According to research published by the Federal Reserve Bank of Boston, there were 176.8 million credit cardholders in 2008. Additionally, the average credit cardholder has 3.5 credit cards. For many people, these numbers add up to credit problems and difficulty managing consumer debt. Luckily, several options are available to deal with debt and to obtain professional financial help.
Financial Counseling
Financial counseling, also known as credit counseling, is an important step in dealing with consumer debt. Professional financial counselors provide advice for managing debt and work with individuals to create budgets and debt repayment plans.
Because financial counselors have worked with many different people, they are often able to provide good advice on which financial management methods work best. Many nonprofit groups such as the National Foundation for Credit Counseling offer this important advice for free or at discounted rates.
Debt Consolidation
Debt consolidation loans can help consumers pay off debt effectively. Several existing loans are combined into one. Because the term of the consolidation loan is longer than the terms of the original loans, the monthly payment is kept low. Additionally, because all previous consumer loans are rolled into one payment, there are fewer monthly deadlines to remember.
While debt consolidation can be advantageous, it also can be problematic. Before consolidating debts with a new loan, consumers should be sure that the new payments can be made. Individuals should also be disciplined enough to close old lines of credit and resist the temptation to continue spending with available credit.
Debt Settlement
For consumers not able to pay back the full amount of their loans, debt settlement may be a good option. An agreement is made between the individual and creditors to close the outstanding account for less than is owed. However, because creditors will only consider this agreement in financial hardship, debt settlement should be considered only when it is clear that full repayment is not possible.
If this situation occurs, contact creditors directly and explain your financial position. Creditors are not obligated to settle debts for less than the original amount. However, many understand that working with consumers allows them to collect a percentage of the debt instead of receiving nothing.
Personal Bankruptcy
Bankruptcy is a process to legally eliminate or "discharge" consumer debts. Bankruptcy should only be considered as a last resort due to the long-term negative credit effects of filing. However, when other debt solutions have failed, bankruptcy can be the right choice.
Two types of personal bankruptcy exist. The first, "Chapter 7," completely discharges debts. If approved by the court, consumer debt included in a Chapter 7 filing does not need to be repaid. The second type of personal bankruptcy, called "Chapter 13," restructures debt but does not completely discharge it. Chapter 13 bankruptcy can be used to establish attainable monthly payments and allow consumers to repay outstanding debts.
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