At this point in your life, getting out of debt probably seems like a monumental task. In fact, chances are that instead of working your way out of debt, you are actually going deeper into debt each day that goes by.
If I am, don't worry. Together we'll find a solution that will work
Right now the debt relief options available to you must seem endless... and confusing! Is debt management the same as debt consolidation? And isn't debt consolidation a loan? Doesn't bankruptcy wipe your "debt slate" clean? What about companies offering complete debt elimination? Is what they are offering legal?
In order to answer these questions, and at the same time help you get started on your road to debt freedom, let's walk through a complete list of your debt relief options, break down each one, and try and decide which one is best for you. But before we do that, let me make one thing clear. For the most part, the options you will see below are tools. Tools that you can use to help yourself start getting out of debt. They are part of the solution, but they are not the solution.
In other words, don't expect to "pick" one of these options, sit back, make no changes in your life, and expect to be debt free in 6 months. Sorry, it doesn't work that way.
Sidebar: The exception to this "I suppose" is Chapter 7 Bankruptcy which discharges most of your debts, but not all. And even still, if you don't address the reasons for your current debt troubles, you may find yourself back in debt soon anyway.
Alright, let's start with your first "option" for getting out of debt...
Create and stick to a budget.
Are you still with me?
Good. I know the words "personal budget" scare a lot of people away. So if you're still with me, let's keep going.
I hesitate to even call creating a budget an option. It is NOT an option. It is the foundation of any successful debt reduction plan, and it should be the first place you start when putting such a plan together. Planning and budgeting together are a powerful combination because they are proactive solutions. Now, if you are "afraid" of budgeting, or don't know where to start, don't worry.
First of all, creating and sticking to a budget can be a liberating experience, both financially and emotionally. And you should never underestimate the importance of the emotional side of getting out of debt. Second of all, if you don't no where to start, there is plenty of help available. In fact, right here on this site I have an entire section devoted to helping you prepare and stick to a budget. And if you need even more help assessing you finances and preparing a budget, you can always speak to a credit counselor who will work with you and help you along the way.
The rest of your options...
Part of the process of preparing your budget is making a list of all of your outstanding debts. This includes the outstanding balance, interest rate and minimum monthly payment amount for each debt. And if you have already done this, you are already well on your way to setting up a debt relief plan called the "debt snowball". (Other variations of this type of plan are the debt roll-down and debt roll-up).
Here's is what else you need to do.
a) Take your list of debts and order them from smallest outstanding balance, to largest outstanding balance.
b) Each month going forward, you will make only the minimum payments on all of you debts except the debt at the top of the list.
c) Your goal is to pay as much as you can each month towards the debt at the top of your list. (This is where a detailed budget comes in. Living according to a budget can free up extra money each month that can be used to pay down your debts.) Your focus is to get this one "top" debt paid off as soon as possible.
d) Once the fist debt is completely paid off, have a little party for yourself, cross off the debt from your list and...
e) Repeat the process starting with the next debt on your list.
Does this method of getting out of debt sound too simple? Well, it is simple, and it works. You would be doing yourself a great disservice if you dismissed this option because of its simplicity.
OK, by now you are starting to see a crack of light at the end of the debt tunnel. You know it's time to get a handle on you money management and create a budget, but you are just too overwhelmed. It would be a big help to you if you could just get a little personal guidance and help from someone who is a professional, and has done this many, many times. No problem.
If you need a bit of extra help, speaking to a credit counselor can be a wise move. In fact, most reputable debt and credit counseling companies will offer a free, no obligation consultation to get you started. They will assess your financial situation, and help you complete a thorough budget. They will also provide access to educational material on money management and personal financial management to make sure you stay on track with your debt relief plan.
You've tried to come up with a debt relief plan on your own with no luck. You have even worked with a debt counselor to sort out your finances and create a budget. But you still can't seem to arrive at a plan for getting out of debt that you can manage financially from month to month. If this is the case, it is likely that your debt counselor will suggest that you enter a debt management plan or 'DMP'.
Well, once you decide to enter a debt management program, your debt counselor will negotiate with your creditors to eliminate late fees and penalties, reduce your monthly payments to fit your budget (if necessary), and get your interest rates lowered. You will then begin to make one lump sum payment to the debt/credit counseling company each month. From those funds your debt counselor will make sure that your creditors are paid the newly agreed upon amounts.
Are you suffering a financial hardship due to an event in your life (divorce, job loss, sudden serious illness)? If you are, or if your debts are just so large that you are continually missing payments making it unlikely that even entering a debt management plan will solve the problem, then debt settlement might be your next best option.
How does only having to pay 30% to 50% of your debts sound? Would that make getting out of debt easier? But how is it possible that you can settle your debts by paying only 30 cents on the dollar, you ask? The answer? Good old fashioned negotiation.
A typical debt settlement strategy would have you (or a debt arbitrator that you hire) simply negotiate with each of your unsecured creditors over a period of time to reach an amount that both parties can agree upon to settle the debt once and for all. This is a perfectly legal form of debt reduction and is often used as a bankruptcy alternative. In fact, for this reason, debt settlement is often called the "new-bankruptcy".
Although I have it listed as getting out of debt 'Option #5', the debt consolidation loan is probably one of the first solutions that people consider (or at least think about), when their debt problems get out of hand.
There are three reasons why you might consider getting a debt loan and use it to shift (remember you are not 'paying-off' anything) your current debts to a new creditor.
(a) reduce the interest rates you are currently paying,
(b) reduce the monthly payment amounts, and
(c) have the convenience of making only one debt payment each month.
Here are some potential sources of these debt loans:
Secured Loans: These funds are usually obtained through a home equity loan, a home equity line of credit (HELOC), a straight second mortgage, or through a cash-out mortgage refinance. The advantage of using your home as collateral is that you can typically get a lower interest rate, the interest you pay may be tax deductible and you can extend the term of the loan out considerably, thus making the monthly payments lower.
But their are disadvantages to this tool for getting out of debt as well. For one, you are exchanging unsecured debt for secured debt. Now, not only are you in debt, but your house is on the line. Also, although being able to lower your monthly payments is an advantage, if you take longer to pay off your debt, you could end up paying significantly more in interest charges over the life of the loan.
Unsecured Loans: Also called personal loans or signature loans, you would typically get these loans from a bank or other lender. And because they are unsecured, your credit rating/score and income will play a much larger role in both the interest rate you are charged and the term you will be offered. If you don't have "good" credit and a "good" income, chances are the interest rate you will end up with won't be much better than what you are paying now.
Bad Credit Debt Consolidation Loans: If you have "bad" credit, your chances of finding a debt loan that makes sense are slim to none. On top of that, you must watch out for "advance fee" debt loan scams. If a company advertises that they will accept you as a customer regardless of your bad credit, or low income, be wary. It is likely a scam and won't help you with getting out of debt. In fact you will probably end up a few hundred dollars more in debt after they steal your money.
Retirement Account Loans: If you have a 401(k), 403(b) or pension plan you may be able to borrow against it. With no credit check or income verification required, and the interest being paid to yourself, these type of debt loans have their advantages for sure. But, they also have their disadvantages. So tread carefully when considering this type of loan for getting out of debt.
Credit Card Balance Transfer: This can actually be an effective strategy for getting out of debt. What you need to do is get a new, low interest credit card (ideally a 0% interest credit card) and transfer your existing balances over to the new card. The low (or zero) interest rate will likely only be a temporary or "introductory" rate (usually lasting 6 to 18 months), but during that time frame the interest you pay will be greatly reduced allowing you to pay down a considerable amount of the principal.
Chapter 13 bankruptcy is often referred to as a "pseudo" debt management plan. With this type of bankruptcy you get to keep all of your property, but you must repay all (or a portion) of your debts over a three to five year period (much like the goal of a debt management plan).
Chapter 7 bankruptcy is also called "liquidation" bankruptcy. Under
this option for getting out of debt some of your property may be sold
to reduce your debts. Most of your unsecured debts will be wiped out
under Chapter 7, but there are some debts that will remain, including
student loans, tax debt and spousal/child support. And depending on the
laws of the state in which you live, you will be able to keep some of
your other property including the equity in your home.
Many of the above options we have discussed so far are offered as services by credit counselors, debt relief companies and/or attorneys. As such, you will pay fees in order to have these people/companies assist you. But there is no reason that you can't undertake some of these options yourself.
A good way to do this is to order a book or course that will walk you through the process.
Debt elimination sounds like a good thing. After all, no matter which option for getting out of debt you choose, your ultimate goal is to eliminate your debts right? However, the term "debt elimination" has taken on a negative connotation over the years as it has often been used to refer to scam operations and techniques that will "supposedly" eliminate your debt. And if you fall for these debt elimination scams, you may end up out thousands of dollars, and under investigation by the FBI. You know the old saying, if it's too good to be true...
This option is often called the "Ostrich Technique". Unfortunately, this option does not solve anything. In fact, the longer you stick your head in the sand, the worse your situation is going to get. The Ostrich Technique usually leads back to Option #8 (Chapter 7 Bankruptcy).
You have probably noticed that the first 10 options for getting out of debt focus almost entirely on your debts and expenses. What I have done is put together a program that incorporates these options, but at the same time takes you beyond a focus of just getting out of debt, and walks you through the process of creating a new, recurring source of income doing something that you love. More on this coming soon.