All Your Options
Here are 10 of the most common options for getting out of debt. If you have a debt problem, you should consider all methods available to you and choose the most realistic option that harms your credit the least.1. Liquidating Assets. This may sound like something rich people do with their stock portfolios. But liquidating assets basically means selling things in order to raise cash. It could mean cashing in savings bonds, selling a second car, or selling anything else that could bring in cash. People who have few or no large items to sell may be able to have a yard sale or garage sale to raise money by selling off numerous smaller items. Liquidating assets is one of the simplest methods for addressing debt, and it won't affect your credit score.
2. Debt Consolidation. Taking out one loan to pay off several other debts often benefits you by giving you a lower interest rate (especially if you're paying off several credit cards) and by simplifying bill paying. It's easier to remember to make one loan payment each month than remembering numerous credit bills. Of course, the "catch" with debt consolidation loans is that you have to avoid taking on new debt, or you could find yourself in an even bigger credit mess.
3. Credit Counseling. Credit counselors make an objective assessment of your income and debts and work out a plan that lets you avoid bankruptcy while paying off your creditors over a three to five-year period. Look for credit counselors who are certified by your state (if applicable), and research them thoroughly before signing on. Check your local Better Business Bureau and your state's attorney general office to find out if there have been complaints about a credit counseling service you're interested in. Credit counseling may involve the counseling organization negotiating with your creditors to lower interest rates or accept lower monthly payments, or it may involve drawing up a debt management plan.
4. Debt Settlement. Debt settlement firms advise you to stop paying creditors and instead set aside the money you would have used to pay creditors in an account. Once the account reaches a certain level, the firm negotiates cash settlements with creditors. Normally, creditors will be asked to accept a fraction of what they're owed in exchange for taking a cash settlement. There are dangers to using a debt settlement firm. Some creditors will sue you when you stop paying them, and others will shut your accounts down. It can harm your credit score, but causes less damage to your credit than bankruptcy.
5. Bankruptcy. Sometimes only bankruptcy can relieve debt. While it shouldn't be taken lightly, there are cases where bankruptcy is your only option. Legislation passed in 2005 makes it more likely you'll have to file Chapter 13 bankruptcy (which involves a plan for paying off your debts) than Chapter 7 (which liquidates assets and pays creditors a few cents on the dollar). Bankruptcies stay on your credit history for seven to ten years and wreck your credit score. Bankruptcy may be indicated if:
- You don't earn enough to pay expenses and debt payments
- You've considered tapping into your 401(K) retirement money
- You have to use credit cards for necessities like food
7. Working Overtime. If your job offers overtime, choosing to work extra hours can be a convenient way to bring in extra cash that you can use to pay down your debts. If you haven't defaulted or gone delinquent on any of your debts, this option gives you the advantage of not harming your credit score. Additionally, it reduces the need to find a second job, so you can get busy paying down debt right away.
8. Do-it-Yourself Budgeting. Simple carelessness can cause debts to grow. Sometimes, realistically examining income and expenses can get you back on track with cost-cutting measures and a commitment to avoiding future debt. Some credit counseling services offer classes on budgeting, and there are many online tools available to help people draw up budgets. Sometimes finding out exactly where your hard-earned money goes is an eye-opening experience.
9. Borrowing from Family. This is tricky in some families, so it isn't to be undertaken lightly. If this is an option, make a repayment plan and sign it so the person lending you money knows you're serious about paying them back. This should probably be a last resort choice when bankruptcy is the only other option. Borrowing from family can strain family ties, so be prepared to be diligent about paying them back.
10. Negotiating Directly with Creditors. You don't have to use a debt settlement firm to negotiate with creditors. However, be aware that some creditors will shut down your account if you try to negotiate with them, and this will leave a negative mark on your credit history. Then again, if you have a good track record with a creditor and threaten to shut your account, they may be willing to work with you. Credit card issuers often pay $300 in advertising and soliciting costs to bring in a new customer, and they want to hang onto their good customers.
Ignoring debt is the worst thing you can do. The longer you let debt accumulate, the more likely you'll have to resort to drastic measures like bankruptcy to deal with it. The sooner you vow to conquer your debt, the more options you'll have. It is also important to remember that once you pay your debts, you need to stick to a budget and avoid taking on too much credit. Otherwise you'll be right back where you started.
Sources:
http://personalfinancebythebook.com/proactive-options-for-getting-out-of-debt/http://www.debtsteps.com/options-for-getting-out-of-debt.html
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
http://blog.perkstreet.com/debt-relief-5-options-for-getting-out-of-debt-for-good/
