A Guide to Debt Relief

After the economic downturn, many Americans saw their adjustable-rate mortgages ratchet upward or saw the home equity they had planned to use to pay off debt practically disappear. Credit card defaults occurred in record numbers and those Americans affected searched for ways to get some relief. While scores of debt relief agencies sprang up quickly, many were dishonest or could not deliver what they promised. Yet debt relief has always been available for those that are willing to take action.

Self-help

The best first step is to try to handle the situation yourself. The Federal Trade Commission recommends you create a monthly budget, tracking all of your expenses and income, so that you know how much you can realistically allocate toward your debt per month. Credit card companies and other creditors often ask how much you can afford and you need to be able to supply an answer. Many times you can find extra money you did not know you were spending.

Negotiation

Once you know how much you can commit to paying, contact your creditors and tell them what is going on and how they can help you afford your payments. Contact any collection agencies who have contacted you about an outstanding debt and either work out a settlement amount or a repayment program, again for an amount you can commit to paying. Once you have made an agreement, get the terms in writing and make copies of any payments you make as proof of payment. To avoid any further repercussions, send all payments on time and as agreed.

Credit Counseling

If you do not have any luck talking to your creditors or lack fiscal discipline, your best bet is to work with a credit counseling service. These companies can help you manage your debt, negotiate with creditors on your behalf and make sure you pay your bills on time. The service can also help you create a monthly budget so you can avoid debt in the future. After a credit counselor sets up a repayment plan for you, you send the service one monthly check that it uses to pay your included bills. MSN Money's Herb Weisman advises you look for a service that charges no more than $50 upfront and a monthly fee of no more than $25. Check out any services you are considering with organizations, such as the National Foundation for Credit Counseling and the Better Business Bureau.

Bankruptcy

If the total of your debts is more than you can manage to afford in three to five years, you can choose to declare bankruptcy. In a Chapter 13 bankruptcy, the court steps in and creates a repayment schedule that you can afford to pay and the creditor must accept. Chapter 13 bankruptcy typically lets you keep assets, such as your home. You usually complete your court-ordered repayment within three to five years. A Chapter 7 is harder to get, but it completely forgives all included debt. While you will take a huge hit on your credit score, if you begin rebuilding your credit responsibly, your score will rebound within two to three years.