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Debt management, debt settlement or bankruptcy?

One of the most common burdens faced by consumers in Ohio and across the U.S. is debt. Credit card debt can weigh on the whole family, and so many people are looking for solutions. Debt management, debt settlement and bankruptcy are the primary options available; each of them has its own unique advantages and disadvantages.

It is usually a good idea to consult a credit counseling agency early on in the process. There are for-profit and non-profit agencies on the market; most are better off with a non-profit. The Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling are two organizations comprised of non-profit agency members. A debt management agency may be helpful for people interested in a debt management plan, by which debts can sometimes be paid down with an affordable monthly payment. This method is less likely to harm the debtor's credit than debt settlement or bankruptcy.

Debt settlement can take many forms, but one common strategy requires the debtor to stop making payments on credit accounts until enough money can be saved to make a settlement offer. For most in debt, it takes time to save sufficient funds. In a situation where a husband and wife are debtors on $85,000 in credit card debt spread over four credit cards, for example, a debt settlement strategy might involve a negotiation and settlement plan that covers years. Debt settlement can be an effective method if a lump sum settlement amount can be agreed upon, but creditors may choose, in the meantime, to sue in court to collect the money owed.

Consumer bankruptcy for the typical person comes in two varieties: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is limited by income requirements, and Chapter 13 requires debtors to repay creditors as much as they can through a bankruptcy plan. A bankruptcy attorney may be able to help interested parties understand the differences between the various debt-elimination options and may be able to help debtors formulate a debt-reduction strategy.

Source: Fox Business, "Debt Settlement vs. Bankruptcy: Which is Worse for Credit Score?", Jane McNamara, April 23, 2014

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