Debt can take on many sizes, shapes and forms -- from student and auto loans, to credit cards, mortgages, business loans, promissory notes and more. It is common to borrow large sums for major purchases, such as a mortgage, and pay it back at an agreed upon interest rate (fixed or variable) over time, or all at once at a later date (a balloon payment). A loan or line of credit has the potential ability to help us get ahead in life -- providing the means for an education or the boost that a fledgling business may need to get off the ground; but equally so, loans also possess the dangerous ability to do just the opposite and drown us in a sea of debt. Left unchecked, debt, and in particular credit card debt can lead to financial ruin. The largest and most popular credit card companies routinely find ways to collect interest at rates up to and in excess of 30% APR from those who can least afford it -- you might call it a form of legalized theft.
So how does one get out of debt and stay out of debt? It is usually much easier said than done as it requires a change in lifestyle. Of course the simple answer is obvious: you must spend less than you earn. This, of course, requires a sensible budget and a tremendous amount of discipline. But what if your bills are already piling up? Most financial experts would agree that the fastest way to get out of debt is to pay off the loans with the highest interest rate first, then work on paying off debts with lower interest rates. Occasionally, however, it may be difficult to even pay the minimum payments on debts. Several options exist, including debt consolidation, debt settlement and bankruptcy, among others. Which option is best for your situation can only be decided by you and your financial and/or legal advisor.
Debt consolidation can simply be the merging of a number of unsecured loans into another unsecured loan (for example, credit card balance transfers), but more often it involves a secured loan against an asset that serves as collateral, which is most commonly a house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset in order to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Debt consolidation is often used as a means of paying off credit card debt, which can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.
Debt settlement (or debt forgiveness) is an alternative to debt consolidation and bankruptcy. During debt settlement, the consumer offers to settle the debt with the creditor for less than the original amount owed. The creditor has an incentive to accept this offer if they think that the consumer's only other option is to declare bankruptcy; for if the consumer declares bankruptcy, the creditor stands to loose all the money that they loaned to the debtor. Debt settlement may or may not have an impact on the credit score depending on how it is handled. In some countries like United states, consumer debt settlement has become a big business for attorneys as they may collect fees of up to 15% of the settled debt.
It is not necessary to obtain the services of an attorney to settle debt, however. You yourself may negotiate a settlement directly with the creditor. MSN Money offers several excellent tips for negotiating with debt collectors.
Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. The primary purpose of the laws of bankruptcy are to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and to repay creditors in an orderly manner to the extent that the debtor has property available for payment. Bankruptcy allows the debtor to resolve his debts through the division of his assets among his creditors. Additionally the declaration of bankruptcy allows debtors to be discharged of most of the financial obligations, after their assets are distributed, even if their debts have not been paid in full. During the pendency of a bankruptcy proceeding, the "Debtor" is protected from extra-Bankruptcy action by creditors by a legally imposed "stay."
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Debt can take on many sizes, shapes and forms -- from student and auto loans, to credit cards, mortgages, business loans, promissory notes and more. It is common to borrow large sums for major purchases, such as a mortgage, and pay it back at an agreed upon interest rate (fixed or variable) over time, or all at once at a later date (a balloon payment). A loan or line of credit has the potential ability to help us get ahead in life -- providing the means for an education or the boost that a fledgling business may need to get off the ground; but equally so, loans also possess the dangerous ability to do just the opposite and drown us in a sea of debt. Left unchecked, debt, and in particular credit card debt can lead to financial ruin. The largest and most popular credit card companies routinely find ways to collect interest at rates up to and in excess of 30% APR from those who can least afford it -- you might call it a form of legalized theft.
