Options for Getting Out of Debt
- It is possible to get out of debt.Debt concept - cutting a credit card image by Sophia Winters from Fotolia.com
According to moneycentral.msn.com, 43 percent of Americans annually spend more than they earn. The average credit card debt for American cardholders currently stands at over $15,000. The problem is worsening, with bankruptcies nearly doubling in the last decade. The rising debt situation in America has forced many consumers to look at their options for getting out of debt. - A debt management plan works best for people who have some income left over after covering their basic expenses, but cannot meet all their credit obligations on their current salary. Usually, the debtor works with a third-party agency to create a budget, and a plan for distributing payments to creditors. Some agencies will try to negotiate lower rates of interest, penalty freezes and smaller payments on the debtor's behalf. Some creditors will agree to this, and to a freeze on interest and penalties, as long as the debtor continues making regular payments. This can help consumers slowly pay down their debt while doing minimal damage to their credit rating. It can also relieve them of the burden of juggling several credit accounts.
Be aware that a freeze on interest and penalties is up to the creditor. Your creditors can also alter the terms of your debt management plan or opt out at any time.
Finally, consumers need to be aware of fraud. Some companies will promise huge reductions in interest, amount of debt, and penalties, but deliver very little. In fact, some of their clients may end up in worse financial circumstances than before. The National Foundation for Credit Counseling is an excellent source for finding reputable credit counseling services. They can provide a list of services in your area that will give you the advice you need. - Debt settlement is a way of clearing debt by offering a lump-sum payment. With debt settlement, you need to be realistic about how much you can afford to offer. Once you have determined this figure, you may offer it as a one-time settlement fee. Creditors may be willing to accept half the outstanding amount, especially if the debtor is a good candidate for bankruptcy. If they accept your offer, you need to get the agreement in writing and then pay the agreed amount. If you settle the debt for less than you originally owed, it can still remain on your credit report. However, you can request that it be marked as "settled," so that it does minimal damage to your credit score.
Unfortunately, debt settlement isn't always an option. It is entirely up to your creditors whether they will accept the settlement offer. For a creditor to accept settlement, you need to demonstrate an inability to pay. Loss of income, illness or divorce can seriously alter a debtor's financial status, and these are situations where a creditor might consider debt settlement. However, if you have sufficient income you will be expected to pay your debt. - Chapter 7 bankruptcy offers you a clean start on certain kinds of debt. If the court approves your petition for Chapter 7 bankruptcy, you are no longer responsible to your qualifying creditors once the process is complete. If you have assets, you may be forced to liquidate some of them to pay a portion of your debt. Also, Chapter 7 bankruptcy carries a heavy penalty: it will remain on your credit report for ten years. During this time, obtaining new credit, finding a place to live, getting the best insurance rates, and finding a job can become more difficult.
You cannot discharge certain types of debt under Chapter 7. Student loans, taxes, child support and fines for legal offenses are usually not qualifying debts in Chapter 7 bankruptcy proceedings. - Chapter 13 bankruptcy is a way of reorganizing your finances over a set period of time. Under Chapter 13, you must create a budget and pay your creditors as much as you can afford. This agreement remains in place for three to five years. At the end of the agreement, any remaining debt is forgiven. Chapter 13 bankruptcy requires careful consideration, because it can do serious damage to your credit score. However, it does offer a way to escape a serious debt burden.
