If you have numerous looming debts and you're having trouble digging yourself out of debt, you have several legal options available to you. Debt consolidation, credit counseling and, as a last resort, bankruptcy provide assistance in getting rid of your debt--but they have various levels of negative repercussions on your credit report.
Credit Report
Before you take any action on resolving your debt issues, you must know where you stand financially. Under the Fair Credit Reporting Act, you are entitled to a free copy of your credit report from each of the three credit reporting agencies each year. Once you know your credit score, you will be able to choose the best course of action for getting yourself out of debt. You may order your credit report from the Annual Credit Report website.
Debt Consolidation Loan
One option for getting yourself out of debt legally is to take on a debt-consolidation loan. Using your house or some other type of collateral, the debt-consolidation loan wipes out your current balances so that you make one monthly payment rather than multiple payments to your various debts. You must be fully committed to paying off your debt and keeping it paid off, however. According to Bankrate, 70 percent of people who take on a consolidation loan end up with the same amount or more debt within two years. Also, it's vital to make sure that you're getting a better deal with a consolidation loan. Oftentimes the rock bottom interest rates advertised are only for those with extremely good credit.
Credit Counseling
If you can't seem to get yourself out of debt alone, a credit counselor may be able to help you get a financial plan in order. Credit counselors help their clients to create budgets and limit their spending to dig themselves out of financial ruin. If you have defaulted on your debt payments, a credit counselor may suggest a debt-management plan, which involves your counselor negotiating lower interest rates and/or payoff balances with your creditors so that you may pay off your debt over a specified period of time. You may have difficulty obtaining new credit after taking on a DMP, since you creditors see that you weren't able to pay back your full debt.
Bankruptcy
The last legal resort for those who need to get out of debt but cannot make payments is to declare bankruptcy. However, it's important that you understand that declaring bankruptcy means that when your debt is wiped out, so is your credit history. The bankruptcy stays on your credit report for up to 10 years. You will have to rebuild your credit from scratch and you will have trouble obtaining new credit to do so.
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