It’s inevitable, sooner or later we all find ourselves with some kind of debt. And that is not necessarily a bad thing. Taking on debt or receiving credit can be a good thing. In fact, it is “money creation.” When we receive credit (take on debt) to buy a home, purchase a car, pay for an education or simply buy furniture or clothes, that we otherwise could not be able to buy (because we do not have the cash to pay for the items outright), the credit we received acts as money, allowing us to buy the house, car, education, furniture or clothing. Debt then becomes a very useful way of bettering our lives, allowing us to purchase things and services that make our lives better.
The real issue is paying back the debt, after the purchase is made. If we take on more debt than our income can afford to pay back, it becomes overwhelming, leaving us stressed, anxious or even depressed, as we look for options on how to deal with the debt burden.
Over many years of representing clients saddled with excessive debt and counseling those overwhelmed by insurmountable debt burdens, I have found three common themes that, if understood before debt is taken out, most people can avoid being placed in a position of trying to figure out how the debt will be paid back.
THE FIRST RULE:
Do not borrow money that cannot be paid back by current income.
Seemingly simple enough to understand, yet people every day accept and commit themselves to debt when they don’t have the income to pay it back. For example, prior to the real estate collapse, and the mortgage crisis that followed, homebuyers committed themselves to years of monthly payments, with the hope their income would increase to allow them to pay the loan, with no real concrete plan to actually pay it back. Any unanticipated event in their lives and the mortgage was not paid.
THE SECOND RULE:
Do not use credit to purchase assets that don’t produce income or have any chance of going up in value.
Understanding this rule, one will appreciate that borrowing money to buy real estate, which over an extended period of time tends to increase in value and also acts as a vehicle for saving money by building equity, is a good use of debt, but using credit to buy a car or a new computer, items which drastically depreciate in value as soon as the buyer walks out the dealership or store, may not be the best use of debt.
THE THIRD RULE:
If you use a credit card, use it for convenience sake, to make purchases you can afford to pay when the bill is received the following month.
We all understand the convenience of having and using a credit card to buy goods and services. More often than not, a credit card may be the only way to pay for something. For example, an airline ticket or rental car usually can only be purchased by using a credit card as the means of payment. Credit cards are also a convenient payment method when making an online purchase. But the key is, to pay the bill when it is received the following month. Using a credit card for the convenience it provides in making a purchase, but not paying the bill when it is received the following month, quickly leads to a situation where the debt and the accumulated interest on top of the debt, becomes overwhelming, leading to a situation where current income cannot afford to pay off the debt.
There you have it. The 3 rules you need to know to effectively handle debt and avoid being placed in a position of not being able to pay it back.
Of course, sometimes truly unforeseen circumstances do arise, leaving you with the inability to pay back debt. An unexpected loss of a job or an injury leaving you unable to work and without income, are both instances that cannot be fully anticipated and can lead to manageable debt burdens quickly getting out of hand. In those circumstances, you have options.
Call to talk with an experienced bankruptcy attorney in Chicago. There is a better way.
What about you? Do you see credit as a form of money creation? Do you have any other suggestions or rules on how to effectively use debt? Is it possible to function in today’s society using the mentioned 3 rules of debt? How has debt overwhelmed you? Send a comment with your thoughts.
Together, we can make it better.