about tax debt, but if you have tax debt, I assume that you have other debts as well. It has only been within the last few months that the IRS has softened their stance on allowing you to claim your minimum credit card payments as an allowable expense, so it’s a topic worth addressing.

Credit card debt in general is one of the biggest problems in our society. If you rack up a lot of it, and can’t pay it, life starts to suck when the creditors start calling. Five years ago, when I was heading into bankruptcy, one of my favorite days was the day that Qwest cut off my phone service because I couldn’t pay the bill. That was when the credit collection calls finally stopped!

If you’re looking to address your credit card debt, and other consumer debts as well, there is a simple and often repeated formula for paying down and eliminating those debts. You’ve probably heard two variations of this before, but I think they’re worth hearing again now and then.

The process is pretty simple: Make a list of all your debts, and rank them by priority based on either interest rate from highest to lowest, or by debt amount from lowest to highest. Then, take any extra money you have each month and put it towards the first item on the list.

Mathematically speaking, it’s best to rank them by interest rate. Most of the time, if you owe the IRS money, they’re going to be at the very tippy top because the combined interest and penalty rate can exceed 60% APR. However, many personal finance experts suggest doing it a little different, and paying off your smallest balances first. The rationale behind this is largely psychological, because paying off a smaller debt and being able to say, “It’s paid off!” gives a mental boost to the whole process.

After debt #1 is paid off, the money that was going towards it every month is now applied to debt #2. This accelerates payoff of that debt. Once debt #2 is paid off, the entire monthly amount from that goes to debt #3 until it’s paid off, etc. Eventually, everything is paid off.

While you’re making this debt paydown process, you’re generally making your minimum payments on your other credit cards. If you’re in a situation where money is extremely tight and you’re already several months behind on some bills, it may be worth considering stopping paying on them. If your credit score is already destroyed by being 90 days behind, being 9 MONTHS behind isn’t really going to make it much worse.

This is the strategy that I ultimately went to before my personal bankruptcy. Barely able to pay the mortgage and put food on the table, I started by no longer paying on my credit cards and unsecured lines of credit. It was more important to keep a roof over my head, the lights on, and food in my belly than to worry about my credit score and credit cards. The simple reality was that I didn’t have enough money coming in to pay everything, so I had to start making decisions about what was NOT going to get paid.

Hopefully, you aren’t or won’t get to that point, but it’s nice to know that it’s an option. Remember, debtors prison no longer exists in America, and sometimes you’ve gotta do what you’ve gotta do.