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How to Get out of Debt: An Overview of Debt Consolidation and Debt Settlement

Updated on August 21, 2015


By the mid-aughts, the average American carried a debt load that includes over $9,000 of high-interest credit card debt. Add to this tens of thousands of dollars of home and college loan debt, and it is not surprising that over a million people per year seek bankruptcy protection. However, declaring bankruptcy is not nearly as easy as it once was, nor is it a good option for most. That leaves debt consolidation and debt settlement as the most viable alternatives for most to get their personal finances back in order.

Debt Consolidation

Though it can several different forms, when you choose any debt consolidation option, you will likely get a single, low interest loan to pay off all your debts. This allows you to end harassing phone calls and crippling late payment charges. You can also stop the extremely high interest rates that are typically charged by credit card companies – often 30% annually or higher – when payments are missed.

Most companies that offer such loans are for-profit companies, though some are non-profit organizations. When taking out a consolidation loan, some companies will loan to you based upon current employment, though many others prefer to secure the debt against the equity in your home. It's important to note that when you secure a debt with your home, any difficulty paying one off can find you homeless rather than simply bankrupt.

No matter how many creditors you owe money to, as long as the interest rate of the loan you receive to cover them is lower, you can save a significant amount of money over the lifetime of your likely debt. Since the terms of debt consolidation loans are usually several years, it's important that you guard against paying more on that loan than you originally owed – interest, fees and all.

Deb Settlement

Debt Settlement

For many with short-term debt or low-interest debt that has become a hassle, it's preferable to offer each debtor a deal they can't refuse. This can sometimes be accomplished through a credit councilor or mediator, though individuals can also do this themselves with a certain amount of caution. Either way, debt settlement is a viable option that can help you get better terms on the money you owe or help you pay it off faster.

Whether dealing with credit card companies or government secured loans, no debtor is required to make a deal with you. However, it is often in everyone's best interest to make arrangements you can actually meet, rather than getting late and irregular payments from you or even selling your debt to a collection agency. If you can make a reasonable offer, the odds are often good that they'll accept.

You can also shop around for another card to transfer your balances to with low or no interest on transferred balances – just be careful to read all the fine print and be on the lookout for fees and draconian punishments for even a single late payment.

Debt settlement, no matter what form it takes, is best accomplished when you actually have the means to make an immediate pay-off, even if you can only offer a fraction of the total on an old debt. More often, however, you'll be setting up a payment plan that you can easily handle paying off in ample time each month. Since most companies have very little patience with those who make alternative payment arrangements and don't keep up with them, late payments are strictly off limits after coming to a deal.

Whether you choose debt consolidation or debt settlement, the goal is to pay less over the long run and return your credit to good standing. Always pay attention to interest rates, what is at stake if you can't pay and the term of the contract. With just a bit of math and some help from a certified credit councilor, you can easily figure out the best course of action for your entire debt or just the worst of it.

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    • knowledgeispower profile image

      knowledgeispower 8 years ago

      Great hub on debt consolidation.


    • profile image

      debt settlement 9 years ago

      Debt settlement saved me from bankruptcy, and it was the smartest decision I've made in a long time. Thanks for sharing your POV with people.

    • Julie-Ann Amos profile image

      Julie-Ann Amos 9 years ago from Gloucestershire, UK

      You have a duty to yourself and your family, as well as those you borrowed the money from. You need to balance your two obligations and ensure you meet both, to the best of your conscience

    • profile image

      ibelievesoiam 9 years ago

      You see, Mrs./Miss Julie -Ann Amos, your page had a releveance to me for I am in debt. The options that you have given are the solutions, yes; ones that a few of my friends had suggested to me. That was the only way I could "free" myself from life-long burden - settling the amounts I owed for lesser by pooling my available resources.

      But I have been always honest and this manner removing debts leaves a sense of deep guilt in me, for the fact remains that I did borrow the amounts. I am unable to even say that I will not be able to furnish the interest, let alone the principal amount and am continually hoping that my fortunes change so that I may pay them all in full.

      This is, indeed, an unrealistic approach as many have pointed out. However, I am not able to come out of such a pattern of thought.

      How do I get over the permanent feeling of guilt despite my intention to make good my dues?