Constantly living with debts impacts all our daily actions and decisions. It depresses our souls and saddens our spirits. If this debilitating problem were a serious medical issue, we would seek out professional help to find the root cause of the problem and treat it so thoroughly that it will disappear forever. The same approach should be used for dealing with debts.
What is debt?
So, where do we start? In its simple form, the definition of debt is “money owed by one party to another”.
To fully understand the extent of our debts we should differentiate between “visible debts” and “invisible debts”.
Visible debts are known and defined (and usually fixed) amounts of money we owe to:
- The bank
- The Cable Company
- The Mobile Phone Company
- The Municipality and other government organizations
Invisible debts are sums of money we have already committed to pay back, but for some reason have not been settled yet. For example:
- Future monthly deductions, such as credit card payments
- Post-dated checks
- Interest charges on bank overdraft
- Instalment-based purchases (future payments are considered as debts)
- Unpaid parking tickets
- Deferred payments at our neighborhood store
These may be negligible sums, but they add up quickly. If they carry interest they can amount to a lot of money.
Other significant debts are those that result from foreclosure, bankruptcy, and “gray market” debt settlements. These debts, owed to tough organizations, give us sleepless nights and must be dealt with urgently. Because of their complexity, we recommend that you seek out professional help directly. We will not deal with them in this article. However, we are obliged to stress that you must refrain from using “gray market loans” at all costs. These loans are out of question, period.
“No Brain – No Gain”: Debts must be paid. There is no way around it. In this article we will try to explain how to avoid the sliding slope of debts that can lead to legal action against you – all the way to house repossession and full bankruptcy. Simple logic tells us that resolving debts before they become legal issues are simpler and much more cost-effective.
To summarize thus far
Here is a partial list (long enough, unfortunately) of types of debts:
- Bank loans
- Credit cards
- Loans through paychecks
- Workplace loans
- Loans against work deduction benefits
- Local grocery store
- Charity of any kind
- Friends and family
- Running behind on mortgage payments
- Private loans
- Post-dated checks
- Income tax, Sales tax, Social Security
- National Broadcasting Authority
- Property tax
- Electric bills
- Telephone bills
- Mobile phone bills
Know your debts. In order to help you deal with this long list and to avoid giving up, lets create an organized table that will help us map our debts. Here is an example:
|Creditor Name||Debt Balance||Date Debt Started||Interest (in %)||Number of payments left||Monthly payment||Notes|
|National Bank||13,000||4/12/2013||8.65%||Credit Line: 20,000|
Up to 5,000, 5.55% interest
5,000 – 20,000, 8.65% interest
Generally, debts are divided into two main types, and a separate special one:
Settled debts: Debts for which an arrangement was made with the creditor or the lender, and there is a monthly payment, recurrent or one-time. For example: bank loans or credit card payments.
Non-settled debts: Debts for which there was no payment date arranged with the creditor or lender. For example: local grocery store debt, late property tax payments, returned checks or bank overdraft.
Mortgage: Mortgage is considered a debt, but for the purposes of this debt mapping table we will not consider it as debt, but rather as an ongoing housing expense. However, in the case of mortgage payments in arrears, we will treat late payments and fees as debts.
How are these debts created?
There is no point in trying to resolve debt issues unless we first understand how they are created or formed. Otherwise, they will quickly sneak up on us again through the backdoor.
In some cases, debts are created due to expected and/or unexpected life events we did not plan for in advance. Examples of such events include: bar mitzvah or wedding of one of our children, layoffs, or – God forbid – serious illness.
Another type of debt is one that results from ongoing fiscal mismanagement. Simply put – you spend more than your income allows you – your budget is unbalanced. You cannot eliminate debts due to ongoing unbalanced budget unless you seriously change your lifestyle. Working on changing your lifestyle in the present will stop a pileup of future debts and will allow you to settle past debts.
What is the first step to resolve our debt problem? The answer is to first prioritize our debts and deal with them accordingly. How do we do it? That will be explained in the next chapter of this guide.
Overcoming debts in five steps:
- Know your debts
- Learn how to prioritize debts
- Calculate your monthly repayment ability
- Plan your debt settlement while cooperating with your creditors/lenders
- Persistence! Even when it’s tough