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Coping With Debt
Making Decisions About Your Debt
If you are struggling with that four letter word DEBT, don't. There are things you can do right now to relive the stress, but there's one thing you don't want to do - that's do nothing.
The Problem With Debt
The problem with debt is - you have to pay it back. If you never had to pay debt back, then all would be well and debt wouldn't be debt anymore. Debt creates both emotional and financial stress that can paralyze your ability to make good decisions about what to do next.
Solutions to debt problems come in a few forms - debt relief and debt settlement. Before deciding on what course of action to take, gather your records for the following items:
1. Amount owed.
2. Income (future earnings)
3. Your age
4. Your current credit rating
The problem with debt, depending on how deep in debt your are, is it can take a long time to pay it back. This is where age becomes a factor in your decision on what solution to take. Do you want to spend you final years worrying about debt?
One of the choices a person has is bankruptcy. In some cases bankruptcy is the only legal way to protect yourself from long, drawn out collection practices and even though the laws changed in 2005, you can still file for chapter 13 and chapter 7 if qualified.
Younger folks have to weight their debt problems in a different light. Most young people have major purchases ahead, e.g., house, car(s), and have to be more conscious of what bankruptcy will do to their credit rating. Even though bankruptcy gives immediate relief, it also has negative, long term implications on ones credit score. So, this is why age becomes an important factor when deciding which debt solution is right for you.
Solutions for Stress Due to Debt
There is an element of debt less talked about that effects you, your family, job and happiness, it's called debt stress.
If you're in a position where debt is consuming your life, it's probably wearing on your health too. As this situation lingers on, the pressure increases as you get more collection calls, letters, and even threats.
Don't avoid you lender, confront them. We don't mean confronting them in an aggressive manner, we mean call them first and admit you have a debt problem. This will throw them off balance because they are usually the ones chasing the debtor. You might be pleasantly surprised to find that most are very nice and appreciate it if you contact them first.
Next, reduce the energy you use for worrying and focus it on solutions. We can be our own worst enemies when we imagine the worse, but in reality the situation is not as bad as we think. People will make a bad situation even worse by worrying, even to the point where their health is affected. And your health is your biggest asset, because it is what allows you to make money and pay debts.
Finally, don't let debt isolate you from solutions. Debt has this uncanny way of making us feel lowly, in such a way that you feel as if you're the only person who has defaulted on these obligations - not so. Millions and millions of people, average and celebrities, have had debt problems and recovered. Talking about it, searching for solutions will help you discover that debt problems are a part of capitalism and recovering is a part of learning. Don't walk around with your head down, you won' find the answers on the ground.
More Debt Solutions
As money gets tighter things change, lenders don't lend as much and the whole game changes.
As we discussed bankruptcy is the only real way to get immediate protection under the law. Forms of settlement are outside the law and can be just as effective if negotiated right.
The key issues for settlement is:
- Can you meet the future payments?
- Are you saving enough in this process to make it feasible?
- How badly will your credit be damaged?
- Is the settlement company helping you reputable?
People think that just because they enter into a settlement agreement that their safe, it's not so.
The debtor still has the right to contact you. They don't always play by the rules, they have been know to still try to collect even after a settlement has been reached. If your dealing with a reputable company chances are they will play fair, but a settlement is not the same protection as a bankruptcy.
The key here is get some basic knowledge for yourself so you know what to ask. You will be able to spot a bad situation right away.
Another option to bankruptcy or debt relief is called Debt Rollover.
This means your taking short term debt and turning it into long term Debt. One of the popular ways to do this was to use the equity in your house. This has become less doable as house prices have declined and lenders have become tighter in their practices.
1. Not locking in Rates and Terms.
2. Reverting back to old habits. (running up credit cards after being paid off)
We have a good example of this in our own backyard. A state has short term debt, then sells a 20 years bond, turning a short term debt into a long one. The problem we see now is they accumulated more short term debt. This is not what we want to do in our situations.
Shifting debt from one place to another is an option, the key is discipline. Don't repeat the debt habits that got you there in the first place. Some banks, depending on your situation, will give you unsecured rollover credit to do this transaction. You have to be in pretty good shape for them to help with this, but it can be done.
There are some cases where using cash from an insurance policy or even a loan on a 401k plan makes sense. In these cases a talk with a professional tax person is advisable.
You don't want debt to steal your health, you don't want to make bad choices, but you do want to learn from this situation. Take the time to find out more about how debt works, do this at the debt hub. It's time well spent.