I recently heard an advertisement that
said there was only one way to solve your debt problems when there was no
hope. They were advertising bankruptcy legal help, but actually there are four
things that can be considered before you apply for bankruptcy. They’re to pay off
debts by snowballing, debt management, debt consolidation and debt settlement. The last step is bankruptcy. Hi I’m Roxie
Rogers-Dinstel, Health, Home ,and Family Development agent and associate director
of UAF Cooperative Extension Service. Let’s take a look at each of these
options, what it does to your debt, your credit,
and your long-term financial fitness. To snowball your debt, list all your expenses, and the minimum
payments on your debt. Set up a budget to meet these expenses. Find a few extra
dollars in your budget that can be devoted to paying off those debts. List your debts from the smallest to the
largest, pay the minimum amount on each debt, and take the few extra dollars that
you found and devote it to paying off the smallest debt. When the debts paid, move the minimum, plus your extra funds,
to the next debt on the list. As you pay each debt off, move all the money to the
next step until they’re all paid. The good thing is that your debt gets
paid off over time. What can go wrong? A lack of discipline
may make it difficult to stick to the plan, or you may encounter unexpected
debt that makes it difficult to follow through with your plan. A second method
is debt management. It works on unsecured debts, such as
credit cards and requires credit counseling. Before choosing debt
management, be sure that you are dealing with a legitimate credit counseling firm. Look for those that are licensed by the
National Foundation of Credit Counselors or American Consumer Credit Counseling. Check with the Better Business Bureau
for reviews on the companies that you’re considering. Do your homework, and ask
about fees before signing with a counseling agency. The counselor will contact your
creditors and try to reduce the interest rates that you’re currently paying. You
will make one payment each month and will get statements on where that money
was applied. This process can only be used if it is possible to get you debt
free in five years or less. There will be no credit card use when
you are under debt management and your existing account will be closed. A
limitation of this method is that it does not cover student loans, home
mortgages, automobile loans or federal loans. Debt
consolidation allows you to get a new loan that rolls all your debts into
one note. It will lower your monthly payments, but will extend the repayment
time. It does come at a lower interest rate, and it will be a secure fixed-rate
loan. You have lower payments, it’s easier to make only one payment, and
it does no additional damage to your credit. A disadvantage is that it extends
the payoff date and can be a bigger financial risk, depending on the terms of
the loan. The numbers are against you on this one
as well. Seventy percent of those who use a
consolidation loan end up back in debt within a few years. Changing your
financial habits is essential to making this method work. Debt settlement is
another option to bankruptcy, but it’s one of the riskier options. It also is an industry that is rife with
scams. The company tells you to stop paying
your credit card, and you pay only one payment to the company. Late fees,
increased interest and over limit fees can all be applied to your creditors,
making your debt higher. You may be turned over to collection agencies
and the debt does eventually go away as the company tries to negotiate smaller
interest rates and applies your payment to the loans. The challenge is that they charge
fees before they settle debts. If you choose this option, seek a debt
settlement company that has a good reputation with the Better Business
Bureau or an attorney who specializes in debt settlement. Going this route may
damage your credit, will be expensive and there may be debts not included in the
settlement. Bankruptcy is the last resort. There’s two types of bankruptcy; chapter
7 completely discharges your debts. It will be four to six months before the
process is completed, and it will remain on your credit report for 10 years. Chapter 13 is a restructuring of your
debts, giving you three to five years to pay everything off. It remains on your credit report for
seven years. Child support and tax liens cannot be
dismissed. Sixteen percent of all bankruptcy filers
are repeaters. If you choose this option, find a
bankruptcy attorney to prepare the materials for filing. Interview attorneys
to make sure that you’re comfortable with them and their approach before you
hire them. Credit counseling is required as a condition of your bankruptcy. Now getting out of debt is neither quick
nor easy. Before you make the decision on the alternative you choose know what
your options are, and weigh each option carefully.