What is Debt Elimination?

Debt elimination is basically that – getting rid of your debt in any of several ways. Most of us have between $8000 - $10,000 worth of credit and revolving debt, and we are re-paying by making minimum payments each month, most of which go toward the interest on the debt. If payments are missed or late, the interest rate will rise still more, and more fees will be added to the total balance. It can take as long as 30 years to pay off the average household debt if minimum payments are made. As well, debtors can get in over their heads and then need to find a way to ease the pain of not enough money to pay and the stress and anxiety that comes with the situation.

So, it is a good idea to look at elimination by one of several methods:

Debt Consolidation Loans: These are loans taken out to pay off all of your other debt, and they carry a monthly payment that is less than the previous debts combined. The interest rate can be high, and you will still be in debt until this is paid off – usually 5 or 6 years. But, you can look forward to an end at least. The key here is that you have to stop charging on the cards you just consolidated, or you will be in even worse shape within a few months.
Negotiation with Creditors: You can always attempt to negotiate with creditors for a lower interest rate and/or lower overall balance. Usually, this is done before a debt consolidation loan is secured, and the creditor is willing to give some in order to get a big chunk payment at once, especially if your financial situation is tenuous and they think they might not get paid at all.
Budget Tightening: If you are not too deep in debt, sometimes the setting up of an extremely strict budget which allows you to make more than the minimum payment on one or more of your debts, can result in a debt-free status within several years – much better than the 30 years you were originally looking at.
Home Equity Loan: Some people are able to access the equity in their homes through this type of loan. They pay off the higher-interest rate debt and have a new debt at a lower interest rate. Re-financing the home and taking cash out to pay the debt can accomplish the same thing. Again, in this option, you have to stop charging and taking out any new debt, because you will be in more trouble down the road.

When Bankruptcy is the Only Option

The final resort for debt elimination is bankruptcy. There are two types, chapter 7 and chapter 13. With a chapter 13 bankruptcy, a judge determines what portion of the total debt the debtor is able to pay, usually over a period of 3-5 years. The creditors take a smaller amount in repayment, and the bankruptcy is discharged once the payments are completed. Chapter 7 bankruptcy is also referred to as a “fresh start.” In this situation, the debtor is relieved of all debt and never has to pay anything back. The bankruptcy is usually discharged with a few month of the filing, the all debt is eliminated. Although bankruptcy is under federal jurisdiction, each state has its own laws affecting what assets a debtor may keep and which he must surrender. Anyone contemplating bankruptcy should discuss all of the details with a competent attorney. It is also important to remember that bankruptcy ruins one’s credit, and it will be 10 years before it is off the credit report. Credit can be re-built gradually over a period of a few years, if the debtor is careful not to get into any other financial difficulty and pays all bills on time. Bankruptcy is the “final solution” but it does not come without cost.