Debt Relief: 5 Options for Getting Out of Debt for Good

Posted by Guest on July 14, 2011 in Dump Your Debt, Guest Posts

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Editor’s Note: This is a rare guest post by a non-customer, Frank Collins. Frank is a personal finance writer with years of experience in the space. Besides the usual debt relief, credit and investment topics, Frank also turns to some alternative solutions such as supplemental income planning. To find out more about traditional or innovative ways to fight debt, visit the debt settlement blog.

If you’ve been looking at debt relief options, you’ve probably already figured out that there are several ones to consider. None of them fit every situation. The debt option you choose is based on your debt, your income, your expenses, how fast you want to be out of debt, and whether you’re willing to sacrifice your credit score in the process. Let’s have an overview of the debt relief options available.

Your Own Debt Plan

How it works: You develop and execute your own plan to pay off your debts in the order you think is most effective.

Is it for you? You must be able to pay more than the minimum on your accounts. If you can only afford to make the minimum payment, it could take several years, maybe even decades to pay off your debt. You’ll only be able to pay off your debt faster if you can pay at least 20% above the minimum on your accounts.

Consumer Credit Counseling

How it works: You work with a credit counselor to review your budget and decide what’s the best way to pay off your debt. If you qualify, the credit counselor will set you up on a debt management plan where you make a lump-sum payment monthly to the counseling agency, and the agency then pays your creditors. The counselor will often attempt to work out deals with your creditors in order to reduce your APR and, in effect, the total amount you would pay toward your debts.

Is it for you? Credit counseling works best for debtors with mostly unsecured debts. You must be able to afford the combined payment and a small monthly fee charged by the agency.

Debt Consolidation

How it works: Debt consolidation involves combining all your debts by paying them off with a loan. You now only have one creditor – the one who provided your consolidation loan. Your new monthly payment and payoff time depends on the loan amount and interest rate. You can work with a debt consolidation company who will help you locate a loan or consolidate on your own by finding your own loan.

Is it for you? To consolidate your debt, you need to qualify for a loan that’s large enough to pay off your debt. If you have enough equity in your home, you can use a home equity loan or second mortgage to consolidate your debt. Otherwise you need to have a high credit score to qualify for the loan.

Debt Settlement

How it works: You pay your creditors a lump-sum payment that’s around 40 to 70 percent of your balance due and the creditor cancels the rest of the debt. Creditors agree to settlements when they believe it’s more money than they’ve already lost on the account or they believe your account is at risk of becoming a loss. You can work with a debt settlement company to settle your account or you can negotiate your own settlements.

Is it for you? To settle your accounts, you must be willing to let your credit score suffer for several months. You also need to come up with the money to settle your accounts as a lump-sum payment. This may require you to save up for several months. Meanwhile, you’ll have to deal with collection efforts from your creditors.

Bankruptcy

How it works: There are two types of bankruptcy for consumer debt. Chapter 7 bankruptcy lets you discharge most or all of your unsecured. Chapter 13 bankruptcy requires you to pay at least some of your debt over three to five years.

Is it for you? Your income determines which bankruptcy you can file. Your finances will be scrutinized in both cases and you may have to give up certain assets. If you qualify, Chapter 7 bankruptcy can give you a clean slate. Chapter 13 bankruptcy will let you keep certain assets like your house or your car and catch up on past due payments. Both bankruptcies go on your credit report. More importantly, they will remain as a public record in the bankruptcy court indefinitely.

Making a Choice

All debt relief options have pros and cons. The ultimate goal is to pay off your debt with as little damage to your credit as possible. Fortunately, your credit can recover if it suffers in the process of getting rid of debt, however the recovery period can be very different depending on the strategy which you choose.

What do you think? Would you rather live for years with debt and the stress related to those dues, or declare bankruptcy and hope for a fresh start? Share your thoughts in our comments section below.

Photo: eric731

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Afbryan04081

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http://twitter.com/chrisrouse Chris Rouse

My problem with declaring bankruptcy (in most circumstances) is that you’re essentially saying: “I wasn’t responsible enough to stay out of this much debt and I don’t want to be responsible for paying it back”. Debt is not the fault of the creditor (well…maybe) and the burden of the debt shouldn’t be paid by the creditor, and in turn, other people responsible for debts to that creditor.

Certainly there are some situations where bankruptcy truly may be the only option left for someone, but I have a feeling that 99% of the time it’s not that way. Creditors want their money and they’ll be willing to take it in as small amount for as long as you will keep sending it.
CathyF7

I agree with Chris – Debt Settlement and Bankruptcy shouldn’t really be a “strategy” to get out of debt. I understand that some people are forced into it, but to make a plan to sit back and choose to take the ding on your credit so that the credit card company might settle with you seems a bit immoral to me.
Mia

Be VERY careful with debt consolidation. You’re essentially just shifting the debt around and you still owe the money, only now you owe it to a different/new creditor. Taking out a home equity loan or second mortgage (both secured debts) to pay off credit cards (unsecured debts)? IMO, JUST PLAIN DUMB! You risk losing your house AND you haven’t addressed the spending habits that got you into that mess in the first place, which means you’ll very likely charge those cards right back up. PLUS, now you owe more on your house, too!!! Ugh! Better to feel a little pain with that debt repayment, so you’ll think twice and learn how to manage your money better.
Mbc Bank

Frankly speaking Frank you are great as personal finance writer
Frank

I like your opinion Mia! The only reason to go for the consolidation is to lower your interest payments. That is, if you are serious about paying off your debts, of course, in which case it wouldn’t matter to you whether your debt is secured or unsecured. Just the fact that you can pay 5% or less instead of 20% is enough to help many people get rid of their debt much faster.

I definitely agree that pretending that you need a debt settlement when you don’t is as close as you can get to fraud legally. I don’t think people should be doing it but then again I also don’t think the banks should have gotten that insane bailout after being fully responsible for the mortgage meltdown.
Frank

Also… you’d be surprised but many people don’t realize that they don’t need a debt settlement and will go far (basically do anything they can think of) to reach it even though they might have better options.
Jan8022

Hi, Chris – It’s a common assumption that most people just rack up credit card debt, then roll over and say “bankrupt!”. But in reality, especially these days, many people have lost jobs and the medical insurance that went with those jobs, or their businesses are so down in revenue for such a long time with no relief in sight, that in order to keep their heads above water, bankruptcy is the only option. I work for an attorney and handle bankruptcy cases, and in my experience, no one goes into this lightly. Additionally at least in NY, the bankruptcy laws protect against consumers who intentionally use credit with the intent of declaring bankruptcy. And, I might add, with the fees and interest rates credit card companies charge, they are not losing any money. While these companies may be legally entitled to their profits, the issue of morality seems to fall ONLY on the consumer by the public when they have to take measures like bankruptcy (which businesses do all the time). I’d love to see a little less moral outrage for institutions who by virtue of government backing are charging usurious interest rates and fees (almost at will) and a little more for the consumer trying to struggle with shrinking or no wages, rising prices and predatory lending practices by credit card companies. It could be us someday.
about annuities

5 great options pivk the one best for your situation.
Anonymous

there are more than one option out there, before you do anything check them all out in detail then choose what is best for you and your family.
selling annuitypayment

There are many options avaiable to the public but always choose the one you have the most faith in. Maybe you have known someone who has used this company or maybe it comes highly recomended by a good lawyer.
selling annuitypayment

Never go head first into something this important. Check out all the facts call the bbb,make sure its what you want to do.
wealth management

Making the right decision for yourself and your family may take some reading into, it can be a hard choice to make, but be sure you check out all your options before you make your choice.
wealth management

Making the right decision for yourself and your family may take some reading into, it can be a hard choice to make, but be sure you check out all your options before you make your choice.
hearing aid doctor

There are several good options to look at if you are considering debt consolidation or bankrauptcy,make sure you check them all out before forging ahead with the wrong decision.
Ed Butowsky

Make the right decision on consumer debt relief,always read the fine print, they all have pros and cons, just make sure you find what is best for you.
Ed Butowsky

Make the right decision on consumer debt relief,always read the fine print, they all have pros and cons, just make sure you find what is best for you.
sovereign funding

Take your time study and learn before you do anything, do not rush through something like this.
Liza Baker

Now I do have a concrete idea about Consumer Credit Counseling. http://storify.com/EdButowsky