Debt: The Good, the Bad, and the Ugly

You may have heard that there is good debt and bad debt. Good debt is typically considered debt that will work for you at some point in the future, such as a mortgage or a student loan. Bad debt, on the other hand, usually consists of consumer debt that will not do anything for you, such as credit card debt. While these are very simplistic definitions of good debt and bad, the definitions of good debt and bad debt are much more nuanced. No one should take on debt just because they think it is ‘good’ and without realizing all the ramifications it may bring.

Student Loan Debt

Tuition in America is extremely expensive and most people cannot afford to obtain a post-secondary education without going into at least some debt. However, not all college and university programs are created equal, and it is critical that you understand how much student loan debt is good, and when it starts to move into the bad category.

According to the Charles and Helen Schwab Foundation, you should not take out a student loan that is more than what you expect to earn in the first year. For example, if you want to work in education, you may consider going to school to obtain a master’s degree in education. Perform some research to determine how much you expect to make in your first year. If that amount is $65,000, you should not borrow more than $65,000. That total includes the student loan debt you will need for your total education, not each year.

This logic works because it is presumed that the longer you work in your chosen field, the higher your salary will climb. As such, you should be able to repay the debt and the accumulated interest within the typical 10 years you will have to repay it.

However, if the economy is on a downturn, or the job market is unstable, you may want to take on less debt than what you expect to make in your first year. Otherwise, your student loan debt could quickly be categorized as bad debt. If you are already enrolled in school when the economy takes a hit or there is a sudden lack of jobs in your field, consider taking on less debt in future years.

Your Mortgage

Historically speaking, mortgages have been considered one of the best types of good debt a person could incur because every time you make a monthly payment, you are building equity in your home. Still, there is perhaps no one in the country who knows more than Floridians that mortgages are not always a guarantee that everything will work out. Foreclosures can happen. Home prices do not always increase the way they are expected to, and if you borrow more than you can afford, or do not fully understand the terms of your mortgage, owning a home may actually hurt you more than it helps.

This was never more evident than during the subprime mortgage crisis in 2008. At that time, home prices plunged while adjustable-rate mortgages (ARM) were adjusted upward and many homeowners lost their homes to foreclosure. Still, home loans are considered one of the safest investments you could make today, but you must understand how much you should borrow, and the market conditions at the time you purchase the property.

The general rule of thumb is that your monthly mortgage payment should not exceed more than 28 percent of your gross monthly income. Remember as well that the recommended percentage includes not only the principal and interest on the loan, but also private mortgage insurance, property taxes, and other expenses that are included within the monthly payment.

In addition to following the percentage rule, you should also take many other factors into consideration when applying for a mortgage. To determine the monthly mortgage amount you can afford, consider the size of your family, as well as the possibility of future layoffs or any other event that may affect your ability to pay your mortgage on time every month.

Distinguishing Good Debt from Bad Debt

Although certain types of debt, such as home loans, are considered good debt and other types, such as consumer debt, are considered bad, clearly, it is not always that simple. When determining if the debt is good or bad for your personal situation, you must ask yourself whether the debt will give more than what you put in.

It is a question that seems rather simple, but you really have to give the answer a lot of thought. Consider factors such as not only the principal amount, but also the interest that debt will accrue, and other ways you could use that money. When you start to look at debt this way, it is true that even a credit card could be considered good debt, as long as it will work for you in the end.

When Debt Becomes Ugly

It is clear that even when you incur purportedly ‘good’ debt, it can quickly become a bad situation. In the best of cases when this happens, people may experience financial hardship for a brief period of time before quickly getting back on track. Unfortunately, this often does not happen. When that is the case, the debt may turn from bad to ugly.

The worst type of debt, ugly debt, is that which causes a debt collector or creditor to take legal action against you. After you have not paid your debt for a while, a debt collector may file a lawsuit against you, which could result in wage garnishment or other consequences that could place you in even greater financial hardship.

Suffering from the Wrong Type of Debt? Call Our Florida Debt Defense Lawyers

Categorizing all of one type of debt as good or bad is one reason why debt soon becomes unmanageable for some and it turns into ugly debt. If you are suffering from debt and a debt collector or creditor has taken legal action against you, our Fort Lauderdale debt defense lawyer is here to help. At Loan Lawyers, we know how to defend against debt lawsuits so you do not fall further into financial hardship. For the best chance of success with your case, call us today at (954) 807-1361 or contact us online to schedule a free consultation.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation and find out more about our money-back guarantee on credit card debt buyer lawsuits, and how we may be able to help you.