About Debt Elimination Options

Americans are carrying more debt than at any other time in history; on average, $8,000 per person. When debt becomes overwhelming, there are numerous options to help consumers handle it. There is no one right option for everyone; the solution to a debt problem is a matter of the individual's personal and financial circumstances.

Significance

Debt, particularly unsecured debt such as credit card balances, can build up more quickly than many people imagine. Credit card companies have a vested interest in keeping you in debt because if you make only the minimum payment each month, you will be paying off the amount borrowed many times over for years to come. Americans today carry huge amounts of consumer debt, making it difficult to save money, be it for short-term goals such as setting up an emergency account or long-term investments such as retirement funds.

Types

Types of debt elimination or reduction programs generally fall into one of several categories: self-help, debt negotiation and settlement, debt management plans and bankruptcy. Consumers should first try self-help strategies to get out of debt, such as establishing a budget and creating a plan for repaying debts. If, however, funds are insufficient to pay all creditors, you may need to consider the other options. Debt repayment plans allow consumers to create a plan for getting out of debt within a given time period, whereas debt negotiation or settlement aims to reduce the total amount of debt that is owed. Bankruptcy is a legal proceeding that releases borrowers from debt amounts above their ability to pay.

Warning

Debt reduction or debt elimination plans are very risky. These firms ask you to save and deposit a portion of your money each month in order to accumulate a lump sum that you can offer to your creditors as a negotiated payment in full. However, while you are saving this sum, your accounts will be recorded as delinquent, and creditors and collection agencies can continue to contact you in an attempt to collect on your debt. It is possible that the lenders will not accept the amount offered. Additionally, many debt reduction firms charge large fees for their services.

Expert Insight

Financial expert Clark Howard recommends that you avoid debt settlement agencies in your efforts to get out of debt, and instead consider working with a non-profit credit counseling agency such as Consumer Credit Counseling Services. He also notes that although bankruptcy is the only viable option for a small percentage of people, that it should be considered an absolute last resort, and should only be considered after all other options have been explored.

Misconceptions

There are many myths about debt and getting out of debt, and these are the basis for the credit repair scams that consumers fall into. First of all, despite what some "credit repair" agencies would have people believe there is absolutely no legal way to remove accurate negative information from your credit report. Items appear on a credit report for a period of seven years, and no company is able to make them disappear. (Although, in some cases, if you negotiate with a credit card company as a part of a repayment plan, they may be willing to downgrade some of your delinquent status or add positive payment information to your record.) Another popularly held misconception is that delinquent medical bills are not reported to credit agencies and do not affect your credit score. This is false. Medical organizations, just like any other creditor, are able to report payment activity to credit bureaus and can negatively impact your credit record accordingly.