Debt Management: Bad Debt Repairs

Studies show an average American household has debt worth $120,000. Suppose, you make only minimum payment on the principal amount, it would take you many years to become debt free and you would also end up paying more interest. There are two types of debts - bad debts and good debts. A debt is a good debt, when you apply for a student loan to finance your higher education with the hope of getting a better job opportunity. Here the student loan is considered as an investment than a debt. Examples of a good debt are the home loan and the mortgage loan.

A credit card debt is a bad debt. The reason is when you use plastic money you do not feel the money slipping through your fingers and you have the tendency to splurge. This can lead to an unhealthy financial condition if you do not clear the entire amount at the end of each month. If you pay only the minimum amount due, the debt is going to accumulate and the credit limit on your credit card comes down. Another example of a bad debt is taking a loan to pay for a vacation that you cannot afford.

Bad Debt Repairs

If you are badly in debt, get a debt advice of a debt counselor. He would be in a position to help you make a financial plan to repair your bad debt. Debt counseling would help you in deciding whether you want to apply for debt consolidation or declare bankruptcy.

Debt consolidation
When you approach a professional debt consolidation firm, they would help you get a debt consolidation loan with a low rate of interest. According to the agreement between you and the debt consolidation firm, they would deal with the creditors directly. The firm would consolidate all your debts and you would have to make only a single payment to your debt consolidation firm. They would distribute the money among your creditors. Some of the benefits of debt consolidation include

• The rate of interest is low.
• Your credit rating would gradually improve.
• You would be free of debt within a span of 5 to 8 years provided you follow the financial plan drafted by the debt counselor.
• Debt consolidation would help you save some amount of money that can be used to meet other expenses.

Bankruptcy
When you cannot repair your debts through debt consolidation you can declare bankruptcy. However, before you file for bankruptcy it is advisable to meet a reputed debt counselor. Filing bankruptcy can affect your credit report for the next ten years. Once you file for bankruptcy most of your debts are cleared off and you can stop wage garnishment.

Debt consolidation and bankruptcy are for the people who are neck-deep in debt. You can repair the bad credit by yourself provided you make a monthly budget plan and also by reducing the urge to spend on unnecessary goods and services. Pay off the outstanding debt of the credit card(s) with high rate of interest first. If necessary, use your savings to clear off the debts. This will reflect in your credit score. When you are badly in debt, the positive effects of savings will become nullified. Once you become debt free, you can start to save again.