If you're swimming in debt, your options for help can be confusing. Debt consolidation, debt management plans and even bankruptcy have probably crossed your mind, but it's hard to know which is right for you without knowing how each of these debt help solutions work and how they affect your credit.
Hardship Programs
Debtors whose income has dwindled because of unemployment, illness or another temporary setback may find that asking for hardship assistance from their creditors can help them dig out of debt.
Many credit card companies and other creditors offer some type of hardship program that will temporarily reduce monthly payments, erase finance charges and/or reduce or eliminate interest on the account. The goal is to let you pay something while you're getting back on your feet, with the payments reverting to the agreed-on amount after the program expires.
Debt Consolidation
If multiple high-interest debts are making it difficult to pay your monthly bills, consolidating your debt through a low-interest loan or credit card can relieve you, but only if you're smart about it.
The home equity loan is the gold standard in debt consolidation loans, offering low rates that are possible because your home stands as collateral for the loan. However, if you fail to repay the loan, your home is on the line.
If your credit is nearly flawless, two other options that are open to you are a personal debt consolidation loan, or a zero or low interest credit card. A personal debt consolidation loan may offer a rate that's low enough to save you significant money on interest, but research this carefully before signing on the dotted line. As for zero or low interest credit cards, remember that these are teaser rates that will eventually go up and that the rate will go up immediately if you make a late payment.
Debt Management Plans
Anyone who is overwhelmed by their debt needs to make an appointment with a reputable credit counselor (see "Resources"), not only to determine where the money is going, but to get an idea of how to use credit wisely. As a part of credit counseling, you may qualify for a debt management plan. When you enroll in a debt management plan, the credit counselor works with you and your creditors to create a payment schedule you can live with, generally by reducing monthly payments and/or interest and other fees to make your payment affordable. Rather than paying each individual creditor, you instead pay the credit counselor, who makes payments for you. Debt management plans typically last three to five years.
Bankruptcy
Bankruptcy should be your last resort financially. While bankruptcy can clear or reorganize your debts, it leaves a black mark on your credit that can take years to erase. Chapter 7, or liquidation bankruptcy, discharges all unsecured debts, with any assets being sold to repay your creditors. Chapter 7 takes several months to complete, and stays on your credit report for 10 years.
Chapter 13, or reorganization bankruptcy, gives you three to five years to repay creditors some or all of your debt. A trustee appointed by the court oversees your finances, giving you a living allowance, while the remainder of your income goes to debt repayment. Chapter 13 bankruptcy stays on your credit report for seven years.
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