Get Me Out of Debt: A Common Cry

The year 2009 has begun with the economy of the world facing a recession. More people than ever before are indebted to a degree that makes getting out of debt seem an impossible dream. This level of debt on the part of consumers, and the lack of available cash to the affected businesses have created a situation that has led to the federal government having to bail out many of the larger financial institutions to prevent another depression like the one seen in the 1930s. When asked what their New Year's resolutions were this year, many people responded, "Get out of debt." But how will they go about this in the New Year?

Several different companies offer a service that allows them to negotiate with lenders to reduce interest rates, and in some cases, the principle amount owed on bad debts. The logic behind this move is promoting the idea that collecting some of the money a person owes is better than losing the entire amount of the debt. For many people, this type of debt settlement arrangement can be a good first step toward getting out of debt. Settling debts for less than the amount owed shows up as a negative on a person's credit report, however, it is not as bad a negative as failure to pay any thing on the debt. This option is often offered by companies to consumers directly as a means to reduce the amount of uncollectible accounts receivable they carry on their books.

Another popular option for working toward getting out of debt is taking all of one's unsecured credit card debt and consolidating it into a single loan. Most debt consolidation loans have interest rates that are much lower than the original credit card interest rates. In addition, because there is only the single monthly payment instead of trying to send each individual card its minimum payment, the amount of cash available for current expenses is generally higher, reducing the need to rely on credit cards.

Most financial institutions that offer debt consolidation loans require those individuals who take out the loans to attend some form of consumer credit counseling to help keep them from compounding the problem by consolidating the loans and then maxing out the credit cards again. One of the first things that a consumer credit counselor will recommend is destroying all but maybe one or two credit cards. The one or ones that are left are for emergency use only until the amount of debt has been reduced to manageable levels. Then the credit card may be used in certain cases to charge purchases that can be paid off in one or two months as a means to rebuild good credit.

Debt consolidation loans and debt settlements may not be the ideal solution for all people. In certain cases, a combination of the two may be more helpful. Generally speaking, if debts are negotiated down to a level significantly lower than the original amount, and a consolidation loan is taken out to pay off the outstanding negotiated balances, the maximum savings per month can be incurred. The major drawback to taking this particular path toward becoming debt free is that consumer credit counseling will almost definitely be required by the creditors and the odds are that the available credit lines will completely disappear. The advantage is that by not having credit available to one, one will be forced to learn how to budget money and live entirely within one's means.

The final solution for getting out of debt is the very last resort, bankruptcy. A very large number of lawyers and debt reduction companies advertise getting rid of debt legally without significant cost to you. What they are offering is bankruptcy. Bankruptcy is governed under federal law and does provide several different options. New laws passed by congress last year make some of these options less available or unavailable to people who make above a certain amount of income.

The most common form of bankruptcy, and the one most affected by the new laws governing who can file, is chapter 13. Under a chapter 13 bankruptcy, all of a person's unsecured debt and some secured debts are lumped together and a judge declares these debts forgiven. The debt has been gotten rid of, but the bankruptcy will show on a credit report for at least seven years and new credit will be difficult to obtain.