The current recession is a result of a confluence of economic factors that have been building over a period of decades. After the terrorist attacks of September 11, 2001, the Federal Reserve cut interest rates and held them down for the next several years. This fueled an unprecedented expansion of debt as easy credit enticed real estate speculation and refinancing of existing homes as owners pulled out their equity and converted it into cash. This credit bubble continued to feed on itself as mortgage loans were granted to people who couldn’t afford them, and the use of credit card debt exploded.
This was a house of cards waiting to crumble, and cracks began to appear as investment banks that had leveraged complex debt instruments began to unwind as secured asset values plummeted. Many people borrowed more money than they could ever afford to repay, even in good economic times. As the bubble started to burst, and jobs began to be lost, this compounded an already growing problem of unpaid mortgages and consumer loans. As a result, mounting levels of unpaid debt are weighing heavily on the economy’s ability to start a meaningful recovery.
Video: What is a Recession?
Choosing the right debt option
The first thing to do is to assess your current financial condition consisting of a list of all your assets and liabilities. The difference between the two numbers is your net worth. In addition, compile a statement that lists your monthly income from all sources and your monthly expenses. If your expenses exceed your income, then you clearly need to find an immediate solution that brings you to a balanced budget position. Assembling this information is important in order to determine what kind of help you may need, and whether or not you should seek the assistance of a financial professional. It will also save you time because a professional would need that information in order to put together a financial recovery plan.
The key to successfully executing any plan is the discipline required to stick with it over an extended period of time. It may take several months or years for you to achieve the goal of getting your debts under control and within your ability to pay them off. It also takes the recognition that you got yourself into this dilemma and blaming others will not help you achieve your objectives. If you lack the willpower and determination to do this on your own, then the assistance of a debt relief specialist may be a good idea. Together, you can assess your situation and prepare a realistic budget that will put you on a positive path to recovery. While this help may cost you money in the short term, the advice you receive will be more than worth it in the long run if you are able to avoid bankruptcy and the loss of your credit rating. A good counselor has the experience and connections to negotiate with creditors and work on your behalf to reduce your debt load as efficiently as possible.
Debt relief alternatives
These are a few of the most common approaches to debt relief:
Credit Counseling – This is usually available to those who still have reasonably good credit scores, and are looking to reduce their interest rates or avoid late payment fees and penalties. Choosing this option may lower your credit rating since some lenders regard this as a form of bankruptcy.
Debt Negotiation – Negotiate with creditors for lowering the interest rates, extending the repayment period of the loan, or writing off part of the principal balance of the loan.
Debt Settlement – This is one of the best options since it offers a solution to high interest rates and several other benefits. Generally, you stop paying interest and obtain a reduced principal amount, allowing much lower monthly payments.
Debt Consolidation – This allows the debtor to consolidate all his debts into a single loan at a lower interest rate and longer repayment term. The primary advantages are that the debtor now has only one loan to worry about, is paying less than before, and maintains his credit rating. The disadvantage is that there is typically no reduction in the principal owed.
Bankruptcy – This should be the option of last resort since it will destroy your credit rating and a judge will control your financial life for the foreseeable future. You also will incur an additional liability for attorney’s fees and tax consequences. This option is available to those who have no ability to pay off their debt, and the other options won’t adequately solve the financial crisis.
The option you select will be dependent on your unique circumstances and future outlook, such as income stability and projected expenses. The key is your ability to repay in a consistent manner that will cure your debt addiction and get you on the road to becoming debt free.
Video: Debt Relief Options (FindLaw)
There are several government programs aimed at helping consumers conquer their debt problems. At the conclusion of this article, several links are listed that will provide comprehensive information on various agencies that have programs in place to provide timely financial assistance. The Department of the Treasury has implemented new efforts to help debtors, including the elimination of taxation on the forgiven portion of a mortgage loan. The Internal Revenue Service offers an Offer-in-Compromise program that allows taxpayers to negotiate a binding settlement for their back taxes. It is a mutual settlement for a reasonable amount of the taxes owed, which may be less than the actual total. Now is a good time to seek relief since there is no way to tell how long the government will continue to support its current efforts to help struggling consumers.