There are several methods available to the consumer to consider when trying to get out of debt.  These methods are:

·         Try and manage their current debt themselves – in other words tighten their belt and spending habits.

·         Debt consolidation loan – this would combine all outstanding unsecured debt into a single payment loan. The problem is can the consumer qualify for a new loan with no job or financial hardship issue.

·         Refinance or Home Equity loan – This might work, if the consumer has enough equity in their home, however the repayment may be an issue.

·         Credit counseling service – This program acts like a debt consolidation loan. The consumer pays a third party company who in turns pays a small or set percent each month to the lenders until all the balances are pay off. In addition, there is credit counseling for the debtor and this will also have an affect on your credit score.

·         Bankruptcy – This is the most serious and the final step that a consumer should consider.  The consumer needs to discuss with an attorney all facets of bankruptcy since it will cover all debts, both secured and unsecured.

·         Debt settlement – This is a program by which a third party negotiates with the lender in order to reduce the outstanding balances on unsecured credit cards.

With the onset of the credit crunch in 2007, millions of people saw their mortgage rates and their mortgage payments skyrocket.  Home foreclosures have hit new records across the country.  The credit crunch caused other impacts in the financial markets as well.  As the economy began to slow, consumers began to run into problems paying their unsecured and credit card debts.  Defaults on credit cards have reached an all time high according to MBNA.  Unfortunately, once you are in financial hardship there are not too many great choices in terms of getting out of debt.
How Does Debt Consolidation Work?

One option is debt consolidation, which will put all of your bills into one payment and possibly get your interest payments down.  Often times the payments are not much different than they were before the problem started.  Many people would like to take this option but they just can not afford it.

Facts About Bankruptcy
Another option would be to file for a Bankruptcy.  This would give you two options, one would be a Chapter 13 and the other would be a Chapter 7 bankruptcy.  A Chapter 7 is total liquidation which means that the debt is completely wiped out.  This can be very hard to get in light of the new bankruptcy laws.  The other option is to file a Chapter 13 bankruptcy.  A Chapter 13 does not wipe the debt away; you are basically just doing a debt restructure.  You will have to pay some of what you owe back.  This is up to the U.S. Bankruptcy Court to decide however.  Both bankruptcy options will have long lasting negative effects on your credit report and impact your FICO score for up to ten years.
What Is Debt Negotiation?

The other option is to do debt negotiation, or otherwise known as debt settlement.  You should only consider doing a debt settlement if you are unable to keep up on your bills (already behind on them) and you have determined that debt consolidation, Consumer Credit Counseling, or debt management programs are out of your budget.  A debt settlement program can have you out of debt in less than 36 months with no negative long term effects to your credit. You can also save yourself a lot of money.  The average debt negotiation program can save you 40-60 percent of what you owe your creditors.

I would like to point out that debt negotiation is not a free pass to dismiss paying your bills.  If you think that you are going to go out and charge up a storm to only put yourself in a program, you may be setting yourself up for fraud.  A reputable debt settlement firm would not take you on if the majority of your credit card debt is new.  Most people who enter a debt negotiation program have either lost jobs or had catastrophic medical issues to deal with.  People that do register for a debt reduction program do have integrity in that they want to avoid a bankruptcy.  They really do want to pay their bills.  If they did not want to, they would just do nothing.  To most consumers a bankruptcy is not an honorable solution.  People know that they borrowed the money and most feel an obligation to make some kind of amends with their creditors. Use Credit Wisely

My best advice is to do real planning when it comes to taking on new debt.  When you are going to make a purchase with credit you must be very clear as to what the impact of the new debt will be on your life.  It is an obligation and it is something that once you make it, there is no turning back.  What may seem like a good idea now may be a disaster in the future.  Make a budget and know what you can afford to do.  I know that we all want things but from my own experience I would rather have piece of mind than a bunch of junk in my house that I have to worry about paying for.  Debt Free is the way for me.  That is my mantra.  Try it out, it might help you sleep at night.  My goal is that you are happy and prosperous in your life.
Written by Debt Free Dave who has been in the mortgage and consumer finance business for over 10 years. He has a Finance and Real Estate degree from the University of Arizona. This Article is designed to be of general interest and should not be considered legal advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

What is Debt Negotiation? Debt Settlement is a process where a debtor negotiates with a creditor and the creditor agrees to a reduced principal amount of payback. Debt Settlement is also know as debt arbitration and debt negotiation. Debt Arbitration is considered to be an honorable way to settle your debts.

Will a creditor really settle debt with a debt negotiation program? Continue Reading »