Many people believe that financial problems invariably result in bankruptcy filings. However, the debt management, debt mitigation, debt settlement and debt consolidation spectrum is long. Bankruptcy falls on the extreme end of the continuum, and is only considered as a last resort. Even when the bankruptcy option is triggered, it should be borne in mind that there are multiple different forms of bankruptcy filings that can be made, including chapter 7, chapter 8, chapter 11 and chapter 13 bankruptcy. The most common forms of bankruptcy filings would be Chapter 7 for liquidation bankruptcies, or chapter 13 for wage-earner bankruptcies. Note that these should not be considered as a default option, given that there are many other remedies you can employ.
1. Debt management
Debt management plans are designed to manage your debts better. To be effective at paying off your debt, you will need discipline and sound decision-making processes. The first step towards managing debt is to freeze on all unnecessary spending. There are several ways to work towards this, including putting your credit cards on ice, removing your credit card details from online shopping sites (which forces you to manually enter them), and curtailing expenditure. If you find yourself unable to differentiate between needs and wants, delay the purchase. Additionally, it is advisable to pay more than the minimum monthly balance on your outstanding debt. Living within your means, or below your means is advisable, since this encourages saving and reduces expenditure.
2. Prioritize debt repayments
On the debt continuum, there are certain debts that need to be paid first. These are the high interest debts such as credit card debt with high APRs, or bad credit loan debt with high interest rates. Once you’ve taken care of the most expensive debt, you can work towards reducing other debts. There is good debt and there is bad debt. Good debt includes things like student loans which are designed to further your education to enhance your job prospects. Other forms of good debt include home mortgages which effectively cap your rent repayments, and safeguard your investment over time. Of course, you want to ensure that you always have enough to repay your good debt so that you don’t lose the investment.
3. Do you understand bankruptcy?
Believe it or not, bankruptcy filings require the services of legal experts. This makes them inherently more expensive, convoluted, and tedious than other debt management solutions. A bankruptcy filing needs to be approved by the courts, and it does not absolve you of any responsibilities related to things like unpaid federal taxes or state taxes, child payments, student loans, alimony, etc. If you are in the process of declaring bankruptcy, you don’t have carte blanche to spend money willy-nilly. Besides, bankruptcy filings are expensive, since you will have to pay legal fees and you may have to pay court fees as well. Bankruptcy filings also require clients to take bankruptcy classes to understand the implications of their actions. This is done as part of an ongoing learning process to help you better manage your finances and debt.
4. Stop overspending
According to statistics, American spent $1.33 for every $1 that they earn. This means that everybody is indebted by 33% at the bare minimum. Living on credit means that you’re always paying interest on the principal. According to statistics, typical US middle income households have $7100 worth of credit card debt per month. The biggest culprit in rising household debt is college debt. It is worth understanding why people spend more than they have. Behavioural psychologists believe that many folks spend more as a way to make themselves feel better. Retail therapy may be brought upon by low self-esteem, boredom, or stress factors. However, frugality allows for a much more satisfying lifestyle without the attendant stresses of high debt levels.
BONUS TIP
Once you’ve dotted the I’s and crossed the T’s, you may find debt consolidation to be your best option. With debt consolidation, you get to bundle all of your unsecured debt (for example credit card debt) into a single loan which is repaid at a lower interest rate. This is ideal for individuals who have not yet defaulted on their loan repayments. It allows you to put more of your money towards repaying the principal than the interest on the debt. Debt consolidation loans are available from both bank and non-bank lenders.