I have too much debt, what can I do?
You have four basic options.  You can do nothing, you can attempt to settle the debts with your creditors, you can engage in debt management (sometimes referred to as credit counseling) or you can file bankruptcy.

If I do nothing my problems will go away?
Doing nothing is not an option for most people.  In specific cases, when your only income is social security benefits, disability, or welfare and you have no assets then you are considered “judgment-proof.”  That is, even if your creditors get a judgment against you, they will not be able to garnish your wages (all your income is protected) and they will not be able to file a lien on your property (you have no property subject to a lien).

But what if I do earn a regular paycheck and have some assets, can I still do nothing?
You can elect to do anything if you choose, though it will eventually catch up with you.  Creditors will obtain legal judgments against you and they can begin garnishing your wages and putting liens against any property you might own.  If you have property that can be obtained by creditors, taking some affirmative action is in your best interest.

Okay, I want to do something about all this debt, but I can’t afford to even pay off the interest every month.  What can I do?
Depending on your financial situation, it may be in your best interest to just pay the whole debt off, but at a reduced interest rate and over an extended period of time.  This is what’s called “credit counseling.”  A credit counselor works with your creditors to work out a payment plan that will eventually satisfy the entirety of the debt.

I really can’t afford to pay off the entire debt, are there any alternatives?
The two most readily available alternatives are debt settlement and bankruptcy.

How is debt settlement different from credit counseling?
With credit counseling, you are paying off the entire debt over an extended period of time.  With debt settlement, an experienced debt negotiator attempts to lower the amount owed to the creditor so that you can pay it off all at once.  With debt settlement, you save up as much money as you can and then your negotiator offers that amount to your creditor in hopes that the creditor will eliminate the entire debt for that amount.

How much is my debt reduced through debt settlement?
There are literally dozens of factors that will influence how much your debt can be reduced and even whether or not creditors will even settle in the first place.  How much you owe, how long since you’ve last made a payment, how much you earn, who the creditor is, how the creditor is doing financially at that time, etc.  Because these factors can change day-to-day, it’s impossible to make any guarantees regarding how much debt can be settled.  Don’t be fooled by any company that makes any guarantees regarding how much your debt can be reduced.

What if I can’t afford to pay my debts through credit counseling or even save anything for debt settlement, what can I do?
You should explore the option of filing bankruptcy.

What does it mean to be bankrupt?
Bankrupt is a legal term used to describe someone who is legally insolvent.  In more casual language, it means you are unable to pay your debts as they become due.  Upon a voluntary petition (or, less frequently, a petition by creditors), you can ask a court to find that you are legally insolvent and be protected from creditors.

Are all bankruptcies the same?
There are six chapters of the bankruptcy code, located in Title 11 of the United States Code.  For the vast majority of consumers, only two chapters are important to understand – Chapter 7 and Chapter 13.

What is a Chapter 7 bankruptcy?
Chapter 7 is a “liquidation” bankruptcy.  If you qualify under Chapter 7, an appointed Trustee will liquidate, or sell off, all of your non-exempt assets.  The money made from the sale of those assets is used to pay creditors off.  The sale and payment to creditors will satisfy the entirety of your debt regardless of how much the creditors actually receive.  If you have no applicable assets to sell, then there will be little or no money at all going to the creditors and it still discharges all of your debt.

Does a Chapter 7 mean the Trustee will take everything?
Chapter 7 liquidation does not mean the trustee will take everything and sell it.  For instance, you are allowed to exempt your home, some personal property, some insurance benefits, and most of your wages.  One way to think about it is if you depend on it to live, you can probably exempt it.

How is a Chapter 13 different from a Chapter 7?
Chapter 13 can be thought of as more of a reorganization of debt rather than a total discharge.  Under Chapter 13, you propose a plan to pay your creditors over a 3 to 5 year period.  Generally, you will be required to pay as much as you can afford each month. That is, you figure out your monthly income, you subtract your reasonable monthly expenses and the difference is what you have to pay to the trustee.  One of the biggest advantages of filing under Chapter 13 is that you get to keep all of your property.  However, you are obligated to make timely payments over the 3 or 5 year period.

I heard it’s nearly impossible to file bankruptcy these days, is that true?
No. Although the new 2005 law made the bankruptcy code stricter regarding Chapter 7 bankruptcies, it is not impossible.  Chapter 13 bankruptcies were not affected in any significant way.

How do I know if I qualify for Chapter 7 under the new law?
Basically, the 2005 law requires application of a “means test” to all Chapter 7 petitions for bankruptcy.  In this case, “means” is your ability to make some kind of payment to your creditors.  A common determining factor for whether or not you will qualify for Chapter 7 is whether your income falls above or below the state average income.  The average income is determined by family size.  A good rule of thumb (though not perfectly accurate) is if, when you subtract your expenses from your income, if you can afford to pay $160 or more per month, you have to file a Chapter 13.

Since there are so many options, what’s the best choice for me?
Because there are so many factors that can influence which choice is best, it’s a good idea to consult an established professional in the field of consumer rights.  Also, because new companies are springing up every day that claim to be experts, you should be careful who you consult with regarding your rights.  It is advisable that you consult with an attorney rather than a plain “debt-settlement company” in order to be fully informed and fully represented.