The credit boom and subsequent credit crunch of the last decade have left many Americans with an overwhelming level of debt that they have no real means of ever paying back. This will no doubt have a contributory factor in the 20% rise in personal bankruptcy filings witnessed during 2010.
If you are one of the millions of Americans with a seemingly insurmountable level of debt, there are several options open to you that could help improve your financial situation.
Live the frugal life
This may seem obvious, but if you curb your spending habits, you may see a rapid improvement in your financial circumstances. For example, if you have a $2.00 coffee on your way to work every day, then spend a further $5.00 on lunch each day, which amounts to over $150 every month and almost $2,000 per year. You can save a large portion of that $2,000 by simply cutting back on the morning coffee and preparing your lunch at home, then taking it to work with you. If you apply this principle to other areas of your life, you can save even more money and keep enough money back to put into savings.
However, this will only make a difference if you have a manageable level of debt as it may help you pay it off quicker than expected, as you have more money to pay down each month. If you have a larger amount of debt, you may have to consider some of the following options.
Debt consolidation
Debt consolidation works by gathering up all of your outstanding debts, such as loans and credit cards, and then offsetting them with a larger loan that is usually taken out and secured against any property you may own. This could be in the form of a remortgage of your home or a tailored debt consolidation loan that some lenders will offer.
This is a good solution for many as they do not have to worry about various credit lines. This can be confusing and difficult to manage, it can also offer a lower rate of interest so you will not pay as much money back in the long run. The downside to this is that you have to be in a position where lenders are still willing to offer you more credit and, should you fail to keep up with the repayments, you could lose your home.
Debt management and settlement
If the first two steps, do not suit your circumstances, you could enroll in a debt management plan whereby a third party company will contact your creditors in a bid to reduce or freeze interest rates. This will put a stop to costly default fees and phone calls demanding payment.
This works well as an interim measure for those heavily in debt and may also lead to a settlement plan whereby your debt management planners agree on a compromise figure with your creditors. This may lead to you only paying back 50% of what you owe. However, this will have a damaging effect on your credit rating which could mean you will struggle to gain credit for up to six years.
Bankruptcy
This is usually the last resort for many as the Federal courts are involved in liquidating your assets to eliminate your debts and a Chapter 7 bankruptcy order takes into account personal income regulations to determine whether you are eligible. If you have any saleable assets, these will be seized as part of the bankruptcy. If the implications for your credit score are severe, it could last for up to seven years.
Although you could be discharged from any unsecured debts within a matter of months, bankruptcy should never be seen as an easy option because the sanctions and future limitations placed on you are severe. For more information on bankruptcy visit the United States Courts website.
If you are in debt, these are just some of the options available to you. You should always seek professional financial advice before deciding which debt solution is best for you.