When people are in debt, they want nothing more than to get out of it. This can create an atmosphere of anxiety and panic. It’s not surprising that when in this mindset, people act without thinking and often make mistakes. When mistakes are made, instead of your debt issues getting better, they actually get much worse. Let’s look at the most common mistakes people make, so that you can avoid making them yourself.
Only Making Minimum Payments
This is the most common mistake people make. They think that by making minimum payments they are addressing the debt, but this isn’t the case. Minimum payments can keep an account current without substantially reducing the principal. This means that your debt will almost never go away from just making minimum payments. You will just be paying the interest on the principal forever. It should be noted that minimum payments may be appropriate in some circumstances, such as if you just want to prevent an account from going to collections while you work on a different debt. However, minimum payments are almost never sufficient to resolve substantial debt.
Taking on New Debt to Pay Existing Debt
Many people will use credit cards, personal loans, or other borrowing methods to cover overdue bills. This is a massive mistake. You are not actually taking care of your debt. It is more like you are just moving your debt around. You still owe the debt, the creditor has just changed. Additionally, if you do this multiple times with multiple debts, it can quickly become confusing. You will find it difficult to remember who you owe and how much. This often leads to missed payments, worsening your debt.
Ignoring Debt Collectors
When debt collectors start calling, some people choose to ignore them. They hope that eventually the calls will stop. They will not. The debt will stay in place, and is actually likely to grow due to interest. Furthermore, if you ignore collectors long enough, they may take legal action, which can result in wage garnishment or liens being placed on property. Instead of ignoring them, you should open all notices and understand the debt they are intending to collect. It is also important to remember that collectors have rules they must follow that are set by the Fair Debt Collection Practices Act. Should debt collectors violate the rules laid out in this act, you may be entitled to take your own legal action against them.
Not Creating a Realistic Budget
One of the most powerful tools when it comes to addressing debt is creating (and sticking to) a budget. You should build a budget that includes essential expenses, minimum debt payments, medical costs, and unexpected expenses. The key is that this budget must be realistic, meaning that you can actually stick to it. An unrealistic budget is useless and will not help you address your debt in a meaningful way. Consumer.gov offers a tool to help you make a budget that is realistic.
Waiting Too Long to Explore Debt-Relief Options
The earlier you address debt, the better. The longer you wait, the worse your debt will get. Unfortunately, many people wait until it is far too late to take action. For example, out of fear, many people do not consider bankruptcy. Bankruptcy is actually one of the most useful tools at your disposal. Not only does it pause collection efforts against you with an automatic stay, it also helps you get your debt discharged. This can be done through liquidation of your assets or through a payment plan, depending on if you choose Chapter 7 or Chapter 13 bankruptcy. As mentioned, do not wait to explore this option. As soon as debt becomes unmanageable, you should meet with local bankruptcy attorneys to discuss your options.
The Biggest Mistake: Doing Nothing
The absolute worst mistake you can make is doing nothing. Debt is not something to be ignored. When ignored, even a small debt can end up ruining your life financially. You need to buckle down and take action. Debt is not something to fear and hide from, you must face it head on.
