A Short Guide to Household Debt

As of May last year, the USA’s household debt was at a record high level of $11.65 trillion according to the Federal Reserve Bank of New York. The biggest cause of this debt was mortgages, accounting for just over $8 trillion, followed closely by credit card debt and student loan debt.

Whilst debt traditionally brings negative connotations, some debt can be positive – helping the economy strengthen and be managed efficiently.

Here is a short guide to debt, helping  debtors understand their position and their options.

Secured v Unsecured Debt

A secured debt is essentially a debt which has had collateral offered against it – the most common of which are mortgages. The collateral offered against the mortgage is the property purchased with the loaned amount, which can be repossessed by the bank or lender if repayments are not made. Similarly, an automobile bought with financing is subject to secured debt with the automobile offered as collateral.

Secured debts can often be considered a ‘good debt’ as they are the long-term purchase of a product and equity is being invested in. Furthermore, large-scale purchases of homes and cars can benefit the economy, helping to re-strengthen the financial structure of the country following the global recession.

InControl explain in further detail the types of debt which can be considered ‘good debt’.

An unsecured debt is a debt which has been agreed upon without collateral offered. There are a number of different forms of unsecured debt, of which credit card debt is the most common in the USA. Other forms of unsecured debt include store card debt, student loans, utility bills debt, rent arrears, personal loan debt and more.

Debt Management

As circumstances and financial situations change over time (often unexpectedly) it can become difficult to cover debt payments. There are a selection of debt management schemes and options available for people struggling with both secured and unsecured debts. These options can often help realign repayment amounts better suited to the debtor or even completely wipe out the debt within 12 months.

A debt consolidation loan is an additional loan which incorporates a lower repayment amount, helping debtors cover the entirety of their debt with a payment scheme suited to their income. HSBC offer debt consolidation loans which will immediately pay off existing debts, allowing debtors to repay this consolidation loan at a lower rate.

Alternatively, a debt management plan employs an experienced advisor to negotiate a lower rate of repayment with a debtor’s creditors. By demonstrating the benefits of accepting this new rate to the creditors (mostly, the added guarantee of being paid in full), the advisor can often negotiate a more favourable repayment rate and freeze additional charges and interest rates.

When all other alternatives have been exhausted, an individual may apply for bankruptcy – wiping out many forms of debts. However, this often has numerous negative effects including seriously impacting upon the bankrupt party’s credit rating and their ability to make future investments.  Accordingly, you should learn what all the results of filing bankruptcy are for your situation, and learn how to file for bankruptcy should you decide to take that path.

If you are struggling with debt, it may be beneficial to talk to an advisor – helping you find the ideal solution to your situation.