As the economy goes through its regular cycle of boom and bust, you may find yourself in a position where excess expenses or other financial hardship inhibit your ability to pay your debt. For cases of true financial hardship, there are a number of options you can utilize to help reduce your debt. However, all of them involve damaging your credit report.
True Hardship
Although no one wants to make debt payments, you signed a contract when you took out your loan or opened your credit card account, and you promised to make good on your debts. Unless you truly have a financial hardship, you should do all you can to revise your budget, cut back on expenses and pay the debt you incurred. In fact, the U.S. Bankruptcy Code was revised in 2005 to ensure that Americans could not successfully file bankruptcy unless undergoing true hardship. If you are a victim of extended unemployment or astronomical medical expenses, you may be in a position where you are unable to realistically pay your debts and should take some action.
Debt Negotiation
If you cannot keep current on your debt payments, the first option to consider is debt negotiation. If you are a good customer and current on all payments, you can call your creditor and ask for a reduced interest rate or even a reduction in the balance owed. Unfortunately, most creditors, especially credit card companies, will not negotiate a dramatic reduction in your terms unless you are a few payments late and your credit report has already suffered. If your creditor views you as a risk to file bankruptcy, in which case they would receive no payment at all, they might be receptive to negotiating some sort of debt reduction with you.
Debt Settlement
If you have numerous creditors and neither the ability nor the inclination to negotiate individual debt reductions, you can turn to the services of a debt settler or negotiator to work out a payment plan on your behalf. Oftentimes, the terms of a debt repayment plan require the suspension of the use of your credit cards and a monthly payment equal to two percent of your outstanding balance for a period of five years.
Bankruptcy
If you cannot even afford a payment plan, you might consider filing bankruptcy. The two main forms of consumer bankruptcy are Chapter 13 and Chapter 7. In a Chapter 13 bankruptcy, you keep your assets but set up a payment plan with court approval for a period of three to five years. If you cannot afford a payment plan and pass a so-called means test, you may qualify for a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, also known as a liquidation bankruptcy, you must sell any assets above certain state-defined exemption levels to pay creditors. If you have little by way of assets, your case may be deemed a "no-asset" case, in which you do not have to surrender any property but still receive a discharge of all of your unsecured debt, such as credit card debt.
Consequences
Any form of debt settlement or bankruptcy will damage your future ability to obtain credit, at least at lower interest rates. Debt settlements and Chapter 13 bankruptcies remain on your credit report for seven years, while a Chapter 7 bankruptcy will show on your report for ten years.
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