Tag Archives: debt

Consolidating Debt Can Help Avoid Bankruptcy

Now a days there is no need for debt to lead to bankruptcy. Over the past twenty years the legal framework for bankruptcy and managing debt problems has dramatically changed meaning that there are now more options available to people that are suffering financial difficulties.

One of the key ways to get on top of debt problems is by considering debt consolidation. This is where a borrower takes out a new loan and uses this to pay off expensive credit or store card balances, loans with high interest charges or monthly instalments.

This is particularly effective where the credit rating of the borrower is still in good shape and a new loan can be sourced with good terms. If the debt problems have already caused payments to be missed then the credit rating may have been affected meaning that the best terms may not be available to the individual.

Debt consolidation works by reducing the individual’s monthly payment into a single loan obligation compared with the aggregate amount payable on the previous loans. Although the total amount of interest paid may end up being greater, the prime driver is to reduce the monthly payment to a more affordable amount for the individual. This way, much needed cash can be freed up to make living within the available budget easier.

The number of people filing for bankruptcy has increased throughout the recession but not as alarmingly as many analysts thought. This is through the increased use of debt consolidation and Individual Voluntary Arrangements (IVAs), many have managed to avoid the ultimate sanction.

IVAs have been particularly successful in reducing bankruptcy proceedings. These are legally approved debt management plans that allow debtors to talk to and agree with lenders what can be afforded. This is done with an understanding that at the end of the IVA term any remaining debt will be written off.

Whilst this is not ideal for lenders, it does offer them a structured and legally approved method of recovering some of their loan balance rather than having to repossess or go to the expense and hassle of instigating bankruptcy proceedings.

Whilst smaller amounts of debt may be manageable, larger sums may take more of an effort to get under control. Ignoring debt is never an option. Debt may eat into relationships and cause all sorts of future borrowing problems if it is left unaddressed. There is a good and effective legal framework for managing debt problems ranging from debt consolidation loans through to IVAs.

Bankruptcy need only be considered as a final and drastic remedy.

This is a post by Phil Broadhead.

Mailbag: 5 Steps To Get Out Of Debt

I received this email from “Alan,” a 24 year old who was just hired after being unemployed for 8 months after graduating college.

I am in $15,000 of credit card debt and got a job that pays $60,000/year. I was living with friends without really paying rent and now that I’m moving out into the real world, I have no idea what to expect once I get there. I have to pay for rent, utilities, food, and car payments, I’m not sure how much I should set aside for debt, retirement, and savings. How should I allocate my funds?

Alan seems to be in a fairly similar position to me, although his credit card debt is likely accruing interest at a faster pace than my student loan is. I would recommend 5 steps to get started building savings and tackling the debt.

1. Track Expenses

Go right now and sign up at Mint.com. It’s hard to predict exactly how much you’ll spend on lunch with co-workers, fun, and other expenses. Don’t worry about creating a budget just yet, but be responsible with your purchases. Keep in mind that you’re in debt and are trying to get out.

2. Build $2,000 Emergency Fund

After paying the minimums on your credit card, throw everything else into an emergency fund. Some people suggest that $1,000 is enough to get started, but the truth is that $1,000 may not cover what you need. If something happened to your car or if your job doesn’t work out for some reason, this is what you’ll have to rely on. $2,000 should provide you enough of a cushion at the beginning, and after you have that much, keep contributing a small amount each month to give yourself more to fall back on. Every few months, check back on this emergency financial file and keep adding because as you work more, you’ll have higher expenses and will need a bigger cushion.

3. Build A Budget

Once you have an emergency fund, it’s time to see how much you can afford to throw at the debt. Use Mint to build a budget based on your expenses in the first 2 or 3 months, and cut out what you can. Stick to your budget and you’ll see the debt decrease.

4. Aggressively Pay Off Debt

Anything you have left over after expenses and what you put into the emergency fund, write a check to the credit card company. This number will fluctuate depending your living situation and city you live in, but more you pay now, the less you’ll pay overall. Imagine the feeling of being debt free!

5. Work Hard

While focusing on getting out of debt is great, keep in mind that it will be a slow process. Over time, the mound of debt you have will decrease slowly and surely, but it shouldn’t be all you think about. Focus on your job. Improve yourself, work hard, and get noticed. If the debt is gone but you don’t have a job, then you’ll be right back to where you started. The best thing you can do is to do you job well. Having that job will be much more valuable than the emergency fund.

For now, I am going to suggest passing on the retirement savings because the interest rates on your credit cards are likely higher than the rate of return you’d get in your retirement account. Once you have the debt taken care of, you can start pouring all that money you were using to pa off the debt and instead use it to build a healthy emergency savings account and retirement fund.

What other steps should Alan be taking to get out of debt?

If you have a question you’d like answered, please don’t hesitate to contact me!

3 Benefits of Debt

In the personal finance community, it’s best to be out of debt. Without a question, I would rather be $20,000 richer and not have to worry about my student loans. Still, there are several advantages to being in debt:

1. Boost Your Credit Score – When you are building your way out of debt and making your car loan, student loans, and credit cards payments on time, you are improving your credit score. In the short term, being in debt may cost you in interest, but in the long run, you may save thousands by having that good credit score when you get a mortgage.

2. Tax Deductions – Student loans and mortgages are tax deductible, and can lower your overall tax bill. So in addition to owning a home and having a college education, we can take solace that the tax bill won’t be quite as high.

3. You’ll Learn Great Lessons About Personal Finance – When you don’t have to worry about your finances, you don’t worry much about managing them. Once you become responsible for your finances, you realize just how much it is costing you and try and avoid it at all costs. Those who are in debt learn quickly from the experience and are better off afterward.

I don’t advocate being in debt to collect on any of these benefits, but I include it in the reasons why I’m ok with being in debt and why I am saving instead of aggressively paying off my student loans.