Guest Editorial:

"14 ways to handle your debts"


By Scott Bilker of DEBTSMART®

There is always much advice as to how to handle your debt. As with everything in life, there are pros and cons to each strategy. Picking the right path depends on your personal situation and, of course, careful consideration of the costs. My feeling is that the best choice is the smartest financial choice. That means the least expensive strategy. That said, let’s take a look at a few approaches to dealing with debt.

DO NOTHING (#1)

Method: Don’t take any action. Hakuna Matata (no worries)!

Pros: You get to keep your cash because you’re not paying back the debts.

Cons: Your creditors will sue you—and win! You will destroy your credit history—guaranteed!

GET MORE CREDIT TO PAY OLD CREDIT (#2)

Method: Apply for new lines of credit to increase your credit limits. Use this credit to pay all current credit card bills.

Pros: This will work at first. You will be able to continue spending and enjoying your newfound credit lines.

Cons: It won’t take long before you run out of the ability to get new credit. Additionally, the interest charged on the debt will overtake your credit limits thereby maxing you out with no ability to pay. It’s a guaranteed losing proposition. Note: It is smart to avoid being late by using one credit card to pay another. However, the idea of the continuous acquisition of credit to avoid debt is destructive.

RUN AWAY TO ANOTHER COUNTRY (#3)

Method: Fight or flight—the latter.

Pros: See the world.

Cons: See the world with no money.

H&H—HERMIFY & HIDE (#4)

Method: Run for the hills. Change your name, address, and phone number, and wait until the statute of limitations runs out on all your debts.

Pros: Sounds exciting. Might feel like a movie.

Cons: You cannot live your life in hiding. The skip-tracers (those that find people that skip on their debts) will work overtime to find you and serve you (and they’re not serving dinner).

PAY THE MINIMUM FOREVER (#5)

Method: Manage your cash flow so you can meet all your bills and nothing more.

Pros: You will survive.

Cons: You’ll spend your life paying thousands of dollars in interest payments to the banks! Oh, the feeling of satisfaction you’ll have contributing to Capital One Financial's, CEO, Richard D. Fairbanks, annual compensation of $280,083,843!

BORROW FROM FRIENDS AND FAMILY (#7)

Method: Ask those closest to you to help bail you out.

Pros: May be a quick fix.

Cons: Risk destroying your relationship with the people you love over money. If you have to claim bankruptcy, the bank debt will go away. But if you cannot repay relatives and friends, there could be hard feelings. Note: This strategy will work only when it’s a true business transaction and both parties benefit.

NEGOTIATE WITH CREDITORS (#8) Method: Read my book, "Talk Your Way Out of Credit Card Debt!: Phone Calls to Banks That Saved More Than $43,000 in Interest Charges and Fees" and start calling the banks.

Pros: You will have some success—I guarantee it! You will learn how to deal with the banks. You will save money.

Cons: None, you can’t make it worse. However, you do need the stick-to-itiveness to make it work. And it is work—but work that pays!

FINANCIAL PLANNER (#9)

Method: Use the service of a financial planner to “rebalance” your budget and put more money towards debt.

Pros: Outside, professional help that will help to organize your finances.

Cons: It will cost a little, but probably worth the fee. You are still left to follow through on the new plan and budget.

CREDIT COUSELING (#10)

Method: Contact, and work with, a credit counselor who will create a personalized DMP (Debt Management Plan). Allow the credit-counseling agency to negotiate with creditors and make your payments.

Pros: They do all the work. You send them a check and they do the rest.

Cons: Banks report your dealing with credit counseling to the credit bureaus and this will hurt your credit score. The companies are simply voluntary debt collection agencies. That’s because some of their compensation is derived from what’s known as “fair share.” This is a percentage of the money they get you to pay (they collect). There have been credit-counseling companies that have paid late or not paid their customers' banks at all! Many say they’re non-profit, but that may not be true. I’m not saying they’re all bad. I’m saying that you have to be very careful and research each company before doing business with them or you could be sorry.

DEBT SETTLEMENT COMPANIES (#11)

Method: Use the service of a debt settlement company to mediate your debts one-at-a-time in lump sum payment and at a discount.

Pros: Professional help. These companies will negotiate with your creditors and get the debt settled for 45 percent or less of the total amount. Even with their fee (typically 15 percent of what you save or the total amount), it’s worth it from a dollars-and-cents perspective.

Cons: You send the debt settlement companies your money, and they put it in escrow until such time as they can negotiate with the banks. Banks must see that you’re not paying before they negotiate. Why would they want to reduce the amount you owe if you haven’t missed any payments? Of course, when you stop paying the banks, they will report this to the credit bureaus, and your credit score will be trashed. Additionally, any money eliminated from the total debt will be considered income and you will receive a 1099 and be responsible for taxes, which isn’t too bad. Again, you must research the debt settlement company! Many have been known to walk off with all the collected money, leaving their clients in far worse shape than when they started.

HOME EQUITY LOANS (#12)

Method: Borrow money against your home (or business) and use that money to pay off debts.

Pros: Home equity loans are tax deductible, so your true interest rate will be less than the quoted number. You may be able to get enough money easily to eliminate all your debts. That’s because property values have increased dramatically leaving them cash poor, equity rich!

Cons: Credit card debt is unsecured. However, once you pay it off with a home equity loan, the debt will be secured by your property. That means that if you have to claim bankruptcy, you will still be responsible for that debt!

SELL YOUR HOUSE (#13)

Method: Get the most you can for your residence, pay off your debt, and buy something smaller.

Pros: You meet all your obligations and get a fresh start.

Cons: You may not have enough equity to pay off all debts. You lose the commission of the sale to the realtor. You may not be able to buy something smaller because of elevated home prices.

DECLARE BANKRUPTCY (#14)

Method: Chapter 7 or chapter 13.

Pros: If you’re successful in getting a Chapter 7 bankruptcy, then all your unsecured debts will be erased! You owe nothing! A true fresh start!

Cons: Bankruptcy remains in your credit history for 10 years. Plus, because of recent changes in the bankruptcy laws, you will be forced to comply with strict standards that could push you into a Chapter 13 bankruptcy. With this, you still pay your debts back over time and have all the negative factors that go along with bankruptcy as well.


Scott Bilker is the founder of DebtSmart.com and the author of "Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be More Credit Card and Debt Smart." Send your questions about money, credit, loans, mortgages, or debt, to him at: Scott Bilker, PO Box 563, Barnegat, NJ 08005-0563 or online at: www.DebtSmart.com/askscott


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