Debt: The Worst Sort of Holiday Hangover

[Jan 16, 2009.]

 

For those who tend to overindulge in alcohol, the recent holidays probably brought some horrible headaches--and repeated promises of 'never again'. For those who tend to overindulge in spending, the same will apply.

The problem is that most drinkers quickly break their promises, and 'never again' becomes 'never again until the next time'. And again the same applies to spenders. People in both groups tend to have to hit rock bottom before they seriously address their problems.

The good news is that, in the current economic climate, many will look at their finances and perceive themselves as having hit that rock at the bottom. Why is that good news? Because, for both drinkers and spenders, that is often the only trigger that will set them on the path to a new and better life. Acknowledging that one has a problem is the first step.

Debt Worries or Debt Crisis?

Those coping with debt face the same challenges wherever they live in the first world. A UK web site offers some good advice for Americans and Britons alike--although it is important to recognize that English legal remedies are different from those in the US.

Martin Lewis, who is an award-winning journalist, writer and broadcaster on debt matters, suggests that before doing anything else, those with debt worries should assess how serious their problems are. Some people will have to radically change their lifestyle in order to turn around their finances. Others must recognize that no amount of economizing, budgeting, and juggling will allow them to become debt free.

A Simple Calculation

Understanding into which category one falls is a simple matter of drawing up a realistic schedule of income and expenditure to see whether one can eat, travel to work, pay the mortgage or rent, settle household bills, and make at least minimum payments on all cards and loans. Those for whom the sums just won't add up are in 'debt crisis'.

Martin Lewis advises those who face the worst problems, and who are in a debt crisis: "First of all, don't panic at the name. I've never yet heard of someone with debts so bad there isn't a path through them; starting to deal with them will make you feel better and speed up the process."

Some Ways Forward

Nearer to home, the Dallas Morning News agrees that making a realistic assessment of one's position is the key first step. For those in crisis, it recommends two possible ways forward.

First, they can consult professional credit counselors. It is worth taking care in selecting the right organization, and ensuring that its employees are appropriately trained and certified.

The credit counselor may recommend a debt management program (DMP). This involves the organization negotiating reduced rates with creditors, and then accepting a single, agreed monthly payment from the borrower, which it then passes on to all the lenders. It will require a fee for this service, but this should be minimal.

Debt Consolidation

The other way forward that may be recommended is debt consolidation. This involves combining all existing debts in a single, new loan, which is repaid over a much longer period and therefore requires lower monthly installments.

Debt consolidation has real advantages for those with no alternative. But it does have its drawbacks. The pros and cons will be explored further in the next blog.

 

About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.