Debt Relief & Credit Counseling

Many people are seeking a way to deal with excessive debt. Debt relief options, such as debt settlement and bankruptcy, may be the only way out for people with extreme debt and no way to pay. Both options can seriously damage your credit for at least seven years. Debt consolidation makes paying debts less complicated. Often, credit counselors can help consumers find a way to pay off the debt.

Debt Settlement

One form of debt relief is debt settlement. Debt settlement companies negotiate with creditors to pay a lump sum that is a fraction of the amount you owe them. In return, they take a percentage of the face value of the original debt as a fee -- often 14 to 18 percent. It is important to choose an experienced company that can negotiate the lowest possible settlement. Debt settlement generally has a very negative impact on your credit record, because it signals creditors that you may not be a good risk. Some creditors won't deal with debt settlement companies and decide to sue instead, according to MSN Money.

Bankruptcy

Chapter 7 bankruptcy wipes out all debt and costs less than debt settlement, according to MSN Money. This may be a better option for debt relief, unless your income is too high and precludes you from filing this type of bankruptcy. Chapter 13 bankruptcy ties you to a five-year repayment plan on debts. Bankruptcy damages your credit rating for seven years.

Debt Consolidation

Debt consolidation takes many forms. It is a way of putting all your unsecured debts into one loan and making one payment, often at a lower interest rate than credit cards charge. One of the best ways to consolidate debts, according to MSN Money, is to get an installment loan from a bank or credit union. Some other forms, such as home equity loans, will accomplish the same task but put your house at risk. Debt management plans from credit counseling agencies also consolidate debts.

Credit Counseling

Credit counseling agencies usually offer debt management advice for free. If you enter a debt management plan, in which the agency takes an amount from you every month to pay your debts, you will pay around $40 a month. The Federal Trade Commission says universities, credit unions and Cooperative Extension Service offices usually offer credit counseling. MSN Money recommends you choose a credit counselor listed with the Association of Independent Consumer Credit Counseling Agencies or the National Federation for Credit Counselors, who have certified counselors and charge small fees (see "Resources").