How to Live Debt Free - 12 Steps to Total Financial Freedom

- Proverbs 22:7

In step 5, we will discuss types of debt and debt relief options that are available to consumers. We will discuss two types of debt categories; unsecured and secured.

Credit card debt is just one example of unsecured debt. Other examples include medical bills and signature loans.

Credit card companies spend millions of dollars trying to convince people all over the world to use credit cards. Credit cards used wisely can be a great help to manage short term cash flow shortfalls. When not used wisely they can create a lot of problems since credit card company's main source of profits is from people who are late in their payments and over limit fees, which is why some people compare credit card companies to the loan sharks of the old days.

The difference between secured and unsecured debt is with secured debt, property is used as collateral, such as your home or car. If you experience financial difficulty with your mortgage or car loan, the bank can foreclose on your home or repossess your car.

There are debt relief options available to consumers that experience financial difficulties with their unsecured debt. Since there is no property involved the banks only options would be to charge off the debt as uncollectable. They usually sell this debt for between eight and twelve cents on the dollar to a debt collection agency. Their other option is to sue for a judgment but few credit card banks will do this. You may have a problem with litigation with high medical bills unless you have a third party act on your behalf to settle the debt.

There are some options for debt relief that are available to consumers, each having their own set of pros and cons. They include bankruptcy, debt consolidation, consumer credit counseling and debt settlement and negotiation.

Thanks to a change in the bankruptcy law reform recently it has become almost impossible to claim Chapter 7 bankruptcy, which is total liquidation. There is also Chapter 13 which is a debt repayment program. The problem here is that the repayment terms are usually unrealistic and can only be considered after a consumer gets credit counseling from an approved agency.

This develops another series of problems however. The companies that are approved belong to the consumer credit counseling industry and really do nothing for the consumer to help with their debt. They are essentially companies that serve as an extension of the collection arm of the credit card companies. They do not have the consumer's best interest at heart. They get funding from the credit card companies in the form of voluntary donations. They will negotiate interest rates with the credit card banks but you will end up paying the entire debt back plus interest. Their programs are usually seven years in duration.

This type of program has many pitfalls for the consumer and other debt relief options should be explored.

There is also debt consolidation where you borrow money using your house as collateral for the debt. I highly suggest you take some things into consideration before getting involved with a debt consolidation loan such as; does it make any sense to try to borrow your way out of debt? It doesn't make much sense.

Also, now what was once unsecured debt has become a secured debt. Get into financial trouble again and your house is now on the line.

The only solution that is viable for consumers suffering a true financial hardship is debt settlement. Also called debt negotiation. This program focuses on the entire balance of your unsecured debt and settlements can be made at around forty to sixty percent, including program fees.