Several debt solutions exist to help people overcome mounting bills and pay off credit cards. Some of the most common solutions include debt consolidation, debt settlement, debt management, credit counseling, budgeting and bankruptcy.
Each of the above debt solutions offers a way out of financial problems. Most have a set of pros and cons. All require some level of participation. In order to get out of debt, it is imperative to make a plan. The first step of any debt elimination plan is conducting research. Doing so will help you determine which money management plan is best suited for your financial needs.
The following is a brief overview of the most common debt solutions. Additional information on each can be found in our article database.
Debt consolidation requires the debtor to obtain a loan to pay off all unsecured loans. These might include credit cards, personal loans, student loans or medical bills. Most debt consolidation loans are home equity loans and require a second mortgage using real estate as collateral. This can be risky business and places your home at greater risk for foreclosure.
Debt settlement involves negotiating with creditors to reduce the amount of debt owed. Debt settlement is generally handled by a debt settlement company. Some lawyers engage in this debt solution as well. Consumers are required to pay a fee, which is usually a percentage of the amount of debt owed. There is no guarantee that creditors will engage in negotiations. However, if you work with a reputable company there is a possibility of reducing debts by half.
Debt management involves paying a monthly fee to a company who pays your bills. While debt management companies can help debtors obtain lower interest rates and lower payments, the monthly fee can be higher than paying bills on your own. Financial expert, Dave Ramsey says, "Don't do it!" Not to mention, debt management companies tend to have a bad reputation. There are better debt solutions available.
Credit counseling can be beneficial for people who have a hard time managing their money. The truth of the matter is most people have never been taught about budgeting or money management. Millions of Americans are living paycheck to paycheck. Many of them are needlessly suffering simply because they don't have financial know-how. Credit counselors are trained to review finances and provide clients with debt solutions. For best results, use the services of an approved credit counseling agency through the U.S. Trustee Program.
Budgeting is perhaps the best debt solution of all. It doesn't cost a dime and you don't have to expose your entire financial life to someone you don't even know. All that is required is to thoroughly review your finances, create a list of income and expenses, and develop a budgeting plan. Many of our parents used envelopes and stuck money inside for each month's bills. This is a very effective way to budget. However, budgeting does require self-discipline. You must be able to keep your fingers out of the envelope unless you are paying the bill!
Bankruptcy is by far the most damaging debt solution. Not only does it destroy your credit, it lingers around for up to a decade. Ten years is a long time to be punished for financial mistakes. Additionally, the new bankruptcy laws enacted in 2005 make it much more difficult to file for bankruptcy protection. While there are instances where bankruptcy is the only option, all other debt solutions should be attempted before petitioning the court.
Overcoming debt can seem like an insurmountable hurdle, but it can be done. Keep in mind that it took time to create a mountain of debt and it will take time to eliminate it. Then, decide what debt solutions will help you achieve your financial goals. Make a plan, put it in action and experience the joy of kicking "debts" butt!