Help & Advice
Debt Management
If you dread checking the mail because you feel like your credit card bills have gotten out of control, it's time to rethink how you mange your debt.
Take Control of Your Credit Card Habit
The first step is to stop using your credit cards, so you don't add to the amount you already owe. Cut the cards up, freeze them in a block of ice, or have a friend hide them in your house. Live on cash and carry only a debit card to get in the habit of paying for purchases immediately, instead of charging them and paying over time.
Next, take an inventory of your credit card debt. Once you know what you owe, you can make a plan to pay it all off. Collect all your monthly statements and make a list that shows:
- Your balance. This is the total amount you owe at any given time.
- Your available credit. If this amount isn't shown on the statement, simply subtract your balance from your total credit limit.
- The annual percentage rate (APR). The APR could be as high as 24.99 percent, depending on your payment history. The higher the interest rate, the longer it takes to pay off the balance. Finance charges increase the total amount you owe every month, even if you don't charge a cent.
- The minimum payment. Aim to pay more than the minimum amount due, or else you can expect to be paying off your debt for a long, long time.
- The payment due date. Credit card companies make a fortune off late payment charges, which can be $20 to $30 every month.
Get the Cash and Pay It All Off
If you have cash available in a savings or taxable investment account, consider using it to pay off your high-interest debt. If you're paying 18 percent on you debt, your savings would have to earn the same return just to break even, and these days, few investments produce that kind of return.
Don't pay off all your debt if it leaves you cash-poor. Otherwise, you'll need to live off your credit cards, and the cycle of debt will start all over again. Instead, use some of your cash to pay off the first card with the highest interest. Try to reduce your total debt burden to an amount that feels more manageable, and then make a plan to pay off the remaining amount.
Make One Monthly Payment if You Have Several
If it's hard for you to keep track of several bills each month, debt consolidation may be your solution. When you consolidate all your bills, you end up making one payment every month to cover the cost of all your bills. There are several ways to consolidate bills:
- Transfer high-interest balances to an existing card with a lower rate. If you have enough available credit on another card with a lower APR, transfer the balance from a higher-rate card. You'll still owe the same amount, but you'll be paying much less in interest. This way you can pay off the total amount sooner.
- Take advantage of low introductory rates on a new credit card. If all your rates are high, apply for a new card with a low introductory rate and transfer the balances to the new card. Make sure you understand how long the introductory rate lasts, because it may suddenly skyrocket after six months or a year. Don't be afraid to negotitate for a better deal either. Some credit card companies will apply the introductory rate to balance transfers until the balance is paid off. Of course, once the new card arrives, you must promise yourself to not use it.
- Tap your home equity to pay off debt. Using a home equity loan or line of credit to pay off redit card debt is a smart move for two reasons. First, you'll get a lower, fixed interest rate on a home equity loan or line of credit. Second, the finance charges may be tax deductible. But discipline is still the key to financial management. Once you pay off your credit cards, you have to avoid the tempatation to charge on them again.
- Apply for an unsecured debt consilidation loan. If your overall credit is good and you want to tap home equity, you may be able to get an unsecured debt consolidation loan from your bank. The loan will allow you to pay off your credit cards, lock in a much lower interest rate, and extend the repayment term. However, the interest on an unsecured loan isn't tax deductible, and you still have to resist the urge to charge.
Bankruptcy
Bankruptcy is a financial tool of last resort. While it may seem like an attractive way to eliminate debt, stop the harassing collection calls, and financially "start over", declaring bankruptcy will have an impact on your life for years. It's important to understand how bankruptcy works and what declaring bankruptcy means for your future.
Chapter 7 Bankruptcy
If you can't pay your bills now and are not likely to earn enough income to pay them in the near future, you may be eligible for Chapter 7 bankruptcy. The laws vary in each state, but Chapter 7 usually discharges most unsecured debts, such as credit card debt and medical bills. You will still have to pay back secured debt, like the mortgage on your home or the loan on a car, if a judge decides they are exempt. Chapter 7 also does not eliminate government student loans, taxes, alimony, child support, or any debts that are the result of fraud. Other than your home and car, any personal property of value will be sold by a court-appointed trustee in order to pay your creditors as much as possible.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is available for people who are still earning income, but can't meet their monthly debt obligations. You can't have more than $250,000 in unsecured debt or $750,000 in secured debt to qualify for Chapter 13. The court will appoint a trustee to sort through your finances and come up with a three to five year repayment plan. Your debts aren't forgiven, but you won't have to sell any personal property to pay them off. Instead, your creditors agree to accept the monthly payments decided upon by the courts without charging you any additional interest. Don't expect the court to provide you with a generous monthly allowance, though, the goal is to pay your creditors as much as possible.
How to File for Bankruptcy
Before you decide to file for bankruptcy, you should talk to an attorney, so you fully understand the process and the implications it will have on your finances. If you choose to declare bankruptcy, you'll have to fill out legal paperwork and file it with a bankruptcy court. You'll also owe a filing fee, an administrative fee, and your attorney's fee. Remember, you can only declare Chapter 7 bankruptcy once every six years, so you can't just go back to old spending habits afterward.
Life After Bankruptcy
Most people only think about the freedom they'll feel once bankruptcy takes care of their debt. But bankruptcy follows you for the rest of your life. It stays on your credit report for up to 10 years, and can make it difficult for you to re-establish credit. Even after 10 years you may have trouble qualifying for a mortgage or car loan. You'll have to check "yes" on every application that asks if you've ever declared bankruptcy, and you could be turned down for an apartment or a job as a result.
Bankruptcy provides a way out for people who cannot afford to pay off their debts, but it isn't an end unto itself. Before you decide to declare bankruptcy, you should explore every other possible avenue for taking control of your financial situation.
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