Archives for May 2019

While many people think of debt as being a bad thing, this is not always the case. Some debts are brought on by careless spending and can lead to problems for a person. Some debts, considered good debts, are those that are needed for big purchases such as a home. This kind of debt brings value to a person’s life. Understanding the differences in good and bad debts can help individuals to better manage their finances and even improve their financial outlook with debt consolidation.

What Is Considered Good Debt?

There are some things that are worth going into debt over. If going into debt brings you something that is going to generate an income or increase net worth, then it may be worth it. Whenever someone enters into debt, they need to be sure they carefully consider their options before making a final decision. Debt should never be entered into lightly.

Seeking a college education is worth going into debt as long as you are choosing an educational path that will lead to a solid career. Those with higher educations are generally able to secure a higher paying job. Investing in your future is always a sound decision and a good reason for going into debt.

Purchasing real estate is a type of good debt. Whether you are purchasing a home to live in or property for investment, both can improve net worth. Many people purchase a home and live it in for a few years before moving out and using the home as a rental. A rental property can bring in a steady source of income.

Starting a small business is also considered good debt. As long as you have carefully researched and are prepared to work hard, owning a small business can help to increase your net worth and income.

While good debts are considered more acceptable than bad, debt should never be thoughtlessly pursued. Whenever considering going into debt, think about whether or not the purchase is going to benefit your future income in some way. If it is not, you may be heading towards a frivolous purchase that is later a regret. Many people who get in over their heads with debt find themselves there because of poor financial decisions.

What Are Bad Debts?

Bad debts are those that are used to purchase items that will not add value or will depreciate over time. Generally speaking, you should avoid debts that will not increase your net worth or add income. For this type of purchase, it is wise for individuals to save money and make a cash purchase instead of creating more debt.

A new car purchase is bad debt. Cars immediately begin depreciating in value. New cars are expensive and they will not increase your net worth or give you income. Many people purchase a new car for pride reasons. Instead of getting into debt, it is wise to save money and purchase a used car with savings.

Credit cards are the worst of bad debts. The interest rates for this type of debt are often much worse than consumer loans. Because of the setup of payments, they are stretched out in such a way as to cause higher amounts of interest to be charged. Credit card debt should be avoided as much as possible.

Clothing, goods and services, and consumables should never warrant going into debt. These expenses can sometimes be frivolous. Going into debt for vacations, new wardrobes, and other goods is a waste of time. The interest paid on these debts is wasted and could have spent more wisely.

Some Debts Are Neither Good or Bad

In some cases, debt is not necessarily good or bad. One such case is debt consolidation loans. If someone is in over their heads with high-interest debt, taking on a debt consolidation loan can be helpful.

Using a debt consolidation loan to pay off high-interest bad debts will help to decrease the amount owed. The most important tip for obtaining a debt consolidation loan is to use the extra money that is being saved to pay off other debts. By taking this strategy, you will be able to pay off your debts much faster and reduce the amount of interest that is paid.

Conclusion

Making the right choices when going into debt is essential. Choosing good debts helps to increase your net worth and income, but they should not be pursued often. With too much debt, individuals find themselves struggling to make payments and the interest can become overwhelming.

When debt becomes a big problem, a consolidation loan may be beneficial. Using the money to pay off the high-interest debts that are owed can lessen the payments, freeing up money to pay off other debts. Taking on debt can sometimes be a good thing, as long as it is approached sensibly.

Getting into debt takes very little effort on a person’s part. Paying off debt once it has amassed tends to be extremely difficult. Individuals often underestimate how much they will pay in interest and other fees and find they are in over their head in little time. For this reason, numerous people in their twenties are now opting to file for bankruptcy to secure a better financial future. Even those who come from a financially stable family may find they are in this situation. However, is bankruptcy the best option?

Chapter 7 Bankruptcy

Chapter 7 bankruptcy erases a person’s debt in full with certain exceptions. This provides the person with a clean slate to begin again. However, numerous individuals find the debt that remains is still overwhelming and they aren’t better off financially like they imagined. Furthermore, certain assets must be surrendered as part of the process, and bankruptcy attorneys charge a fee for their assistance. This fee is paid either as a lump sum at the beginning of the process or over a period of several weeks.

Individuals must recognize certain types of debt will not be erased when this option is selected. Student loans are very difficult to get discharged as part of a bankruptcy and the same is true of child support obligations. The debtor needs to speak to an experienced attorney to learn which items he or she may be able to keep as part of this process and which debts will remain once the bankruptcy filing has been approved.

Chapter 13 Bankruptcy

In contrast, chapter 13 bankruptcy enables the debtor to retain some of his or her assets. Nevertheless, the debt is not erased but must be paid over a period of three to five years. Any debt remaining at the end of the monthly payment plan is then erased. With this option, individuals find the attorney fee is rolled into the monthly payment as opposed to being due at the start of the process. The no-fee-up-front practice remains common among bankruptcy attorneys and the fee tends to be higher than if paid up front. Furthermore, individuals who find they cannot adhere to the repayment plan as agreed will have their case dismissed and the debt remains their responsibility.

Duties of the Attorney

Once an individual files for bankruptcy, he or she is instructed not to speak to creditors. The attorney handles all communications with creditors when the paperwork has been filed, and the debtor stops making payments on the debt. Furthermore, creditors are prohibited by law to contact a debtor following a bankruptcy filing. Be aware the first payment of the repayment plan is also due before the first court hearing on the matter.

The Bankruptcy Hearing

A person may be hesitant to file for bankruptcy as he or she fears appearing in court. However, most cases of this type are handled in a casual manner and the entire process within the courtroom may only take a matter of minutes. Once the filing has been approved, the debtor is officially bankrupt. Those who filed for Chapter 7 find the majority of their debt has been erased, in most cases, and individuals who filed for Chapter 13 will continue to make payments on the payment plan for the predetermined period of time.

The Benefits of Bankruptcy

Debtors who file for bankruptcy often feel relief upon doing so. They have a plan to deal with their finances and can improve their financial situation in less time than they originally imagined. Much of the debt may be erased, making it easier to pay on any debt that remains. However, there are drawbacks to this process that individuals need to be aware of.

The Drawbacks of Filing for Bankruptcy

Bankruptcy typically results in a person’s credit score dropping, and this can have a negative impact on the individual’s ability to secure credit, rent an apartment, obtain a mortgage, or secure a job. Furthermore, the person must report the bankruptcy on various official documents the rest of his or her life, and the bankruptcy is a matter of public record. Anyone who wishes to obtain information about this legal action can do so easily.

Other Options

Bankruptcy isn’t the only option for those individuals who find they are drowning in debt. A person may wish to look into debt consolidation loans, work directly with creditors to pay down the debt, or borrow from family and friends to get their head above water once again. Each option has its benefits and drawbacks that need to be considered before any decision is made. What works for one individual may not be appropriate for another, so be sure to take the individual circumstances into consideration when weighing each choice.

Admitting to overwhelming debt is something individuals don’t wish to do. However, this is the first step in overcoming the problem and securing a financial future that is significantly brighter. A person can then thoroughly evaluate his or her debt relief options to determine which solution best meets his or her needs.