Debt Relief

If you have a serious debt problem, your options are somewhat limited.

1. You can continue to struggle and pay what you can, always hoping for a lottery win, a better paying job or something else to come along and enable you to get on top of things again. The problem with this approach is that it leaves a lot to chance.
2. Debt Consolidation Loan: If you haven't already fallen behind on your payments you could apply for a debt consolidation loan. In our experience if you are struggling with making your minimum payments (even if you're still current), it is unlikely that you will qualify for such a loan.
   In order to qualify for a debt consolidation loan, you usually have to have good credit, a good debt-to-income ratio, and some asset to secure the loan (a house is the most common). If you are struggling to make the minimum payments every month, you very likely have a high debt-to-income ratio. In today's economy that means it is unlikely you would be approved for a loan. If a lender were to approve a debt consolidation loan for someone with a high debt-to-income ratio or poor credit, it would generally come with a high interest rate and would likely not offer much of a savings. Additionally, with the loan usually tied to your home's equity, failure to repay could result in foreclosure on your home. When you are overburdened by debt, debt consolidation loans are rarely a good option.
3. Debt Management Program: Another possible option is a debt management program offered by "consumer credit counseling" (CCC) agencies. Here is how these programs work:
   You sign on with the CCC agency and they submit a proposal to your creditors for a reduction in the interest rates. You would then pay a monthly payment to them and they would then distribute that monthly payment to your creditors. These programs generally take 5-7 years to complete.
   Many debt management programs do not handle medical bills. Not all creditors participate in the programs. Accounts that have already gone to a collection agency might not be accepted into a debt management program. Generally, debt management programs have a certain list of creditors that they can and cannot work with. Some of your creditors may not be on every debt management program's list.
   Debt management programs have strict monthly payment requirements and if you can't make their required monthly payment, you cannot participate in their program. Through these programs you pay 100% of the principal amount you owe to your creditors plus interest.  For people who can afford the required monthly payment these programs help speed up the process of getting out of debt.
   
4. Debt Settlement offers an alternative to those who are unable to maintain the minimum monthly payments on their debts, cannot afford the debt management plans offered by CCC agencies. These programs are usually much more flexible in terms of working within your budget. In debt settlement you are usually asked to set up a special bank account (referred to as a settlement account) and make a monthly deposit into that account. Funds accumulate in that account until you have enough money to offer a settlement to one of your creditors. Negotiated settlements are paid from your settlement account. The process of accumulating funds and then settling an account repeats until all of your accounts are settled.
   Savings on settlements vary greatly. Not all creditors are willing to settle in all circumstances. Most ethical debt settlement companies will not quote or promise a savings either in dollars or as a percent of your debt.
   Debt settlement company fees can be high. Fees of 15-20% of your total debt are not unheard of. These companies often require clients to have a minimum of $10,000 in unsecured debt in order to enroll. This may put this service out of reach for many families.
   You can settle your own debt, you do not have to hire a debt settlement company. To learn how to settle your own debt, get The Debt Survival Kit.
5. The final option is bankruptcy. You should consult an attorney to get all of your questions answered regarding bankruptcy. In our experience it is best for people to try the above avenues to resolve their debt situations before considering bankruptcy. Bankruptcy will always be an option should no other solution work for you. Therefore, it is our recommendation that bankruptcy be the last possible resort. Bankruptcy will stay on your credit for up to 10 years and it could have a strong adverse effect on your credit during that time.
   Besides being a devastating blow to your credit, a bankruptcy can also be a very stressful and embarrassing decision to continually have to explain to every potential lender. Additionally, a bankruptcy may affect your ability to get a job as many employers are pulling credit reports. While there is life afterbankruptcy, it can be a very unpleasant one. It is certainly harder to re-establish good credit after a bankruptcy than after resolving your debt through any of the above means.