5 Debt Management Questions You're Too Embarrassed to Ask


There are some questions that we're too embarrassed to ask anyone, particularly friends or family. We certainly don't like the idea of letting others know that we have financial hardships. And all too often, we avoid asking the questions at all, preferring to bury our heads in the sand.

This, of course, is never a good idea. So here are five of the most common questions about debt that people are too embarrassed to ask, with answers that shed a little light on the subject.

1. When Do I Declare Bankruptcy?

It's a word that strikes terror in our hearts: bankruptcy. It is interpreted as failure. Destitution. The end of the line. However, bankruptcy is not as bad as it sounds. Many famous and wealthy people have declared bankruptcy, and they do just fine. It provides a means to restructure your debts, working with creditors to pay what you owe whilst getting a level of protection that won't leave you penniless.

When to declare bankruptcy? Well, that's different on a case by case basis. But, if you can only make minimum payments on credit cards, and are using them to pay minimums on other cards, that's a big warning sign. If you are living paycheck to paycheck, can't pay bills, are about to be evicted, and have absolutely no savings, you're in trouble.

However, a simple test is to add up all of your assets, and compare them to all of your debts. If you have way more debt than assets, and creditors are hounding you day and night, it may be time to declare bankruptcy.

2. How Do I Declare Bankruptcy?

If you have decided that, yes, bankruptcy is the only option, the next logical step is to go and do it. But again, that can be a daunting prospect. You first need to know what type of bankruptcy to declare. You hear talk of Chapter 11, but that's a very complex solution usually reserved for businesses. You will most likely want to file a Chapter 7 or Chapter 13 bankruptcy, instead.

Chapter 7, also called a straight bankruptcy, is the simplest. This plan liquidates your current assets, if you have any, to pay off as much of the debt you owe as possible. The remaining debt is then haggled over. Some can be forgiven, and the remainder is put into a repayment plan that you can handle. The big drawback with Chapter 7 is that you may lose almost everything you own, including your home, car, and possessions of value. It's a fresh start, but it really does rip the Band-Aid off.

Chapter 13 is therefore a better choice for anyone with property. This option is known as a reorganization bankruptcy, and you may well need to do this, anyway, if your annual income is too high to qualify for Chapter 7. Both options have many rules and regulations.

Once you determine the type of bankruptcy you prefer, the process begins by filing a two-page petition to your district bankruptcy court, alongside supporting forms and a fee of about $300. The best thing to do is search for a bankruptcy attorney in your area, as you likely don't want to navigate these waters alone.

3. How Do I Deal With My Massive Credit Card Debt?

Credit card debt can be crippling. Sadly, many people take on more and more credit cards to help cover costs, and before they know it, they are buried in minimum monthly payments they cannot make. If you find yourself in major credit card debt, you have options.

First, do you have any way to take that debt and transfer it to loans or other cards with significantly lower rates? A HELOC usually has a much lower rate than a typical credit card, and the repayment terms are much easier, too. Some credit cards offer zero percent interest on balance transfers, with a small fee (2%–3% of the balance), or sometimes, no fee at all. Shop around.

Can you cut costs elsewhere to apply more money to your credit card payments? Is your gym membership being used? Do you need all those cable channels? Can you cut down on meals out, or subscriptions to magazines? Find ways to cut everywhere, and apply all of that to your debt.

Finally, try the snowball method: Apply as much money as you can to pay off the card with the smallest balance, while making minimum payments on the others. Once that balance is at zero, take all of the payment and apply it to the next card down the line. You get a feeling of accomplishment, and the payments get bigger and bigger on each card, snowballing to create a huge payment by the time you get to your last card.

4. How Can I Improve My Poor Credit Score?

Having a low credit score is not only a little embarrassing, it's also very costly. Your credit score directly influences the kind of financial deals you are going to get. If you want to see better percentage rates on loans and credit cards, or avoid being turned down for any kind of credit, you'll need to address the issue.

Now, this is not something you can fix overnight. A low credit score takes years of behavior into account, and it will take more than a few weeks to reverse your past misdeeds. But, you can start taking steps to improve it immediately. (See also: 7 Ways to Increase Your Credit Score Quickly)

First, get a copy of your credit report from AnnualCreditReport.com. It's free, and you can see exactly what you're dealing with. Ensure there are no mistakes. And as mistakes do happen to a lot of people, you can begin correcting those errors. Any faulty late payments or delinquencies can be addressed, and your credit score will rise when they're removed.

Next, look at all your credit card balances. Do you have small amounts spread over lots of cards? If so, you'll want to consolidate those debts onto just a few cards, and use only those cards going forward. However, DON'T close out the other cards. That can actually hurt your score. Leave them open; they are a history of good credit and they improve your credit utilization ratio, which measures how much of your available credit you have free to use.

In the future, you will want to make sure you pay every single bill on time. Technology is a wonderful thing, so use it. Create a calendar on your phone or computer that lets you know when bills are due. And, use auto-pay when you can to avoid any kind of late fees.

5. What's the Difference Between Good and Bad Debt?

Some people even wonder, "How can debt ever be a good thing?" Well, there is a significant difference, and if you know what it is, it can have a real impact on what you spend your money on, and how you spend it. (See also: 8 Signs You've Crossed From "Healthy" Debt to "Problem" Debt)

Let's start with good debt. This is anything that creates value over time. Most people consider buying a home good debt, because the investment will grow in value, and will ultimately lead to more money at the end of the day. Other examples include student loans, which are an investment in yourself and future income, and business loans, which should ultimately lead to greater revenue. Of course, all of those examples have been marred by things like the collapse of the housing market, or the lack of well-paying jobs after graduation, but as a general rule, they are still considered good debt.

Bad debt, on the hand, doesn't create any value. It's money spent on disposable items, high-interest rates, and anything else that contributes to "spending without eventual financial gain." For instance, putting a $1200 clothes spending spree on a credit card is bad debt. A new car loan is actually bad debt, because cars depreciate in value. Even dining out is bad debt if you keep ringing it up on the credit card, and only pay off the interest each month. So, be careful. You may think it's good debt to put a new suit for work on your credit card, but if it isn't leading to a legitimate financial payoff, it's actually bad debt.

What are you too embarrassed to ask about debt reduction?

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