3 Popular Plans for Getting Out of Debt

Debt can hold you back not only financially, but mentally too. When debt spirals out of control, stress increases, and most people don't function optimally when they're under chronic stress. Debt problems are easiest to solve when they haven't taken over to the point of causing chronic strain on a person or a family. If you have too much debt, addressing it today instead of tomorrow is the best plan because it is a problem that doesn't get better on its own. Getting out of debt isn't easy, but you have several options available for doing so. Three popular plans for getting out of debt are debt settlement, credit counseling, and debt consolidation loans.

Debt Settlement

Debt settlement companies generally tell clients to stop payments on their bills and save up cash in an account. The company, in turn, uses the account value to negotiate cash settlements with creditors. Settlements may be as low as 30 cents for every dollar owed. In other words, if you owe $60,000, sometimes debt settlement companies can negotiate a cash settlement of $20,000. There are no guarantees, but when debt settlement works as intended, it provides needed relief for clients in trouble. But there are drawbacks, including

• Damage to credit scores
• Risk of lawsuits by creditors
• Big tax bills, since the difference between amount owed and amount paid in settlement is considered taxable income
• High fees

Credit Counseling

Credit counseling services create plans to help debtors manage their debt and pay off credit cards over a period of three to five years. These plans require strict budgeting, but when successful, they help clients avoid bankruptcy. Credit counseling services, which may be nonprofit or for-profit, provide the following services:

• Objectively evaluating the client's financial situation
• Suggesting personalized options, which may involve educational materials, budgeting help, or a debt management plan
• Creating a debt management plan if that is the best option

Debt Consolidation Loans

Sometimes when people take on too much debt, the problem is compounded by failing to remember multiple due dates each month, causing problems like late or missed payments. Debt consolidation loans are often used to pay off multiple credit cards. Once the proceeds of the loan are used to pay off the credit cards, the client has one monthly payment toward the debt consolidation loan. Besides convenience, the other main advantage of debt consolidation loans is that they usually have significantly lower interest rates than credit cards.

Alternative Solutions to Debt Problems

Sometimes debt problems can be vanquished without the help of formal programs. If debt is high, but not crippling, consumers can often address debt through budgeting and improved financial management on their own. On the other hand, sometimes debt is so bad that none of the plans listed above are enough. In those cases, bankruptcy may be the only option. With debt, the worse it gets, the fewer and more severe the options available for dealing with it. That's why it's so important to deal with debt problems sooner rather than later. Your future financial health depends on it.

Sources:

http://money.msn.com/credit-and-debt/when-debt-settlement-makes-sense-weston.aspx
http://articles.moneycentral.msn.com/Banking/YourCreditRating/why-credit-counseling-often-fails.aspx?page=2
http://www.consumercredit.com/credit-counseling/credit-counseling.htm
http://www.bankrate.com/brm/news/cc/20031007a1.asp