Managing your good and bad debt will improve your financial outlook.

Debt! Sometimes it’s good; sometimes it’s bad….and it can definitely contribute to stressful situations and relationships. Although most of us don’t love the thought of owing money to others, debt can sometimes be helpful: for example, student loans (when planned for and used properly) can help you earn a college degree that will allow you to build wealth. But student loans can also be detrimental if you take out more money than your degree will yield in the long-term. Mortgages are often considered good debt because they enable you to build equity in your home. But, if you become unable to make payments, borrow more than you can afford, or don’t plan appropriately for an Adjustable Rate Mortgage (ARM) loan, you could become “upside down,” meaning you owe more than the home is worth…..turning that good debt into bad debt. Credit cards, if you repay all your monthly balances on time, can build credit history and generate significant cash back or rewards. But interest rates are typically high, so failing to pay the balance each month means you’ll quickly rack up bad debt.

Essentially, debt becomes “bad” when you cannot pay back the money you owe (either via a loan or other type of bill). Debt collectors will start calling, and you might have legal problems if you cannot pay back the money. It can all be overwhelming and confusing, but with a little planning you should be able to tackle the most important piece of effective debt management: determining whether a particular debt will reward you with more than what you’ve invested.

Creating a Budget

The first step is to create your budget, which will designate the all-important income and expense totals and allow you to see your boundaries for spending, enabling you to live within your means. To create your budget, you’ll need to gather documents such as pay stubs (i.e., income), recurring bills (rent/mortgage, utilities, insurance, etc.) and receipts for monthly spending (groceries, transportation, entertainment, shopping, dining, etc.) (i.e., expenses). Add up your combined monthly income and subtract your monthly expenses: this will show how much money you have remaining at the end of each month, and whether you are routinely spending more or less than you earn. You can then use your budget to evaluate where you can make adjustments to spend less, save more, and start paying down any debt.

Payment Plans

If you are behind on any bills, call those companies and inquire on whether they can work with you. Many companies will allow you to adopt a payment plan versus paying an entire bill at once. If you explain your situation and emphasize that you want to reimburse them, they should be incentivized to create a plan with lower payments you can manage. Some companies or organizations (such as hospitals), also have policies where they will offer hardship discounts, allowing you to pay less than the original bill in certain situations – after all, they’d rather get some of their money back than none). Even if you don’t qualify for a discount, payment plans will allow you to pay what you can afford over a longer period of time. The companies still get their money (albeit more slowly) and you don’t get penalized by being referred to a debt collecting agency.

If you’re having trouble paying your mortgage or car payment, contact the bank immediately; you don’t want to face a foreclosure or car repossession. For student loans, contact your loan servicer directly to request assistance (the government has certain programs that can help those with federal student loans).

Debt Collection and Credit Counseling Agencies

If you’ve already been referred to a debt collector, confirm whether it’s truly your debt and find out the logistics of who you owe, how much you owe, payment options, and what to do if you don’t believe it’s actually your debt. However, don’t share personal or financial information with a debt collector, and don’t make any commitments until you’re comfortable. If you don’t agree that it is your debt, you can send a written notice to the collector, who must then provide verification of the debt (such as a copy of the bill.) A good resource for learning more about your rights, as well as the rules collectors must follow, can be found at:

Finally, if you’ve followed the tips above and still feel you need further assistance, you can contact a credit counseling agency. These agencies can advise you on how to best address your debt and stick to a budget. However, make sure you do your research! You’ll want to find an authorized, non-profit agency that doesn’t charge high fees. The U.S. Department of Justice provides a list by state of approved credit counseling agencies. Your local consumer protection agency may also be able to provide recommendations.

Managing your debt is one of the best ways you can ensure financial stability for you and your family. Understanding your budget and addressing any bad debt is a great start. If you have questions or would like to discuss debt management further, HW&Co. would be happy to chat. Our advisors are well-versed in financial matters and can point you to relevant, local resources that help you plan for your future.

© 2021

Dave Shealy

Dave Shealy, CPA, CGMA