Debt Settlement or Debt Negotiations as it is often called can be right for you if you have a financial hardship, can't or don't want to file for bankruptcy or can't see how you will pay off all of your bills and still save for your future retirement, your kids education or if something catastrophic happens. This is a very effective way to get rid of your debts, but is also the most aggressive. If you find the right company and stick with it, it is by far the most effective way to eliminate you debt without having to declare bankruptcy.

When you use a professional to negotiate for you, they not only have working relationships developed with your creditors but, they also handle a large amount of accounts which give them volume discounts and better leverage than what you could achieve on your own. For an example, let's say that you owe a creditor $10,000. You have saved up $5,000 and you make them an offer. They can say; we want 70%, or 80% on this account. What then? Now, let's say that you hire a professional to handle the negotiation for you. They call the same creditor and say, we have $500,000 worth of debt that we would like to settle. We can pay you $175,000 (35%) right now to clear all of these debts off of your books. Get the idea? That is the leverage that you get with a professional that you would not have on your own. In addition, most established Debt Settlement companies already have established settlement amounts with creditors based upon the volume of their client base.

A good Debt Settlement company also tracks current trends in the industry and knows if any creditors are in need of cash or are offering specials. So you understand a little bit more about the process, within the credit industry, there will on occasion be special offers. For example a creditor may normally settle debts owed to them for .50 cents to the dollar. However, they may have had a week quarter and in order to boost up revenue/prevent additional charge offs, etc., they will grant settlement offers for .33 cents to the dollar. You won't know about it, but your negotiator probably will.

They can also help guide you through the Fair Debt Collection Practices Act. What to say and not say to those creditors who call you looking for money, etc. Again, make sure that you are comfortable with who you hire. Chances are that you will be working with them for the next 2-3 years. Make sure that they are in good standing with the Better Business Bureau and are participating in an Organization that requires them to maintain a certain code of ethics. For example the United States Organization for Bankruptcy Alternatives (USOBA) or the Association for Credit and Collection Professionals (ACA).

Bankruptcy

This should be considered you last resort.

For the average consumer there are basically two types of Bankruptcies that are available to them. A Chapter 7 (straight Bankruptcy or referred to as a liquidation) and a Chapter 13 (often referred to as a reorganization). The below is a general overview and is not intended as legal advice. You should always consult with an attorney prior to making any type of legal decision. Filing for Bankruptcy is never pleasant and should always be considered as a last resort. Although your credit profile will be affected for 10 years, there are programs out there that are specifically designed to assist a post-discharged consumer with restoring and rebuilding his or her credit profile. Your attorney can discuss this as well as other options with you. Make sure they are in good standing with their Local Bar Association and shop around. Price isn't as important as comfort in our opinion.

Chapter 7 bankruptcy is designed for someone that does not have the financial ability to pay their existing debts. In a Chapter 7, you must disclose all of your debts and all of your assets. Once filed, a Chapter 7 Trustee is assigned to your case to liquidate your assets to pay your creditors. You may claim certain property as exempt from seizure under governing law. The purpose of filing Chapter 7 is to obtain discharge of your existing debts; however some debts are not dischargeable under the law.

Chapter 7 is basically used to discharge (forgive) unsecured debt; credit cards, unsecured loans, deficiency balances on repossessed automobiles, medical debts, etc.

A Chapter 13 is designed for someone with regular income who is temporarily unable to pay their debts but would like to pay them in installments over a period of time. You file a plan with the court to repay your creditors all or part of the money you owe them, using your future earnings. The court must approve your repayment plan before it can take effect. Under Chapter 13, unlike Chapter 7, you may keep your property (usually), both exempt and non-exempt, as long as you continue to make payments under the plan. After completion of payments under your plan, your debts are discharged. There are some exceptions such as, alimony and support payments and long term secured obligations.

Consumer Credit Counseling

Credit Counseling was actually created by your credit card companies. Initially, it was a way for them to recover money from people who were not making payments. Instead of losing that money or spending more money (through collections and lawyers) to try and recover it, they created a "safe" place for a consumer to go so they still get something. Actually, they get all of their initial money and interest. Not bad. It has now evolved into a billion dollar industry.

Credit Counseling is one way to get out of debt. Normally, a credit counseling company will negotiate a reduced interest rate on your credit cards (your creditors would have to accept this proposal and may not reduce the interest rate at all, it all depends on your financial situation and the credit counseling companies relationship with your creditors). On average, you can expect to pay back your entire balance at 6-12% interest. Again, this is not a promise but a general guideline. When speaking with a credit counseling company, they should give you the exact terms and conditions before you retain them. They will also try to have late payment and over-the-limit fees forgiven. This generally takes place once you've established a six month track record of good payments.

Credit Counseling companies make their money several ways. First, don't be fooled about non-profit status. All that means is that at the end of the year, the company shows no profit. They still get healthy salaries; spend advertising dollars to get clients (just like for profit companies do). Also, non-profit status does not indicate honesty, integrity or even reliability.

Credit counseling agencies normally charge a set up fee and monthly fee (they will describe this as a "contribution"). They also receive what is referred to as a "fair share". It basically works like this. They set up a relationship with several creditors. When they set you up on monthly payments (remember, you are paying the balance and interest) to that creditor, they will receive a percentage of what they recover from you.

In order for credit counseling to work, you must have sufficient income to pay your basic bills and to make sure you don't miss a payment to credit counseling company. You should make sure that your payment arrives in time in order for the counseling company to disburse the payments to your creditors. Otherwise, you may be charged additional late fees and other charges, in addition to adversely affecting your credit profile.

You must stay in this type of program until all of your bills have been paid in full, plus interest.

Consolidation

There are a couple of approaches to consolidating debt. Credit card companies suggest transferring debt from multiple cards to one card at a lower interest rate. This is in effect transferring unsecured debt to another unsecured debt instrument with no tax benefits. Not only are you still carrying the same amount of debt but, if you miss a payment, your interest rate will go up. Believe it or not, most consumers will end up using the other credit cards that now have a zero balance and the cycle continues all over again. Truth be told, this is what the creditors want you to do so they can make more money. They know that people will not change their spending habits and they will continue to reap the billions of dollars in interest for years to come.

Homeowners with equity may find it more advantageous to take out a home equity loan, if you even qualify. In the process, unsecured debt becomes secured and therefore you may get some tax advantage. You may maintain your good credit while lowering your payments; however, you are now taking an unsecured debt and putting your home on the line. If you miss your payments or heaven forbid something happens to you and you can't make your payments, you may loose your house. In addition, most people won't get rid of the credit cards that they just paid off and again, they will find themselves charging on the cards and owing all over again. Never trade unsecured debt for secured debt unless you know that you will not use those credit cards again.