Being in debt is a lonely, frustrating experience. When you owe thousands of dollars to multiple creditors and can barely afford to make the minimum monthly payments on your bills, it can feel like the entire world is out to get you.
The good news–you’re not alone. Like you, millions of Americans are living through a spiraling debt nightmare, looking frantically for a solution to a problem that often seems intractable.
Don’t believe anyone who tells you that there’s a simple, pain-free route out of debt or a one-size-fits-all solution that works for everyone. Your debts are unique, comprised of a particular blend of credit card bills and medical bills, outstanding personal loans and other unsecured obligations whose astronomical rates of interest collectively drain thousands of dollars per year from your savings.
There are five common solutions to the problem of serious debt. Each has its own advantages and disadvantages and may be more or less ideal for your particular predicament.
Your default option is simply to do nothing and let your debt situation unfold naturally. Of course, there are several problems with this approach.
First, ignoring your debt situation may be the best way to make it worse. Even with rates near record lows, your creditors are probably demanding double-digit APRs on many of your outstanding debts. If you miss a minimum payment, you’re usually docked with late fees, penalty interest and other associated costs that immediately add hundreds of dollars to your already-high burden of debt.
When you’re in debt, each new month is like a new chapter in your own personal nightmare. You’re forced to make unpleasant choices about what to do without, which can be especially painful if you have a family to support. While making your minimum payments and just barely sliding by without allowing your debts to overwhelm you completely may be the easiest and least painful option in the short term, it’s not really a long-run solution.
Unless you anticipate a major jump in your earnings in the near future, it’s unlikely that your debts will take care of themselves. Most creditors’ minimum monthly payments are set low enough that they don’t do much more than cover the interest accrued on your outstanding obligations. Significant debts, on the order of several thousands dollars or more, can take years or decades to pay off in full with the “do nothing” option.
If you’re sick of doing nothing and watching your debts continue to mount, you may be considering a debt consolidation loan. This is a growing business: Helped along by well-produced television and Internet ad spots that promise eye-popping results in short order, thousands of Americans take out debt consolidation loans each year.
As their name implies, debt consolidation loans are loans that are generally large enough to enable you to pay off your existing debts in full. In theory, this is advantageous because it replaces a confusing array of outstanding balances with a simple, easy-to-understand monthly loan payment.
Many providers claim that interest rates on debt consolidation loans are competitive, saving those who use them thousands of dollars per year compared to their existing debts. This is dubious: Even if you have mediocre credit, which may be optimistic to assume if you’re thousands of dollars in the debt hole, you’ll have trouble finding a debt consolidation loan with an APR of under 14 percent.
Assuming you pay about 20 percent on your existing credit card balances, that’s only a savings of $600 per year for every $10,000 of debt. That’s not insignificant, but the fact remains that a debt consolidation loan is still just another form of debt.
In contrast to the aggressive marketing techniques of debt consolidation loan providers, many non-profit credit counseling services take a lower-key approach to debt relief. Credit counselors bundle your debts and replace your multiple monthly payments to individual creditors with a single sum, payable to the counseling service each month, that includes a management fee of anywhere from $25 to $50.
This service may reduce the day-to-day stress of your debt burden, but it’s unlikely to reduce the burden itself: Although credit counselors can negotiate with creditors to bring your interest payments down somewhat, missing one payment can disqualify you from the program and further damage your credit.
Of course, you can always throw in the towel and declare bankruptcy. You may be able to get many of your debts forgiven this way, but you’ll pay dearly for it. Bankruptcy filings linger on your credit report for a decade or more, making it difficult to secure new credit regardless of how badly you need it. Some bankruptcy courts now mandate the repayment of some supposedly “forgiven” debts on a tight repayment schedule, making bankruptcy functionally similar to this next debt relief option.
Debt settlement can be a powerful solution to debt and is likely your cheapest and quickest way out of debt. Debt settlement providers negotiate with your creditors to reduce the total outstanding balance, not just the interest rate, on each of your loans. Depending on your situation and your creditors’ inclinations, you may be able to settle your debts for 50 percent or less of what you owed originally.
Even better, debt settlement providers rarely charge upfront fees for their services. The one major drawback: Debt settlement negatively affects your credit score for a year or two after the process has completed. The impact of doing nothing or declaring bankruptcy is likely to be far worse, however.
Remember, your debt situation is unique. While there are some tried-and-true methods of paying down your debts and getting back on the road to solvency, there’s no “magic bullet” debt solution that works in every situation. The best thing for you to do is to choose carefully from among your debt relief options and commit the time and effort necessary to put your financial problems to bed once and for all.