My wife and I are working really hard to get out of debt. We are overwhelmed with 5 credit cards, 2 car loans, student loans for both of us, a mortgage, and furniture that we financed. We now clearly see the mistakes we made and the dangers debt can present. I've been doing some research to figure out the best way for us to pay off the debt without going bankrupt and am confused between debt consolidation vs debt settlement. Can you explain and recommend which is best?

Drowning in Debt

Dear Drowning in Debt,

I am so sorry for the pain and stress you are experiencing. That kind of financial burden can be crippling and have devastating effects on your health, relationships, and financial future. My wife and I suffered under crushing debt early in our marriage so we are compassionate toward those who have made similar mistakes.

The good news is that you CAN work your way out of this. Debt consolidation and debt settlement options are tempting because they seem to lance the pressure. But, I do not recommend either one. Here's why.

Debt Consolidation

This is a process where debts are combined into one loan, making it easier to pay one bill than several. But it has some major drawbacks:

• There is no guarantee that your overall interest rate will be lower
• Your interest rate is influenced by past payment history and credit scores
• They promote low interest rates but usually increase them after a period of time
• Even though your debt is restructured and your payments are lowered, the term of your loan is lengthened, so the total amount you pay will be greater
• It will not work if there is too much debt or if you continue to accumulate debt

Other Forms of Debt Consolidation:

1. Transferring Your Balance

Transferring your balance on a high-interest credit card to a low-interest credit card can be an option, but only for those with excellent credit scores (above 700). Again, even this option comes with hefty drawbacks: you may be charged a fee of up to 5% of the balance, you cannot miss or fall behind on any payments, and interest kicks in after 12-18 months. You can read more about it here.

2. Personal Loans

Personal loans via banks, credit unions or online lenders charge a lower fixed rate than credit cards. Origination fee, prepayment penalty, and collateral (home or car) may be involved. Your new loan will have a fixed interest rate and a fixed monthly payment.

3. Home Equity Loans

Home equity loans are secured by your house. The danger with these is that you could lose the house if you don't keep up with the payments. They typically have lower interest rates than an unsecured loan and do not require good credit, but repayment terms can be 10 years or longer.

4. 401K Loans

401(k) loans have significant drawbacks. With lower interest rates than unsecured loans, you are borrowing from yourself. The loan is not counted on your credit report. However, it reduces your retirement fund, and charges heavy penalty and fees if you cannot repay. If you lose or leave your job, the loan is due in 60 days. Ouch!

Debt Settlement

This is a dangerous method that entices desperate consumers. Avoid it!

Supposedly, companies negotiate with creditors so people can pay less than what is owed. The settlement company charges you before they settle or reduce your debt. The Federal Trade commission has been involved in numerous cases where companies simply walk away with the fee.

Pursuing debt settlement is risky, and I would say unwise, for several reasons. First, you're using debt to solve a debt problem. While I understand how desperate and overwhelming debt can become, turning to these last-resort solutions puts you in greater danger and prevents you from making more progress.

Additionally, the debt settlement process can take two to three years, accruing late fees and penalties during that time. It negatively impacts your credit score and remains on your credit report history for seven years. Typically, you'll pay a fee of about 20-25% of the final settlement and may be taxed for the amount forgiven. You can get sued if you haven't paid; you're not guaranteed that the creditor will agree to the settlement, and settlement companies are never motivated by your best interests.

Income - Expenses = Savings

Below are a list of suggestions to help you find more money in your budget to pay off debt. Some are extreme, and could even be painful, but remember that your goal is to get out of debt as fast as you can. The overwhelming pain and stress you're feeling now is worse than any of these solutions!

I suggest you choose to live like your poor. That doesn't mean you will be miserable. In fact, the benefits far outweigh the stress of debt. These are temporary remedies that will alleviate some of the immediate pressure and help train you to handle money responsibly.

• Increase your income and apply the extra money toward your debt.
• Sell your cars and carpool with your spouse, neighbors, coworkers, or friends.
• Sell other valuables or have a garage sale.
• Reduce expenses to necessities only to save like never before.
• Live with family/friends for a year and apply rent/mortgage to your debt.
• Stop eating out and cook inexpensive meals at home.
• Sell your pets to eliminate food, boarding, vet, and grooming costs.

Plan for Progress

A debt management plan is typically a three- to five-year program involving counseling and education so you don't find yourself in the same predicament a decade from now. You'll pay back the loans without creating more debt. I highly recommend Christian Credit Counselors; they've been our trusted partners for years and can walk you through this process the right way. Get in touch with them and start a free debt analysis today.

Things that you can start on your own:

1. Make a budget
2. Use the Debt Snowball Method
3. Go through the 30-Day Money Reset

Credit should never be "normal" for Christians. The only debt that it good for us is found in Romans 13:8 and, that should be your ultimate goal in your debt payment plan: Owe no one anything, except to love each other, for the one who loves another has fulfilled the law.

We have many free resources to help you in your journey out of a bad financial situation. Take it one day at a time. Start small and don't give up until you are free!