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What options exist for dealing with credit card debt?

Because credit card debt is so common in the United States, many people fail to see the debt as a problem until it has snowballed. Credit is useful and invaluable in many situations, but sometimes life intervenes and circumstances change in ways that make repaying incurred debt difficult if not impossible. Examples of such circumstances include job loss or reduced hours, health emergencies, unexpected family additions, or the need to provide care for a loved one. For many people with high levels of credit card debt and limited income, the problems extend beyond financial stress to include delinquent payments (and the resulting late fees) and creditor harassment.

Fortunately, there are various options for people struggling with debt. The first step is understanding which options are available and then analyzing the particular circumstances to determine which option is most useful for a consumer's particular situation. Four general categories of potential solutions are self-help remedies, debt relief services, debt consolidation and bankruptcy.

Although "self-help" remedies may seem insufficient, they can take make different forms and can be quite useful. For example, developing a budget to keep track of income and expenses can set many people on the path to financial stability. Contacting creditors also falls under self-help. Communication with creditors can result in a modified payment plan or other arrangements that can alleviate some immediate financial stress. Understanding the federal laws related to collections can also be useful in reducing or eliminating creditor harassment.

Debt relief services can take many forms but generally involve advice on dealing with debt and expenses and help in creating a repayment plan. It is important to carefully investigate any potential debt relief services, however, to ensure the companies are not unscrupulous and intending to take advantage of people while providing limited aid. Credit counseling provides similar advice on money management, developing a budget, and understanding your full financial situation. Debt settlement programs can also help eliminate debt in certain cases, but there are often risks involved, especially since this remedy is often provided by for-profit companies. In contrast to debt relief, debt consolidation simply repackages debt--often in second mortgages or home equity loans--to take advantage of lower interest rates and reduce the overall number of bills. Finally, bankruptcy remains an option for many people and--depending on the particular situation--it can be quite useful in eliminating debt and financial stress.

Source: Federal Trade Commission, "Coping with Debt," Nov. 2012

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