Debt Solutions

When searching for debt solutions, one of the more obvious options is debt consolidation.  Fortunately, there are several different viable solutions to the problem of growing debt.

In this publication, we're going to talk about solutions, or options, that individuals have when it comes to lowering their debt.  As part of that discussion, we're going to talk about four solutions:  debt consolidation, payment-in-full, debt settlement, and bankruptcy.  We'll also briefly discuss a fifth option - do nothing.

Dealing with Debt

As part of a separate debt topic, we talked about credit card debt elimination.  In that article, we discussed ways you can get help in managing your debt:  by creating budgets, through better planning, and by 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 mounting debt problems.

Here we will be discussing solutions that go beyond household budgeting and the managing of your finances.  That is to say, these particular solutions will involve more risk, and should be reserved for individuals with very serious debt problems.

So what exactly are these possible debt solutions?  As mentioned earlier, we think there are at least five different solutions to unwanted 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

One of the first solutions that come to mind when discussing the elimination or reorganization of debt is debt consolidation.  Consolidating debt is simply taking what might be several smaller debt problems, such as credit card debt, and putting them 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 seem realistic.  We all know people that have a lot of debt, but they also have 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 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 to 50% of outstanding debt, but this agreement needs to be negotiated.  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.  This includes sources of income as well as debts to other lenders.   Negotiating through an attorney sends a clear signal to the credit card company that you are close to bankruptcy.  This particular solution, however, will very likely 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 put 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, then consult an attorney, bankruptcy is a legal proceeding.

Do Nothing

Finally, you always have the "do nothing" option available to you.  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

There are many debt solutions available to you.  Some are obviously much more painful than others.  The one you choose should balance risks, rewards, and your future financial security.

The 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, 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 affordable interest rates may be reduced.

About the Author - Debt Solutions

Bill Sharlow is the Editor of Money-Zine.com.  Copyright © 2004 - 2011 Money-Zine.com