When struggling with high credit card debt, there are several different avenues taken to alleviate the situation. The first thing to do is to sit down, don’t panic, and try to look at the whole situation and truly understand what the position is now, then figure out what exactly needs to be accomplished. Do you need to lower your interest rates and have more manageable payments? Is it a matter of simply spending less? Do you have to eliminate your debts completely and start fresh? Which way would be the best to go about that? Formulating a solid plan will help the situation and objective become clearer, rendering a better position to accomplish that objective effectively. I will discuss each option in detail and bring to light both the advantages and disadvantages of each option available to people in financial arrears.

Financial stress can be very overwhelming and often lead people to do absolutely nothing at all. In general, stress can make any situation seem that much worse and in cases of financial problems, it is especially so. The worst thing that can happen to anybody is “analysis paralysis.” That’s when someone just becomes so overwhelmed with confusion and worry that they just don’t want to think about it. In most cases, the lack of addressing a situation will only cause it to become worse. Again, the best thing to do is to sit down, take a deep breath, and then formulate a plan.

The last solution to resolving credit card debt or any large debt should be bankruptcy. Unfortunately, this is usually the first idea that creeps into the back of many people’s minds. It's a result of the inundated feeling they get when they don’t have an idea of what to do next. Bankruptcy is such a drastic move and has such a long lasting affect on a person’s life that it should be avoided if possible. However, depending on the circumstances of course, bankruptcy could be the only viable option for someone. Point being that every other possible solution should be explored prior to even considering bankruptcy.

For people with financial situations that aren’t too far out of hand, some sort of credit counseling program should be considered first. A program like this can help to reduce the interest rates, waive excess fees, and in some cases lower your monthly payments significantly. Some of the drawbacks to a credit counseling program are that they often take 5-6 years to complete and they can have an adverse effect on a credit report. Throughout the duration of the program it is possible that the banks and/or creditors could be reporting the accounts enrolled in the program as “being paid by a third party,” which unfortunately can have a negative effect on a person’s credit. One thing that has to be understood is that over the course of time, 100% of the debt would be paid back in addition to some interest and a low monthly fee that the credit counseling company would be charging for their service. In essence, much more than the actual amount originally borrowed would be paid back through a credit counseling program. In regards to the possible benefits that may be received though the use of a counseling program, it has to be understood that the counseling company itself does not dictate what benefits would be allowed when the accounts are still held with the original bank. The banks stipulate which benefits will be allowed.

Another option is to try and obtain a consolidation loan. Several accounts could be lumped into a new loan at a lower interest rate. This could help to decrease the balances quicker because a higher percentage of the payments being made are actually applied to the principal balance over the interest. It must be understood that the banks have really tightened up on lending due to the state of the economy. Even individuals with an outstanding credit score are being denied. Recently, it has become very difficult to obtain a consolidation loan without putting up some kind of collateral, which is never recommended if that becomes the case. If the consolidation loan can be obtained without collateral, meaning just based on a signature as an unsecured loan, than that is an option that may work. Nobody should ever change unsecured credit card debt into secured debt. It makes no sense to risk a home or vehicle. Using a home equity-line of credit to pay off credit cards is not worth doing if more than 50% of the equity line would be used for credit cards. It’s too much of a risk at that point. The bottom line of this option is that a person is borrowing to pay off other debt by just taking from one hand and giving to the other. It doesn't really move anybody forward.

An increasingly popular method of eliminating debt is to negotiate the debt to a lower amount through a debt settlement company in which the debt can be paid off. A person’s creditors would be paid, one at a time, by one lump sum payment to each. There are so many lending institutions and collection companies out there and many will agree to a wide range of different settlement offers, but 40%-55% of the total debt is what most settlement companies can average for their clients inclusive of the service costs.

A customer cannot be current with their creditors for any debt settlement program to work. Normally negotiations will begin around the sixth month of delinquency right before or after the original creditor would be charging it off of their books. This does have an adverse reaction to a person’s credit score initially, but it only affects a portion that reflects no more than the past two years anybody’s credit history. Two years from a person’s last delinquent month that information would no longer be available or would impact a credit report negatively. The objective is to eliminate the debt as quickly as possible. Once a settlement program has been completed a person will be in a much better position to rebound because they’ve eliminated their debt. The debt-to-credit ratio of a credit report would improve throughout the process because debts are being eliminated along the way.

While going through any debt settlement program, there is the possibility that a creditor can try to sue an individual that has defaulted on their payments. Whether a creditor will want to pursue a lawsuit cannot be predicted because it's completely circumstantial. Obviously the creditor and their legal team would have to evaluate whether it is worth it for them to pursue the matter considering the time and resources necessary for them to invest. They know that even if they win in court and receive a judgment against somebody, it does not mean that the bank will definitely be paid. One way to try and prevent a creditor from pursuing a lawsuit is to have an attorney-based debt settlement company working to negotiate the debt. If a client receives a summons to court, an attorney based settlement company could be able to contact the opposing attorneys and try to negotiate it outside of court. Typically, a creditor’s legal team would be receptive to an offer like that because they know that the debt has a better chance of being paid without them having to waste the time and resources of going to court. Debt settlement companies that aren’t attorney based or do not include legal protection as part of their services may not be able to help an individual in that scenario. That's how so many people are left to handle their accounts on their own. Having an attorney-based company that's already familiar with a client’s situation and one that would continue to negotiate the debt would be the best recourse in the event of a lawsuit.

The tax liability on forgiven debt is an issue that is normally not explained in enough detail and often misleads people into believing that it is a drawback of debt settlement. It is not a drawback when you consider the fact that any taxes paid on the forgiven debt plus the amount paid back to a creditor as part of a settlement will not exceed the original debt owed. A person will still save money by settling on the debt for a significantly reduced amount, even when the cost of service for a legitimate debt settlement company is factored in. More than that, there is an exemption from the tax liability that many people qualify for. They would apply to the I.R.S. for tax exemption on the forgiven debt on the basis of being insolvent. It is easy to apply and most people that are considering a debt settlement program can easily prove that they are a candidate for exemption.

No matter what avenue a person decides is best for their situation, they should feel comfortable and know that they’re making the right choice based on the extensive research they’ve done. They should completely understand their decision, knowing both the ups and the downs. If they’re going with a company to help achieve their objective, it is important to thoroughly check out that company’s background through the BBB and the American Bar Association for attorney-based debt settlement companies. In regards to a debt settlement company, it is especially important to make sure that the company is properly registered with that state and is abreast to the local laws. States have very strict laws concerning debt settlement companies and if they are not properly registered the risk of losing money to a company that becomes prohibited from doing business comes into play. Check with an Attorney General to confirm that they are abiding by state regulations.

The fear of the unknown is what scares people the most when making a choice of how to rebound a tough financial situation. Having the knowledge and a detailed plan in place is the key to regaining financial stability.