Debt-Relief Tools

If you owe creditors a lot of money and cannot pay as agreed, they can take actions against you such as wage garnishments. The federal government as well as nonprofit organizations offer several debt-relief tools that may help you financially. But before filing bankruptcy or signing up for a debt-relief plan, explore all available options because many debt-relief tools can harm your credit rating for years.

Credit Counseling

When you first realize you're in serious financial trouble, contact a qualified credit counselor, advises the Federal Trade Commission. You must complete a credit counseling session with a federally approved agency to file bankruptcy. But even if you do not plan to declare bankruptcy, a credit counselor can help you with your budgeting and help you come up with other ways to get out of debt faster.

Debt-Management Plans

Some credit counselors can enroll you in a debt-management plan, according to the Consumer Credit Counseling Service of San Francisco. Once you enroll in such a plan, your credit counselor will renegotiate the terms of your debt and repayment plan with your creditors. You then make one payment each month to your credit counseling agency; the agency representatives distribute the funds among your creditors as agreed. But do your homework before selecting such a plan, as some agencies are not responsible with consumer payments, warns the California Office of the Attorney General.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy permanently eliminates your obligation to repay most of your pre-existing debts, but generally you must earn less than your state's annual median income to qualify for such debt relief. As of 2011, the annual median income level for a single California resident was $48,009, while the figure for a family of four in Arizona was $67,113, according to the U.S. Trustee Program. A Chapter 7 case will damage your credit rating for 10 years from the date of filing.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to partially repay your debts over three to five years, according to the U.S. Bankruptcy Court. The case damages your credit rating for seven years from the date of filing. You cannot include recent tax bills, most federally issued student loans, child support, alimony, court fines or lawsuits related to criminal acts in any type of bankruptcy case.