Debt Relief Options: Desperate Measures for Desperate Times

With gas and food prices skyrocketing and layoffs widespread, it's increasingly easy to fall into debt. According to CardWeb, an industry tracker, 61% of all users carry a balance on their credit cards. The average amount of that balance is a staggering $9,659, nearly double what it was 10 years ago. The good news is it's possible for most borrowers to climb out of debt with some self-discipline and professional help.

Debt Management Plan: Fix Your Future

Debt management planners determine how much you can afford to pay each month and often negotiate concessions from your creditors to make repayment possible. You make a single monthly payment to the plan and the money is then distributed to your creditors as agreed. Contact a credible credit counseling agency and work together to develop a debt management plan. The agency will help you develop a budget and a monthly repayment plan. Knowing you have entered into a debt management plan, your creditors may be willing to waive late and overdraft fees as well as reduce your interest rate or lower your total amount of debt. Debt management plans vary in length depending on the amount of debt you have, but the average takes four years to complete.

"You can try to negotiate a debt management plan with your creditors on your own, but a credible credit counseling agency certainly will have more clout with a Chase Manhattan or Bank of America than the average consumer," says Doug Erickson, of Consumer Credit Counseling Service of Greater Atlanta.

Debt Consolidation: Get It Together

If you carry a lot of high-interest credit card debt or other consumer financing, consider consolidating your debt into one loan. Debt consolidation loans lower your monthly payments in two ways--first, they are nearly always secured by your home, and therefore the interest rate is much lower than for comparable unsecured debt like credit cards. Second, the debt can be stretched out over a longer period of time.

Another potential advantage of debt consolidation loans is that the mortgage interest may be tax deductible. However, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, if you use your house as collateral, you run the risk of losing it. If you go this route, Cunningham says, take your extra savings and make more than the minimum payment so you will pay off your debt as soon as possible. Also, you must be very careful not to end up charging items back to your cards and increasing your debt yet again. "I've seen that happen too many times," she says. Cut up your credit cards so that you won't be tempted.

Debt Settlement: When Less is More

For a fee, typically 15% of your total outstanding balance, a company will negotiate with your creditors. The goal is to get creditors to accept less in order to make repayment possible. For example, if you owe a total of $10,000, and your settlement company negotiates this down to $4,500 and charges you $1,500, you will end up paying $6,000 and saving $4,000. The creditors may choose to go along when they believe that the amount offered is the most they can expect to recover. The Federal Trade Commission cautions consumers that there is no guarantee the settlement company can reduce the debt, that debt reductions may be taxed as income, and that disreputable outfits could cost you money and ruin your credit. Be wary of shady companies that push debt settlement: "A rule-of-thumb is if you see them advertise on TV, 'Let us settle your debts,' don't do it," Erickson says.

Bankruptcy: Square One

Bankruptcy is considered the "heavy artillery" for those who need more help with debt than budgeting, consolidation, or negotiation can provide. Chapter 7 filing involves liquidating assets to satisfy creditors and in most cases discharging whatever debt remains unpaid. Chapter 13 filing allows you to keep your assets but uses your income to repay some or all of what is owed to your creditors. Bankruptcy filings stay on your credit report for 10 years, which can make it difficult to get a credit card or lease, buy a car or a house, and even get a job or insurance.

Choosing Debt Relief Options: The Long Run

Your best option depends on the size of your debt (and the availability of income to repay it), the equity (or lack of) in your home, the extent of existing damage to your credit score, and your own self-discipline. Says Cunningham: "Justremember that you didn't get into debt in a few days, you're not going to getout of it in a few days either."

Sources:

• Cunningham, Gail, Interview by Beth W. Orenstein, 16 July 2008
• Erickson, Douglas, Interview by Beth W. Orenstein, 15 July 2008
• National Foundation for Credit Counseling