Free of debt
Table of contents
Staying debt free is a general problem for many consumers. Due to the harsh economic state, a lot of individuals borrow amounts in order to cover their needs. Debts do not only derive from unnecessary purchase of goods and services. A default payment issue can arise out of consumer’s inability (usually bad financial situation) to cover the amount borrowed from a creditor. When an individual falls behind with his regular loan payments, he becomes a debtor and the monetary obligations- delinquent amounts or “defaults”. In such situation, the consumer is no longer considered as debt free. When falling into debt, the indebted subject has to cover late payment fees and interests as well, which further impedes his financial state. If a second party (borrower) is not yet in a late-payment situation, he can perform various methods and schemes in order to forerun falling into debt situation.
How to avoid falling behind on payments?
In order a consumer to avoid falling into debt, he has to comply with his earnings and expenses per month. This can be done by implementation of a personal monthly budget management. If the debtor analyses his expenditures (including the amounts he owes to creditors) and his gross income, he will be able to exclude a past-due payments’ situation.
When borrowing a monetary sum from a lender, the consumer should calculate the amount he can afford to pay per month, depending on their financial condition and wage. If the budget list is accurate and is strictly followed, the consumer will not fall behind with the monthly payments, and past-due debts will be less likely to appear.
If a debtor has a monetary obligation towards a lender, it is recommendatory that the second party (debtor) starts using cash for his future purchases instead of credit cards. In this way, the consumer will be able to trace and monitor his expenses easier. Therefore it will be more likely for him to overdraw his bank/credit account or to fall behind on his monthly debt payments.
When there is more than one debt due to be paid, a consumer can prioritise his payments (outcomes). If the debtor has more than one monetary obligation awaiting, which has not become a bad debt yet, he should clear the most urgent ones first and will be less likely for him to fall into a bad debt situation.
It is strongly recommended that a consumer considers his accounts, income and expenditures first, before borrowing an amount, which might be impossible or very hard to recover. When a consumer is in need of borrowing a good loan (e.g. a student/house/car loan), he should estimate whether this good or service could be purchased with cash and savings, instead of with borrowing an amount.
If an important purchase is to be made, e.g. an estate property, and the mortgage is needed, it is recommended that the consumer chooses a house he can actually afford and such that will not affect his monthly income in a negative way (leading to a past-due debt situation).
What to do after falling into debt?
Sometimes it happens that a person falls into debt, even though his financial condition was stable when he borrowed the amount. This can be due to an income reduction or the debtor might have simply forgotten about his monetary obligation towards a creditor. When a second party is not punctual anymore regarding his monthly payments and a past-due payment is in evidence, the consumer should decide how to compensate such delays and clear his debt in full. There are several schemes and methods, which provide a consumer with a “how to be debt free” service. If a consumer is already in bad debt situation, he should consider stopping redundant purchases of unneeded goods and services. If he lowers his expenditures, he will be able to clear the past-due obligations.
A consumer who has fallen behind with his payments should consider cutting off his debts, using different repayment plans or debt reduction offers, such as different settlement plans, personal and company agreements, debt management (personal or professional, provided by a private debt reduction organisation), debt consolidation methods, etc. All these schemes help a person in debt to realise how to be debt free. Such debt clear methods can reduce the full amount of his debt, in return of one single payment; can reduce his monthly payments and freeze (optional) all additional interests; or can consolidate all his debts into one, using monthly payment for the monetary obligation.
If a debtor cannot afford to hire a professional company to determine his affordable monthly payments, he can perform this on his own, using the Debt-To-Income ratio formula. The DTI will define the exact contradistinction between debtor’s income and his expenses per month.
Once in a debt, a consumer can take advantage of the so-called debt snowball method. This scheme is not only about paying the biggest debts first, but also about prioritising the defaults in the correct order. It is still disputable whether a person in debt should clear the lowest or the highest monthly rates first, that is why there is no universal formula for more successful or less successful actions. Generally, the debt snowball method is considered more appropriate for consumers with higher monthly income, who can meet all debt requirements each month.
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