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final option before bankruptcy might be negotiating a debt reduction. Again the consumer must use caution for a couple of reasons. Any reduction of debt above $600 will result in a 1099, which IRS will tax as added income. Additionally no creditor is going to reduce the debt owed unless they think that is all they will get. Therefore your payments must be 2-3 month behind which means your credit has been destroyed.

Bankruptcy

And then there is Bankruptcy. Just as debt negotiation is a desperate measure, bankruptcy is even more desperate and should be considered ONLY as a last measure. Specific advice on bankruptcy in your particular state should come from a bankruptcy attorney.

But be aware that all bankruptcies remain on a consumer's credit file for 10 years. Additionally, there are costs associated with bankruptcy. Filing fees run approximately $200 and attorney's fees vary but are not cheap. There are also two counseling courses now required by law. A budget and credit-counseling course is required before filing and a debt education course after. Course fees run about $36 to $50 each.

Most commonly, a consumer will file a Chapters 7 or 13. If a consumer's income is within the state's medium income and there is very little equity in possessions, Chapter 7 is most common. If however the consumer has an above average income or needs to protect the equity in a home or other property, Chapter 13 is required. If approved by the court, Chapter 7 excuses the debt. On the other hand, Chapter 13 is essentially a debt repayment program. It is similar to a Debt Management Program (DMP) as stated above except that it is court ordered and the time limits are less restrictive. Additionally a DMP may not even find its way to your credit report. And even if it does appear, it must be removed within 7.5 years. Bankruptcy is guaranteed to be on a credit file for 10 years.

What is the correct action for you? I don't know and only the consumer can decide that. However, getting professional advice from a counseling agency and if needed an attorney is always the best course of action.

Learn more about this author, Michael Killian.
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