The University of Alabama

DEBT MANAGEMENT

Getting Out of Debt

If your monthly debt payments, excluding mortgage or rent, exceed 20% of your income, your debts are a serious problem requiring action. Here are some basic alternatives for getting out of debt:

  • Do it yourself
  • Debt consolidation
  • Credit counseling
  • Bankruptcy

Do it yourself

The do it yourself approach may include steps such as negotiating with your creditors, paying off debts with the highest interest rates first, obtaining a second job, and cutting up your credit cards. Many people lack the self-discipline to follow this approach.

Creditors sometimes are willing to negotiate lower payments or interest rates, or waive late charges and other fees, because they realize that it’s better to receive some of the money owed than none of it. But do you have the ability and temperament to conduct difficult, time consuming negotiations yourself?

 

Debt consolidation

In a typical debt consolidation, you consolidate your existing debt payments into one, sometimes at a lower interest rate. You take out a loan the lender sends you a check and you pay off your creditors.

If you have a habit of buying on credit and carrying large balances on your credit cards, debt consolidation won’t fix your underlying spending problem. Also, you remain solely responsible for paying your own bills and negotiating with creditors.

 

Consumer Credit Counseling

A credit counseling service can conduct the negotiations for you and provide additional guidance as part of a debt management program. You send a single payment each month to that organization, which then pays all of your creditors on your behalf.

In addition to establishing a structured payment plan based on your debt, a credit counseling agency may also be able to negotiate benefits for you, like lowered interest rates and waived late and over-the-limit fees. They can also respond to collection calls on your behalf, saving your from harassment. Many credit counseling agencies, including also believe in providing ongoing educational support so that once the individual is out of debt, he or she will also have the knowledge needed to prevent that situation from happening again.
Make sure you take advantage of not for profit Credit Counseling Centers, and avoid any services that offer a quick credit repair.

 

Bankruptcy

Filing for bankruptcy should only be considered as a last resort. Bankruptcy is a court preceding that stops lawsuits and any other attempts by creditors or collection agencies to collect from you. However, it comes with a high cost—it generally stays on your credit report for a full 10 years, causing extreme difficulty in using credit to obtain cars, homes and other loans, and even restrict you from certain kinds of employment. Bankruptcy should never be thought of as a “quick” or “free” way to get out of debt, as it creates such difficulty to obtain future credit for such a long length of time.

Although bankruptcy may fix your short-term problems, because it stays on your credit report for so long it should only be used in extreme situations. Many people who file bankruptcy make the mistake of doing so without fully exploring their options, and never realize they have other, more viable choices that will allow them to preserve their credit standing.

Source: InCharge Debt Solutions