Dealing with debt can feel overwhelming and stressful. However, there are many options and resources available to help you get out of debt and take control of your finances. This guide covers the best approaches to debt help, including debt settlement, debt management, credit counseling, debt consolidation loans, and bankruptcy.
Assessing Your Debt Situation
The first step is to fully understand your current debt obligations. Make a list of all your debts and key details including:
- Creditor name
- Total debt amount owed
- Interest rates
- Minimum monthly payments
- Type of debt (credit card, medical, student loan, etc.)
Next, examine your finances to determine how much you can afford to pay towards your debt each month. Look at your income, necessary expenses, and savings goals to come up with a realistic number.
Having a complete picture of your debt and budget will help you determine the best approach to becoming debt free. Track your progress each month to stay motivated.
Best Debt Help Options
Here are some of the most effective strategies for getting out of debt:
Debt settlement involves negotiating directly with creditors or using a settlement company to settle your debts for less than the full amount owed. This usually requires stopping payments and letting accounts go into delinquency or default to motivate creditors to settle.
- Pros: Settles debt for typically 40-60% of balance owed.
- Cons: Damages credit score, fees, tax implications on forgiven debt.
Debt Management Plans (DMP)
A DMP allows you to consolidate debts into one monthly payment through a credit counseling agency. The agency negotiates lower interest rates and monthly payments with creditors.
- Pros: Consolidates debt into one payment, lower monthly payments, avoids bankruptcy.
- Cons: Enrollment and monthly fees, no reduction in principal owed.
Credit counseling provides guidance on managing debt through an accredited nonprofit agency. Counselors can help you with budgeting, debt repayment plans, and credit education.
- Pros: Customized money management plans, avoids bankruptcy, low or no cost services.
- Cons: No negotiating with creditors, debt obligations remain the same.
Consolidating debt into a new loan with lower interest rates can reduce monthly payments and total interest costs. Unsecured debt can be consolidated into a personal loan or home equity loan.
- Pros: Lower monthly payment, lower interest rate, fixed payoff timeline.
- Cons: Secured loans have collateral risks, variable rates can increase over time.
Filing for bankruptcy liquidates assets to pay back a portion of debt, discharges the remaining debt. Chapter 7 bankruptcy eliminates most debts, while Chapter 13 bankruptcy restructures debts into a repayment plan.
- Pros: Eliminates eligible debt, stops collections and lawsuits, allows debt rebuild.
- Cons: Severely damages credit and future ability to borrow, liquidates assets, fees and costs.
Key Factors to Consider
Choosing the right debt solution depends on your specific financial situation. Keep these factors in mind:
Types of debt – The types of debt you have impacts options. For example credit counseling won’t help with medical or student loan debt.
Interest rates – Higher interest rates make strategies like debt consolidation more appealing to reduce total interest costs.
Your assets – Options like debt settlement and bankruptcy allow you to hold onto assets but hurt your credit. Home equity loans use your home as collateral.
Timeframe – Debt settlement and bankruptcy provide relatively quick resolution while debt management and counseling take 3-5 years to resolve debt.
Impact on credit – Bankruptcy damages credit the most. Debt management and settlement also hurt your credit score initially but you can rebuild credit over time.
Upfront fees – Debt settlement and bankruptcy have high upfront fees. Credit counseling is generally the most affordable option.
Ability to pay – If your income is not enough to keep up with minimum payments, options like debt settlement, bankruptcy and credit counseling allow reduced payments.
Finding a Reputable Provider
Be cautious of debt relief companies and make sure to research providers thoroughly before choosing services:
- Avoid upfront fees – Avoid any company asking for large upfront fees before providing services. Fees should be modest and proportional.
- Check credentials – Legitimate credit counseling agencies are accredited by the NFCC. Check the AFCC if the company offers debt settlement services.
- Read reviews – Check the BBB and independent reviews on sites like Trustpilot to verify quality and customer satisfaction.
- Ask questions – Get full details on services, fees, the resolution process and your obligations in writing before signing anything.
- Check alternatives – Nonprofit credit counseling or negotiating directly with creditors yourself are often cheaper alternatives to debt settlement companies.
|Type of Provider||What to Look For||Red Flags|
|Credit Counseling Agency||Nonprofit, NFCC-accredited||High upfront fees|
|Debt Settlement Company||AFCC accreditation, reasonable fees||Guarantees of cancelled debt, high fees|
|Debt Consolidation Lenders||Reputable lenders, fixed rates, no origination fees||Variable rates, subprime lenders, home equity scams|
|Bankruptcy Lawyers||Certified public accountants (CPAs) or consumer bankruptcy attorneys||Requests payment upfront before filing, doesn’t offer free consultation|
Using the right debt help solution for your situation will allow you to take control of debt, reduce stress, and improve your overall financial health.
Developing Healthy Financial Habits
In addition to your debt help strategy, developing good financial habits and money management skills will help you achieve lasting financial stability. Here are some healthy habits to implement:
- Track expenses to control spending and stick to a budget
- Build an emergency fund with 3-6 months of living expenses
- Contribute to retirement accounts like 401(k) or IRA
- Limit use of credit cards and avoid racking up card debt
- Pay bills on time to manage cash flow and avoid late fees
- Reduce expenses by cutting unnecessary costs
- Pay down highest interest debt first with debt avalanche method
- Review your credit reports regularly and improve credit scores
- Learn to use credit responsibly by maintaining low card balances
Getting professional guidance from a credit counseling agency or financial advisor can also provide the education, accountability and customized plans to change your money behaviors for good.
- NFCC.org – Nonprofit credit counseling agency locator
- ConsolidatedCredit.org – Debt management plan and credit counseling
- Credit.org – Nonprofit credit counseling and financial education
- AmericanConsumerCredit.com – Debt settlement services
- FreedomDebtRelief.com – Leading debt settlement provider
- NerdWallet.com – Debt management vs. debt settlement guide
- CreditKarma.com – Debt consolidation loans explained
- DaveRamsey.com – Debt snowball method
- USA.gov – Bankruptcy and debt relief resources
By understanding all your options and choosing the right debt solution for your situation, you can get out of debt and regain control of your finances. Consistently practicing good money management habits will then help you build financial security and prevent future debt. There are many reputable resources available to help you become debt free – you just have to take the first step.