Dealing with debt is one of the great challenges of adulthood. Whether or not to get into debt, how much to take on, how to pay it off, and how to deal with problems when they arise are questions that keep many people awake at night.
Luckily, there are a number of tools you can use to help you deal with debt, especially when it becomes problematic. Bankruptcy is one of these tools and often the best one to help you get back on track.
It’s not your only option though.
Debt management programs are plentiful, and while these programs can be extremely helpful and allow you to avoid bankruptcy, they can also make your debt situation much worse.
What should you know?
Consolidating Your Debts
Debt consolidation is one of the most popular debt management tools available. It comes in a variety of shapes and forms, and can provide both short- and long-term debt relief.
One of the most common ways to consolidate debt is to combine several credit cards into one. Ideally, you’ll want to take higher interest cards and combine those balances onto a card with a lower interest rate. Not only does this reduce the amount you’ll pay over time, it also means you’ll only be making a single payment each month, which is often lower than the several payments you make to different companies.
It’s important to be sure you commit to a card that isn’t offering just a low introductory rate, or if it is a temporary rate that the ultimate higher rate is still lower than what you’re paying now.
You’ll also want to consider the transfer fee if there is one. It might be beneficial to pay a few hundred dollars to consolidate, but you don’t want to take on a hefty fee that just piles onto your existing debt.
The goal is to make your debts more manageable now, and ideally, to lower the total amount you owe long-term. If you must pick one over the other, and your current financial situation is dire, you’ll want to focus on the former. Reducing your monthly obligation now helps you avoid foreclosure and other serious collection efforts.
Finally, keep in mind that if you must put up any collateral for a consolidation loan you are putting that asset at risk. Consolidation loans that use your home as collateral can help you improve your situation, but if you fail to meet your obligations, your home can be taken from you. A debt that was originally unsecured (credit card debt) that would be discharged in a bankruptcy become secured (by your home) and can put you in a far more serious problem than had you left the debts unsecured.
For more tips on transferring or consolidating credit card balances, check out this article from Creditcards.com.
Settling Your Debts
Another tool for debt management is debt settlement. This is when you pay a lender a lump sum amount that is more than your monthly payments but less than the total balance you owe.
There are a few ways to achieve this:
- Negotiate on your own with your credit card companies
- Work with an attorney who negotiates on your behalf
- Work with a debt settlement company
Most debt experts recommend against the third option because there are so many scams out there and relying on a debt settlement company can turn a so-so situation into one that is a full-blown financial crisis. Many debtors have signed on with a debt settlement company only to find themselves facing lawsuits, wage garnishment, and other drastic debt collection efforts, even as they believed their situation was improving.
If you choose to settle a debt on your own or you work with an attorney, there are also a few important things to remember. Yes, you’ll be paying less and saving money on the debt, but your credit will still take a hit and you’ll be responsible for paying taxes on the forgiven amount. The last thing you need is to settle a debt, think you’re in the clear, and learn you owe several thousand dollars to the IRS in April.
If you’d like to learn more about the debt management programs available or you’ve decided the tools available aren’t right for you and it’s time to consider bankruptcy, we can help. Contact the Law Office of Robert M. Geller at 813.254.5696 for more information.