How to Make Good on Bad Debt

How to Make Good on Bad Debt

To most Americans struggling under the burden of unmanageable debt loads, it can be pretty tough to believe that there could be any such thing as good debt. Obviously, you would think, all debts are bad debts, but, still, some debts are worse than others.

A housing loan could be considered a good rather than a bad debt because your house builds up equity over time, and because the value of the house appreciates over time. It’s the rare family who would be happy to pay off their housing debt by losing their family home.

Likewise, business loans and student loans–even in this shabby economy–aren’t considered bad debt because they improve earning potential over time. Credit card debt on consumables like food and clothing, on the other hand, are considered bad debt because the items, once bought, lose almost all of their value, leaving you with nothing but a bad debt and a near-lifetime of ever-compounding interest rates on that debt.

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Still, all debt is by definition bad debt if you can’t pay it, because it drags down on your credit rating; plus, if you can’t even make minimum payments, your debt obligation will only increase because of interest accrual.

The worst thing you could do, though, is chase bad debt with worse debt by taking on additional credit card debt to maintain your standard of living while suffering under your pre-existing debt. It used to be that credit card companies only looked for people who might be able to pay off their monthly debts, but now credit card companies are actively chasing bad debts, because they figured out they could make more money by charging twenty interest interest rates on that debt, thus dragging you further and further into a hole.

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In addition, the governmental safeguards put in place to protect consumers who’ve taken on too much bad debt are now weaker than ever because of new legislation–spurred on by those same credit card companies who love to collect on your infinitely compounding interest loans–that has sharply limited working families’ eligibility for Chapter 7 protection, which used to be a final safeguard that could remove bad debt while preserving a family’s most important assets such as a house and car.

This leaves Chapter 13 protection, which does help families negotiate a single-value monthly payment to eliminate bad debt, but which unfortunately does not consider a family’s real expenses in deciding on this payment amount, meaning that a good portion of families can’t hold to the program’s stringent payment schedule.

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This situation has led a lot of families in over their heads to consider other options for resolving their bad debts, including debt settlement negotiation. You see, credit card companies (and other lenders) have another definition of “bad debt”: To them, a bad debt is one that will eventually be defaulted and will have to be written off as a total loss.

To avoid the total loss of a bad-debt write-off, credit card companies may be willing to cut a debtors’ balance by up to two-thirds–after a series of involved discussions, including promises of full payment within a defined time period–thus solving both parties’ problems with bad debt, and also helping prevent the huge damage to a debtors’ credit rating (and peace of mind) that come from simply ignoring the debt.