Debt in America is on the rise again. In fact, recent numbers suggest that more and more Americans are getting comfortable with higher debt loads. The first quarter of 2017 ended with household debt topping out at 12.73 trillion, a number never before seen since the tracking of household debt by the New York Federal Reserve. Just from the end of 2016 thru the first quarter of 2017, Americans accumulated $50 billion worth of new household debt. For the year, 2016 showed the largest increase of household debt in the last 10 years.
The reasons Americans are eagerly taking on more debt are quite clear. In the years after the financial meltdown of 2008, banks became very strict in their lending practices. In addition, many Americans had serious impacts to their credit during the Great Recession and were unable to obtain much credit at all. Now that the economy is strengthening, banks and other lending institutions are more optimistic, and they have begun to relax their lending standards. Additionally, consumers whose credit took a hit during the tough financial environment of the recession have had sufficient time to repair it.
Along with the improved economic conditions, consumer confidence has risen to a 16-year high according to The Conference Board. This spurs American spending on big-ticket items such as homes and cars because they feel their financial future, as well as that of the country, looks bright.
Therefore, while it is somewhat alarming to see debt levels in America climbing at such a fast rate, it is fair to note that delinquency rates are not nearly as high as they were in 2008. However, with the cost of living still outpacing income growth, the risk is there that many consumers will find themselves in a troubling debt situation.
Is there such a thing as good debt?
Many consumers believe there is a distinct difference in the types of debt they hold. Some feel there is actually a good kind of debt. Let’s be clear about this: there is no such thing as good debt. It is always better to have no debt. You may think it’s a good thing that you were able to obtain a mortgage to buy your home; however, it is obviously much better to have a home that is free and clear. Many think a mortgage offers a good tax deduction, but most Americans will receive little to no tax benefit from their mortgage interest deduction.
So, since there is no such thing as good debt, what’s left is bad debt. Of course, there is such a thing as reasonable debt. A young couple that is just getting started in life will probably not be able to save enough cash to buy a home outright, so they will need to take a mortgage. Having a mortgage that you can comfortably afford if you are young enough to be able to pay it off before retirement is reasonable debt. Having multiple, maxed out credit cards that you are struggling to pay each month is not reasonable debt.
So, how do consumers accumulate a bad debt problem? Unfortunately, there are many ways. Some are due to unfortunate life events while others are due to a lack of discipline. With Americans carrying so much debt, it could mean trouble for many consumers if the economy starts to sputter or life throws them an unexpected curveball.
Types of bad debt
Regardless of how the consumer accumulated the debt, it’s never a good situation when anyone is deep in oppressive debt. Let’s review some of the types of debt consumers can fall into, and some of the circumstance that may occur.
Debt from overspending
Because we live in an “I want it now” society, many Americans do not have the self-discipline or the patience to wait until they’ve saved enough money to make a bigger purchase. Credit cards make it easy to purchase things that consumers do not have the cash to pay for. Because minimum payments are designed to make money for the bank or credit card company, consumers find themselves in a situation where they are paying a lot of interest but very little toward their principal balance.
In addition, many have never learned to formulate a budget or manage their money well enough to make ends meet. Creating a budget is the only way to avoid accumulating credit card and other types of consumer debt. Otherwise, there is no accounting for where monthly income is going, so there’s a good chance overspending will occur. Having a budget will also help you learn how to save money so there is less reliance on credit cards to make up for budget shortfalls.
Debt from loss of income
When someone loses his or her income, through a job loss or some other catastrophic event, things can deteriorate very quickly, particularly if the person losing the job is the family breadwinner. It can be a very stressful time as families struggle to keep their head above water. Many times, debt will accumulate very quickly, as they have no choice other than to turn to buying on credit simply to survive.
It is also common for a person who has become unemployed unexpectedly to take a lower paying job while continuing to job search. While some income is better than no income, debt can accumulate rapidly because there just isn’t enough income to make ends meet.
Families that find themselves in these dire circumstances should seek out as much support, financial and otherwise, as they can find. There are numerous options out there to explore. Networking and talking to friends and neighbors can uncover many unexpected opportunities. In addition, there are other forms of assistance, such as unemployment compensation, that one should investigate, as well.
Debt from having no savings
Estimates say that almost 70% of U.S. consumers have less than $1,000 in savings; most have none at all. This is a very scary proposition for consumers long-term, as this includes retirement savings. This also means that most Americans have very little ability to handle even the smallest of life’s emergencies, much less something such as a job loss or an unexpected medical event.
While saving money can be a difficult process when money is tight, it is necessary to put money aside each month to guard your financial security. Creating a budget and cutting out unnecessary expenses is a good place to start. Comb thru your monthly expenses and look for wasteful spending practices or bills you can eliminate or at least reduce. In addition, picking up extra income from a second job or from selling items that you longer need or want can be a great way to get a savings account started.
Debt from medical bills
Medical bills are one of the primary sources of debt for low-income consumers and the elderly. With the rising cost of medical care, getting good care can be expensive, even with the best of insurance. Co-pays, deductibles, prescriptions, and other out-of-pocket expenses can add up to big dollars, and most Americans are not prepared for several thousand dollars in unexpected medical expenses.
If the person who is ill or injured is the major breadwinner in the family, then the effects can be far worse. Medical bills that are piling up on a family with reduced or eliminated income can push it into financial trouble very quickly. If no savings exist for a family to fall back on, relying on credit cards could become necessary immediately.
Families facing a large amount of medical debt should proactively communicate with their healthcare providers about resolving the debt. Many times, substantial discounts are on offer for those who can pay immediately. If not, most hospitals and providers will allow a negotiated payment plan that, in many cases, is interest-free and offers very manageable monthly payments.
Debt from divorce
When a family goes through a divorce, it is always, even under the best of circumstances, a devastating event for all family members. Apart from the difficult emotional stress brought on by divorce, financially, it is enormously difficult and complex. Separating a married couple, especially if they have children, is generally so intricate and complex that it requires court intervention to reach a settlement regarding finances and property.
Many times, the financial strain of separation and divorce can lead to a rise in overall debt. Having to break one household up into two can mean doubling expenses such as rent and utilities. If there is no additional income coming in, separated couples may need to rely on credit cards to meet their budget demands.
Often, due to some of the circumstances we’ve covered, consumers find themselves in a very difficult financial situation. When this occurs, it is important that they act swiftly to try to resolve their debt situation before their options become too limited. If they have found themselves at the point of insolvency, meaning they are no longer able to meet their obligations, they cannot delay in choosing a path to resolution.
Many consumers, when faced with such dire circumstances, believe that bankruptcy is their only way out of their oppressive debt situation.
When a consumer files for bankruptcy, he or she has taken a very large and impactful legal step. Bankruptcy allows a person or a company a legal means to absolve itself from much of the debt. While there are several different types of bankruptcy, some are better suited for individuals, while others are ideal for corporations. If a consumer is considering bankruptcy, he or she should seek the advice of a qualified bankruptcy attorney before deciding the best path forward.
Many bankruptcy attorneys will offer a free consultation to those considering filing bankruptcy. When meeting with a bankruptcy attorney, consumers need to be willing to talk, in depth, about their financial situation. This will, most likely, include a detailed discussion about their debts, assets, income, and any recently sold or transferred assets. He or she will want to know about all assets, including homes, boats, and cars, as well as any investments, such as stocks, bonds, life insurance policies, and other property. It is important to account for all assets, sales, and transfers so the attorney can make a proper recommendation. All assets and transactions will need to be reported properly to the bankruptcy court.
When the attorney establishes the most favorable form of bankruptcy for a consumer to file, he or she will handle most of the legal process from there. The process of filing and processing the bankruptcy through the court system will generally take several months to complete and, depending on the type of bankruptcy filed, may require several years of restructured debt repayment. A consumer’s credit score will suffer for a period of 7-10 years. After the filing is complete, it is important to begin rebuilding credit immediately.
Is there another option other than bankruptcy?
If consumers are proactive about their debt situation, often times, there are far better options than bankruptcy. Sometimes, consumers may be able to qualify for a debt consolidation loan if they have not allowed their credit to suffer in the meantime.
If consumers are unable to qualify for a debt consolidation loan, they should consider debt settlement before making the leap to bankruptcy. Debt settlement is a managed process of negotiating settlements with creditors.
Debt settlement companies such as National Debt Relief work with consumers and their creditors to settle difficult debt situations. They often take over communications between the creditor and the consumer, in an effort to facilitate a smooth resolution.
If you are in a difficult debt situation, regardless of the reason, it’s important that you act decisively to resolve your debt in the best way possible. Give a good amount of consideration to your options and seek the advice of a financial professional who can help you decide the best path forward.
With so much help available, it is unnecessary to let your debt problem grow out of control. Get started right away on reaching the right resolution to your debt problem.