It’s dangerously easy to fall into debt when you’re young.
You’re probably making more money now than you ever have before. But you’ve probably got more expenses too. That’s a dangerous combination. It’s far too easy to spend a lot more than you actually have. And that leads to trouble with debt.
Of course, getting sick, losing your job, and other things beyond your control can also land you in debt. But there are usually ways to prevent debt problems, as well as ways to improve your situation if you do get into trouble.
The best way to handle debt is to avoid it. Spending within your means and watching how you use credit—especially credit cards—can help. But if you don’t know what debt trouble looks like, it can sneak up on you. If you find yourself in any of these situations, it’s time to start managing your finances more carefully:
- Regularly paying only the minimum on your credit cards or missing payments altogether
- Regularly hitting your credit limit on your credit cards
- Needing to withdraw money from your savings account to cover bills or basic expenses
- Having trouble paying for an unexpected expense, such as car repairs or a new phone
- Depending on unpredictable income,such as gifts from family, to get by
Filing for bankruptcy is a last resort, something you should be considering only if you’re looking at an extremely long period of debt repayment, usually five or more years. When you file for bankruptcy, the court where you file allows you to discharge your debts. Under such a plan, you pay less than the full amount you owe, and your lenders recover some of their money.
By resolving your debt, bankruptcy allows you to get a new start. You’re legally protected from creditors, so you know that your situation can’t worsen. But bankruptcy damages your credit history, and you stand to lose many of your assets in order to repay your debts.
Remember, too, that bankruptcy doesn’t wipe out amounts you owe the government for income taxes or student loans, or get rid of any alimony obligations you may have.
To start dealing with debt, take a close look at your monthly spending and pinpoint some areas where you can cut back to free up more money for your debts. Then make paying your bills every month a priority—not an afterthought.
CAN YOUR CARDS
Since interest on credit cards is higher than on most other sources of credit, they’re particularly dangerous if you’re teetering on the brink of debt disaster. If you find yourself in such a situation, it might be time to get rid of your cards, especially if you’ve had problems with overspending. Even if you keep one card for emergencies, it’s probably smart to pay in cash or with a debit card most of the time.
GET OUT OF DEBT
If you end up in serious debt trouble, don’t give up. You can take a number of approaches to resolving debt problems, a process often known as restructuring debt.
The simplest thing you can do is to ask your creditors to rewrite the terms of your credit agreements so that your bills are easier for you to pay off. This often means smaller payments over a longer period of time, which of course means you’ll end up paying more interest and increasing your overall cost. But that’s usually a better deal in the long run than having to default or declare bankruptcy.
If you need help dealing with your creditors or figuring out the best way to handle your debts, a non-profit credit counseling service can help. For a relatively modest cost, they’ll help you come up with a repayment plan that’s feasible for you. Check out: the National Foundation for Credit Counseling at www.nfcc.org or the Financial Counseling Association of America at www.fcaa.org.
Credit counseling is really about changing the way you handle money, not just getting out of a financial tight spot. A repayment plan is a great idea, but you also want help creating a spending plan and advice on how to stick to it. Otherwise, history is apt to repeat itself.
PUTTING IT TOGETHER
Using a loan consolidator is another way to handle debt. Consolidators lend you money to pay off your bills, and you repay the consolidator instead of your original lenders.
While debt consolidation may allow you to make a lower, more manageable monthly payment, the interest rates and fees that consolidators charge can be much higher than you’d otherwise pay. And since many of them impose heavy penalties for paying off your debt ahead of schedule, you might find yourself stuck with even more financial headaches than you had before.
STUDENT LOAN DEFAULT
There’s a slightly different course of events if you fall behind on repaying student loans. If you don’t make a payment on time, you’re considered delinquent. If you don’t make payments as required by your promissory note, your loans go into default. The consequences can vary, from a damaged credit rating to having your federal tax refund withheld or even having your wages garnished.
If you’re subject to garnishment, a percentage of your paycheck is withheld to pay your loans. Since that means your employer will find out about your situation, it can be embarrassing and potentially damaging to your job security as well as financially harmful.
Default can also result in your having to pay any costs your lender incurs in order to collect the outstanding money you owe. You’re no longer eligible for additional federal student aid, you lose deferment or forbearance options, and your loan can’t be forgiven. And these loans are almost never written off, so they’ll haunt you. It’s smart to contact your lender to try to put together a feasible plan before you get into real trouble.