How to take charge of your debts

The rising cost of living and dying has made people more reliant on loans and credit that most people have been indebted to someone at some point in their lives.  A debt is an obligation that should be paid and accounted for no matter how meager the amount.

Being in debt is normal considering that no one has a monopoly of all the money in the world.  People will always have the tendency to accumulate debts no matter how rich.  In fact, rich people have more debts than poor people because they have more needs and they have more collateral or security.

Being indebted isn't something that you should be ashamed of provided you are a responsible debtor.  This means the money was used for a very good cause or purpose and the debtor is religious in looking after his responsibility to pay his debts.

Even a person who is savvy is financial management can get into debt for one reason or another.  However, a person who is good in managing his finances should also be good in managing his debts.  Managing debts would include the ability to know how much a person owes and from where he would get the money to pay such debts.

The ability to know the total indebtedness is a must in debt management because the person who is in debt is aware of the total amount he has to produce to pay off his debts.  There are people who don't practice good debt management and they keep borrowing money without being able to monitor how much they already owe people or the financial institutions.

Debt management means that at the time the loan was made, the borrower knows where he would source the payment for such debt.   This makes the debt manageable because it would appear that the person has some source of income and he is just not liquid at the time he borrowed the money.

People who don't have a steady source of income should be discouraged from borrowing because there is a tendency for their debts to pile up without being paid at all.  Unemployed people who resort to borrowing for their essential expenses like food and daily subsistence would borrow from another creditor to pay off a debt that is already due and demandable.  The same thing happens to the second and the next loans after which it becomes a cycle.

A person who is indebted to someone should take an inventory of his assets that can be used to pay off his debts.  There is no problem if the debtor is looking at a possible income that hasn't yet been encashed or paid.  Such unpaid income can be considered an asset which can be used to pay his debts.

Debts are easily made but they are difficult to pay.  Thus, every person should be careful when borrowing money form others.  Make sure that you have something to pay for the debt like an incoming income or check, or assets that can be sold to pay off the debt.

Some people get indebted by virtue of loans which have varying interest rates.  This means that aside from the principal amount borrowed, the debtors still have to pay for the interest rate.  A person who borrowed $100 at ten percent interest rate per month will have to pay the principal plus the interest rate of $10 per month.  Some interest rates are based on the actual balance like if the debtor has already paid $20 then the interest rates would only be pegged on the balance of $80.  However, there are some interest rates pegged at the original amount borrowed.

While being in debt is a natural thing, every person should learn how to manage his debt and how to stay out of debt if possible.  One of the major factors why most Americans are indebted today is the misuse of credit cards.

Credit cards are those plastic cards that can be used to pay for almost any purchase even if you don't have cash.  People find it easier to spend when using their cards because they just swipe it and voila----it works like a genie granting their every wish!

However, most people who fail to use their credit cards wisely become indebted and are faced with legal actions for failing to pay their cards when they become due and demandable.

Go ahead, borrow if you must but always take charge of your debts to make sure they don't lead you to declaring insolvency or bankruptcy.

Debt Counseling – What It Can Do for You

Statistical reports show that nearly 80% of consumer expenses in the United States are on credit and the most convenient way to shop is to use plastics, or more popularly known as credit cards. Moreover, the average debt is more than $8,000 with a typical interest rate of 18.9%.

No wonder so many people are now heavily buried in debt. Along with it came lots of debt relief programs aiming to provide consumers effective ways out of debt.

Among the many debt relief programs available today, debt counseling is one of the most well liked programs, helping more than the average consumers who seek debt consolidations.

Debt counseling is one way of teaching consumers how to administer their profits and expenditures. This program will also teach them how to avoid further accumulation of debts.

In essence, debt counseling should have been a preventive measure for accumulating debt, but the problem is that most people use this after they have already mounted lots of debts.

With debt counseling, you can learn the different ways on how to avoid debts. The main focus of debt counseling is to let the consumers be aware of their expenses, balances, and the credit score that they accumulate.

All of these things will put a great impact on the interest rates as well as the types of loans one can pursue. It is important for every consumer to seek debt counseling before they start charging their expenses.

Here is a list of things that your debt counselor can do for you:

1. Debt counselors can teach you the whole credit card process

One of the greatest problems why many people accumulate debts more than what they can afford to pay is that they aren't aware of the actual operation of their credit cards.

According to surveys, almost 75% of credit card holders aren't aware of their balances, not even the amount they are paying off monthly.

How is that? This happens when consumers only try to pay the minimum required balance stated on their credit card bill. They are only prolonging the process and accumulating bigger debts through interest rates.

The point here is that paying the minimum balance on your credit card won't get you any farther. It may lessen your actual balance but may only aggravate the situation because of the time it will take you to finish everything off.

With debt counseling, you are made aware of your payments and on how you should go about your balances so as not to accumulate more debts.

2. Money management is the ultimate tool that they can teach you

Debt counselors can give you complete details on money management. Here, consumers are taught on how to manage their expenses and their credit card bills.

Debt counseling programs will teach you how to be aware of your credit card billing statements every month. In this way, you get to be conscious of your expenses and on your available credit limit. The key is not to exceed your credit limit so as not to accumulate debts.

The problem with most consumers who are heavily buried in debt is that they are not aware of their monthly expenditures, thus, tending to cross over the specified credit limit.

Keep in mind that credit limit will most likely keep you in track. Once you have gone overboard, chances are you will find it hard to pay off your balances.

3. They will teach you how to use cash instead of plastics

Since the emergence of credit cards, consumers tend to neglect the real functions of credit cards. They don't understand that credit cards aren't extensions of their profits. Any amount used on credit cards is still payable.

So if you have been charging more than what you can pay in a month, you will definitely accumulate more debts.

Moreover, debt counseling will teach you not to use you credit cards when paying for your basic necessities like gasoline and groceries. These items are so basic that you should have included them in your monthly budget.

By any chance, acquiring them on credit will only entice you to get more than what your budget allows.

Indeed, debt counseling is a very effective way of managing debts. You should realize that debt counseling works better if they are used beforehand and not after the consumers have accumulated debts.

Beware of Catchy Debt Consolidators

Debt consolidators usually attract positive attention at the start because they give the impression that they will neatly arrange all your debts into an organized and even lighter one.  Their campaigns make debt relief seem to be so straightforward.  They will just consolidate all your bills and convert the interest rates to as low as 0%.  Unfortunately, people who have fallen prey to them have experiences worse than the opposite of these empty promises. 

Normal tendency when experiencing financial crisis is to get loans to cover up for previous credits.  This being a well-known phenomenon, debt consolidators do their best to entice people into these types of situations with debt consolidation loans which promise easy and immediate processing and approval as well as lower monthly payments and interest rates.  Being close to desperation, people tend to become easily lured by such and grab them without a second thought. 

If these people only compute how much they actually pay in totality, they will surely be surprised that it is a lot higher.  Sure, the monthly payments are lower but this is mainly because they are spread over a longer period of time.  What are usually unnoticed are the interest rates which are, in fact, higher.  In most instances, rates go as high as 21% or 22% and these subtly and discreetly wring people in their necks while burying them deeper into a financial rut.  

Debt consolidators also assure customers that they will be in charge of everything.  They will apparently coordinate with your creditors.  All that is left to do is make one easy payment every month.  However, what happens in reality is that they actually charge for such service by taking hold of about 10% of payment given monthly.  This is about $50 for every $500 monthly payment.  Instead of such amount being used to significantly reduce debt, it automatically goes to the deceiving hands of debt consolidators. 

Most of their services are obviously those which you can do on your own given the right information.  You yourself can negotiate with your creditors to make payments more manageable in the light of a current financial difficulty.  You need not shell out such a big amount for that.  Most creditors are willing to bend a little if only they will be aware of the circumstances. 

What makes doing the negotiations and payments on your own a lot better is that certain cases have already been reported where the debt consolidators themselves are making late payments.  They regularly ask the payment from their customers but they remit them late thus causing the customers more charges which they are not made aware of.  Such will only be added up to the monthly payments unnoticed.   

Balance transfer cards are also prevalent nowadays which are usual debt consolidation tools.  Just the same, they promise lower interest rates.  However, you have to take note that such low rates aren't going to be the case forever.  After a few months, they will increase.  Of course, when that happens, you will look for another provider.  The network of credit companies sees this kind of activity and considers you as a risk thinking that something else is behind your switching.  Thus, your switching may not be approved and you are left without a choice but hold on to the card and suffer with its high rates. 

It is obviously wiser to think of other options instead of resorting to the services of debt consolidators.  Home equity loans, for example, are better options because of their single-digit interest rates which are even tax-deductible.  In such cases also, since you do have a home equity, your property may be up for a higher amount refinancing.  In turn, you can use the excess money to settle your debts.  You may also try personal loans especially if you used to have a good credit history.  The interest rate may still be high, around 11%, but this remains to be a better alternative as compared to the 20%++ rate of debt consolidators.

There are several other options that you can try out.  If you want to know more about them, you can seek advice and gather information from certain organizations providing credit counselling.  Once you have the information that you need, you deal with the situation yourself.  Most debt consolidators have already been proven to be unhelpful thus should not take part in your alternatives anymore.  You need not worry about being exposed to harassment as there are laws such as the Fair Debt Collection Practices Act to protect you.

Creation of a Budget

No man is an island. We all need help once-in-a-while. We’re not only referring to personal matters. We’re talking about financial matters. We reach a point where we have to buy something out of necessity, but we can’t pay in full just yet. An example of this is a home.

Now the time has come for you to repay on what you own. You must have the discipline to plan out how much you should have saved so when your time is up and you have to shell out the money you owed there and then (plus interest), you wouldn’t have a hard time doing so.

Prioritize which of the debts must be paid first. Prioritize your bills. Make a list so it would be more organized because you could see it right in front of you.

This is what you call establishing goals. Establish first what must be prioritized over those you could schedule paying some other time.

The essential debts are debts that should be on top of your list. These are
- Rent or mortgage. Of course, who in his right mind won’t pay up as soon as possible. Paying your rent or mortgage bills on time helps you have a roof over your head.

- Child support. If you don’t pay on time, there’s a possibility you can be held behind bars.

- Utility bills. As much as possible, set aside a budget on gas, heating, water, electricity or telephone when you get your paycheck. In doing so, when the bill comes, then you have something prepared.

- Car payments. This also includes car maintenance.

- Other secured loans. If you don’t repay collaterals, the creditor takes the property even without court interference.

The non-essential debts can be set aside because when these aren’t paid, they don’t have that much of a side effect. It’s a desired goal but not really a priority. The only concern that can be considered when you don’t pay non-essentials debts for a long period of time is the negative image it could project on your credit report.

- Department store and gasoline charges. Failure to pay these charges may result in losing credit card privileges. If it’s too large, you might be sued.

- Loans from friends and relatives. Morally speaking, there is an obligation to pay but sometimes since they’re family, we think that they will understand if we can’t. Check with them if you can delay the payment and ask them for how long.

- Newspaper and magazine subscriptions. Little by little, if you haven’t paid, they’ll amount to so much.

- Legal and accounting bills. If these remain unpaid after a long period of time, then that’s when you might be sued.

- Other unsecured loans. In unsecured loans, there’s no collateral for the debt. This means that the creditor can sue and then collect the debt.

Here’s the confusing part. Some of the bills border between essential and non-essential. If you let these bills defer for a long period of time, it could have consequences in your personal life.

- Auto insurance. The consequence in some states is losing your driver’s license.

- Medical insurance of bills. If you have a tainted record, you might have a hard time getting new insurance in the future.

- Credit and charge cards. If you don’t pay your bills on time, you might lose your credit privileges and would have a hard time applying for a new credit card.

Now that we laid out the groundwork on how you can prioritize which bill to pay first, we move on to having a time frame.

It’s best that you have a calendar in front of you. A palm pilot or the calendar in your Microsoft Office program will do. Mark the dates wherein you would have to pay the specific debt – be it essential or non-essential. Then what you can do is set aside the bill that is allotted for that debt.

As for the budget, prevention is always better than cure. You know how much you get in a month. That being in mind, you must allot how much percentage of your salary shall go to which. Then do your best to stick to that budget.

If this is how much you should spend for leisure, then that’s how much you should spend for leisure. If at one point, it went overboard, then there would have to be a sacrifice on another aspect, such as food. That seems off, right?

So even in budget, you must also list down which is number one for you. Have the discipline to stick to your priority, your budget and your time frame. If you succeeded, paying the bills won’t be any problem.

A Closer Look at Bankruptcy

Bankruptcy is a process of the federal court that is aimed at helping both businesses and individuals in clearing up their debts and repaying under the protection given by the bankruptcy court.  There are basically two types: liquidation and reorganization. 

Liquidation bankruptcy, under Chapter 7 of the bankruptcy code, occurs when you plead the court to have your debts discharged.  Some of your properties will then be liquidated or sold by the bankruptcy court, returns of which shall be divided among your creditors.  This type of bankruptcy proceeding lasts for four to six months which is quite fast and only one appearance at the courthouse is necessary.  It is very convenient and doesn't require payments stretched over time. 

Chapter 7 bankruptcy isn't available to everyone, though.  You may won't benefit from it if in the past six to eight years, you have benefited from a bankruptcy discharge.  Likewise, if after examination of your income, expenses, and overall debt, it was found out that the other type of bankruptcy proceeding is more appropriate, then you can't insist on pursuing this kind.  Veterans who are now disabled and who incurred their debt at the time of their active duty are almost automatically allowed to file.  In addition, those people whose debts are caused by running a business are qualified as well.  For those people not belonging to any of these categories, certain criteria must be met. 

The criteria has been affected by the new rules imposed on bankruptcy.  One of the considerations is your current monthly income which in turn will be compared against the median income for a family of similar size in your state.  This isn't your income at the time of your filing.  Instead, it is your average income for the past six months before filing.  Social Security benefits like retirement and disability benefits aren't included in the computation.  If your income appears to be enough to support the other type of bankruptcy proceeding in spite of permitted expenses and payments for child support, tax debts, and others, liquidation bankruptcy is unfortunately not allowed.

Many people, if given a choice, would prefer this type since repayment of a portion of the debt is unnecessary.  You may lose some of your properties but some courts permit some sort of a leeway that doesn't take all to give you something to start with afterwards. 

On the other hand, reorganization bankruptcy, usually under Chapter 13, happens when you file to a bankruptcy court a plan on how you intend to settle your debts.  You indicate how much each of your creditors will get, depending on your finances.  There will be a three- or five-year repayment plan, only after which can you be discharged of your debts, if any still remains.  At times, however, due to obvious financial difficulties, the court itself decides to give a discharge earlier than planned and this is what usually happens. 

An additional requirement for both types of bankruptcy is completion of credit counselling conducted by an agency recognized and approved by the United States Trustee’s office.  This helps you look closely at the situation at hand and identify if bankruptcy is really essential.  This allows you to see several possibilities of informal repayment which you may have overlooked in the past.  Even if such is obviously impossible, counselling remains a major requirement.  Furthermore, completion of post-counselling is required after the proceedings.  This aims to teach you financial management to avoid encountering the same situation in the future.  The bankruptcy discharge will not be released unless this is fulfilled. 
Bankruptcy may be beneficial for both the debtor and creditor.  This is a way of recognizing one’s responsibilities and mistakes that led to the financial difficulty.  The entire process takes into consideration both parties’ interests and leads to the development of an action plan that fulfils them.  As such, this law shouldn't be abused by any debtor thinking that a court is there to intervene.

Bankruptcy, although generally advantageous, must be considered as a last resort.  You should, in all circumstances, work hard to be in full control of your finances to avoid being estranged in difficulties.  Discipline is indeed a very crucial trait that must be maintained at all times.