Climbing Out of Personal Debt

If you feel overwhelmed by personal debt problems, you are in good company! More and more individuals have experienced difficulties with their personal finances. Many people, from a diverse range of socioeconomic backgrounds, have suffered from money problems. Clearly, financial worries present all types of practical problems in daily life. There are numerous secondary impacts upon personal relationships, physical and mental health and activities as we suffer a personal debt crisis. In the fast-paced modern world, financial problems are more common than ever. Cost increases are an unfortunate fact of everyday life. Many people are trapped in low paid or casual jobs. Families need to be fed, educated and entertained. People are increasingly seduced by the availability of 'easy credit'. Often this 'easy credit' is only available when we consent to pay high interest rates. Unexpected expenses can rapidly trap us in a downward spiral of debt.

Additional temptations of the modern age can worsen our problems. New and expensive consumer goods are constantly promoted and pushed. Gambling is more available than ever before. For instance, Internet gambling is now commonplace. You do not even need to leave your house to lose the roof over your head. Do not feel that you have failed if you are suffering from a personal debt crisis. Don't feel guilty. Help and support are available for people who genuinely seek assistance and remain committed to a brighter future. Successful and famous people have suffered short-term financial difficulties and rebuilt prosperous lives. You can rebuild too! The aim of this article is to discuss some of the key issues and guide you towards further information, resources and help. Although the advice is general, we hope that you find it useful. At a personal level, you will probably require more specific advice from a qualified financial counselor. Don't be too proud to ask for expert help.

The Origin of Out-of-Control Personal Debt

In simplest terms debt is money that we owe. There are several different types of debt and not all debt is bad. For instance, if a debt allows us to purchase a valuable asset that increases in value, then it may prove beneficial to our financial situation in the longer term. Sometimes there may even be tax advantages from clever debt management. The type of debt that causes a financial crisis is an uncontrolled debt. We lose the ability to repay the debt and pay a heavy price for our failure. Out-of-control debt results in a progressive downward spiral in our financial situation. Our personal relationships often suffer. Our health may suffer. In the absence of immediate and decisive action, we may also have legal problems.

If you are experiencing a personal debt crisis, do not despair. Help is often available. Many people have been in your shoes and rebuilt their security and prosperity.You can too, but you must be strongly committed to action. Everyone who experiences financial difficulties has a unique personal story. There are often several factors which have contributed to an individual situation. Irrespective of the exact circumstances there is a fundamental equation that applies to cases of uncontrolled personal debt. Although this equation makes little mathematical sense, it makes a great deal of practical sense.

                 Expenses  > income = personal debt crisis

In simple terms, the above equation describes out-of-control personal debt. What this means in practical terms is that we must live within our means.

There are particular types of circumstances that often are associated with uncontrolled financial problems. Some major life-changing event often precedes a personal debt crisis. In these situations we may need to readjust our domestic budget and expectations. Some common examples of these life changes include loss of job, illness, separation from partner
retirement, and having children.

A very common response to personal problems or feelings of sadness is to indulge in a little 'retail therapy'. If feeling sad, why not spoil ourselves a little? Spending money on consumer goods is perceived to produce a short-term feeling of happiness. Regrettably, any benefit from 'retail therapy' passes quickly. It does not provide an effective solution to our suffering and pain. Excessive spending may actually increase problems by causing a personal debt crisis. Healing our hurt in a more functional way is much more rewarding and responsible.

An increasing number of young people are experiencing severe debt problems. There are several reasons for this increase. Consumer credit is more available than ever before and many credit products are specifically targeted to attract young people. The rate of interest on this credit is often high. There is powerful peer group pressure to purchase the latest high-tech consumer goods. Often these goods are expensive and rapidly become obsolete. The pressure to upgrade is constant. In several countries, education is becoming a major cost.

An obvious cause of a personal debt crisis is addiction to alcohol, drugs or gambling. Not only do these addictions contribute directly to the dire financial situation, there are other less obvious effects. When people are addicted, they often spend time with people who reinforce irresponsible, or even criminal, behavior. It is also very difficult to make sensible judgments under the influence of drugs, alcohol or gambling. Often errors of judgment are made which have lasting consequences. Solving your personal debt crisis means beating your addiction.
Your situation cannot improve until addictive behavior stops. It's that simple.

The Brave New World of Instant Credit

The introduction of plastic cards and easy credit has radically transformed the world of retailing. The choice of credit products is truly extraordinary. Used properly, credit cards and charge cards provide convenience and flexibility to millions of people. Credit or charge cards used inappropriately provide an almost irresistible temptation to spend beyond our means and fall into a severe personal debt crisis. Instant credit availability encourages overspending. Losing track of spending is easy when credit cards are used regularly. Rates of interest are almost always high. Many people spend up to the limit of their card and fail to reduce the balance. Sometimes there are several cards in operation, all attracting high rates of interest. Living on the edge can be the prelude to a financial disaster. An unexpected expense can start a deep financial crisis from which escape is difficult and painful. There are a number of established pearls of wisdom regarding the responsible use of cards that are listed below.

1.    Where possible, pay the entire balance of a card each month.
2.    Consider a debit card
3.    Only have one card to reduce charges and costs.
4.    Check statements each month. Mistakes and duplications are common.
5.    If you cannot afford to pay the entire balance, aim to reduce the balance each month.
6.    Have a sceptical attitude towards rewards schemes. Often they are a disappointment.
7.    Maintain a reasonable limit and do not increase it. A larger limit means bigger debt.
8.    Pay on time to avoid penalties and excessive interest charges.
9.    Never borrow on one card to pay on another card. There is a clear link between this                 practice and an impending debt crisis.
10.  Learn about responsible credit card use and security.

Remember that some financial institutions may consider your credit card limit as a part of total debt. This may limit your ability to borrow money.

Regaining Control of Your Finances and Your Life

An essential first step to re-establish control of personal debt is to fully and accurately understand expenses and sources of income. The best way to do this is to make a detailed written record of our expenses and match this against our sources of income in the form of a personal budget. When we prepare a comprehensive written record of our expenses the result is often very informative and useful. Frequently such a detailed record throws up a number of surprises! The greater the detail, the more useful the information. All expenses, however trivial, are important. Over the course of a few months these small expenses add up to a significant amount. For instance it can be surprising how much can be spent in a month on items like takeaway food or cigarettes! Many costs are inapparent or hidden. Honesty is essential. If we are not honest, we are only kidding ourselves. There are several excellent books that discuss the details of how to prepare a personal budget. Some of those are listed at the end of this article. Try searching your local library or bookstore. If you have difficulty, ask a financial counselor or someone with financial experience to help you.

When we fully understand our expenses and income a number of important things can be achieved.

All financial experts agree that a personal budget is absolutely critical to resolving debt. It is almost impossible to effectively re-establish control over personal finances without a budget or plan.

Getting the Balance Right

Escaping from a personal debt crisis requires a clear, honest understanding of the state of our finances. It also needs courage, planning, hard decisions and strong commitment. It can however be done. Most certainly, you can rebuild financial security and happiness when the will is strong. Millions of people from all walks of life have overcome serious financial problems. You can too. The key to recovery is to develop an effective balance between expenses and income.

There are many excellent books and magazine articles providing practical tips about saving money and reducing expenses. Often a considerable amount of money can be saved without significant pain, suffering or change of lifestyle. A detailed discussion of this topic is beyond the scope of this short article. You might find the following general tips useful to reduce your expenses.

1.    Make a list of needs before going to the shops. This cuts the risk of impulsive buying.
2.    Purchase 'generic' brands of products.
3.    Highly  nutritious  foods  such  as  fruit and vegetables are frequently less expensive than         highly processed convenience foods. They  usually  have less preservatives and additives         too!
4.    Takeaway food is often expensive. Home cooking is cheaper overall.
5.    Only go to the supermarket once a week to reduce travel costs and impulse buying.
6.    Are you able to reduce mobile phone expenses? Many people call during off peak periods       when it is cheaper.
7.    Watch out for sales and reductions, especially for expensive items.
8.    Water and electricity costs can often be significantly reduced.
9.    Entertainment and clothing costs can often be spent more effectively.
10.  Health and safety should retain a high priority in the scheme of things.

Sometimes our income can be increased to further improve our situation. There are often opportunities to perform part time or casual work for a short period of time until control is re-established over our situation. If we are able to increase our cash flow for a period of time, high interest loans can be paid out and the future starts to look much rosier. Try to save a small part of your income. Over a period of time, compound interest starts to really add up.

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Dealing with Creditors

Dealing with creditors is one of the most difficult aspects of a personal financial crisis. If handled effectively, it can also provide one of the keys to resolving the situation. What do the creditors want? Usually their aim is to recover their money. If we are honest and sincere in our intention to repay the debt, most creditors will allow us the opportunity to reimburse legitimate debt. Communication is absolutely vital. Dishonesty, evasiveness and insincerity are often punished with legal action! The following guidelines should be considered for legitimate debts. If the amount owing is in dispute, think about seeking independent advice from a legal or financial professional.

1.   Remain calm. Take the initiative and propose a solution to the debt.
2.   Have a clearly communicated agreed plan of repayment. Try to get written agreement.
3.   Can you repay in installments? Are you able to negotiate an extension of time?
4.   Always pay on time. This reduces the debt, reinforces discipline and builds trust.
5.   Be realistic about repayment. Do not make promises you cannot keep.
6.   Don't ignore legitimate requests from creditors.
7.   Return phone calls, respond to correspondence.
8.   Do not hide. They will find you! Even changing your name rarely works.
9.   Learn more about your legitimate rights. Seek legal advice if you need it.
10. Avoid further credit until the debt is cleared. Do not make the situation even worse.

Insolvency and its implications

In many countries, rates of bankruptcy are increasing. In recent years, the stigma of a declaration bankruptcy is being eroded. Many people have rebuilt successful and happy lives after they have been declared bankrupt. The business world has thrown up many examples of bankrupt entrepreneurs who have later rebuilt well-managed companies. Do not despair if you are facing bankruptcy. Remain positive, calm and firmly committed to a better future. There are some positive aspects to an insolvency declaration. Debts are cleared and managed by a trustee. Your basic income is protected. These are however minor comforts. Insolvency is an absolute last resort because there are onerous long-term implications and obligations.

The specific aspects and duration of bankruptcy vary from country to country but some of the most general implications are listed below.

These consequences and obligations mean that insolvency is best avoided. It is however inevitable in certain situations. There are many people who can provide more detailed and specific advice about this important issue.

Debt Consolidation

Opportunities to reorganise personal debts may be available in some situations. The possibility of making an arrangement with creditors has been discussed in a previous section. Other possibilities exist. Debts can be often refinanced and paid over a longer time period or at a lower rate of interest. This makes them more affordable. Refinancing may seem attractive but there are several pitfalls that need to be anticipated and avoided.

SUMMARY:  The Golden Rules of Personal Debt Management

1.    Act immediately, do not procrastinate. Delay will only create more debt.
2.    Where possible pay debts with the highest interest rate first.
3.    Make a budget and live within your means.
4.    Accept personal responsibility for solving the problem. Regain control of your life.
5.    Immediately stop all addictive behaviors. You can't escape debt if you stay addicted.
6.    Set specific goals each month and remain committed to reach those goals.
7.    All expenses count, even small ones.
8.    Seek appropriate independent financial or legal advice if available.
9.    Prioritise debts and develop a comprehensive plan based on those priorities.
10.  Make a specific commitment to save a small percentage of your income each month
      (e.g. 5% of income). Saving is important in the long term because of compound
11.  Attempt to pay in cash where possible.
12.  Attempt to pay entire balance of credit cards each month to minimise interest charges.
13.  Learn more about the key issues of personal debt.
14.  Do not look for miraculous 'quick fixes'. They never work. Many people seek to take  
      advantage of those who are vulnerable and down on their luck. Never resort to
      criminal behavior under any circumstances. You will get caught and everything will
      be 100 times worse!
15.  Investigate refinancing or renegotiating your debt. Beware of the pitfalls. Do not
      simply use this as an excuse to create an even larger debt.
16.  Be honest with creditors and negotiate a realistic repayment plan.

Where to find further information
There are many excellent books available on management of personal finances in times of difficulty. These contain more detailed advice on the key issues such as creating a budget, reducing expenses credit issues and refinancing. These publications can lead you through the risks and benefits of various debt elimination strategies. If you have difficulty with the most important issues, seek help from an independent financial or legal professional. Charitable organisations can often provide useful advice at minimal cost. A selection of useful books is listed below. There are many more!

There is also an abundance of websites containing advice and assistance for individuals who are experiencing financial problems. Some of these are listed below.
National Foundation for Credit Counseling
Debtors anonymous
Debt relief Australia
UK Debt advice bureau

By Hilda Caceres (Accountant)
20th April 2004
Saving is the most important factor in becoming financially secure. The sooner you start saving, the sooner you'll be debt free. Even a small amount saved (with less debt incurred), can build up over time due to the power of compound interest.