Options to get out of debt
Looking to get out of debt? This article is for those in the United States.
My name is Crissa Petrovic, and I worked as a debt settlement negotiator in 2007 through 2010, and also worked as a debt collector. During that time, I learned a lot about the wide array of help folks need when it comes managing, reducing, and eliminating debt. One of the more pressing needs is managing and reducing unsecured debt, specifically credit cards.
I put together this list of options to assist you in figuring out your next steps in your debt resolution journey. My goal with this article is to help you save time in your research by making you aware of your options. Note that it is possible there are other options outside of this list, but I included everything I could think of (and there’s not that many!) in this list. Also, I’m not a bankruptcy attorney or a financial advisor.
Debt can be overwhelming and knowing your options is a great first step in determining how to get out of debt.
Here’s a high level list of options for you to consider based on your situation.
Option 1
Debt Settlement – Pay for a Service
This option is predominately offered through a debt settlement service in exchange for a fee (a percentage of the debt savings), where a monthly amount is sent to a trust account managed by the debt settlement company who will negotiate with creditors with the goal to settle debts for less than the owed amount.
It’s based on a lump-sum payment or structured payments to creditors in exchange for reducing the amount owed – typically by around 50%, plus debt settlement services fees.
Timeline: These programs generally range from 1 to 5 years. In taking 50% of $10,000 and dividing it by 3 years, the monthly amount would be roughly $140 per month, not taking into account the debt settlement service fees.
Pros: Pay significantly less than the owed debt and in less than time than paying the minimum amount each month.
Cons: Decrease in credit score. Taxes may be owed on any savings over $599. Run the risk of legal pursuit dependent on the creditor.
Option 2
Debt Settlement – Do it Yourself & Save
This option is ideal for those who understand the benefits and risks of debt settlement, and have a strong interest in settling their own debts without using a service provider – specifically to maintain direct involvement in the debt, retain privacy, and avoid service fees.
Timeline: Dependent on personal discipline and availability of sufficient funds with which to negotiate.
Pros: Pay significantly less than the owed debt and in less than time than paying the minimum amount each month.
Cons: Temporary decrease in credit score. Taxes may be owed on any savings over $599. Run the risk of legal pursuit dependent on the creditor.
Option 3
Pay minimums
This is an option where no other efforts are made to reduce the balance faster or to reduce the interest. Only the minimum(s) is paid each month.
Timeline: It would take approximately 23 years and 9 months to pay off a $10,000 debt at an 18% APR if only the minimum monthly payment (at 2% of the balance, or $25/mo). This means an additional $14,383 would be paid in interest and fees over the repayment period, increasing the total debt to around $24,383.
Pros: Pay the least amount possible monthly. Fulfill the minimum legal obligation.
Cons: Pay significantly more over time depending on the interest rate and compounding interest. Credit score will be negatively impacted if most of your available credit amount is used/owed.
Option 4
Debt Management – Pay for a Service
This is an option where multiple unsecured debts are combined into a single monthly payment.
Debt management services can potentially lower interest rates and monthly payments to streamline debt repayment within a structured plan.
On average, debt management plans usually last between three to five years.
Timeline: Taking the average of 4 years, it would take around $210 for 48 months to pay off the $10,000.
Pros: Potentially pay less than the owed debt. Potentially get the interest rate reduced.
Cons: Potential decrease in credit score. Taxes may be owed on any savings over $599. May take longer than other options.
Option 5
Debt Consolidation
This is a form of debt refinancing that involves taking out one loan to pay off many others.
Timeline: N/A, depends on the terms of your new loan.
Pros: Easier to manage debt with one single loan (if the loan covers all other debts) than juggling multiple debts.
Cons: You will need to qualify for the terms of the new loan and it may mean a higher APR (interest rate) if your credit is poor. Likely will not reduce your debt balance. May take several to many years to pay off the new loan.
Option 6
Bankruptcy – Hire an Attorney
Typically viewed as a last resort, bankruptcy is an option for those who qualify.
Consult with a bankruptcy attorney in your state to learn more.
Timeline: N/A
Pros: Speak with a bankruptcy attorney in your State to learn about this.
Cons: Speak with a bankruptcy attorney in your State to learn about this. Credit score/history may be impacted.
Debt can be overwhelming and knowing your options is a great first step in determining how to get out of debt.
