There are many options available to reduce or eliminate your debt and get your credit rating back on track. Much depends on the amount of your debt, type of debt (secured versus unsecured), the number of creditors you owe and your financial situation. Bankruptcy may be a last resort or an option better than, say, debt settlement plans, but you should explore all possibilities before deciding on a course of action. Hiring a bankruptcy attorney or a financial attorney to help you navigate any re-payment or consolidation plan might be a good investment.
Self-Negotiation
Get free copies of your credit scores from the three major credit-reporting companies (Equifax, Experian and TransUnion). You need to know who you owe, how much you owe, and compare secured debt (such as home mortgages) against unsecured debt like credit cards. If you've got the stomach for it, you should start by contacting your creditors --- or collection agencies --- directly to negotiate debt settlement plans. You may be able to negotiate principal amounts, interest rates, and fees and penalties. You have to develop a strategy for paying on large debts, old debts and high-interest debts. You may be able to offer as little as 25 percent of principle owed on debts three years and older.
Credit Counseling
Non-profit credit counseling firms, most working under the banner of Consumer Credit Counseling Services, can help you develop a plan for debt settlement, debt consolidation or another strategy to reduce and eliminate debt. Modest fees are based on your income and available resources, and services include helping you develop a realistic budget. Make sure your credit counselor is certified, get all promises and DMP (debt management plan) criteria in writing and beware of counselor promises of instant credit history improvement or immediate cessation of harassing creditor phone calls. DMPs require you to pay into an account that the credit counselors access in order to pay your debts.
Debt Settlement
Debt settlement may be the answer if you have available income after accounting for your monthly bills --- rent or mortgage, utility bills and food and clothing allowances. If you don't own a home, debt consolidation isn't really an option, so settlement may be your only recourse short of bankruptcy. You also need to have a minimum amount of debt for debt settlement companies to assume your case. Company requirements vary, but $5,000 is a minimum threshold for most, with $7,500 being common. Debt settlements offer immediate relief through one or a combination of factors. Some debts may be wiped off your record through lump-sum payments. Others may be negotiated down to a lower principle payment or with a lower interest rate. Debt settlement has a negative effect on your credit score, much like a bankruptcy. Debt settlement resembles a Chapter 7 bankruptcy, while debt consolidation is more akin to a Chapter 13 filing. (See References 4) There also may be IRS implications.
Debt Consolidation
Debt consolidation usually results in a lower interest rate than your combined rates on outstanding debt, and the bills normally are rolled into a single monthly payment. You need collateral, such as a home, for a consolidation loan, but the prospect of a single monthly payment and a reduction in creditor phone calls is appealing to those who can qualify for a consolidation loan. Consolidations have less of a negative impact on your credit score, but you also should keep abreast of whatever company you hire to ensure that payments are being made on your bills in your name. You also can deduct the interest of consolidation loans. Check with the Better Business Bureau for ratings of any debt settlement or consolidation firms you're considering.
Bankruptcy
Chapter 7 or Chapter 13 bankruptcy may be an option. If you have a relatively low income, few assets and a high level of unsecured debt, such as credit cards, Chapter 7 may be for you. Your debt is eliminated almost immediately, although your credit score takes a hard hit. But you can begin re-building your score and re-establishing good credit immediately. Chapter 13 bankruptcy is for people with steady income who own assets --- usually a home --- that they want to save. Payment plans are submitted to bankruptcy courts for approval and, based on your income in relation to your state's median family income, a re-payment plan of three to five years will be approved. You have time to pay off creditors, eliminate some debts, and protect most of your assets, including homes, vehicles, most pension and retirement plans, and personal belongings.
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