Do You Know What Kind of Debt You Have?

While people think about the bills they pay each month and begin to wonder how they will continue meeting their monthly obligations, some will consider filing bankruptcy in order to get a fresh start financially. Many who do intend to file bankruptcy figure all of the debts will be resolved and they get to start with a clean slate. However, bankruptcy is usually the last recommended strategy for solving debts. Before it should even be considered, consumers should know exactly what kind of debt they actually have.

The Bad
Bad debt is definitely on the rise in the nation. People who can not afford to pay for merchandise in cash, often resort to credit cards as if it was an extension of their own income. When you can't afford to pay up front in cash, you can not afford to pay for it in credit. When individuals make purchasing decisions such as buying furniture or electronics they can not afford, that is an example of bad debt. Unless you have tucked away cash on the side to pay for big-ticket item, you are likely spending money you do not have.

The Good
There are some types of debt that are considered to be good debts. The definition of a good debt is one where the investment results in creating equity or value, such as a mortgage when you buy a home. However, keep in mind that buying a home is only a good debt when you plan to use it as your primary residence. If you purchased a home in order to use it as a money-making endeavor, especially during the recent mortgage crisis, you likely lost money, making it into a bad debt. Student loans are also considered to be good debt because you are investing in your higher education, leading to better income potential.

It is really important that you sit down and organize your finances so you have a clear understanding of what kind of debts you are facing. Consider that there are some debts that are not able to be dismissed in a bankruptcy court and that some creditors will not be willing to negotiate a debt settlement when you find you can not pay as obligated. When you have a better idea of what you are paying out and what you are bringing in, you can then establish a reasonable budget and even supplement your income in order to pay down and eliminate your debts completely, avoiding bankruptcy and third-party assistance for managing your debts.