Which Debt Reduction Strategy Is Right For You?
Getting into debt these days has become very easy. Credit card
companies bombard us with offers in our mailbox, ads on TV,
promotions in stores. If you can sign your name, it seems like
you can get credit.
But what happens when you use so much credit that you can no
longer pay your credit card bills every month?
And what happens when no matter how much you pay, your bills get
bigger...and bigger...and bigger?
There are several strategies for getting out of debt.
All of them have their good points. And all of them have their
bad points. Which one is right for you? Here is an overview of
the different debt reduction options available to you:
Borrowing money from friends or relatives: If you have a friend
or relative who has enough money to help you get out of debt,
consider yourself lucky. But think long and hard - and then
think again - before choosing this option. While borrowing from
a friend or relative can help you avoid the high cost of
interest (if they are willing to give you the money without
asking you to pay interest), borrowing money can hurt, or even
ruin, your relationship. Everybody wants to pay back their "rich
uncle" - but what happens if you don't? Or you can't? This can
put both of you in an uncomfortable position. Even if the money
is a gift, it can change your relationship entirely. So make
sure to give this option a lot of thought before borrowing money
from a friend or relative.
Credit counseling: For many people, credit counseling is a good
option. After all, inmost cases you can lower your interest
rate, lower your monthly payment, and combine your credit card
bills into a single payment. But be careful. There are LOTS of
"non profit credit counseling" companies out there. And not all
are created equal (and not all do what they say they will do).
Before signing any paperwork, it is a good idea to ask lots of
questions. And compares the fees and other program details. Just
because a business is non-profit doesn't mean there aren't costs
to you - and doesn't mean you don't need to shop around and
compare programs!
Debt consolidation loan: If you are fortunate enough to own a
home (and you have enough equity to borrow money from your
home's value), a debt consolidation loan may be the way to go.
In many cases, your interest may be tax deductible (but check
with a tax professional first to make sure). And also think
carefully about this option - because if you borrow "against"
your home, and you cannot make the payments for whatever reason,
you may risk losing your home! Fees, interest rates, and terms
vary, so make sure to shop around for the best loan program for
you!
Debt settlement: If bankruptcy seems like the only option, then
debt settlement (also called debt negotiation) may be a good
alternative. The process of settling your credit card bills
(paying them off for less than you owe) is a more aggressive
approach to getting out of debt. But if you are behind in your
payments, this can be a less drastic step than declaring
bankruptcy. You will pay income taxes on the amount you save,
but this amount is usually still much less than the amount you
would have paid in interest. Before deciding on debt settlement,
make sure you feel comfortable with such an aggressive strategy
- and once again, shop around and compare terms and fees.
Bankruptcy: Typically, bankruptcy is the last alternative. And
with the new bankruptcy laws put into place in October 2005, you
should consult with a bankruptcy attorney before considering
this option. With good reason (for the most part), having your
debts "written off" through bankruptcy has become more
difficult. So, find a good lawyer, and discuss your options
carefully.
Now, which of these debt reduction strategies is right for you?
There is no simple answer. The best advice is to check out all
your options - very carefully - before deciding which strategy
is best for you. Before signing up with any company:
* Ask lots of questions so you are comfortable with the company
* Learn how the process works, find out the fees, and get ALL
agreements in writing * Check with the Better Business Bureau to
see if there are any unresolved complaints
And while being in debt is certainly very stressful, always
remember that life is not entirely about money. Life is about
making the most of each day, and being thankful for the things
that you do have - while you are working on fixing the things
you don't!