As counterintuitive as it might sound, there is such a thing as “good” debt. Sure, taking out a loan to acquire something capable of appreciating in value is a good thing. Yes, one could argue vacations put you in a better mental space and can help you create value, but they fall under the category of “bad” debt nonetheless.
Meanwhile mortgage loans, small business loans and student loans all fall into the good debt category because you are investing in something that may earn more money in time.
But be warned! Good debt can quickly turn into bad debt if it’s not managed carefully. Here’s what to do when good debt goes bad.
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First Remember Nothing Is Guaranteed
There was a time, in the not too distant past, when buying a nice home in a nice neighbourhood was a quick ticket to profit street. Home prices were appreciating rapidly and there was a lot of cash in the system to help nearly everyone purchase a home. Ultimately, that went bad and a lot of people were left with out turned pockets.
Similarly, student loans can be useful investments if you’re going into a field with high income potential. But you have to be somewhat prescient to anticipate the needs of society when you graduate to make sure your diploma will be valuable. Otherwise, you’ll be out of school with a huge debt burden and no way to service it.
Ditto small business loans. The good news here is lending institutions tend to require extensive documentation and evidence of your expertise before committing. This makes them a better bet, but things can still turn on a dime, leaving you in a lot of trouble.
Smart Debt Solutions
If you find yourself in a situation in which your good debt has gone bad, you do have options. The first thing to do is take stock of your situation to see where your debt to income ratio falls. Add up all of your monthly bills and compare the total to your income. If you make more than you owe, bill consolidation, coupled with renegotiating the terms of your loans to lower your interest rates and payments is a good move.
If you owe more than you make, you can consider one of a couple of debt reduction strategies. Be apprised, many forms of good debt fall into the “non-dischargeable” category, which makes dealing with them a bit tougher. However, if you also have a lot of unsecured debt, getting it managed or settled could free up enough cash to keep the good debt afloat.
Debt Management
Generally conducted alongside credit counseling, this approach involves getting creditors to waive interest payments and fees to help make repayment easier. Lenders tend to accept debt management programs because they’d rather get their principal back than risk losing everything if you’re forced into bankruptcy.
Debt Settlement
Agreements are also reached with creditors in debt settlement. However, in addition to foregoing fees and interest payments, creditors are asked to forgive part of the loan amount in exchange for a lower settlement amount. This at least gets them some of their money back, again, before you declare bankruptcy and the debt is charged off completely.
Primary Consequences
Both debt management and debt relief will have a detrimental effect on your credit score. However, management typically leaves less of a scar than settlement. There might also be tax issues to consider, as the IRS might classify the forgiven portions of a debt as income.
You also need to be careful to find reputable companies with which to work. There are people out there who live to prey upon those in need of this type of assistance. However with careful research, like these Freedom Debt Relief reviews, you can find honest people who are sincere about helping you turn things around.
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