Good Debt vs. Bad Debt
Even though student loans and mortgage debts are generally deemed an “investment” in one’s future and therefore good causes of debt, other forms of debt such as credit card debt or medical bills debt are regarding as bad debt types.
The idea of good debt vs. bad debt speaks to the purpose of the loan taken. Loans taken for educational purposes or for the purpose of owning a family home or other forms of dividend reprising property, are expected to yield a positive financial return.
In general bad debt is looked at by creditors, debt relief and debt settlement providers in two ways. On the one hand, there’s credit card debt which is associated with overspending and living beyond one’s means (if you are familiar with the maxed out credit card syndrome, this is the one for you). But there are a variety of reasons people find themselves trapped into an insurmountable amount of debt.
- Expensive medical bills
- Sudden loss of income due to no fault of their own (ex: COVID-19)
- Expensive divorce settlement
- Unexpected emergency expense (ex: car breaks down)
- Severe damage to property or home
- Helping a family member with an addiction
While both forms of bad debt constitute a problem and an unfavorable circumstance, they are nevertheless looked at differently by creditors and relief companies – there is a big difference in having overdue medical bills vs. overspending on a wedding or irresponsible credit card use.
|Good Debt||Bad Debt|
|Home Mortgage||Credit Cards|
|Student Loans||Personal Loans|
|Business Ownership||Auto Loan|
Debt Relief Strategies
In general debt relief works by applying 1 of 5 strategies:
- Using a credit card balance transfer. Mostly used in cases of high-interest credit card debts, this debt relief formula transfers high-interest credit card debts to a new account with a 0% balance transfer rate.
- Taking a consolidation loan with a fixed term and a fixed interest rate so you know exactly when you will be free from debt.
- Creating a debt repayment plan that will renegotiate the terms of your loan, including its interest rate, duration and even the loan amount to be returned
- Trying out a debt settlement, which may include offering creditors lump-sum payments to settle your debts for less than you owe. This is also known as Debt Forgiveness.
- Finally, the last resort debt option is to file personal bankruptcy. You can read more about the types of bankruptcy.
Ultimately the only way to get yourself out of debt is to arrange for a debt management plan. While in some cases debt management can be done on your own, in most cases it takes turning outwards for help to reach the goal of true debt relief.
Debt Relief Companies
Debt management companies do 1 of 2 things, and in some cases combine both strategies. They will either assist you in negotiating a consolidation and refinancing plan with your creditor, or they will appeal for a debt settlement – which may or may not include some form of debt relief – on your behalf.
Whether you intend to attempt to relieve your own debt or plan to turn to a debt relief company for assistance, here’s the key questions to have answered:
- How much is your total debt amount?
- What is your income-to-debt ratio?
- How many creditors/lenders comprise your debt?
- What is your income forecast in the next 15-20 years
- What are your current monthly returns
- How much are you paying in interest rates?
How to Choose a Debt Relief Company
While debt relief is an attainable goal when done with the help of trained experts, it can be a pipe dream and a disastrous experience if you decide on a company that doesn’t have your best interest in mind. As with all things internet, reputation and a brand name play a role in finding the right debt relief service that will get the job done.
Keep your eyes open for so-called “debt relief services” that offer deals that sound too good to be true. All debt relief companies should prominently list their Better Business Bureau (BBB) rating on their website, along with a link to the BBB website.
Certifications to Look For:
- A+ Rating with the BBB
- AFCC Member
- IAPD Accredited company
- Trustpilot Rating
Look for signs of consumer satisfaction. Check for signs of unlawful activity. Do your homework before you choosing a debt relief/settlement company.