Are you struggling to get out of debt? You re not alone. Nearly 80 percent of Americans owe money to a creditor, while over a third are delinquent in payments. In general, it s better to try to pay off the debts by living on a tight budget and pouring all extra money into paying off credit cards and loans. However, when the amount you owe is overbearing, it may be time to consider debt consolidation, debt management or bankruptcy. Each has its pros and cons, so consider carefully before committing to one or the other. This advice may not necessarily apply to your own financial situation, and you may want to consult with a financial professional before you make any decisions.

What Is Debt Consolidation?

Debt consolidation means taking out a loan at a lower interest rate than you are paying to your existing creditors in order to pay off several of your debts and then paying off the debt consolidation loan. Some debt consolidation services offer a loan option. However, most people take out a personal loan for debt consolidation. Others select to take out a home equity loan; although, you should think carefully about that as you are putting your house at risk if you do not make payments.

Some people with excellent credit may have the opportunity to take out a zero-interest credit card for transferring debt. Usually, you pay a percentage based on the transfer   for example, if you transfer $10,000 in debt, you may be charged a 2 percent fee, or $200   and then you have 12 to 18 months to pay off the card. This can be a great way to consolidate debt if you can pay it off that quickly, but if you don t, you may face hefty penalties or back interest for not paying everything off in time. You also don t want to add charges to that card, as the company will have you pay those off first at the normal interest rate before putting payments toward the zero-interest portion.

Naturally, to get a debt consolidation loan, you will need to qualify with a lender. You may have to pay an application fee and interest over the life of the loan.

Pros & Cons of Debt Consolidation
One of the biggest pros people see with a debt consolidation loan is that there s no stigma. While the loan will show up on your credit report, it only shows up as a loan, not as an indicator of financial crisis. Meanwhile, debt management or bankruptcy services do put a mark on your credit rating and are accessible to employers and future landlords. It also does not do long-term damage to your credit rating.

Combining several payments into one has a couple of advantages. First, you ve essentially paid off the other creditors and now only owe one. This can make it easier to budget and prevents you from playing budget games, like skipping payments on one loan to pay another, or worse yet, using one credit card to make payments on another. In addition, it gets you out from under these creditors  control.

You continue to be in charge of your finances. You essentially combined all your debts into one new loan, preferably with lower interest and more manageable payments. You still have access to credit as well. This can be a double-edged sword. While some people may feel empowered and motivated to put any extra money into paying down their debt, others will see the freed-up income as an excuse to spend more, which exacerbates the problem. With a debt consolidation loan, you do not get budget counseling as with bankruptcy or debt management programs.

The loan should be at lower interest and perhaps have a smaller monthly payment than if you d been paying each separately. This helps in several ways: first, it relieves some of your budgeting stress. Second, it enables you to pay more than just the minimum payment so you can pay off the loan faster. If you do this, you could end up saving more money in the long run than if you d paid each off individually. However, you d be wise to do the math to ensure that the lower payments don t mean you ve stretched out your loan over so many years that you end up paying more in interest than if you d simply paid the debts individually.

While you use a debt consolidation loan to pay off your creditors, you still retain responsibility for late fees, interest and other charges. It pays off loans rather than removing debt. In other words, if you are $55,000 in debt, you are responsible for the entire $55,000. Naturally, it does not exempt you from responsibility for other obligations, like taxes, fines, alimony or the like.

What Is Debt Management?

Debt management companies (also called debt relief services) look at your finances with you to determine the amount you can put into paying off your debt. They negotiate with your creditors to accept partial payments, lower your interest rates, decrease monthly payments and forgive late fees. You then send them a set amount each month and they distribute it to your creditors for you.

Most debt management services have qualifications you need to meet, which include being in a certain amount of debt. Some can also provide debt consolidation loans if that is your preferred venue. If you are interested in this method of debt consolidation, check out our article on debt management and our reviews of debt consolidation services.

Pros & Cons of Debt Management Services
These services charge a setup fee and a monthly service fee. Depending on what you owe, this could amount to more than you d be paying in interest if you took out a loan, so do the math. However, debt management services offer some advantages not offered by debt consolidation loan companies, and these could be worth the price they charge.

First, these companies will negotiate with your creditors to reduce your interest, forgive late fees and in some cases, forgive part of your debt. They may also be able to negotiate for you concerning any outstanding student loans. This could save you money in the long run. However, unlike with bankruptcy, they cannot guarantee a creditor will work with them.

Often, they provide some financial counseling as well. However, the advice could be as simple as looking at your current expenses and telling you how much available money you have after necessities.

While friends and family don t need to know you are on a debt management plan, it does put a mark on your credit rating and is available to employers and future landlords, meaning you may have to explain yourself. Of course, these records, while accessible, are not broadcasted.

These services work to get you out of debt in three to five years. During that time, however, you do not have access to credit unless you negotiate to keep one credit card open for emergencies or work-related expenses. You will have to live within your means. You are also still responsible for regular financial obligations like child support, traffic tickets and of course, taxes.

Speaking of taxes, debt management programs can hurt you there. Creditors that forgive debt can report the forgiven amount to the U.S. government, who then considers forgiven debt as added income. Thus, if your debt management counselor gets $15,000 of your debt forgiven, the IRS may consider your annual income increased by $15,000 that year.

What Is Bankruptcy?

Bankruptcy is a legal proceeding where you file with the court to have all your debts removed or decreased. There are two kinds of bankruptcy. Chapter 7, also called straight bankruptcy, is the more extreme choice and the one most people think of. You have to sell all your assets, and the money is distributed by the courts to pay of your debts. You may be allowed to keep a car, work tools and some basics like furniture. Chapter 13 bankruptcy lets you keep your property and puts you on a payment plan for paying off your debts while negotiating with your creditors to reduce that debt. It also mandates budget counseling. Both types of bankruptcy are legal proceedings, and you should have a lawyer.

Pros & Cons of Bankruptcy
Bankruptcy is usually considered a last resort, especially since it adversely affects your credit rating for up to a decade, but it can offer some advantages to a consolidation loan or debt management program. Chapter 7 bankruptcy is often seen as an  easy  way to get a fresh start financially. You lose a lot in terms of property and credit rating, but you also have all your debt wiped clean, including unsecured debt. Chapter 13, which is meant for people who still have a steady income and can make some payments, lets you keep some of your property while cutting your debt obligation by as much as 90 percent, enabling you to get back on your feet.

The stigma of bankruptcy is one of the most commonly stated disadvantages. Bankruptcy not only shows on your credit report but is accessible to employers and future landlords, meaning you may have to explain yourself. It also adversely affects your credit rating for ten or more years. However, these records, while available, are not broadcasted, so your friends and family don t need to know.

Because this is a legal process, you will have to pay court fees and should get a lawyer to help advise you on your case. However, once those are paid, you do not have any monthly fees or interest. The courts will assign a trustee to handle your payments and set the amount you need to pay him or her. The trustee then distributes that to your creditors according to an agreed-upon schedule.

Like with debt management, you generally end up owing less debt. Bankruptcy removes late fees and fines, and it often mandates the amount of payoff creditors must accept. In addition, creditors are required to show proof of valid debt; if they do not do so by the court-appointed deadline, you do not have to pay that debt. Any forgiven debt gets counted as additional income for the year, which could affect your taxes.

Federal law says that anyone filing for bankruptcy must first get counseling at a government-approved facility for at least 180 days before filing. This can be a big help for people who accrued extreme debt due to excessive spending as opposed to sudden emergency and may even help you avoid filing at all. If you file for Chapter 7, you must prove that you do not have the financial means to pay off your debts.

You are required to follow an extreme budget for the next three to five years and cannot apply for credit during that time without the court s permission.

Graph Outlining Pros and Cons of Debt Consolidation, Debt Management Services, and Bankruptcy

Which Is the Best Choice for You

Debt consolidation loans, debt management companies and bankruptcy are all extreme measures to handle severe debt. Each comes with its own pros and cons. When deciding which step is best for you, ask yourself these questions:

How will each affect your attitude toward yourself and your finances? You should choose the option that will give you the best balance of stress relief and motivation to conquer your debt.

How much help do you need controlling your budget? If you simply need a boost to get back on track, a loan may be preferable to a more restrictive debt management or bankruptcy measure. On the other hand, if you can t seem to stop spending yourself into greater debt, a third-party may help you learn fiscal discipline.

How extreme is your debt? Is a fresh start worth losing everything, or can you get out of debt with a less extreme solution?

How important is your credit rating? Some people, after being in heavy debt, vow to live cash-only in the future, so trashing their credit rating is not important. Others know they will need a loan in the future, such as for a house or returning to college, so they need to get out of debt while improving their credit.

Are you willing to get financial counseling? It s required before applying for bankruptcy. Some counseling may come with a debt management program, but it is not required for a consolidation loan.

Are you on the edge of your tax bracket? If so, debt forgiveness from bankruptcy or a debt management program could result in additional  income  reported to the IRS that could bump you into a higher tax bracket and result an increased tax bill come April.

While the best solution to debt issues is to manage your debt before it gets out of control, severe financial hardship does not have to ruin your life permanently. There are ways to get your bills paid or forgiven. You may take a hit temporarily, but it s for the long-term gain.

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