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Drowning in debt? Here are your options

There are several options, though none is easy.  In general, those in debt should never sign up for a service that requires a large up-front fee. Here's a look at your choices: 

Debt consolidation: Using a single loan – such as a home-equity loan -- to pay off multiple debts at full price. The benefit is usually lower interest rates, and this option is generally credit score neutrala big plus compared to the other options.  Unfortunately, debt consolidation isalso far less common since the economic collapse of 2008, as banks are far less willing to give out home equity loans today.

Credit Counseling:  Involves paying a small fee – usually under $100 – to a service that offers budgeting advice and will negotiate lower fees and interest rates with debtors. Debtors pay the counseling service, which in turn pays the lenders. These nonprofits sometimes receive financial support from credit card companies. Still, Consumers Union says credit counseling is often the best choice for consumers who are struggling with high interest rates but capable of paying back their debt.  Debt counseling will impact a consumer's credit score, but not as severely as default. And it's not magic; according to this story by MSN Money's Liz Weston reveals that counseling programs have a 45 percent dropout rate. To find a debt counselor, visit the National Foundation for Credit Counseling.

Debt settlement: Offering a creditor, such as a credit card company, a lump sum payment on a debt at a negotiated lower amount. For example, a consumer who holds a $12,000 balance on a Visa card might accumulate $8,000 and offer to give the issuing bank that amount in exchange for forgiveness of the rest of the debt. There are hundreds of firms that claim expertise in these kinds of negotiations, and have advertised aggressively since the onset of the recession.  However, consumers can engage in these kinds of negotiations on their own.

Debt settlement comes with many caveats.  First, many debt-settlement firms will instruct consumers to stop paying their bills and instead contribute to a special checking account set up by the settlement company.  At the same time, consumers are told to cease all contact with their creditors.  This tactic is designed to look and feel like a credit counseling arrangement, but it's often deceptive and gets the consumer into more trouble.  Creditors don't take kindly to being ignored and often file a lawsuit.  Also, even a successful debt settlement will have a dramatic negative impact on your credit score, as future creditors will consider it an unpaid or partially-paid bill. Finally, debt settlement can incur a tax liability, as the IRS may consider the forgiven portion of the debt as income.

Bankruptcy: A federal judge will consider your debts and assets, and decide which debts get paid and which get erased. While bankruptcy is sometimes the only option for some consumers, it has the longest negative impact on credit scores.

For more information, consult these prior stories

Debt cut in half? Don't count on it

Will cut your debt ads stampede to Web? (Explains new FTC rules aimed at tamping down debt settlement ads)

For teacher, tough lesson in debt settlement