When you have an enormous amount of debt you may need assistance regaining control of your finances. Debt elimination or debt negotiation will provide some relief, making your budget more manageable. You may incur fees with some programs. Look for the method that is the most cost-effective. Before you consider various methods think about your financial goals, such as becoming debt free.
Debt Elimination/Settlement
If you want to eliminate debt, contact each of your creditors to see if you can work out a settlement agreement. Many creditors are willing to settle; some may accept as much as 50 percent of your balance. You may have to report the settled debt as taxable income. For example, if you owe $7,000 and settle a debt for $4,000, the $3,000 that was forgiven could be taxed as income. If you receive a 1099-C, which is a debt cancellation form, contact your tax professional for advice.
Debt Relief Program
Debt relief programs also offer services to help you manage what you owe to creditors. These programs allow you to settle your unsecured debts for as much as 50 percent of your monthly payments. Sometimes you can get your interest rates reduced and fees waived. Such programs can also help you reorganize, negotiate and reschedule your debt. You pay fees for this sort of service.
Chapter 7 Bankruptcy
A chapter 7 bankruptcy is another form of debt elimination. This is one way to eliminate a large portion of your unsecured debt. You can file yourself, but it is best to hire a bankruptcy attorney who is familiar with the laws. It is a lengthy process to complete on your own. After you file there will be a meeting of creditors. A debtor is examined under oath by a trustee and any creditors that attend to see if there are any discrepancies in information. About four months after filing a "discharge of debtors notice" is issued, which means a debtor is no longer obligated to pay those debts and creditors cannot collect. This finalizes the bankruptcy. Bankruptcies remain on your credit file for 10 years and greatly reduce your credit rating.
Debt Negotiation
Sometimes you can negotiate with your creditors to make payment arrangements on past due balances. For example, if you owe $10,500 and your monthly payments are $450 and the account is past due $2,250, you may be able to negotiate repayment terms of $600 per month until the overdue amount is up to date--in this case, approximately 3.75 months. When the past-due balance is paid you can resume your regular payment of $450. The amount past due will show up on your credit report but should become less significant once payments are made on time for a year.
Balance Reduction
Another way to eliminate your debt is to devise your own plan. List your debts in rows and put the smallest balance first. Include the interest rate, monthly payment and the creditor. Pay off your smallest account balance first and continue until every account is paid in full. Once you pay off your first balance you have more money to put toward the next debt on your list; plus, you will feel a sense of accomplishment knowing you are moving toward freedom from debt. It helps if you negotiate a lower rate of interest with your creditors prior to paying them off.
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