Terry Savage

Q: Because I was out of work for nearly a year, I have so much credit card debt that I can never repay it. What's better -- credit counseling, debt negotiation or bankruptcy?

A: It's important to know the difference between these alternatives and choose the one that best solves your problem and has the least impact on your future ability to borrow. And it's important to get competent help you can trust to guide you through this decision.

There are many rip-offs out there, promising help and charging steep fees. That can only add to your woes. But it's even worse to ignore the situation and hope the debt collectors will give up on finding you.

America does not have debtors' prisons, but many lenders and collection agencies are going to court to get warrants to arrest borrowers who default on loans and ignore court orders.

Debt collection agencies have stepped up their collection lawsuits, and many states, including Illinois, are taking action to make sure that debtors have been properly notified.

There are a range of options for dealing with your debt before jumping into bankruptcy.

The place to start is with an agency affiliated with the National Foundation for Consumer Credit (NFCC.org). There are more than 800 such offices in every state, staffed by certified consumer credit counselors. You will be automatically connected with the nearest office by calling (800) 388-2227.

These nonprofit agencies either offer free counseling or charge only a nominal fee. Although you can receive counseling over the telephone, it's better to gather all your bills, collection notices and other financial information, and schedule a meeting (which does not go on your credit report).

The agencies can also set you up with a debt-repayment program. They notify all your creditors, and typically get interest charges and penalties waived or reduced. Then you make one monthly payment to the agency, and they send out reduced payments to each creditor who agrees to this setup.

Most creditors are happy to cooperate because they'd rather receive a lower payment than none at all. This type of payout arrangement does negatively impact your credit report, but at least it shows that you are dealing with your debt.

Let me wave a big red flag here. There's nothing wrong with trying to negotiate a lower payoff with your creditors, or getting an agency to help you do it. But you can't negotiate if you have no money to offer.

The whole idea of debt negotiation is that you -- or an agent -- offer the lender an immediate settlement in cash to fully settle your outstanding debt. (And be sure you get a written confirmation of the deal.) But first you need the cash to make the offer.

Terry Savage

Terry Savage is a nationally known expert on personal finance and a regular television commentator on CNN, CNBC, PBS, and NBC on issues related to investing and financial markets.

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