Debt is a common part of life for many Americans. From financed home purchases to student loan debt and credit cards, most Americans carry substantial personal debt.
Unfortunately, for some people, that debt can eventually snowball and grow to a point where they can no longer manage it. For people trying to regain control over an unmanageable debt situation, there are certain debt solutions that people commonly turn to for help.
Learning a little about each of these practices can help you determine what is best for you.
Transferring or moving debt
It is surprisingly common for people to deal with existing debt by taking on new debt. People may transfer balances from one credit card to another, take out a payday loan to cover a past-due credit card or even take out a home equity line of credit and borrow against the equity in their home in order to pay off creditors.
Unfortunately, many people continue to use the same source of credit they borrow to pay off, which means eventually they will have a high balance on both the credit card and the new form of credit they used to pay the initial balance. The same risks apply to any sort of debt consolidation loan, as they create an opportunity for more, not less, debt.
Debt settlement, either direct or through a service
Debt settlement involves working with creditors to set a lower amount for the debt that you must repay. Some people make these calls themselves, while others hire a company to do it for them.
Some companies will accept a lower amount if you pay a lump sum up front. There are several complications to debt settlement. The first and most obvious is that you may have to borrow money in order to make the payment. The second is that creditors can report you to credit reporting bureaus and drag down your credit score for seven years after you settle that debt.
Bankruptcy to discharge or restructured debt
Many people treat bankruptcy as a last line of defense against aggressive collection activities, but it can benefit anyone dealing with overwhelming levels of personal debt. Bankruptcy will have a negative effect on someone’s credit score, although the impact of the bankruptcy record diminishes as time goes on.
Unlike other common forms of debt management, bankruptcy actually discharges your debt, which gives you a fresh start and a budget that’s easier to balance. If you have substantial equity in your home or decent income, Chapter 13 bankruptcy gives you an opportunity to at least partially repay your creditors without endangering your assets. For those with fewer assets or lower income, Chapter 7 bankruptcy could be the better option, depending on a variety of factors.