Bankruptcy

Bankruptcy may seem like the easy answer, but is listed in the top five life-altering negative events that a person can go through, along with divorce, severe illness, disability, and loss of a loved one.  Very few people that have gone through bankruptcy would say that it is just a painless cleaning of your debts, where afterwords you happily begin your new life.  It affects your credit, employment, and even applying for life insurance.  Bankruptcy may be the only option for some people, but many times other options are better for you long-term.

Debt Consolidation

Debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. However, in most cases  the lower payment exists not because the rate is actually lower but because the term is extended. If you stay in debt longer, you get a lower payment, BUT if you stay in debt longer, you pay the lender more, which is why companies are in the business of debt consolidation.  It is very hard to borrow your way out of debt.

Debt Management

Debt management companies help "manage" your debt by taking one monthly payment from you and distributing the money among your creditors, with whom they've often worked out lower payments and lower interest. This is not a loan as with debt consolidation. Sometimes people get the two confused.

Debt management companies can help you get better interest rates and lower payments, but at a price. When you use one of these companies and then try to get a Conventional, FHA, or VA loan, you will be treated the same as if you had filed Chapter 13 Bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit very poor.

Budgeting & Debt Payoff

This is the best long-term option if you are willing to work hard and sacrifice for a couple of years.  You can pay your debt off if you get focused on your budget, work extra jobs, and use a proven debt payoff plan.  The are several benefits to this method of debt reduction. 

First there are no negative long-term effects to your credit, employment, and quality of life.  Second, you will be establishing the habits needed to stay debt-free and build wealth for a better quality of life.  This option, like many things in life, is harder for a little while but is best long-term.