Options for Legally Eliminating Debt

When looking for ways to eliminate debt, it's important to understand what your options are so you can choose the methods that are most realistic for you. There are several ways for people in trouble with debt to make their situation more manageable. Some of the options available to borrowers include:

Debt Consolidation: Debt Consolidation is the process of taking all of your debt and combining it, to make one big monthly payment instead of several small payments. Very often, this is accomplished through a home equity line of credit, or HELOC. The borrower would need to secure a line of credit, use the credit to pay off all outstanding debt, and then make one monthly payment until the HELOC is paid off. The advantages of debt consolidation are that the overall interest you're paying on your debt is generally lower and the interest you're paying is tax deductible.

There are also companies who offer to pay off your debt and become your creditor. This option may be appropriate for those who don't qualify for a HELOC, but can also be costly. It's important to research this option and talk to a credit counselor before signing up and paying upfront fees.

Debt Negotiation: Debt negotiation is simply paying someone to talk to your creditors and strike a deal with them to lower your balance due. Why would a lender ever agree to an arrangement like this? If a negotiator can convince the creditors that the borrower is on the verge on bankruptcy, the credit card company would rather receive part of what they're owed than nothing at all.

It's vital that you do your research before beginning the debt negotiation process. There are countless scams popping up on the Internet all the time and many consumers get fooled and end up paying a lot of money and making their debt problems worse, not better. Also, there are adverse tax consequences with debt negotiation, as the money you save is viewed by the IRS as income. You may have a larger tax bill than you expect after taking this step.

Bankruptcy: This should be the last resort and should only be used if debt has become an insurmountable financial hardship in your life. Through bankruptcy, a court of law deems that the borrower is unable to pay the debts and that they don't need to be repaid. The slate is wiped clean, but the consequences will last for 10 years or longer. A bankruptcy will stay on your credit report for 10 years. If you need credit, it's still possible to get a loan. However, the interest rate on the loan will be much higher than it would be if your credit report was clean.

Pay it Off: This may be the most difficult option, but will also be the most rewarding. Through budgeting, credit counseling, and most of all discipline, getting out of debt slowly but surely on your own will leave you in the best position for the future.