The majority of working-age Americans carries debt of some kind. Certain debts, such as mortgages and student loan debt, are considered "good debt" because homes and education are valuable investments. Personal loans and credit card debt are considered "bad debts" because they typically carry higher interest rates and often go toward unnecessary expenditures and depreciating assets like automobiles. There are several ways individuals can solve debt problems.
Altering Financial Habits
Debt often can be handled by making wise financial decisions. One of the most important parts of combating debt is stopping unnecessary spending, including frivolous shopping, eating at expensive restaurants and services such as cable TV. Those in debt trouble should not use credit cards and should avoid taking on more debt of any kind. Be especially wary of "quick cash" offers or cash advances, as they are often associated with high interest rates. By spending as little as possible each month, you will have more money left over to pay off your highest-interest debt. Frugal living and faithfully paying off loans can be an effective way to get out of debt.
Consolidating Debt
Debt consolidation is a process where a new lender buys out several debts and gives you a new loan in place of the old loans. Debt consolidation can make paying off debt less confusing by reducing your debts. It also might involve lower interest rates depending on current interest rates and the rates at the time you took out the original loans.
Debt Settlement
Debt settlement is a process where a debt settlement company negotiates with creditors on your behalf to lower the amount that you owe. Lenders often are willing to reduce the amount you owe if they fear you will default on loans or declare bankruptcy. Debt settlement can be expensive, however, due to fees and commissions charged by the settlement company. Debt settlement also can hurt your credit rating.
Counseling
Debt counseling is an option for borrowers who might not know how to get their finances under control. Debt counseling programs work with borrowers to create a customized debt-management plan to pay off debts over time. Interest owed can be reduced under debt-management plans, but the total principal owed is typically not reduced, meaning debt payments still might be close to the original amounts.
Bankruptcy
Bankruptcy is a potential solution for borrowers who are so deep in debt that other solutions are not viable. Filing for bankruptcy absolves the borrower of many debts such as credit card debt and personal loans. It does not discharge all debt, such as child support, most tax debts and student loans. During bankruptcy, individuals are required to "liquidate," or sell, assets like investments and property to pay creditors. Allowances or exemptions are made for certain types of property such as a home, vehicle and household items. Bankruptcy also has a significantly negative impact on credit scores, which can last for many years.
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