Much has been written on the subjects of debt relief, debt consolidation, and credit repair. This article is intended to help those who are overwhelmed by the sheer volume of information to sort through the hype and get to the "bottom line" of what they must do.
There are three major options
Any solution you opt for will fall into one, or more, of three categories.
1. Increase your income, reduce your outgo
If your debt situation isn't too serious, your main goal will be to reduce your debt level by paying off your debts as quickly as possible. To do this, you must come up with extra cash that you can put toward paying down your credit card balances or other outstanding loans. This can be done either by earning more money, perhaps by taking a second job, and/or by cutting expenses. Simple enough.
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Beyond this, you can reduce your monthly payments by shifting your debt to the creditors with the lowest monthly payment per thousand dollars loaned. This means you'll borrow from sources that have the lowest interest rate and/or the longest payment terms. In many cases, this means taking out a home equity loan.
Pros
You can do this option on your own, and it will help to improve your credit rating.
Cons
What you're essentially doing is reducing your standard of living. You are working more and/or spending less, and the difference is going to your creditors.
2. Get into a debt management program
Variously referred to as credit counseling, debt management, or loan consolidation, this involves partnering with a debt counselor at a non-profit organization that specializes in helping people deal with debt problems they can't solve themselves.
You'll have to "reveal all" about your financial situation to your counselor. He or she will then work with your creditors to negotiate a restructuring of your debt to lower your payments, and to make it possible for you to gradually work your way out of debt. This restructuring can involve any or all of the following
increasing the time allowed for you to repay your debt reducing the interest rate partial forgiveness of the debt balance
Pros
You get professional help and debt advice. You may even be granted a permanent reduction in some of your debt balances.
Cons
Getting into debt management can hurt your credit rating. If you don't stick to the plan laid out for you, creditors will be extremely unforgiving--you've pretty much used up all of your options (except for the following one).
3. Declare bankruptcy
This is the "nuclear option" in the world of debt reduction. Like dropping the atomic bomb, it should not be used to solve a minor conflict!
Recent changes to the bankruptcy laws have made this option more difficult, but contrary to popular belief, it does still exist, and can be used to wipe out most if not all of your debts.
Bankruptcy law is complex. Realistically, if you are considering bankruptcy, no amount of research on the Internet is sufficient. Instead, you should consult with an attorney versed in bankruptcy law. (By the way: there is no such thing as an officially-designated "bankruptcy lawyer." Any licensed attorney can work on bankruptcy cases, though some choose not to do so, while others work almost exclusively in this field. If you don't know which attorney to hire, consult your local bar association. Don't rely on flashy late-night TV infomercials!)
Your lawyer will examine your situation and determine whether a straight, Chapter 7 bankruptcy, or a "reorganization", known as a Chapter 13 bankruptcy, is appropriate. (Under the new laws, the latter is strongly favored). Your lawyer will also be able to help you determine which of your debts can be eliminated, and which will survive the bankruptcy process.
Pros
Only bankruptcy can wipe out most or all of your debt, and give you a true "fresh start." Your debt relief is court ordered and enforced.
Cons
Bankruptcy is the worst possible blemish on your credit record. If you "cheat" on reporting your financial situation, you can be criminally liable.
Take action now
If you have a debt problem, whatever you do, don't just stick your head in the sand and hope it will go away. In all debt situations, time is your enemy.
Is Bankruptcy Right For You? Talk to Bankruptcy Attorneys Free and Confidential. Licensed bankruptcy attorneys are available. Attorneys will call you to discuss your case for free. Find out if bankruptcy is right for your situation.
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