7 Debt Solutions

If you are at the beginning stages of your debt problems and looking for options, you are at the point we were about three years ago. It was becoming clearer to us that we had run out of our own 'creative' solutions to solving our debt problems and we needed professional help.

I had worked for a Financial Services company just prior to this time in our life so I was fully aware of the options. I just wasn't able to settle on one that we hadn't already tried or that we could get behind for personal & ethical reasons. I'll go in to detail as to our reasoning as I review each of the Seven Most Common Debt Solutions.

1) Do Nothing. Believe it or not, this is the position many people take. They are under the stress daily but they are paralyzed to the point of doing nothing. Clearly, this position only makes the situation worse. Creditors do not stop calling, the debt continues to rise and so does your stress level. 

OUR POSITION - We tried this one for almost a year - hoping that conditions would just miraculously change. The truth is, you got yourself in to this mess and you'll have to do the work to get out of it. We finally got to that point and recognized that it was going to take work and personal discipline to turn this mess around. It was also going to require a change in heart. We had to become different people as it related to our views of money, time and purpose.

2) Credit Counseling. Credit Counseling companies are structured to act as a facilitator on your behalf. You sit down with them, review your debt and come up with a financial plan that you can live with. Once you've agreed upon a budget, they will combine all of your debt in to one payment, roll in their fees and then you mail your payment to them monthly. In turn, they will contact all of your creditors and attempt to negotiate lowering your interest rates in order to lower your monthly budget. In 2000, the Better Business Bureau (BBB) had only 404 registered complaints with all credit counseling companies combined. At the time, these companies were primarily non-profit debt help organizations and genuinely inclined to provide a human service. What about five years later? In 2005, the BBB had 1286 registered complaints with credit counseling companies (many for profit), roughly 190 per year over five years. There are still good companies out there but do your research before engaging.

OUR POSITION - We had already contact all of our creditors and had some success lowering our interest rates. We felt that this was something we could do without the help or fees of a Credit Counseling service. Additionally, credit counseling stays on your credit report for about seven years. This was no better than the damage done by Bankruptcy so we ruled this out as an option.

3) Debt Consolidation. Debt consolidation is the process of rolling all of your debt in to one consolidated loan - typically secured. The advantages are clear; one payment rather than multiple, typically a lower interest rate and one creditor to manage. The disadvantages are worth seriously considering; with one creditor, the temptation to start using your cards again is huge; most consolidation loans originate from your mortgage - this will spread your debt out to 10-25 years and removes real equity from your home; debt consolidation loans are secured debt so if you do have difficulty making the payments, you risk losing the asset.

OUR POSITION - The thought of going out and getting yet ANOTHER loan to solve our loan problems seemed crazy. Additionally, we had no equity left in our home from having already borrowed from it in the past. We concluded that we had not yet learned the root cause of our spending problems and we risked keeping ourselves in trouble by seeking another loan. Thus, we ruled this one out.

4) Debt Settlement. The company that I worked for specialized in Debt Settlement. They were very successful at decreasing peoples debt and getting them in a better financial position (at least at first glance). Debt Settlement is the process of negotiating down your debt with your creditors. Again, this is something you can do without the help of a settlement company but typically these firms have better success. The process is as follows; you tell the debt settlement company what you can afford to pay towards all of your debt on a monthly basis, they review all of your debt and determine whether they believe they can negotiate the debt low enough (including their fees) to accommodate that monthly amount. They typically can negotiate your debt down 40-50% of what is owed. The typical repayment plan takes about 33 months. The risks are; say good bye to your credit - they will ask you to stop making payments for at least three months to all creditors so that they are more likely to negotiate; the credit calls will increase and can get quite nasty and uncomfortable - the debt firm will give you great tools to help avoid this but your best bet is to change your phone numbers! Also, they might not have success negotiating all debt so the 'plan' can vary. Finally, you will be hit with taxes on the amount of debt forgiven by a Debt Settlement plan - be prepared for this at tax time. Plus the amount forgiven remains on your credit report as 'unsettled'.

OUR POSITION - This was the plan we had most difficulty with. We just never felt right about asking our creditors to lower the amount we owed them, especially by half! We made each purchase with the intent of paying for the items, not doing so felt like stealing.

5) Borrowing the money from friends or family. Clearly, our friends and family love us and they want the best for us. While watching us squander our money was difficult for our family to watch, they cared for us and hated seeing us in financial duress. Therefore, we accepted loans from our parents, friends and colleagues. We regret this most. Defaulting on an unknown face is one thing, but doing this to family - ouch! As I mentioned in my last blog, these loans will be repaid through our bankruptcy but not for 4 or 5 years. Each time I see these people, I'm reminded of how I disappointed them and I regret my choices.

OUR POSITION - We tried this and regretted it so our recommendation is to avoid this as an option.

6) Establishing a personal repayment plan and living within a budget. This is the best option if you can do it. It will require a combination of all of the above options; negotiating your interest rates down, asking for forgiveness on fines/fees, perhaps even consolidating the loans in to a lower interest plan. Finally, committing to living within a budget is the only thing that will secure success for the long term. Acknowledging your bad habits, changing them for good and living differently.

OUR POSITION. We have now adopted this plan for our future. However, three years ago our debt had exceeded two times our annual income (I say this with embarrassment, regret and a good deal of shame). The majority of the debt was IRS in the form of penalties, fines and increased interest rates. We attempted to work with them but all efforts failed. Our hope for ever repaying this debt was lost once we completed a thorough assessment of our situation. Our only option was some sort of personal reorganization of our debt.

7) Bankruptcy - Most people think of bankruptcy as the process of being forgiven from all of your debt and living with the consequences of bad credit for 7-10 years. Actually, that is just one of the Bankruptcy provisions. There are actually three bankruptcy codes; 7, 11 & 13.

Chapter 7 is the most severe, can be used by all individuals and businesses. All unsecured debts are terminated, and are paid if any money remains after secured creditors are paid and after various exemptions permitted by law are claimed by debtors. 

Chapter 13 is typically used by wage earners and small businesses; this delays and reduces amount of payments to creditors over a period of time; this is known as a Chapter 13 Plan, or an individual reorganization. 

Chapter 11 is used by larger businesses, and resembles a Chapter 13, with many more requirements. If all a debtor needs, is a plan to pay off debts, then a Chapter 13 or Chapter 11 is preferable, rather than a Chapter 7, particularly when trying to reestablish their credit worthiness.

All of these plans have their own advantages and disadvantages - all of them will harm your credit for at least 7-10 years. You'll want to weigh the advantages and determine whether the options align with your own ethics and personal situation.

OUR POSITION - Chapter 7 was out for us. Again, we wanted to pay back our creditors. We just needed a plan that would make that possible. We had already damaged our credit and believed no matter what solution we picked, we would suffer those consequences for a while. We opted for Chapter 13 because the plan requires that all debt be repaid at a maximum limit of five years and ALL creditors would be repaid. The process is lengthy and not everyone qualifies. Fortunately, our lawyer was able to structure a five year plan that paid everyone back over a period of five years. The monthly payment is a KILLER but we haven't missed a payment in two years and we are seeing debts resolved! NOTE: In a Chapter 13, all unsecured creditors are paid last and all interest is forgiven. All secured creditors are paid first and all penalties, fines and fees are forgiven (This is what saved us). However, secured creditors do receive interest on their debt at a reduced interest rate of about half.

As you can see, there are countless options and I only identified the seven most popular. My encouragement is to not give up hope, stop the behavior that got you in this place and begin your research. Seek wise counsel and if you believe in the power of prayer, pray. We found that once we sought God's forgiveness and accepted it, we were able to do a 180 in our lives and starting living a life free from overwhelming debt.

We haven't used a credit card in two years and plan to never use one again. We live on a budget and pay cash for things that we planned. The best news of our plan is that we will be DEBT FREE in three years! Just at the time Larry will retire, we'll have no payments. That could have never happened if we continued on the path we were on.

May you find solutions that solve your financial worries and seek the life that we were meant to live!