A Debt-Free Philosophy
As business owners, we like to think we're pretty savvy about using loans and credit lines to finance our receivables and boost our companies' working capital. But as consumers and homeowners, we're not always so disciplined.
"As you accumulate debt, you eventually reach a point where the monthly fees and interest become larger than your ability to pay," says Stephen Craig, a bankruptcy attorney and founder of Trident Debt Solutions in Denver, which specializes in alternatives to bankruptcy. "It becomes a weight that you carry with you everywhere you go."
What's the solution? Reduce your overhead and adopt a debt-free lifestyle. Pay down your credit cards and limit yourself to a reasonably sized mortgage or student loan that you can handle. "Credit card debt is problematic when you can no longer make a monthly payment of at least 3 percent or more of the debt," Craig says. "To get rid of $10,000 of credit card debt, plan on paying at least $300 to $400 a month until you are debt-free."
Like losing weight, however, that's easier said than done.
To shed that debt and keep it off for good, you need to put a long-term plan in place and set realistic goals based on your income and expenses. Debt-consolidation companies that promise instant solutions can make a bad situation worse, burning bridges with your creditors and pushing you into bankruptcy. Not only will this ruin your personal credit rating, it can damage your company's credit as well.
"Anything other than paying your debts in full and on time will adversely affect your credit rating," Craig says.
Here are several steps you can take to reduce your debt while minimizing the financial fallout:
Assess your options. Before you hire an attorney or debt-consolidation service, understand the long-term effect of your actions. Filing for bankruptcy may stop the collections agencies from calling you at home, but it can damage your credit for as long as seven years, making it difficult to obtain a credit card or a mortgage. Reaching a settlement with a credit card company for less than the amount you owe can also hurt your credit rating.
Find someone trustworthy to help you. Don't assume that a credit counselor necessarily has your best interests at heart. Many of these "counselors" are actually salespeople who make money by signing you up for a debt-consolidation plan. Paying an attorney $300 an hour to help you may actually be cheaper than paying a 15 percent fee to a debt-consolidation service.
Protect your retirement assets. No matter how dire your situation might be, resist cashing in your retirement plan. Because IRAs and other retirement assets are protected from creditors, these funds may be all you have left after you've paid off your debt. "Your IRA should have one purpose only: a savings account for your retirement," Craig says. "Never cash out your IRA to solve a financial problem."
Make long-term lifestyle changes. Just like eating right and going to the gym, being financially responsible must become a part of your life. Review your income and expenses to be sure you can really afford the debt you take on.
Finally, try not to beat yourself up too badly. No matter how much (or little) you end up with, you'll have the peace of mind of knowing that you'll be debt-free for the rest of your life.