Debt Relief Solutions

Identification

The first step you should take is to assess the condition of your credit. You are entitled to receive credit reports annually from each of the three credit bureaus, TransUnion, Experian and Equifax, so you should obtain copies of them. They will show your credit history along with a credit score, each company's evaluation of your credit worthiness. A score of less than 600 generally means that you are a poor risk for any potential creditor. You should also look for errors in the reports, like incorrect or outdated information, and inform the companies of those errors.

Many people simply need to reduce the amount of their payments, which will give them more time to pay off their accounts. A bill consolidation loan lumps all your debts into a single loan, and it generally requires a payment that is less than the total of your current payments. Often, people will use their home as collateral, making it a home equity loan. However, you must understand that if you fall behind on your payments on the loan, your lender could foreclose on your home.

Do not be persuaded by the bad publicity generated by some credit counseling companies because many clients are very happy with the results after dealing with them. Many reputable credit counseling companies are members of the Association of Independent Consumer Credit Counseling Agencies (see Resources). Typically, a credit counseling company will negotiate a reduction in your payments with your creditors, either by reducing the interest rates or the amount that you owe. They will then establish a monthly payment based on your ability that will pay off your creditors over a period of time. Finally, they will prepare a budget for you and monitor how well you perform. They ordinarily charge a fee of about 10 to 12 percent of the total you owe, and many require that you have unsecured debt, such as credit cards, of $7,500 to $10,000.

Rather than having a credit counseling company negotiate on your behalf, as well as provide you with other services, you can do so yourself. If you choose to do this, however, be sure that you have the discipline to make the monthly payments you have negotiated and that you stay on a strict budget until all of your creditors are paid.

After assessing your financial situation, you may find that the only way out is to file bankruptcy. Filing bankruptcy should be considered only as a last resort because of the lingering problems it will create for you. First, the U.S. Congress passed legislation in 2005 that made a bankruptcy more onerous than it was previously. For example, under the new laws, you will be required to attend financial counseling. In addition, the new laws impose more restrictions on your attorney, so a bankruptcy is quite expensive. Long term, you should be aware that a bankruptcy will become a part of your credit history and will remain for about 10 years. That will negatively affect you ability to get credit in the future for a home, auto or other major purchase.