Back about 4 years ago while I was working in financial services I came across an individual who had an extremely huge amount of debt. In fact, they had so much debt that they couldn’t even pay all of the minimum balances on their credit cards.
At the time I came across them this person, they were in the beginning stages of going through bankruptcy. When we got together for our appointment I asked her why she was considering bankruptcy. She said it was the only way she knew she could get out of debt for good.
The reality is that bankruptcy wasn’t the only answer in her situation. There are other options available but she was not aware of them. In fact after further questions I asked if she would interested in other debt relief options but her lawyer had her convinced that bankruptcy was the only answer.
In this post I’m going to take some time and share with you 5 debt relief solutions you should consider, including bankruptcy.
DIY (Do It Yourself)
The DIY debt relief option is by far the cheapest way to get out of debt but not necessarily the easiest. If you are considering this option there are a lot great places to get some self guide help. You can start by checking my debt plans page where you can get articles that explain how to set up your own debt snowball plan.
I also recommend you check out the Dave Ramsey Baby Steps Plan. This plan is a time tested tried and true way of getting out of debt. However, it’s not just a way of getting out of debt but also a plan that will change your life from top to bottom.
The plan has seven steps, they are as follows:
- Save $1000 to start your emergency fund.
- Setup a debt snowball plan and pay off all debts except your mortgage.
- Fully fund your emergency fund with enough cash to cover all of your bills for 3 to 6 months.
- Save 15% of your income for retirement savings.
- Build your child’s college education fund.
- Pay off your home mortgage.
- Give back to others.
Now obviously I could have gone into greater depth with each option but that would make this post over 5000 words easy, so if you would like to learn more about this option check out the link above.
Debt Consolidation
Debt Consolidation is the process of combining multiple debts into one bigger payment, usually through your home mortgage or a home equity line of credit. If you have a lot of extra equity in your home this can be a great option.
There are a lot of advantages to doing this such as cutting down high interest rates on your credit cards, car loans, or personal loans. You will also gain the advantage that you will be able to deduct your interest off your taxes with your home loan.
However, with all the positives there are some down sides to doing this as well. In fact this is one of the issues the individual I spoke about in the beginning got into. Tapping into your homes equity can incur some huge financial risk.
If the debt would get out of control and you could not afford to make the payments you could lose your home altogether. This solution also doesn’t solve the problem of why you got into debt in the first place. Without changing your spending habits you could find yourself in a cycle of repeatedly falling back into debt.
Consumer Credit Counseling
If you’re looking for debt relief help that involves getting someone to help you out on a one on one basis this option may be for you. Credit counselors will help you in all kinds of financial situations like credit counseling, housing counseling, bankruptcy counseling, and even giving help with your financial education.
They will help you set up a debt plan and help you work though it. They also are helpful in keeping you on track of your goals. Unlike the DIY option where it’s all up to you to stay focused on your debt plan, the credit counseling option provides a coach to help you work through your situation. .
If you’re interested in learning more about this option you can check out The National Foundation for Credit Counselors. There you will be able to get in contact with a certified credit counselor as well as other great financial tools like setting up your own budget calculators, and consumer tips.
Debt Negotiation
Debt Negotiation is the processes of having someone negotiate a deal with your creditors to lower the amount of debt you owe. For example, if you have a credit card with a balance of $5000, the debt negotiation company might be able get deals were you only have to pay back 40 cents on the dollars. Meaning you would only owe $2000 of the $5000.
It doesn’t always work this way. Some creditors may not be willing to work out a deal at all. It all depends on your situation and if you even qualify.
To qualify you need to meet certain criteria. First off, they only accept unsecured debt like credit cards, personal loans, and even unpaid medical bills. Second, you usually need around $7500 to $10,000 of debt to be accepted, and finally you need to be facing some sort of hardship such as foreclosure, bankruptcy, or even the illness of a family member.
The worse off the situation the easier it will be for the negotiators to convince the creditors that you won’t be able to pay back the money. If you’re interested in this option check out my reviews of two debt negotiation companies, Debtmerica and Debt Relief of America.
Bankruptcy
I decided to leave this one for last because it should always be your last option, in fact I believe if you have enough will to survive you should never have to consider this option. This option is in a lot of ways the big brother to debt negotiation.
With bankruptcy though, all of your debts will be negotiated by lawyers and your creditors, not just the unsecured ones. This is known as a chapter 13 bankruptcy. This is how almost all bankruptcies are done anymore. The days of having all of your debt wiped clean are long gone. With the new bankruptcy laws in place you will have to pay back at least a portion of your debt back.
The truth is bankruptcy is a life changing event. You will have bad credit for at least 10 years; it will also go on any record that bares your name, so when you go to apply for a job your employer will know about your financial history. It will follow you everywhere you go like the plague.
What makes it even worse is that most people who go into chapter 13 bankruptcies fail to stick with it, resulting in even a bigger problem; you now have ruined credit and no money. This can be a mentally challenging time, and if bad enough could result in depression.
Truthfully, I would try the other four options first before I would ever consider bankruptcy; however it is your choice.
Which Option Would You Choose
If you have or had a severe debt problem which debt relief options would you try? Leave a comment and share your stories.
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For me, I went with DIY. It really depends on how much debt someone has and their ability to pay it off. The reason I recommend DIY for most people is because it makes lasting changes in spending behavior. It is well documented that people who discharge or consolidate have a high probability of running up debt again.
I agree with you DIY is always my first pick. Thanks for the comment.
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