The credit boom and subsequent credit crunch of the last decade has left many Americans with an overwhelming level of debt that they have no real means of ever paying back. And this will no doubt have been a contributory factor in the 20 per cent rise in personal bankruptcy filings witnessed during 2010.
And if you are one of the millions of Americans with a seemingly insurmountable level of debt then there are a number of options open to you that could help to improve your financial situation.
Live the frugal life
This may seem obvious but if you curb your spending habits then 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 and then spend a further $5.00 on lunch each day then that amounts to over $150 every month and almost $2,000 per year. And you can save a large portion of that $2,000 by simply cutting back on the morning coffee and preparing your lunch at home and then taking it to work with you. And if you apply this principal to other areas of your life then you can save even more money and may even 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 works by gathering up all of your outstanding debts, such as loans and credit cards, and then offsetting them with another, 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, which can be confusing and difficult to manage, and it can also offer a lower rate of interest and so you will not pay as much money back in the long term. The downside to this is that you have to be in a position whereby 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 then 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 and 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 which may lead to you only paying back 50 per cent of what you owe to have the debt settled and written off.
However, this will have a damaging effect on your credit rating, if it not already irreparably damaged, that could mean that you will struggle to gain credit for up to six years.
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 then these will be seized as part of the bankruptcy and the implications for your credit score are severe and 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 as 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 then they are just some of the options available to you and you should always seek professional financial advice before deciding which debt solution is best for you.
Many may be wishing they had a finance degree online, or the equivalent after the credit mistakes that have been made.
Article written by Les Roberts, debt specialist at Moneysupermarket.com