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 When most people think about debt solutions, the obvious option appears to be debt consolidation. But really there are several different solutions to the problem of mile high debt. That's one of the good things about this world we live in - we unusually have options.
Dealing with Debt
The last time we talked about debt, we talked about credit card debt elimination. In that article, we discussed ways you can get help in managing your debt - by creating budgets, better planning, and setting financial goals. Of course all those options are still available to you and are certainly viable solutions that can help individuals to deal with debt problems.
Here we will be discussion solutions that go beyond household budgeting and better managing of your finances. That is to say, these particular solutions will involve more risk and should be reserved for individuals with pretty serious debt problems.
So what exactly are these possible debt solutions? Well there are at least five different solutions to overwhelming debt - debt consolidation, debt settlement, payment in full, bankruptcy and, of course, doing nothing. Let's take a closer look at each of these options.
Debt Consolidation
As previously mentioned, debt consolidation is the one solution that usually first comes to mind. Consolidating debt is simply taking what might be several smaller debt problems, such as credit card debt, and putting them all together in the form of a larger loan.
For example, you might have balances on several credit cards in addition to college loans or even a car loan. Debt consolidation allows you to put all these financial obligations together in one place. The goal of this particular option is to leverage better interest rates that would be offered to you with one large consolidated loan.
Payment in Full
This is an interesting option because to some of you payment-in-full might not make any sense at all. But we all know people that have a lot of debt but they've also got a lot of money sitting in their bank accounts too.
Why would someone do this? Because they've adopted the position that they will "pay themselves first" before paying others they owe money to such as creditors. They have set savings goals, and simply refuse to pay down their debt. People in this situation certainly have the payment-in-full option available to them.
Debt Settlement
Debt settlement is different than debt consolidation. Creditors may agree to a debt reduction settlement when they feel such negotiations are in their best interests. For example, they might be more likely to negotiate with someone if they believe the person seeking the settlement is a good candidate for bankruptcy. Many credit card companies will settle in the range of 10 - 50% of outstanding debt, but all this needs to be negotiated. And the settlement process can take anywhere from three to nine months.
Credit card companies will also want to take a close look at your financial situation and ask for a lot of information - such as sources of income and outstanding debts. Negotiating through an attorney sends a clear signal to the credit card company that you are close to bankruptcy. This particular solution, however, is also very likely to negatively affect your credit rating.
Bankruptcy
Unlike businesses, individuals can file for Chapter 13 or Chapter 7 bankruptcy. The difference being that Chapter 13 involves a plan to reorganize your financial situation and eventually puts you in a better position to pay down your debt.
In Chapter 13, you might get involved with a debt settlement or debt management plan. However, there are so many nuances with bankruptcy that attempting to explain it in a paragraph or two does the process no justice. If you are considering this solution consult an attorney, bankruptcy is a legal proceeding.
Do Nothing
Finally, you always have the do nothing option available to you. And while you might not think this is a viable debt solution, this approach is probably the most frequently used by debtors. To describe this solution a little more accurately - it simply involves ignoring the problem and hoping it will go away. Under the best of all circumstances, the creditor will leave you alone. In the worst of situations, you could lose your home, car and bank accounts.
Problems with Debt Solutions
So you see there really are many debt solutions available to you. Some are obviously much more painful than others. The one you chose should balance risks, rewards and your future financial security.
The big problem with many of the above mentioned debt solutions is that some of these options can seriously affect the information appearing on your credit report and ultimately your individual credit rating. Your credit rating is calculated using several factors including the amount of outstanding debt you've got, recent request for credit and payment history.
If a particular debt solution touches any or all of these factors, then your ability to secure future credit or loans at low interest rates may be reduced.
About the Author - Debt Solutions
Bill Sharlow is the Editor of Money-Zine.com. Copyright © 2004 - 2007 Money-Zine.com
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