Recent data indicates consumer debt is set to rise to an all-time high in 2017. This is after ending 2016 just under the record high of $12.68 trillion in 2008. With banks and other lenders easing credit restrictions for consumers, the number of credit card accounts in America is on the rise again. Add in student loans, auto loans, and mortgages, and U.S. consumers are swimming in debt to the tune of an average per household of nearly $135,000.
Although delinquencies are not as big of a problem as they were in 2008, the amount of debt per household is very high. For many families, all it would take is one financial emergency to face a catastrophe.
Consumers can get into financial trouble in many ways. Some reasons are due to irresponsibility on the part of consumers; others are out of their control. However, with many consumers up to their necks in debt, this is a real concern. Should the economy lose its upward momentum or begin to sputter again, we could see another financial crisis involving many U.S. consumers.
Common ways people get into trouble
As mentioned, things can fall apart quickly for a family. Some problems happen in the blink of an eye; others can build up over a period. Let’s review a few ways, along with some of the underlying circumstances.
Many consumers have no idea how to manage money. Financial skills are not usually on the educational menu in college, much less in high school. Because of this, many Americans don’t use most basic money management tools such as budgeting and saving. In addition, when cash falls short at the end of the month, many turn to credit cards to bridge the gap.
Creating a detailed budget is the only way to manage money efficiently if you are serious about living within your means and saving. Utilizing a budget will not only help you make your money reach the end of the month, it will also help you save for larger expenditures such a new car or a house.
Unfortunately, the lack of budgeting and money management skills causes consumers to overspend or give in to impulse buys, usually with credit cards. Credit cards make it easy to buy big-ticket items and worry about the money later.
Credit card minimum payments are usually low, enticing consumers into making purchases they cannot afford. However, minimum payments do not benefit the consumer as much as they benefit the credit card company. Just look at your statement to see just how much purchases will actually cost you and how long it will take to pay it off if you just make the minimum payments.
Loss of income
Losing a job is a difficult time for an individual, both emotionally and financially. This is especially true if this happens to the breadwinner in a family. Fear and uncertainty can quickly turn to outright desperation. Some families will have no choice but to turn to credit cards to keep the roof over their head and food in the kitchen.
Loss of a job can turn a family’s dynamics upside down. The scramble to find employment and replace lost income might force both parents into the workforce. This can raise critical issues around childcare and transportation. Childcare is expensive and can often take a sizable chunk of money out of a working parent’s take-home pay.
Sometimes, unemployed workers must take jobs that pay far less than what they have been previously making. Underemployment has been a very common occurrence in the last several years. Families in a reduced income situation have to fill the gap somehow; and, many times, they will turn to credit cards to make ends meet. Over time, if the income situation does not improve, this can turn into a significant credit card debt problem.
Lack of savings
Many U.S. consumers have very little savings or no savings at all. Because budgeting and other financial skills are lacking for so many, understanding how to manage income and divert some money to savings is a non-entity for many. This means when there is an unexpected expense, emergency, or reduced income, many consumers have no savings to fall back on.
When cash is already tight, it is hard to figure out how to put money aside for savings. However, establishing a savings account and making regular contributions to it is imperative for good financial health. If you do not have enough money coming in to send some to a savings account, you should look to increase your income or decrease your expenses.
Creating a solid budget will help you see where you might be spending your money needlessly. Some areas to look at are cable, landline, and wireless plans. Lower your electric bills by turning off lights and lowering your thermostat. Perhaps picking up a second job or looking to sell off unneeded items can help fund your savings account. Every little bit helps when it comes to saving.
An illness or accident that keeps a breadwinner from working or racks up many medical expenses can be devastating to a family living on a tight income. Medical care can be very expensive even if you have good insurance. High deductibles and out-of-pocket expenses, such as prescriptions, can add up to thousands of dollars. If a family has no emergency fund saved up, credit cards could be the only way to pay the doctors, hospitals, and other providers.
Those faced with a large number of medical expenses should look to negotiate with their healthcare providers to try to bring the amount owed down. Sometimes, providers will offer a discount to those who are willing to pay a portion of the entire balance at one time to get rid of the debt. This discount could be as much as 30%; so, if you are going to have to use a credit card anyway, at least you can bring the amount down significantly.
If you are unable to pay a lump sum, ask for a discount anyway. Some providers offer a sliding scale of fees based on income, which could result in a lower bill. In addition, most providers will allow you to make payments against your bill, interest-free. Take advantage of this and you can avoid the interest charges you would incur with a credit card.
Divorce is often a devastating event for a family. Aside from the emotional stress and heartache for all involved, it is a complicated and difficult situation financially. Disentangling the lives of two people is, most times, so complex that it takes lawyers and judges to divide assets and resolve differences. It usually takes time, and in the meantime, a family’s finances can get very messy.
The more difficult areas to sort out are jointly held assets and debts. Cars and homes are complex enough to resolve, but joint debt is usually much more difficult. Often times, credit card debt that is jointly held can become a large point of contention between the two parties, as neither one wants to take financial responsibility. In this case, credit card payments go unpaid, and the credit scores of both parties suffer.
If one spouse suffers from an income standpoint, credit cards become a backup if unable to make ends meet. Splitting households in half usually end up doubling expenses.
Sometimes, because of circumstances such as the ones outlined above, the burden of debt gets too heavy and something significant has to happen to resolve the situation. If a family or individual has reached the point of insolvency, meaning one can no longer meet obligations, the options for resolution become very limited. Generally, they include filing for bankruptcy or working with a debt settlement company to resolve the debt with lenders. While they both are debt resolution methods, they are very different from one another.
What is bankruptcy?
Filing for bankruptcy is a big legal step. Bankruptcy is a process in which a person who is in terrible financial trouble can have most, if not all, of his or her debt, eliminated. There are several types of bankruptcy usable to eliminate debt or restructure it in a way that one can pay it off over time.
Anyone considering bankruptcy should first gain some education on the different types, how to use them, and the pros and cons of filing. Be sure to direct any questions you have to a qualified bankruptcy attorney, as the laws have changed in the past few years. Don’t rely on the advice of friends and family. Most bankruptcy attorneys will offer a free consultation; take advantage of it.
When you consult with the attorney, be prepared to discuss your entire financial picture, including your income and expenses. The attorney will also want to know about your assets owned, as well as any you may have sold or transferred in the past. These assets include items such as homes, cars, boats, stocks/investments, savings accounts, and life insurance policies. Once the attorney has a clear picture of your situation, he or she will make a recommendation on the type of bankruptcy you qualify for, as well as what may be the best decision for you.
Once you have determined the right path to take, your attorney will handle things from there. This lengthy legal process takes several months to complete. Depending on the type of bankruptcy, you could be repaying some of your debt for several years. The impact to your credit will be severe and could haunt you for 7-10 years. It is important to start building back as quickly as possible, as it will be a long process to re-establish yourself as creditworthy.
What is debt settlement?
Debt settlement is the process of negotiating with a lender to offer a reduced lump sum payment as settlement of a debt owed, usually to a credit card company. The settlement is complete when the creditor agrees to accept the payment as complete payment on the balance. Companies such as National Debt Relief work directly with consumers, often inserting themselves between the creditor and the consumer and taking over all communications.
Debt relief companies set up an escrow account in the consumer’s name, and all monies available for payment of the debt reside here. From that point forward, you make no payments directly to the lenders. Once a predetermined amount of money exists, the debt relief company negotiates the lump sum settlement with creditors.
The impact to credit scores is significant since many creditors may go for some time without payment. However, the long-term impacts, such as the ones seen with bankruptcy, are usually not present with debt settlement. Getting back on your feet from a creditworthiness standpoint should occur much quicker.
In conclusion, there are several ways to address your debt problem, some of which can have long-lasting, adverse effects on your credit score. When considering ways to get yourself out from under a heavy debt load, it’s important to consider your options carefully and seek professional advice on the best path to take. There are many more resources available today for consumers than there were just a few years ago. In addition, most companies in the business of helping consumers get out from under debt offer consultations at no cost to you.
There is no point in letting your debt problem get worse than it already is when there are so many ways to tackle it. Don’t wait, get started today on the road to being debt-free.