Debt Recovery Solutions

When it comes time to turn your commitment to financial freedom into action, you may be confused about where to start. The answer is different for everyone, depending on each person's specific financial situation. However, everyone attempting to get out of debt must begin at the same starting point: getting on a budget.

Budgeting

Any way you go about recovering from debt, you need to create a budget. A successful budget measures your income versus your spending so that you can determine where to cut back to contribute more to other areas. To create a budget, write down everything you spend for a week, then multiply it by 4.3 to get an estimate of the amount you spend monthly. To that total, add any recurring monthly expenses, such as bills and your rent or mortgage payment. Find ways to cut back, such as bringing your lunch to work or taking advantage of your company's public transportation reimbursement, so you are able to contribute more to your debt each month.

Debt Consolidation

Once you've created a budget, you may find a debt consolidation loan to be a good way of making your payments more effective by finding a loan with a lower interest rate than your current debt carries. However, be warned that most debt consolidation lenders advertise their loans at very low interest rates, which only those with stellar credit qualify for. Debt consolidation does make payments easier, allowing you to make one monthly payment rather than payments to each individual lender. However, they may be dangerous for those who have a hard time reigning in the spending. Since consolidation loans wipe out your existing balances, it's up to you to avoid spending on those accounts again, or else you may end up in more debt than you were previously.

Debt Management Plan

You may only use a debt management plan if your credit counselor recommends one for your specific financial situation. Under a DMP, your counselor negotiates with your lenders to get lower interest rates or payoff balances. The counselor then lays out your payments over a time frame---usually 48 months or longer---by the end of which you will have paid off your debt. Lenders may view your DMP negatively because you weren't able to pay off the entirety of your loan; however, if you are responsible with the repayment, it may be a fast route to get you to the point of rebuilding your credit score. To find a reputable credit counseling organization, visit the National Foundation for Credit Counseling website, which allows users to search for counselors by location.

Bankruptcy

The last option for debt recovery is bankruptcy, of which there are two types: Chapter 13 and Chapter 7. In Chapter 13 bankruptcy, individuals with steady income may maintain their assets, such as their home and cars, in exchange for payments made over a period of three to five years. At the end of that period, some of the individual's debts are discharged. Chapter 7 is viewed as a straight bankruptcy, involving liquidation of the individual's assets in exchange for discharge of certain debts. Both types of bankruptcy generally cover unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs; however, they generally do not cover child support, alimony, fines, taxes and some student loan obligations.