What are Your Options Regarding Debt?

With millions in financial distress these days, many are wondering what their options are regarding debt if they aren't able to pay their bills soon.  Some might not have any choice but to try and negotiate with creditors for better terms, longer repayment times, etc.  In order to develop a plan to get out of debt, you need to learn more about your options before you plunge in to negotiating with your creditors. 

Basically, you have five options:

1.  Do nothing.  You can continue to limp along each month barely getting by and hope that you can pay down your debt someday.  This plan rarely works since a single emergency or unexpected event, such as the loss of a job, drives the household to financial collapse.

Pros -- (1) If you are broke and owe less than $1,000 to each unsecured creditor, there is little chance you will be sued.  Collection efforts will last about six months and then the accounts will be written off as noncollectable.

Cons -- (1) If you have wealth, you risk a lawsuit, a wage garnishment, and property seizures. (2)  Your credit rating will be ruined and you will not be able to get credit for the next 3 to 5 years.  What financing you do qualify for will be at a high interest rate.

2.  Budget your way out of debt.  You can give up certain luxuries, refinance loans, and live more frugally so that you can pay down your debt.  

Pros -- (1) Can get out of debt without bankruptcy, credit counseling or debt negotiation; (2) Your credit rating will not be damaged; it might even be improved.

Cons -- (1) You must change your lifestyle; reduce your expenses in order to have more to pay off your debts.

Recommendation:  This is, by far, the best option for you.  If you could give up extras, cut back on unnecessary expenses, you might find $300 to $600 to pay down your debt without revealing you're having a problem or damaging your credit rating. 

3.  Sign up for credit counseling.  Although these agencies promise in their advertising that they can resolve your debt problems by lowering the interest rates on your credit cards and such, they aren't telling you the whole story. 

Pros-- (1) Traditional counseling services offer free, competent budgeting advice and charge only a small monthly administration fee;

(2)  Some companies can instantly arrange for you to have lower monthly payments and interest rates through their pre-established relationships with major creditors; (3) If you have significant credit card debt, you can get your monthly payments reduced.

Cons-- 

(1) Drop out rate is rather high -- estimates range from 40% to 60%.  Only about 20% of those who sign-up complete the program and a high percentage of those who drop-out go on to file bankruptcy;

(2)  Many people's bills actually increase each month rather than decrease -- if you can't afford a 3% increase in your monthly payments now, then credit counseling probably won't work for you;

(3)  The time schedule to pay off debt is often grossly underestimated.  Many people realize after a year that their debt hasn't reduced at all and it will take them at least 12 years to pay off the debt if they stick to the credit counseling plan;

(4)  Not all creditors participate in credit counseling programs.  Some major credit card companies refuse to participate and others will actually increase your interest rate (For example, Chase Manhattan Bank does this.);

(5)  New age counseling services charge high fees, offer low quality money management advice; often don't pay your creditors on time (which results in added late fees and more negative marks on credit reports); and too many of them pocket your money instead of paying your creditors.  This results in $29 late fees, more negative marks on your credit report and renewed collection efforts;

(6)  Your credit rating will be damaged by notations that you have entered a debt management program.  These notations can stay on your credit report for seven years.  You will not be able to get credit for the next 2 or 3 years and the credit you do obtain will be at a high interest rate.

Recommendations:  If you choose this option, you can look in your local Yellow Pages under counseling or credit counseling for an agency named CCCS or Consumer Credit Counseling Services.  Be aware that credit counseling services work for the credit card industry and will steer anyone contemplating bankruptcy to file a chapter 13 (repayment plan) rather than chapter 11 (credit card debt discharged).

4.  Bankruptcy.  Bankruptcy can wipe out a significant amount of debt in about four months if you file Chapter 7, but it isn't a good idea for those who have substantial property and assets that they want to keep.  Many people think that bankruptcy is always something they can use if they have to, but not everyone qualifies.  If you are in serious financial trouble, it is important to find out more about this option even if you aren't planning to file at this time.  You need to know if it is a viable alternative for you, just in case. 

Pros--

(1)  Can liquidate many unsecured debts, such as credit card and medical debts;

(2)  If your bankruptcy is a simple one, the whole process will be over in about four months;

(3)  Is an excellent solution for those with no property, few assets, and a modest net worth;

(4)  There are federal and state exemptions that allow you to keep many personal assets;

(5)  If you do-it-yourself, the process will cost you less than $400.

Cons--

(1)  It is not a good solution if you've been using your credit cards the past three months to make luxury purchases;

(2)  Might have to sell your home and some of your assets;

(3)  It is not a good alternative for those with a late model expensive car or those who have significant equity in their homes;

(4)  Will have a bankruptcy notation on your credit report for 10 years, which will result in having a hard time getting financing for the next 2 to 3 years, and what financing is obtained will be at a high interest rate.

(5)  If you hire an attorney, it will cost you at least a $1,000 for a simple bankruptcy and $3,000 to $5,000 or even more for a complex one.

Recommendation:  Good choice if you can't cut back on expenses, have a modest net worth and lots of unsecured debt.

5.  Debt Negotiation.  You can negotiate for alternate repayment plans and reduced settlements with unsecured creditors and debt collectors.  If you are successful, you can settle your unsecured debts for less than what you owe, get out of debt quicker, and avoid lawsuits.

Pros -- 

(1) Can get out of paying thousands of dollars in debt; 

(2) Can avoid judgments and wage garnishments;

(3)  Can avoid filing bankruptcy.

Cons -- 

(1) Credit rating will be damaged for next seven years and will have trouble getting financing for the next 2 to 3 years.  What financing is obtained will be at a higher interest rate;

(2) Might have to pay tax on forgiven debt; 

(3) No guarantee it will work; those with assets are taking a chance they will be sued.

Recommendation:  Good choice if bankruptcy and credit counseling won't work for you.