A financial crisis can occur at any time over the course of a person's life. Knowing what to do or where to turn for help can be challenging, especially as the crisis becomes overwhelming. However, mounting debt is a challenge that can be overcome --- people just need to assess their situations and decide what solutions may work best for them.
Debt Relief
Credit counseling agencies can help people assess their financial situation and begin to take charge of their debt problems. These organizations have certified counselors trained in consumer debt and financial management. Many of these organizations are nonprofits, but their services are not always free. People should check to see if universities, credit unions, or housing authorities in their areas offer credit counseling programs.
Debt Management Plans
If a person has too much debt or has problems with making consistent payments, credit counselors may suggest a debt management plan. The credit counseling agency works with the person's creditors to come up with a payment schedule. The debtor sends payments to the agency, which then disburses the money to the creditors. These plans may take four years or more to complete, and sometimes creditors will offer concessions. The debtor should check with her credit counseling agency and creditors to see what concessions may be available and plan completion time.
Bankruptcy
Personal bankruptcy is a debt solution of last resort. It involves a court order that discharges the person's debt. The two types of personal bankruptcy are Chapter 7 and Chapter 13. Both are filed in federal bankruptcy court. A Chapter 7 bankruptcy is a straightforward filing that liquidates all nonexempt assets. Nonexempt assets can include cars, work-related items and some basic household items. In a Chapter 13 bankruptcy the court approves a repayment plan for people with a steady income of up to five years to pay off debt instead of liquidating assets. A bankruptcy stays on a credit report for 10 years and cannot be used to discharge student loan debt.
Debt Consolidation and Debt Settlement
People can consolidate their debts by taking out a second mortgage or a home equity line of credit. While this may offer some tax advantages, if the borrower is late on his payments or can't make them, he may lose his home. Debt settlement companies offer to help people negotiate partial payments to creditors. There are no guarantees that the services they offer are legitimate or that the creditors will accept partial payment. Also, any amount of debt forgiven may be seen by the IRS as taxable income. Do your research when considering debt settlement.
Self-Help
There are things people can do to help themselves. A budget tracks money people bring in as well as the money they spend. This can help in creating a plan to pay down debts. There are books and computer software programs that can help budget planning and paying down debt. People can also contact their creditors before their accounts are turned over to debt collectors and try to work out a modified payment plan.
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