Life has its unexpected emergencies and sometimes to solve our crisis we must make hard financial decisions. When an emergency causes you to advance more cash then you have available it may lead to short-term debt. However, if you are unable to pay back your debt, it will continue to exist and continue to grow as interest is added.
If you have recently not been able to manage your debt it may be time to consider consumer credit counseling, debt consolidation or bankruptcy. These three options are tailored for different situations.
Consumer credit counseling is good for people who have “manageable debt.” meaning, that if they could lower their interest rates and consolidate their payments into one lump sum every month they could afford to keep up on payments. One requirement of entering this program is that you must stop using ALL credit cards. However this option is the least damaging to your credit score.
The second option is debt settlement. Debt settlement is good for people who can no longer manage their debt. Debt being any unsecured debt, like personal loan debt, credit card debt, medical debt, etc. Student debt is not something that can be settled even in bankruptcy. With debt settlement, a lawyer will negotiate your debt down on average to 50% of what you owe and then you are responsible for the remaining portion to be paid off in one lump sum. This method does affect your credit score as debt settled on your credit history is worse that a debt paid in full. Also, you must be behind in payments and most likely will continue to be in “default” until the lump sum is payed off.
Bankruptcy should be a last resort. It is used if you are falling behind on unsecured debt like mentioned above as well as asset-backed debt such as mortgages, auto loans, etc. Bankruptcy is devastating to your credit history and can only be claimed once every 7 years.
Always consult a financial professional and legal advice before entering any debt reduction program.