Debt Relief: What Are Your Options?

Most Americans have some form of debt. Many owe money on things like houses, cars, and education loans, and many owe on things like credit cards, medical bills, and personal loans. Too often, the appeal of having something now takes hold, and people find themselves in over their heads. They are struggling to meet their minimum payments and need a solution. Fortunately, there are a number of debt relief options out there.

The following is a list of options for debt relief. If you are struggling with your debt, start at the top of the list and work your way down. The last item on the list, bankruptcy, should only be used when all other options haven't worked.

Credit Counseling

Credit counseling is the first step in getting your debt and overall your budget under control. With a fresh set of eyes on your financial situation, you can come up with a plan to wipe out the debt, control spending, and set up a financial plan that will ensure that the future doesn't hold as many financial hardships.

Most credit counseling is offered free of charge. Some are sponsored through state or city run organizations, and others are nonprofits that collect external funding. Be careful of who you sign up with, though, as there are for-profit credit counselors out there that charge a fee.

Don't expect a quick solution. You are still responsible for your spending, and you may have to make sacrifices to pay off your debts. You can find a counselor nearby using the National Foundation for Credit Counseling website.

Debt Management

Debt management takes the counseling one step further. Working with a credit counselor, you come up with a debt management plan. But this plan is a little more than just a spreadsheet that tells you how much to spend on what.

A debt management plan includes negotiations with creditors to get your interest rates lowered (and thus, making it so you can afford payments). It also helps you come up with a realistic payment plan so that you aren't missing payments on your bills. Some plans can even go as far as setting up an account so you only pay one bill, and the money is dispersed from there (not to be confused with debt consolidation).

The perks are that you establish better credit by making on time payments; the downside is that most plans come with a fee.

Debt Consolidation

Debt consolidation could be swapped with debt management. If you don't want to take the time to sift through a plan and negotiate with all of your creditors (or if you don't like the idea of paying someone to do that), and you are able to get a personal loan (sometimes called a lifestyle loan), then you may want to look into a debt consolidation program.

The idea is to reduce the stress of making payments on multiple loans, all while lowering your overall payments. For instance, if you owe on three credit cards at 20 percent interest, plus medical expenses, plus another high interest loan, then you combine them all into one low interest rate loan.

There are two ways to do debt consolidation. You can talk with a personal banker to get the loan that you need and then use those funds to pay off your other loans in full. Alternatively, and more reasonably, is using a debt consolidation company. These companies can work with you if you have poor credit, find the lowest interest rate loans, and you don't have to run around making all the payments yourself.

Debt consolidation won't hurt your credit score, it should ease your debt burden, and it will streamline your repayments. The pitfalls are that you have to have good credit to get a loan, consolidation companies may charge a fee, and there are unscrupulous companies out there that prey on debtors.

Debt Settlement

Debt settlement is an option that you want to avoid if you can. While it won't hurt your credit as much as bankruptcy, it will put a dent in it.

Here is how settlement works. You can't afford to pay your debt, so you enlist the services of a debt settlement company (do your research first, there are many good companies out there, but there are some bad ones too). This company helps you set up an escrow fund where you put all of your payments in. They then take over negotiations with your creditors to reach a settlement where your payments are permanently lowered – generally by agreeing that you don't have to repay the full amount. Those escrow payments are released when there is an agreement.

During the negotiations, no payments are made to your creditors. Since you are missing payments, your credit is getting dinged. After an agreement has been made, the settlement company charges their fee (generally a percentage of how much you save).

Bankruptcy

The last straw for anyone is bankruptcy. Most of us know that filing for bankruptcy knocks your credit score back several hundred points; and sticks with you for at least seven years.

When you file bankruptcy, you generally need legal help. That means you have attorney fees. Bankruptcy will wipe out most debt, but there are some, like student loans, that you will still owe. The process is disheartening, you won't be able to get a loan for years to come, and you will end up paying off your legal fees for quite some time.

Bankruptcy should be avoided and only used if nothing else will work.

Debt Relief Has Options

When you're in debt, the one thing you want is to get out of debt. But if you're stuck paying high interest rates, that doesn't seem like it's an option.

Fortunately, there are a variety of debt relief options for you. Start with counseling, and work your way down the list until you find a method that works.

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