Debt Solutions Overview: Compare Options, Avoid Credit Score Damage & Save

Debt is unquestionably a double-edged sword. Leveraging it can enable you to purchase a home or secure an education far earlier than you would be able to if full payment was required up front. But habitual overleveraging and other types of irresponsible borrowing can prove disastrous to both your credit standing and bottom line if you aren’t careful.

“Credit cards are useful tools for short-term cash management,” says John Chung, a professor at the Roger Williams University School of Law who studies the relationship between consumer debt and bankruptcy.  “The problems emerge when people view credit cards as a means to fund a lifestyle and/or use them as long-term sources of cash.  Too many people confuse credit cards with actual cash.”

While lifestyle changes and budgeting can be extremely effective when it comes to counteracting minor debt problems and fostering sustainable spending habits, the question of what to do in more dire circumstances still remains. The answer, for many consumers, will be to pursue one of four major debt solutions.

Compare Major Debt Solutions

The following table will give you a sense of how each form of debt relief works as well as what implications it will have for your credit standing and overall financial well-being.

Debt Settlement Debt Management Debt Consolidation Bankruptcy
Type of Debt: - Credit card
- Medical Bills
- Credit card - Any debt - Any debt
Debt Status: - Already defaulted debt
- Impossible to pay
min payment
- Barely able to meet
min payment
- Struggling to meet
min. payments, but have not fallen behind
- Impossible to pay
min payments
Method: - Withhold payments
until offered a settlement
for a lower debt amount
- Enroll in a monthly
payment program with
reduced APR / Fees
- Replacing a number of loans and credit card balances with one big loan that has a lower interest rate and/or a longer repayment period. - File for bankruptcy at your local court
Pros: - Reduced debt
- Paying a portion of debt
is better than not paying
at all
- Reduced APR or
waived fees
- Least damage to your
credit
- Lower interest rate
- More manageable monthly payment
-Reduced overall credit utilization (if original accounts are kept open)
- Reduced debt
- Allows you to get to
a manageable
situation
Cons: - Impact on credit
- Not guaranteed
- Creditors will continue to
try to collect on your debt
while withholding
payments
- Impact on credit
- All credit cards will be
closed
- No debt will be forgiven
- Potential to add additional debt
if you’re not disciplined
- Impact on credit
may involve giving
up property
Credit
Impact:
- Severe if you have not
already defaulted
- No additional impact if
debt has already been
defaulted
- Negative impact but not
as severe as defaulting
or filing bankruptcy
- Minimal to none - Severe impact
- Stays on your credit
for up to 10 years

The form of debt relief that you ultimately decide to pursue depends on the nature of your financial situation. For example, debt settlement is likely to be an option only if you’ve already defaulted, debt consolidation necessitates having a good enough credit score to get a new loan or line of credit, and no one wants to opt for bankruptcy unnecessarily.

As such, you should review the above comparison of major debt solutions and then evaluate how much you owe, what monthly payments you can make, and where your credit stands. This will give you a sense of which types debt relief are realistic options for you.

You should not, however, fall for the marketing gimmicks of companies that promise complete debt elimination. There are no tricks of the trade that such debt repair services can use to absolve you of amounts owed, despite their claims to the contrary. For-profit companies that offer debt solutions are simply known for promising unrealistic results in order to justify their high (typically non-refundable fees). You must therefore thoroughly research any such company prior to hiring it and beginning to make payments.

 

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Our content is intended for general educational purposes and should not be relied upon as the sole basis for managing your finances. Furthermore, the materials on this website do not constitute legal advice and should not be relied upon as such. If you have any legal questions, please consult an attorney. Please let us know if you have any questions or suggestions.