What is the best Debt Relief Solution For You?

Because the options available to eliminate problem credit card debt are limited, I often find it more productive to use a process of elimination to help determine what would be the best debt solution. Most readers will find they can narrow down the list of debt solutions to one, or perhaps two, using the same process I have used during one on one consultations for more than a decade.

People tend to have a bias toward a particular debt relief solution, or even contempt toward some of the options available (cough… bankruptcy). Researching and choosing the option that will work for you is not a great place for emotion, or even preconceived notions. There are tens of thousands of websites, and probably more than a few thousand finance writers out there, so no shortage of coverage about debt relief. Most suggest avoiding bankruptcy at all costs, which is just silly.

There is also an extraordinary number of web sites and columns that raise HUGE concerns about debt settlement, but provide little detail about settling credit card debt, or the benefits. Perhaps they do not know much about it, or are too lazy to cover the topic in the detail needed to inform their readers, and maybe it’s a little of both.

I suggest checking your emotions and biases at the door. The numbers are unemotional and without bias, so I suggest working with your household income and expenses first. Using your current monthly cash flow as a qualifier will help you to eliminate debt relief options you cannot afford.

Along the way  you may recognize that some debt solutions offer you a way to accelerate getting out of debt and moving on with your financial future more quickly.

Calculating your debt relief options.

Add up all sources of income you have on a monthly, quarterly and yearly basis. Next, add up all of your debts. Include all unsecured debts like credit cards and all secured debts like a mortgage or car payment. You will also want to itemize all monthly expenses such as insurance, utilities, groceries etc. Don’t forget about quarterly and annual expenses such as property taxes.

Tip: You cannot fully grasp the best way to resolve your debts until you have completed this task.

When you have completed adding up your bills, separate the monthly payments you may be making toward unsecured accounts (like your credit cards) then add up all other monthly expenses and calculate the total. How does the total amount of monthly expenses without credit cards and other unsecured bills (personal loans, medical bills) stack up next to your monthly income? What amount of money is left over after subtracting your monthly bills from your monthly income (remember – do not include credit card and other unsecured debts)?

The amount of money you have left after all typical necessities are taken care of can be referred to as your debt solution fund. The amount of money in your monthly debt solution fund is what you should start with when evaluating which debt option can best apply to your unique set of current circumstances – weighed beside your personal and family goals over a 2 to 5 year time frame.

Simplified outline for comparing debt payoff funds with available  solutions.

Let’s assume you have $20,000.00 in unsecured credit card bills. You have $300.00 left after all your bills (other than the credit cards) are paid. A consumer credit counseling agency offering a debt consolidation plan will typically be able to get your monthly payments on the 20k of credit card debt reduced to an average 2.1% of your combined balances. With this type of debt consolidation your new monthly payment would be estimated at roughly $400.00 each month. You do not have $400.00 left over to keep up payments on the credit cards. You can now eliminate a credit card consolidation service from your list of debt solutions.

Next in the process of elimination is to consider debt settlement for someone with the above amount of credit card debt, and monthly cash flow, as a way to avoid bankruptcy.

Debt settlement plans are typically sold as an affordable way to save the $300.00 monthly in an escrow account until enough is saved up to settle with creditors.

Let’s assume the $20,000.00 can be settled for $10,000.00 (it is not unusual to cut balances in half with debt negotiation). In order to save up the 10k at a rate of $300.00 a month it would take about 33 months. In this simplified example, debt settlement appears to be an option that could work.

There is far more to the debt settlement process to understand before you should decide whether to pursue this option. You can  learn a great deal more about debt settlement solutions starting with the intro to negotiating your debt.

If credit counseling is taken off the table as a mathematical impossibility, and debt settlement is later eliminated as unworkable, that leaves us with bankruptcy.

Chapter 7 bankruptcy is not an end solution, but more a beginning.

An uncomplicated chapter 7 bankruptcy can cost between $1,500 and $2,000. Let’s assume your bankruptcy will have a total cost of $1,800 from start to finish. With $300 available you will be able to pay for the chapter 7 bankruptcy in 6 months.

If you simply can no longer meet your required monthly minimum payments, or have already missed payments, you will typically focus on debt settlement or bankruptcy as workable debt solutions.

Combining basic math with all that you will learn throughout our free online education, you will be in the best position to make informed decisions about options for debt relief. I already mentioned that there is a great deal of misinformation and bias about different debt intervention options. But when you distill your current situation down to what you can do vs. what you heard you could or should do, you can better filter out incomplete information and the biases that abound.

It is also important to understand that a good amount of the coverage in the media about workable ways to get debt relief are the result of companies offering one or the other solution. That kind of bias is hard to avoid when you are researching what you should do about your debt.

The credit score bias to avoiding bankruptcy.

Many will have a concern about debt relief solutions and the credit report and credit score impacts of each. You may be wondering how long it will be before you can access fairly priced credit products again.

Combining credit reporting and scoring concerns with your current financial abilities (the math) may cause some readers to rule out bankruptcy. But once you understand the cost benefit of bankruptcy and dispel some of the myths about how different debt relief strategies affect your credit, you may find chapter 7 bankruptcy to be a mathematical winner.

You may also learn that bankruptcy would actually provide you access to fairly priced credit products in a time frame consistent with your goals, and sooner than using either a credit counseling service, or by settling your credit card debt.

Being broke because morally you should try to pay your debt.

Here is an example of how math is a better argument than the morality of debt and money made by people who are not in your shoes, and are otherwise clueless about many debt relief details.

Let’s say you have already missed credit card payments and would barely be able to afford to enroll with a credit counseling deb consolidation service. You should be concerned that even though your monthly credit card payments are lowered, and penalties have been removed, you would be one unexpected expense away from not being able to meet the now lower monthly amount due.

The debt consolidation approach seems like the moral and ethical thing to do, but you are spread too thin. The math may suggest you could qualify for credit counseling, but you would be one flat tire away from not making your monthly payment and getting dropped from the plan. Regardless of the preference to pay back what you owe, other factors suggest debt settlement or bankruptcy would be the more logical choice.

Consider that less than a third of people that enroll in a credit card consolidation program through nonprofit agencies actually complete them. Much of the failure and drop out rates with debt consolidation are because people want to pay back what they owe, but cannot. Many should not try to consolidate credit card bills, but so many thousands ignore the math until it cannot be avoided.

Narrowing down which debt relief solution will work for you is not complicated or difficult. We highly recommend reading through our debt relief program in its entirety. You can participate in the comments at the bottom of every article, or can start right here by posting questions and concerns at the bottom of this page in order to get feedback about the debt relief options you want to understand better.

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  1. Lynne says

    I’m currently struggling (basically paying nearly all my net income to make minimum payments) with credit card debt. If I stop paying on these accounts and work with a debt settlement or consolidation company, do you think this would benefit me?

    • Michael Bovee says

      If you are only making minimum payments on your credit cards, and there is little to no room left in your budget at the end of the month, it can feel like you are on the “pay forever plan”… where you are stuck paying minimums for more than 20 years in some instances.

      Debt consolidation companies are often defined as both debt settlement and credit counseling. I encourage you to consider both options as solutions to your debt. They are very different ways to obtain the same thing… reducing or eliminating debt.

      If you post the interest rates you are paying now, and on what credit card balances, I can help you compare the affordability and time lines involved with both solutions.

  2. Dan B. says

    Hi Michael, I have about 40k in credit card debt, and just reached the point where paying everyone is nearly impossible. I talked with a credit counselor and while my interest rate was reduced 2 of my payments actually went up a bit, crazy! Since overall it won’t reduce my monthly payments much at all, I declined their offer.

    In fact, I got a slightly better deal with Chase on my own than with the credit counselor. Right now they are offering me 60 months at 0%, which sounds like a great deal, but only saves me about $30 a month on a $10k balance (I’m current on the other $30k). So I’m not sure I can sustain that for 60 months. I’m 60 days behind on Chase, if I wait another 30-60 days do you think I’ll get a better deal? Or if I decline is my next option settlement?

    Overall, I only have about $10k to use for settlement, so not sure if that is enough for $40k in debt. Unless I borrow from my retirement, but the penalties are steep (understandably). So I’m looking for some help deciding what to do. Thanks!

    • Michael Bovee says

      Chase is not the only bank that will offer hardship payment plans direct to their account holders. Who are the other banks you have credit cards with?

      There is not a better repayment plan with Chase, or any of the other major credit card banks, than what you were offered (zero interest with payments stretched out 60 months). Discover is an exception with their 60/60 plan (you pay 60% of the balance over 60 months, but the plan is not offered to everyone, and requires you to have missed payments), and there are one off pilot programs from time to time, but are generally not public information.

      If you decline the Chase zero percent payment offer, your next best solution would be settling with them. Your settlement savings could be impacted by the fact that you are current with your other creditors (if you stay current). If you were to attempt negotiating and settling all of your credit cards, it would be unusual, using today’s settlement trends with most banks, to get through it with a 25 percent average. You will have about 5 more months to save up (since you are current with most credit cards – you generally get the best deals in first stage settlements just before accounts reach 6 months late), how much money will that extra time allow you to add to your settlement war chest?

      I can help you get a better grip on what settlement will look like if I knew the credit cards you have, and the rounded balances on each.

      I do not encourage credit counseling repayment plans, or direct from creditor hardship plans, unless you are confident you can pay each and every month (dependable job, steady income, smaller odds of unexpected expenses).

      Settling your credit cards is an alternative to bankruptcy. Post a follow up reply with some additional account details, and lets compare the costs between the two.

      Also, it would be good to include what your credit and finance goals may be in the next 24 to 36 months.

  3. Dan B. says

    Thanks for the response.

    I also have a Discover Card with a $10k, BOA with $3k, AMEX with $3k, and my wife’s ATT Universal Citi with $18k. I plan on paying off the AMEX with savings since the monthly payment is so high and it will buy some needed monthly relief. Most of the % rates are around 12-15%.

    My only goal is to get out of debt. I don’t care what it does to my credit, since now my credit is worthless with so much debt. I already own a house, don’t have car payments, have cut as many bills as possible. Have one kid in college and another in the fall. Any advice is appreciated.

    • Michael Bovee says

      Lets assume credit counseling is not a good idea for you, which would likely rule out your own DIY hardship payment plan approach with the remaining credit cards too.

      Realistic expectations for settling with those banks may look something like this:

      Settle with ATT Universal Citibank for roughly 7k (potential to hit a better settlement with an additional 1,000 to 1,500 saved, but not something to plan on).

      Settle with Discover for 50 percent, so add 5k. If you are short of some cash flow funding targets, and Discover offers the 60/60 plan for your account, this may be a good idea, depending on where your at 5 to 6 months from now.

      Settle with Bank America for roughly 1,200. Settlement with BofA could be lower by a couple hundred dollars.

      Settle that Chase account they offered you zero interest on for roughly 4k, with a shot at hitting lower.

      I realistically estimate you would need about 17k to settle all but your Amex credit card. If you throw in the Amex pay off, you need 20k. You have 10k now, how much more will you be able to add to that in 6 months?

      You mentioned getting payment relief by paying off AMEX. What would it look like if you used your 10k to pay off not just AMEX, but the next highest interest rate you have, followed by an aggressive debt roll up payment strategy? I know you mentioned getting out of debt quickly being the number one priority, and that your credit scores and reports are in the rear view mirror for the time being, but I should point it out as an option.

      The ultimate debt relief solution using a cost basis for your situation would be chapter 7 bankruptcy. The national average costs for chapter 7 are roughly $1,800.00, which beats heck on the 15 to 20 thousand dollar settlement estimates I gave. You would have to qualify for that with your states means test, and your home, cars, and other assets would also become part of the discussion too. I will leave bankruptcy out for now unless you care to bring that fully into the discussion.

      Do you have any intentions of taking out plus loans for your kids college costs?

  4. Dan B. says

    I thought about using the entire $10k to pay off as much debt as possible, but hate having no safety net. And afraid that won’t do enough to get the snowball rolling in the other direction.

    Already paying one plus loan, and anticipate another in the fall.

    Of course, I realize the need for more income not just a debt plan. Had an online business and taught some classes to supplement my job income, but that’s dropped from a high of $25k per year to about $2k year right now, working to fix that but not easy. If I could get back to that level, I’d be all set.

    The easiest (but costliest) is to dip into retirement. Afraid of losing more than just debt with bankruptcy. No simple answers, but not seeking any sympathy, just a right direction.

    • Michael Bovee says

      The bankruptcy could, and likely would, impair your ability to get the plus loan in the fall. And if you would lose assets to the bankruptcy, that you could sell and get rid of the debt outside of bankruptcy, well, that is that.

      Settlement is a good fit. Have you read through the first stage settlement debt relief guide here on the site yet?

  5. Dan B. says

    Thanks, bankruptcy doesn’t sound like the right fit for me.

    I have read your articles on settlement, my only concerns are the lack of funds and the stress of having to manage the process. I’ll give it some serious thought. Thanks for all your help!

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