The Road to Debt Relief?
Your Options, Step by Step

The road to debt relief begins with the consumer realizing that he has a financial problem and examining his debt relief options. Many people have debt problems of varying degrees. For some it is a minor inconvenience that can be corrected with a few months of disciplined spending.

However, for most people who have debt issues the problem is much worse. Realization of the problem, acknowledgement that corrective action is necessary, and taking the appropriate measures necessary to alleviate excessive debt are mile markers on the road to financial freedom and a debt free life.

Consumers may realize they have a monetary shortfall each month but hope the problem will solve itself. The time they waste in this denial phase only allows the problem to deepen. The first step on the road to debt relief is to audit your monthly income and expenses to see how and where you spend your money. Getting a handle on your spending will also let you gauge the severity of your debt burden and determine your appropriate course of action.

The Road to Debt Relief—Budgeting

If you are not yet hemorrhaging red ink, but still feel your debt is growing out of control, making and following a monthly budget can be your ticket to success. By tracking your spending you will be able to see where you can economize and save a few dollars every month. You can then redirect those dollars where they are needed, to any delinquent bill or an unexpected payment. Once your accounts are current, the extra dollars can go into a monthly savings plan that can become a buffer against future financial stress.

Communicating with Creditors

If you are actually late on monthly payments to creditors, the road to debt relief should include contacting your creditors. Nobody likes surprises and neither do the companies to whom you owe money. By reaching out to them you may get some relief. The first question they will ask is when you think you will able to make your payment. Don’t answer optimistically; answer truthfully. With some car and consumer loans you may have the option to make interest only payments once or twice per year.

If you react to your debt problem before your credit is negatively impacted, you may get yourself a temporary respite by obtaining a new credit card with an interest-free grace period of several months. Since the interest charged on credit card debt is typically the highest interest rate a consumer will face, rolling over credit card balances onto a card with no interest for as much as 18 months will certainly grant a short term reprieve from the onerous payments. However, this is not a license to spend, but rather a risky technique to buy time for you to get your financial affairs in order as quickly as possible. The debt principle must be paid down during this grace period because at some point the interest will begin accruing again.

The Road to Debt Relief—Consolidation Loan

In the same vein as rolling debt onto an interest-free credit card, a bill consolidation loan could be the next stop for those who face more severe financial problems. A bill consolidation loan typically uses home equity to provide the capital to pay down all your other debt. Home equity loans will have substantially lower interest rates than revolving or unsecured debt. This will convert several separate monthly payments into one payment saving late charges and the necessity of dealing with multiple creditors. Because of the economic situation today in the US getting a loan of this type will require a squeaky clean credit record and high credit score.

Credit Counseling

Consumer credit counseling is a form of debt relief where you as the debtor enlist the aid of a debt counselor to negotiate with his creditors and arrange a payment plan that will allow you to meet your obligations. Typically, the consumer will sign a contract stipulating his payment and acknowledging that he owes the debts. This is another method of gaining breathing room for you to get control of your financial situation. For the life of the agreement, creditors will forego legal action. The debtor must make monthly payments to the counselor who pays the creditors until the debts are satisfied.

Sometimes creditors will forgive part of the debt in the interest of getting paid the balance of what is due them. Not a common occurrence on the road to debt relief, but it is an option that should be explored through negotiation.

Bankruptcy—Last Resort

As a last resort, bankruptcy will discharge the obligations of the debtor. Chapter 13 bankruptcy is court supervised reorganization similar in purpose to using a credit counselor. A court appointed trustee accepts payments from the debtor and deals with the creditors. He will disburse the monthly payments from the debtor pro rata to the creditors. This arrangement will last for three to five years as dictated by the court. At the end of the bankruptcy, the court will legally discharge the remaining unpaid debt.

A Chapter 7 filing is a straight liquidation of the debtors remaining assets to pay the creditors. In either type of filing, the creditors will rarely receive all that they are owed. If bankruptcy is the road to debt relief that a debtor chooses, his credit rating and score will be damaged for years to come.

No matter which type of remedy you seek, the road to debt relief will eventually leave the debtor free from his original debts and his credit score in tatters. To rebuild his credit and get his financial house in order will take time and effort.