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Debt Negotiation:  What Are Your Options Regarding Debt?

In order to develop a plan to get out of debt, you need to learn more about your options before you plunge in to negotiating with your creditors. Basically, you have five options:

1.  Do nothing about your debt.  You can continue to limp along each month barely getting by and hope that you can pay down your debt someday.  This plan rarely works since a single emergency or unexpected event, such as the loss of a job, drives the household to financial collapse.

Pros -- (1) If you are broke and owe less than $1,000 to each unsecured creditor, there is little chance you will be sued.  Debt Collection efforts will last about six months and then the accounts will be written off as uncollectible.

Cons -- (1) If you have wealth, you risk a lawsuit, a wage garnishment, and property seizures. (2)  Your credit rating will be ruined and you will not be able to get credit for the next 3 to 5 years.  What financing you do qualify for will be at a high interest rate.

2.  Budget your way out of debt.  You can give up certain luxuries, refinance loans, and live more frugally so that you can pay down your debt.  If you would like to find out if you can do this, visit the Budgeting section of and create your own budget. 

Pros -- (1) Can get out of debt without bankruptcy, credit counseling or debt negotiation; (2) Your credit rating will not be damaged; it might even be improved.

Cons -- (1) You must change your lifestyle; reduce your expenses in order to have more to pay off your debts.

Recommendation:  This is, by far, the best option for you.  If you could give up extras, cut back on unnecessary expenses, you might find $300 to $600 to pay down your debt without revealing you're having a problem or damaging your credit rating. 

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3.  Credit Counseling.  Although credit counseling companies promise in their advertising that they can resolve your debt problems by lowering the interest rates on your credit cards and such, they aren't telling you the whole story. 

Pros-- (1) Traditional counseling services offer free, competent budgeting advice and charge only a small monthly administration fee; (2)  Some companies can instantly arrange for you to have lower monthly payments and interest rates through their pre-established relationships with major creditors; (3) If you have significant credit card debt, you can get your monthly payments reduced.

Cons-- (1) Drop out rate is rather high -- estimates range from 40% to 60%.  Only about 20% of those who sign-up complete the program and a high percentage of those who drop-out go on to file bankruptcy;
(2)  Many people's bills actually increase each month rather than decrease -- if you can't afford a 3% increase in your monthly payments now, then credit counseling probably won't work for you;
(3)  The time schedule to pay off debt is often grossly underestimated.  Many people realize after a year that their debt hasn't reduced at all and it will take them at least 12 years to pay off the debt if they stick to the credit counseling plan;
(4)  Not all creditors participate in credit counseling programs.  Some major credit card companies refuse to participate and others will actually increase your interest rate (For example, Chase Manhattan Bank does this.);
(5)  New age counseling services charge high fees, offer low quality money management advice; often don't pay your creditors on time (which results in added late fees and more negative marks on credit reports); and too many of them pocket your money instead of paying your creditors.  This results in $29 late fees, more negative marks on your credit report and renewed collection efforts;
(6)  Your credit rating will be damaged by notations that you have entered a debt management program.  These notations can stay on your credit report for seven years.  You will not be able to get credit for the next 2 or 3 years and the credit you do obtain will be at a high interest rate.

Your Options Regarding Debt continued  >>

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Credit, Debt, Loans, Saving Money, Identity Theft, Scams, Mortgages, Auto Loans, payday Loans, Budgeting, Getting out of Debt, Handling Debt Collectors