Blog | Personal Finance

How to Get Out of Bad Debt in 2020

Know when to cut your losses and start moving forward

The credit industry actively entices all comers, especially the young and inexperienced, with the promise of credit. Critics charge their aggressive practices border on predatory lending, taking unfair advantage of those who shouldn’t be borrowing.

With nearly trillions in unpaid consumer debt, a million households filing for bankruptcy each year (more or less, depending on the year), and a very low savings rate, how can one be free of consumer debt and finally start building wealth?

Sometimes you need more than just a payment schedule to get out of debt. If you’re constantly juggling payments, robbing Peter to pay Paul, or using credit cards to fill in the gaps in your budget, more help may be in order. Here are your options when your debt is getting to be too much.

Evaluate these options as a potential tool to help you get to your ultimate goal:

Credit Counseling

When you enter a counseling program, you’ll typically make one monthly payment to the agency which then pays all your participating creditors. It’s not true consolidation in the sense that you’re still on the hook for all the original debts. If the agency doesn’t make your payments, guess who’s still responsible?

In addition, some types of debts can’t be included, such as student loans, tax debts, mortgages, car loans, etc. The agency may have other programs to help you with those debts but they typically can’t be included in a Debt Management Plan (DMP.)

A potential problem is consumers may get sucked in by a counseling agency that charges high fees or doesn’t make the payments to creditors on time. When either happens you may find yourself deeper in debt. This doesn’t happen as much as it did several years ago, but you still want to make sure you are dealing with a reputable agency.

Debt Settlement

As the economy spiraled downward, millions of people found themselves unable to pay their bills. Debt settlement agencies saw this as an opportunity and began aggressively marketing debt relief solutions to consumers. The most common promise? Pay off your debt for pennies on the dollar and avoid bankruptcy. Step right up…

Debt settlement can be a legitimate option for someone struggling with a lot of credit card debt. It can be especially helpful for business owners, and those who own property (such as real estate) that they don’t want to lose in bankruptcy. But it’s also crucial you understand what it can and cannot do.

Although many credit card companies won’t admit it publicly, all of them negotiate settlements through these firms every day. If you are timid, overwhelmed, or just too busy to effectively negotiate with all of your creditors, it can be helpful to get professional advice. There are firms that coach consumers through the process if they want to do it themselves, as well as full-service firms that handle as much of the negotiations as possible for clients. The right choice depends on your time, energy and confidence that you can get the best deal possible.

Bankruptcy

The word bankruptcy alone can conjure a range of emotions including shame, disapproval, and fear. If you’ve been through a bankruptcy, you may wish it never happened. If you haven’t ever had to file, you may judge those who have as simply irresponsible with their finances. The truth is, common life events such as divorce, a small business that goes under, a lawsuit, or an unexpected illness can throw anyone’s financial life into a tailspin and land them in bankruptcy court.

If you think bankruptcy may become inevitable, it’s better that you meet with an attorney sooner rather than later to discuss it. Many people make costly mistakes that they could have avoided if they understood the facts.

The biggest mistake people make when they are deep in debt is to procrastinate. It’s the “deer in the headlights” syndrome, and credit counselors and bankruptcy attorneys see it all the time. It’s painfully obvious to everyone except the person in debt that they need to make a hard choice or they won’t have many choices left.

Don’t let debt scare you into doing nothing. You know your options. Act now to get the help you need so you can focus your time and energy on creating a positive financial future.