Being in debt can cause enormous stress. If you struggle with debt, you may wonder about your best options for managing debt.
Before exploring the options, you should first assess your financial situation in order to decide which may work best for you. You should consider the following:
- The types of debt you owe;
- Your financial difficulty in paying the debtor (short or long term);
- Whether exemptions can protect your property; and
- Your state’s wage garnishment laws.
Once you determine the status of these factors, you will better understand which debt management option is best for you. There are 5 options to consider.
Do Nothing
Doing nothing may seem counterintuitive. However, in certain financial situations, it may offer the best or only solution. This works only if you are “judgment proof.” All the following must apply to your financial situation to be judgment proof:
- You only have unsecured debt;
- Your financial situation is not likely to change;
- Exemptions protect all property you own; and
- Your income is a type that cannot be garnished.
Doing nothing means you still owe the debt and will continue to receive harassing communication from your creditors. Doing nothing could result in a lawsuit and will continue to affect your credit. Under this option, there is little chance of a financial fresh start. Nonetheless, it is probably the least expensive.
Get Help from Others
Asking family or friends for help to pay your debt may be a hard thing to consider. In certain situations, it may be a good option for you. This works best if your debt situation is a short-term problem and you are able to quickly repay your family or friends.
Your loved ones may be okay helping you out of a tight spot but may become resentful of having to help continuously. While this option could help reduce your debt, it has the potential to strain a relationship.
Negotiate with Creditors on Your Own
Negotiating with your creditors and developing a budget to pay them back can be a good way to get a handle on your debt. You would need to start by calculating all your outstanding debt, living expenses, and income and propose up a workable budget.
Once you know how much you can pay toward your debt, you can contact your creditors to see if they will negotiate with you. Here are some ways a creditor may help you:
- They may temporarily lower your interest rates or waive fees;
- They may temporarily lower your payments or allow you to skip a few payments and pay the difference toward the end of your loan period; or
- They may completely modify your loan.
Most creditors only agree to negotiate if you can prove your financial situation is the cause of a temporary hardship such as job loss, medical problems, or divorce.
Get Help with Negotiating Debt Settlement
If you could not negotiate with your creditors yourself, you could seek the help of a debt settlement firm. For a fee, typically 20% of debt settled, a debt settlement firm will negotiate with your creditor on your behalf. They typically work to get your creditor to accept a reduced lump-sum payment of what you owe. This works best if you mostly have unsecured debt.
After you sign a contract with the firm, you will stop paying your creditor, and begin making monthly payments into a savings account held by the firm. Once the debt settlement firm believes you have enough in the account to offer a reasonable lump-sum payment to your creditor, they will start negotiating with the creditor. This could take a long time and there is no guarantee the creditor will negotiate.
If the creditor does accept the reduced payment, you may have to pay taxes on the forgiven debt.
File for Bankruptcy
Bankruptcy may be a good debt solution for you if you have too many creditors to reach individual agreements or you are facing one or more of the following collection actions:
- wage garnishment
- vehicle repossession
- home foreclosure
- property lien
Bankruptcy offers protection against such collection actions as soon as you file. Bankruptcy also works to help you either eliminate debts or repay the debt under a court-approved structured repayment plan. Most bankruptcies end with a discharge of your liability. Once your liability is discharged, the creditors can no longer legally pursue you for payment.
The type of bankruptcy you file and how your debts get paid depends upon your financial situation. Bankruptcy laws are complex so it is best if you seek the help of an experienced bankruptcy attorney. The attorney will know what works best for your situation.
If you want to see if bankruptcy is a good debt solution for you, contact us for a free evaluation. Brock & Stout’s bankruptcy lawyers have helped thousands of clients handle their debt and get a financial fresh start.