Many consumers find themselves knee-deep in debt and unable to get a handle on their personal finances. Several debt repayment programs exist to help consumers get free from debt. Some programs, such as credit counseling, help consumers repay the debts themselves. Other programs, such as debt settlement and bankruptcy, allow consumers to settle their debts for less than what they owe. All debt programs work to some degree.
Credit Counseling
Debt counseling services help consumers create payment plans to pay off their debt. For a fee, the consumer can work directly with a counselor. The counselor will look over the consumer's debt and income and create a custom monthly payment plan. Repayment plans can last several months or several years depending on the amount of debt a consumer has. During the repayment plan, the consumer must not accumulate any additional debt.
Debt Settlement Programs
A debt settlement program helps a consumer pay off his debt by negotiating a settlement with his creditors and creating a payment plan. With a debt settlement program, the company will contact the consumer's creditors directly and negotiate a settlement amount for each debt. The consumer will then make a monthly payment towards an account held by the debt settlement agency. When the account reaches a certain amount, the agency will pay the creditor. Debt settlement programs will help a consumer pay off debt, but may hurt the consumer's credit report. Since the creditor goes unpaid while the consumer builds funds in the debt settlement account, the creditor may report several late payments to the credit bureaus.
Debt Consolidation Loans
A consumer can take out a personal loan or home equity loan to repay debts. With a personal loan, the consumer will not need any collateral. However, the consumer typically needs good credit to qualify. With a home equity loan, the consumer can take out a loan against the value of his house. While a debt consolidation loan allows a consumer to pay off large debts quickly, it also adds to the amount of debt the consumer has. The consumer will need to pay back the principal of the loan, plus interest. Failing to make the loan payments can worsen credit.
Bankruptcy
Bankruptcy will allow a consumer to either give up his assets in lieu of repaying debts or to restructure his debts. With Chapter 7 bankruptcy, a consumer must give up his assets. In return, he will not have to pay his outstanding debts. With Chapter 11 and Chapter 13 bankruptcy, a consumer can keep his assets but must repay all or a portion of his debts. Known as debt restructure, this gives a consumer time to repay his debts without penalties. Bankruptcy can help a consumer with debts, but will have a serious negative effect on his credit score. The consumer may have a hard time qualifying for loans or credit cards after filing for bankruptcy.
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