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Getting to grips with your debts

Some people are able to get their debts under control by reducing their monthly outgoings, maximizing their income and paying back a little bit extra each month. But for millions of Americans, the mountain they have to climb to deal with their debts calls for more extreme measures. Here are the top three avenues that people can pursue to bring their struggles with debt to an end.

1. Filing for bankruptcy
Bankruptcy may seem like a frightening concept, but it can be a useful way to reduce or even eliminate your debt if you are in serious difficulty and can see no other way out. It is actually an act governed by law that is specifically designed to help people get out of debt.

Personal bankruptcy comes in two main forms – Chapter 7 and Chapter 13. If you have large amounts of unsecured debts (such as credit cards, unsecured loans and medical bills) and few assets, then Chapter 7 is likely to be the most appropriate solution. It gives people a fresh start by eliminating most types of unsecured debt.

Alternatively, if you and your family have a high income, a Chapter 13 bankruptcy may be more suitable. This allows you to pay back a percentage of your overall unsecured debt, typically over the course of three to five years.

2. Debt settlement
Debt settlement programs are becoming increasingly popular in the US, as they can be an effective way of getting back on track. The debtor is initially asked to open a new savings account and deposit some money. Negotiations then begin in an effort to reduce the overall amount owed to lenders. The funds in the savings account are then used to settle their outstanding account balances.

Unlike bankruptcy – which is court-ordered – lenders involved in debt settlement negotiations are not under any legal obligation to agree to reduce people’s debts. However, many see it as in their best interests to get some form of payment from the debtor, even if it is not the full amount, and are willing to enter into negotiations. Debt settlement is therefore proving popular with both those in debt and lenders.

3. Credit counseling
Credit counseling programs are less well-known than bankruptcy and debt settlement, but they offer an attractive solution for many people with debt problems. In essence, the debtor pays a financial advisor to look at their finances and help them to budget more effectively. It often turns out that a person’s situation is less bleak than they initially thought and that, with a concerted effort to reduce spending and maximize income, their debts can gradually but steadily be repaid without resorting to bankruptcy or settlements with lenders.

If you are feeling overwhelmed by your debts, consider the three options listed above and work out the best approach for you. Speak to an advisor if you are unsure about the best way to proceed.