The Credit Card Debt System in America

A Step-by-Step Story You Might Find Hard to Believe

As many of you already know, the credit card debt system can be soul-crushing—sometimes even pushing people to the brink of despair. The pleasure of shopping freely without having money in your pocket may be one of the greatest temptations in the world. Having fallen victim to that temptation myself—and especially after an accident that kept me from working for three months—I ended up maxing out 11 credit cards.

The debt piled up so much that I could no longer pay it back (since I wasn’t working). Eventually, all of my credit cards were canceled. When the banks began calling me constantly, things became very serious. Naturally, I thought of how such situations are handled back in Turkey (including the possibility of imprisonment), and I started to panic.

Some friends told me about “bankruptcy.” In America, bankruptcy works in a very particular way. You declare to the court that you cannot pay your debts. A judge is assigned to your case, and you must convince them of your circumstances. They first examine whether there is any chance you could repay what you owe. If the court accepts your case, your bankruptcy is approved—and all your debts are erased at once. However, your credit score drops to zero, and you cannot access any credit-related services for seven years. During that time, the bankruptcy record also remains visible on your credit history.

The Turning Point: Collection Agencies

As days went by, the situation became more stressful. But finally, I found a job. My wife was also working. Together, we were able to start making some payments on personal debts. That’s when I received my first letter—not from the banks I owed money to, but from a “collections agency.”

Here’s how the system works:

If you owe money to a bank and fail to pay, the bank sells your debt to a collection agency. Once that happens, your credit score begins to drop. These agencies purchase debts from banks for a fraction of their value—sometimes as little as half—and then they negotiate directly with the debtor.

For example, let’s say your credit card debt is $3,750. The agency may send you a letter saying: “We have reduced your debt to $1,500. If you pay this amount, your entire balance will be considered settled.” They may also offer installment options.

It’s important to note that banks don’t actually lose money in this process. As far as I know, banks insure these debts. Through insurance payouts and debt transfers, the bank recovers what it needs. The agencies’ job is simply to collect what they can from debtors.

My First Offer

When I opened my first letter, my total debt was listed as $3,822. But the agency was offering to settle it for $1,390. By that time, both my wife and I were working, including weekends.We realized we could manage these reduced payments.

We received more letters with similar offers for other cards. Since we were able to pay lump sums, we immediately cleared four of my credit card debts. When I checked online afterward, the balances truly showed as $0.

One by one, we eliminated all 11 credit card debts in this way. (Here I’d like to send my heartfelt thanks to a dear family friend who helped us with about $5,000 so that we could pay off the first four cards in full.)

The Car Loan Deal

Now, as I write these lines, I am close to finishing my final debt—my car loan. And this one is unbelievable. My car loan was originally $21,000, but the settlement offer I received was just $6,330. I now have only two installments left. If I pay them both this month, I will finally have zero debt in America

The Final Surprise: Taxes There’s one more detail I should mention. After paying off my credit card debts through these settlements, I received a letter from each bank: Form 1099-C.

Here’s what that means:

Let’s say you owed $3,570 on a credit card, but through a settlement you only paid $1,500. The difference—$2,070—is considered “income” by the IRS. You must report it on your tax return as taxable income.

It may sound strange, but it makes sense. After all, it is a form of financial gain—you didn’t have to pay that $2,070.

Looking back, the entire system feels almost surreal. From drowning in debt and fearing the worst, to negotiating settlements at a fraction of what I owed, to finally being on the verge of clearing every dollar—it has been a journey I could hardly have believed myself if I hadn’t lived it. This blog post was written on May 18, 2018.