The Human Side: Debt Stress
In all the technical discussion you hear about credit card debt, the best ways to manage it and pay it off and all the rest, one thing goes largely ignored. Credit card debt is extremely stressful, and can have a very negative effect on your life, if you let it. Itís as bad as an addiction, always hanging over you, bringing you down, making it hard to life your life the way you want to. In this article, weíll take a look at how you can recognise debt stress, and what you can do about it.
The Symptoms of Debt Stress.
There are an awful lot of symptoms that can be caused by stress. Some of the most common ones are: headaches, not being able to sleep, feeling depressed and irritable, and being forgetful and unable to concentrate on what youíre doing. If youíre not sure whether your symptoms are related to stress or something else, you should go and see a doctor.
Who Gets It?
Almost everyone who has debts is stressed about them. Debt is blamed for millions of days off work every year, and is one of the leading causes of suicide ñ it seems like most times you read about someone who has committed suicide, their name is followed by ìwho owed [a very large amount] in debtsî. Students and graduates are especially vulnerable, as debt is growing amongst them faster than in any other group.
The average adult owes many thousands in debts ñ and since thatís the average, it means that many people must owe much more. Never forget that youíre not alone, and thereís always someone worse off than you.
How to Deal With It.
Stress caused by debts is often considered to be embarrassing, or shameful. People with lots of debts donít want to talk about it, even with their family, for fear of upsetting people or looking like a failure. It is very important, though, that you do talk about your problems, as keeping it all inside yourself will make you much, much more stressed. It is especially important that you talk to your partner ñ they are the number one person who can support you.
The best thing to do then is to find two people: one who can advise you, and one who can be a counsellor. That means a professional who knows what theyíre doing in financial matters, as well as a psychologist or psychiatrist, or some other kind of counsellor. Donít let stigmas put you off ñ this is about your health.
The next thing to do is to have a good think about how you got that debt to begin with. See if you can find old credit card statements. What did you spend the money on? You need to sit down, work out a budget, cut unnecessary expenses and try to free up as much money as you can to pay back debts. Even if itíll be a long time before you get everything paid off, knowing that your debt is gradually going downwards can be an excellent cure for debt stress.
Debt Consolidation Options
Debt consolidation is the act of combining multiple and various loans into one loan. In effect, once you consolidate your debt, multiple loans become just one loan ñ payable at only one rate of interest, one consistent due date, one set of payment terms and conditions so the loan becomes easier to track, monitor and, eventually, pay off. If you are thinking of consolidating your loans, read on to find out what some of your options are.
Balance Transfer Option
This is being offered by credit cards. As the name implies, balances from other loans are transferred over to the credit card where the balance transfer loan was availed. However, you should be careful about balance transfers with credit cards. Before you commit, read the agreement. Make sure, too, that you have been granted a credit limit high enough to cover all of your financial obligations. Furthermore, you should also make sure that your credit card will make a transfer to every one of your creditors and that each one will be on the balance transfer rate ñ not the cash rate or the purchase rate of your credit card.
Balance transfer rates are usually very low to entice new card members, but these rates are distinct from purchase rates which are applied on regular credit card purchases. They are also different from cash advance rates which are applied on credit card cash withdrawals. If you make an unapproved transfer ñ that is, balance transfer to a restricted type of loan ñ you may forfeit the favorable balance transfer rate and get the purchase rate or cash rate instead.
You should also be careful about making a transfer to your personal account. This is probably going to be considered a cash advance, not a balance transfer.
Home Equity Loan
From the term itself, it should be obvious that this loan has something to do with your homeís equity. Your home equity is that part of your homeís value that you actually own. Thus, it is something that you can use up or convert to cash if you want.
The loan can be processed in two ways: you can get your loan amount in one large sum or you can get it through a credit line. For the purposes of debt consolidation, however, the lump-sum loan is the better option as this would allow you to make full payments on all of your loans.
Mortgage Refinance with Cash-Out
You can also finance your debt consolidation y refinancing your existing mortgage. Typically, this is done to reduce interest rates on a mortgage. However, this can also be used to consolidate debts if a cash-out option is included. That is, the refinance will entail a cash loan which you can then use to pay off other loans ñ if the cash is large enough that is.
Whatever loan type you choose for your debt consolidation move, you should remember one crucial thing. You should be able to get the best possible interest rate (given your credit rating and financial status), enough money to pay for all of your financial dues and flexible loan use so you can pay off all of your loans whatever kind they may be. If you achieve this, then youíve got a very good debt consolidation plan going.
Debt Consolidation Advantages
There are many kinds of debt that most people incur such as credit card debts, mortgage, and students loans among other. It is possible that all these debts will add up to a point where it can become unmanageable for a single individual to handle. But there are methods to get out of this financial rut; debt consolidation can be one of the best solutions to this problem.
Basically, debt consolidation will enable you to consolidate all your debts into one so you will benefit from lower interest rates and lesser problems to deal with. If you own a house then it might be a good idea to use your home equity as your security. In this case, your house will be used as the security against the loan meaning the creditor will have a lien on your house until such a time when your debt is paid in full. You might be wondering why this is a good idea since you are putting your own house at risk. But it actually is a good idea because it has many advantages if you are really serious about getting out of your financial trouble.
Some of the advantages you can expect include keeping the creditors away from you since they have your house as their collateral anyway. You can also keep yourself away from bankruptcy because of this. In addition, you can expect smaller monthly payments that are due.
But note that while debt consolidation certainly offers a glimmer of hope for an individual who has a lot of debt, it is not without its disadvantages. For one, it is very possible that you may end up paying much more interest rates than you expect when you decide to take advantage of the option to pay off your debts in a longer time frame. Of course, this extending the time frame of your loan will entail additional interest rates.
You should remember that the main purpose behind debt consolidation is to let individual avail of lower interest rates at a longer time frame. It is also possible that debt consolidation may not work for you if you can actually pay off your debts in a shorter time frame. Ultimately though, it is your choice whether you want to take advantage of debt consolidation services or not.
There are many debt consolidation companies that offer their services to people who need help, and usually, the kind of service they offer is the same. However, you should still choose your debt consolidation company wisely because they may the key to helping you get out of debt permanently. You should also consider looking into other services they offer such as financial guidance and budgeting. When you take advantage of these services, you can expect that you will be free from debts in no time. But you should always remember that the real key to getting out of debt is knowing the root of your problem so that you will be able to avoid the debt scenario in the future.
Will You Have to Pay Back the Debt Anyway?
The most widely held misconception about <b>bankruptcy</b> is that itís the debtorís version of the ìget out of jail freeî card in Monopoly. While most people know that bankruptcy affects your credit for 7 to 10 years, very few people know that itís possible that youíll have to pay back the debt anyway, even if you file a <b>Chapter 7 ìstraightî bankruptcy</b>. The formal definition of bankruptcy is ìa proceeding in federal court in which an insolvent debtorís assets are liquidated and the debtor is relieved of further liability.î On the other hand, the commonplace definition of bankruptcy is probably ìthe process of completely wiping out your debts for free.î In the majority of cases, the latter definition may be appropriate, but in some scenarios, itís likely that even with bankruptcy, youíll still have to pay back at least a portion of the debt.
So when is it likely that youíll have to pay back your debts? Here are the most common scenarios when youíll get all the <b>negatives of filing bankruptcy</b> (severe credit impact for 7 to 10 years), but none of the benefits (youíll still have to pay back at least part of the debt):
1) You make more than the average person in your state. If this is the case, then itís likely that youíll be forced into a <b>Chapter 13 bankruptcy plan</b>. In a Chapter 13 bankruptcy, the court orders that you pay all your disposable income to a court appointed trustee, who in turn disburses payments to your creditors. Keep in mind that the court determines your disposable income by national and county statistics on average necessary expenses, not what youíre paying. So just because youíre paying a lot for a car doesnít mean the court will approve it. There are numerous cases when a judge ordered families to stop sending their children to private schools so they can have more money to pay back their creditors. In Illinois, here are the latest statistics on the Illinois median income by size of household:
Illinois Estimate
1-person families 41,650
2-person families 52,891
3-person families 62,176
4-person families 72,368
2) You have assets. If you own a home or car, then itís possible that the bankruptcy court will force you to sell them to generate sufficient cash to pay back your creditors. Chances are if have a good chunk of change invested (unless itís in a tax-exempt account like an IRA) then youíll also be forced to liquidate it. If you have a second home or another vehicle (assuming you own both completely), then youíre really out of luck. Fortunately, there are some safeguards to protect consumers from bankruptcy hell. In <b>Illinois</b>, every resident is entitled to at least $7,500 of the value of their home, $1200 of the value of their vehicle, and $2,000 for anything that they want (known as the wildcard exemption). Also, these values double if youíre married (assuming the property is in both of your names).
What does this actually mean? Consider the following example.
Letís say you have a house thatís worth $250,000, and itís in both yours and your wifeís name. You still owe about $200,000 on your mortgage, and you decided to file Chapter 7 bankruptcy. In this example, you would be forced to sell your home, and with the proceeds you would pay back the mortgage company what you owe on the outstanding balance of the loan ($200,000), youíd pay yourself the Illinois real estate exemption ($15,000), and then youíd pay back your other creditors whatever was left ($250K-200K-15K=$35,000).
Let say your house was only worth $215,000, but everything else in the above example remained the same. In this case, you wouldnít be forced to sell your home because the proceeds from the sale wouldnít amount to anything after you paid back the mortgage company and then paid back yourself the Illinois real estate exemption.
3) The creditors can prove that you were fraudulent and never had any intention of paying them back.
For the majority of us it means that unless a) you donít have a lot of equity in any of your property, b) you donít have any investments like stocks, real estate, ect., c) you donít care about having to sell anything mentioned in points a and b, or d) you donít care about having to give up your disposable for 5 years in a Chapter 13, then bankruptcy may not be your best option.
What is Financial Securities
It is true that bankers also invest money in securities, and that some of these are foreign, but here again the proportion invested abroad is so small that we may be reasonably sure that any money left by us in the hands of our bankers will be employed at home.
But in actual practice those who save do not pile up a large balance at their banks. They keep what is called a current account, consisting of amounts paid in in cash or in cheques on other banks or their own bank, and against this account they draw what is needed for their weekly and monthly payments; sometimes, also, they keep a certain amount on deposit account, that is an account on which they can only draw after giving a week’s notice or more.
On their deposit account they receive interest, on their current account they may in some parts of the country receive interest on the average balance kept.
But the deposit account is most often kept by people who have to have a reserve of cash quickly available for business purposes. The ordinary private investor, when he has got a balance at his bank big enough to make him feel comfortable about being able to meet all probable outgoings, puts any money that he may have to spare into some security dealt in on the Stock Exchange, and so securities and the Stock Exchange have to be described and examined next. They are very much to the point, because it is through them that international finance has done most of its work.
Securities, then, are the stocks, shares and bonds which are given to those who put money into companies, or into loans issued by Governments, municipalities and other public bodies. Let us take the Governments and public bodies first, because the securities issued by them are in some ways simpler than those created by companies.
When a Government wants to borrow, it does so because it needs money. The purpose for which it needs it may be to build a railway or canal, or make a harbour, or carry out a land improvement or irrigation scheme, or otherwise work some enterprise by which the power of the country to grow and make things may be increased.
Enterprises of this kind are usually called reproductive, and in many cases the actual return from them in cash more than suffices to meet the interest on the debt raised to carry them out, to say nothing of the direct benefit to the country in increasing its output of wealth. In England the government has practically no debt that is represented by reproductive assets.
Our Government has left the development of the country’s resources to private enterprise, and the only assets from which it derives a revenue are the Post Office buildings, the Crown lands and some shares in the Suez Canal which were bought for a political purpose. Governments also borrow money because their revenue from taxes is less than the sums that they are spending.
This happens most often and most markedly when they are carrying on war, or when nations are engaged in a competition in armaments, building navies or raising armies against one another so as to be ready for war if it happens. This kind of debt is called dead-weight debt, because there is no direct or indirect increase, in consequence of it, in the country’s power to produce things that are wanted.
This kind of borrowing is generally excused on the ground that provision for the national safety is a matter which concerns posterity quite as much as the present generation, and that it is, therefore, fair to leave posterity to pay part of the bill.
What Can I Do If I Am In Debt?
The vast majority of consumers will, at some time or another, find themselves in debt. Debt, in and of itself, is not a bad thing. Debt allows those who are not wealthy to purchase items that otherwise would be out of reach. Home and automobiles are two examples of items that might take years, if not a lifetime, to save enough to pay cash for. By using credit, which leads to debt, people are able to experience a better standard of living. As mentioned above, debt is not a bad thing, until it becomes out of control. Then it can become a very bad thing.
How can a consumer know if he or she is getting too far into debt? Here are some of the signs that might appear that consumers should be aware of.
Missing a payment because of a lack of funds: Most consumers will find themselves short of cash from time to time, but if you are missing payments on a regular basis or habitually making late payments as you try to juggle cash around, in essence, robbing Peter to pay Paul, then you may want to sit down and carefully look at your income versus your debt.
If you do not open the mail that comes from your creditors because you are afraid of what it might say, you are probably too far in debt.
When you have to regularly borrow money in order to pay your monthly bills, you are too far in debt.
If at the end of the month you are only able to pay the minimum payments and there is no cash left over for savings, you are probably heading for trouble.
So what can you do to alleviate these debt problems?
There are actually a few things you can do and it all starts with planning.
There are two basic documents that you need to start with: An income statement and an expense statement. It is very difficult to know where you stand financially if you do not understand how much money is coming in and how much money is going out. These are easy to create and they are filled with power once you have them finished.
Your income statement is simply a list of all the income that you have coming in. Your expense statement is probably going to be longer and will take a bit more time, but it is important. List all of your expenses including rent, auto payments, insurance payments, credit card payments, etc. Try not to forget anything.
Subtract your expenses from your income and that is your disposable cash for the period. Some people may have a negative number, meaning they are spending more cash than they are getting in. This is a sure sign of trouble.
If your disposable income is a small amount or a negative number you may want to continue reading some of the other useful articles we have available for you. There are certain actions you can take to help get you out of debt or at least reduce the strain that it has on your income. Working on your debt issues is time well spent.
4 Simple Steps To Get Out Of Debt – And Stay Out
Step One: Plan for the Unexpected Big Time Bill
The first step arises from debt from a one-time large expense – something that is too large to be paid for with your monthly paycheck, or by saving for a few months.
Many of these debts are investments in either an asset that will appreciate over time, or a income stream that will be greater over time. The most common example is the purchase of a home. Very few people are able to save enough money to purchase their home outright, or pay for their entire home out of a few paychecks. We use a mortgage to pay for the home after-the-fact, and to enjoy home ownership in the meanwhile. Another example is investment in education. Many people cannot afford to pay for college tuition outright – so we take out loans, planning that our future income stream will enable us to be able to afford to pay for the education after-the-fact.
The more insidious type of one-time large expense is the expense that is not an investment. The emergency, unexpected, unplanned-for bill – extreme medical bills, disability, failure of a business, a lawsuit judgment, or long-time unemployment. These bills can put a family under – forcing them to either sell assets, move out of their home, or declare bankruptcy, because they will never be able to pay off the debt with their income.
One way to combat this danger is to set aside three to six months of your living expenses in a special savings account – an Emergency Fund — to be used for the emergency, unexpected expense. This money is sacred, only for a family emergency. The Emergency Fund will save your family from potential tragedy and help you create a secure future.
Action Step #1: Open a special savings account to be your Emergency Fund. Set aside money each paycheck or month to fund this account.
Step Two: Think Out of the Budget Box
Instead of worrying about budgets, this step is the flip side of cash flow problems – income.
We know when we have a debt problem. We may stop opening bills, stop answering the phone. We may even try to create budgets, reduce our expenses, cancel cable, live at the basic minimum, to try to stop the bleeding.
But sometimes, overspending is not the problem. It is underearning.
You may just not earn enough to afford to live your life. I’m not talking about living an extravagant lifestyle, or even a “nice” lifestyle – but the basic necessities of life – housing, automobile, phone, insurance, groceries, gas, clothing – may add up to too much, given your income. This is especially common in expensive places to live, like the Silicon Valley.
The first step in dealing with this problem is to stop feeling guilty. You are not a bad person, who spends irresponsibly. You are someone who needs to acknowledge that you need, want, and deserve more income.
Instead of being frozen in guilt, start to take action on creating more income. You may not need to do something radical – you may just need to ramp up what you are already doing, or look for hidden treasure already in your life.
Put together a proposal for your boss, to describe how the company would be better if you got a raise. Create a new information product to generate passive income for your business. Search your basement for items you can auction on e-bay. Teach a class on scrapbooking, or changing the oil in your car. Have a garage sale to generate some quick cash, and reduce the clutter in your life.
Whatever you do, the important idea is to start today.
Action Step #2: Brainstorm 5 ways you will earn more income now – such as – ask for a raise, look for a new job, start a small business, sell a new product, auction old items on e-bay, rent out a room, teach a skill, or have a garage sale.
Step Three: Planning for the Big Stuff
This step is about the debts that sneak up on us. You may be able to pay for your bills and regular expenses each month — but what happens if the car breaks down? The property tax bill arrives? Your quarterly’s are due? Christmas? Baby announcement? Wedding invite? The family or high school reunion? The big family vacation you all deserve?
Are you able to pay for those non-monthly expenses out of your paycheck or your small business profits? Or, do those items go on a credit card?
Automobile repair, gifts, taxes, and travel are all examples of expenses that are non-monthly, but are expected. We know they are coming, but not necessarily when, or how much. These expenses should not be going on a credit card – you should save for them ahead of time, so you do not pay a bank 10-20+% a year for the privilege of paying for your expenses after-the-fact.
Go through your bills, receipts, and cards for the last year, or the last few years, and figure out how much you spend on each of these categories each year, on average. If you don’t have those records, make a realistic estimate. Divide that annual amount by 12. That’s how much you should set aside each month for your irregular expenses.
Action Step #3: Open a special savings account for at least one non-regular expense: either auto repairs, taxes, travel, or gifts. Save a fixed amount each month in that savings account, so when bills are due, you already have the money!
Step Four: Plug The Holes
Step four is about how to prevent your family from going into debt, by planning for your expenses ahead of time. This step we come to the most insidious problem, and the most difficult to conquer – overspending.
Do you know where your money goes each month? How much are all of your bills? How much are you spending on Dining Out? Drinks Out? Gas? Target & Costco? Clothes? Personal care (i.e., massage, pedicures)? Recreation – movies, golf, Netflix? Toys (both for the kids, and for yourselves)? Do you really know?
Do you spend your money in accordance to your values and priorities? Is there one, or more areas, where you are spending money not because you particularly need, or even enjoy, that product or service – but because you are not paying attention, or because you are compensating for another problem in your life by habitually spending money in that area?
Commonly, we see this in clothes, toys for kids, recreation, high-tech gadgets, and dining out – easy for relatively small expenditures, made each day or week, to add up to hundreds, if not thousands, of dollars each month. Spending without thinking will derail you from ever being able to achieve your most important life goals. Especially if you are spending more than your income, month after month.
Instead of being frozen in guilt, do something about it. Look over your habits for the last few months, and pick the most obvious problem area, where you “go” when you are stressed, bored, or unhappy. Do you buy CDs? Shop online? Get a new pair of shoes? Start in one category, and create good habits and rules for yourself in that area – then carry those personal rules over to the rest of your expenses.
Action Step #4: Create a Cash-Only account for your problem category. Withdraw your budgeted monthly amount in cash on the first day of the month, and place the cash in an envelope – when the envelope is empty, you’re done!