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“A DOUBLE-EDGED SWORD”
(Sep. 27, 2019) — Does debt feel unavoidable to you these days? It’s certainly very common for Americans to buy on credit or loan — especially for big purchases like a home, vehicle, or college education. In fact, most adults in the U.S. have some form of debt.
If you’re one of them, does that mean you’ll always have to have it?
Whether or not debt is a fact of life depends on how you look at it. What’s most important is going into debt for the right reasons and coming up with a strategy for eliminating the debt that’s detrimental to your well-being.
Facts About Debt in the U.S.
We mentioned above that most Americans carry some kind of debt.
Here’s a breakdown of debt by generation from The Motley Fool:
- Millennials: 81.5 percent
- Gen Xers: 79.9 percent
- Baby Boomers: 80.9 percent
The most predominant types of debt in America right now are mortgages and student loans — but there are also auto loans, credit card balances, medical bills, and personal loans to consider.
Differentiating Between “Good” and “Bad” Debt
Is having debt necessarily a bad thing, though? At the end of the day, the type of debt matters just as much as the amount does. Two people with the exact same amount on paper may be facing extremely different financial outlooks.
Jess and Janet are neighbors, each with $50,000 in debt. On the surface, they seem to be in a similar boat. Digging a little deeper, we find Jess has $40,000 left to pay off a mortgage and $10,000 to pay off on a vehicle loan. Meanwhile, Janet has $40,000 in student loans left over from college, plus $10,000 spread across five credit cards. These two neighbors, though they both owe $50,000, have very different obligations — and should tackle repayment very differently.
Experts generally consider debt “good” if it helps increase your net worth (like buying a home) or increases your earning potential (like a college degree). There are exceptions to this rule, but mortgages and student loans can be investments worth making.
Bad debt, on the other hand, goes toward paying for depreciating assets — incurring debt for something that will only lose value. Examples here include credit card debt and loans for a new car, which will lose value the second you drive off the lot.
As long as you can commit to paying back your good debt over the long term, taking it on can help you improve your financial health — and its interest rate tends to be reasonable. It only becomes a problem if you start defaulting on these types of loans.
Bad debt, on the other hand, is best eliminated as soon as possible. Why? The interest rates tend to be high, and it’s easy to get stuck in a spending cycle without having anything to show for it.
So, Is Debt a Fact of Life?
Debt has become commonplace in America. But bad debt doesn’t have to be a way of life. Here are some strategies to consider:
- Consolidation: This tactic involves taking out a loan, then using it to pay off your bad debts in one fell swoop. You’re then responsible for repaying that loan for however long it takes. You’ll typically need a decent credit score to get a low-interest loan.
- Settlement: As this Freedom Debt Relief review notes, settlement is an option for people who are struggling to keep up with their monthly unsecured debt payments but don’t qualify for consolidation. A reputable program will negotiate with creditors on your behalf after you’ve saved up a certain amount of money, attempting to get them to settle your balances for less. You will pay a fee for each successful settlement.
- Bankruptcy: Bankruptcy is a last resort for people who have no other way of escaping their bad debt. If you file for Chapter 7 bankruptcy protection, your debts will be discharged but you’ll have to liquidate your assets. If you file a Chapter 13, you may be able to keep your property, but will be responsible for repaying at least some of your debts. Bankruptcy usually stays on your credit report for seven to 10 years.
Debt can be a double-edged sword — useful or harmful. Just remember debt doesn’t have to be a fact of life; there are ways to get rid of bad debt that’s dragging you down.
The most common question asked by people contemplating filing bankruptcy is, “What type of bankruptcy should I file?”. Debtors should consider Chapter 7 vs Chapter 13 bankruptcy. The debtor has two options: Chapter 7, which discharges your debts, or Chapter 13, which reorganizes your debts.