What You Should Do If You Have Bad Debt
Bad debt happens when one party loans money to another party, but the party borrowing the money fails to repay the debt as agreed upon. For example, the borrower failed to make monthly payments as agreed or completely defaults on the loan completely. This makes the debt bad because the lender loses a portion of their investment.
This type of debt is particularly a problem for both non-business and business lenders. Instead of providing a return on their investment, a bad debt situation creates legal and financial issues and often stalls income. That makes it imperative that all debt agreements are clearly defined in writing so there are no disagreements or misunderstandings.
Legal Issues Caused by Bad Debt
When lending money, you need to be aware of issues that can be caused by bad debt situations. These may include:
- Bankruptcy: While bankruptcy can sometimes release the borrower from their debt, not all types of debt are dischargeable in a bankruptcy.
- Tax consequences: This type of debt situation can sometimes affect how a lender is required to file their tax deductions. Depending on the situation it could have good consequences or bad.
Turning Bad Debt into Good Debt
It is possible to reverse the debt into good debt by creating the right budget. To stay on the right path financially, and avoid creating bad debt, you should never have more than one-third of your net income go toward your mortgage payment. This means you have to find the right balance in your budget. To turn your bad debt into good, you must implement the following steps:
- Kiss your credit cards goodbye. The first and possibly most important step you can make is moving away from credit card use. You should not be using credit cards to pay all expenses or to pay for your everyday needs. This will get you into significant financial trouble. Instead, only use one or two credit cards and pay off balances before you start incurring more fees. The last thing you need is even more long-term debt problems from credit card use.
- Increase your income. If you are able to increase your income, it will free up some of your cash to allow you to pay down debts more quickly. By paying down your debt, you will have more cash that can be used to reach your long-term goals. Loans and credit cards that have high balances should be your first priority. You should consider making more than the minimum payment or increasing the frequency of the payments if possible.
- Do not lose your motivation. Take your time and do not get frustrated. Motivation will lead you to success. After you pay off your first credit card, apply the amount that you had been paying on that debt to your next largest debt. You will continue to make the minimum payment on the second card, as well, and this will help you pay off the next card even faster. Continue this method until all of your debts are paid off.
- Last but not least, build wealth. Once your bad debt is paid off, take the payment that you had been making monthly and invest that money.
Consult with an Experienced Attorney
Do not be afraid to contact an attorney if you are having financial trouble. People find themselves struggling financially for a variety of reasons, and there is no shame in it. The attorneys at Cornwell Law Firm can help you understand what debts you that are good and bad and help you determine what your best options are for finding financial freedom. Contact our office today to schedule a consultation.