Escaping the Consumer Debt Trap

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” – Ogden Nash, American poet

How Good People Get Caught in the Debt Web

If you are staggering under the weight of Consumer Debt, join the club.

According to a May 13 article in Investopedia entitled “Stop Keeping Up With The Joneses – They’re Broke”, over 43% of Americans spend more than they make. One financial journalist estimated that there are more than two million Americans carrying a credit card balance of more than $20,000. Most people making minimum payments (without taking on more debt) won’t pay off their cards for 24 years.

There are some common reasons for this:

Debt is viewed as normal part of American living. Everybody’s doing it!
We want what we don’t have. We covet what others have. We don’t prepare for emergencies. And ‘delayed gratification’ is not part of our cultural vocabulary.

It starts with a series of small and seemingly manageable compromises. Dinner with friends? Just charge it. Car needs fixing? Flash the plastic. Had your eye on a new flat screen TV? With low monthly rates, it can be yours today.

All of these decisions might seem reasonable at the time. However, the accumulation of these smaller debts adds up to a large and ungainly debt. Before we know it, we have monthly payments we can’t get rid of.

We fall into The Debt Trap by accident. We really didn’t mean to!

In the beginning, our intention may have been to utilize debt as a cash-flow management tool, which can be a smart strategy. But now, the tool is using us. What started as “responsible management of credit” or even an effort to establish or raise our credit score spirals out of control.

We felt like we could handle those “low monthly payments.” But debts accumulate, incomes change, inflation raises our cost of living, and too late, we realize we are trapped in the debt quicksand.

When attempts to pay off a debt in increments over years – or decades – are unsuccessful, then it might be time to explore some new options.

We’re too embarrassed to deal with our debt. So we don’t.

It is natural to avoid issues that make us uncomfortable or trigger feelings of being overwhelmed. A key element in reducing financial stress is to examine how you handle emotional, mental or physical stress. Once self-care and stress reduction become a priority, then financial issues won’t feel as overwhelming.

We grow accustomed to being in debt. And too paralyzed – or complacent – to get out.

If you carry an extra $1k a month in consumer debt payments, it becomes ‘normal’ over time. It is neither normal nor desirable! People can become accustomed to most situations over time, even intolerable ones. Never lose sight of the fact that there are always choices.

Debt: Easy Come, Not-So-Easy Go

Getting into debt can be the result of bad spending habits, emergencies or even intentional financial strategies. How we get into debt can affect how we get OUT of debt – and how quickly. Here are the two most common scenarios:

Habitual debtors. Habitual debtors have trained themselves to see credit cards and monthly payments as a regular part of life. They might be living modestly or appear to be keeping up with the Joneses. In either case, debt is seen as a necessity for making ends meet. Even if they live a humble existence, they are still not living within their means.

The solution may be simple, but it’s not necessarily easy. To break out of the Debt Trap, income must increase and expenses must decrease, but a change is essential.

Emergency debtors. These people live more or less within their means. Their credit cards are for emergencies only, but there is no plan in place to save for emergencies. Unexpected situations such as unemployment, divorce or a dire medical emergency can cause debt to accrue at an alarming rate.

Once the emergency has been resolved, it is possible for emergency debtors to get back on track, though it may require extra measures such as liquidating assets, increasing income or even declaring bankruptcy.

What to do if YOU got caught in the consumer Debt Trap.

The Truth about getting OUT of debt isn’t pretty. One of the dirty secrets of the “debt help industry” is that many programs designed to help consumers fail to do what they promised, or even leave them worse off than before!

Consumer Credit Counseling, typical debt settlement programs and even Chapter 13 bankruptcies actually fail for a majority of people. This is usually due to inflexible and often unmanageable high payments, often with long time frames that make it unlikely that a default won’t occur when something doesn’t go as planned.

Debt consolidation loans are problematic as well. By definition, such a loan will be equal to all of your smaller debts, with fees (and sometimes years of additional payments) tacked on.

Nevertheless, there is hope. To decide on an effective debt relief strategy, let’s look at four keys that reveal why some people succeed in getting out of debt and others don’t, using financial author Kate Phillips’s ‘M.A.P.S.’ acronym:

M – A Positive New MINDSET

Believe that you WILL get out of debt. It is essential that a thought become real in your own mind in order for it to become a reality. If you envision a debt-free existence (and are disciplined to envision it on a regular basis), you will discover a way to create that life.

A – Consistent ACTION

The habits that got you into debt will not get you out. You probably didn’t accumulate your debt overnight. It could take months, perhaps years of action until you are debt-free. If you give up when things get difficult, you will remain trapped in debt. Prioritize your goal and follow through by taking action until you reach it. You can choose to earn more, spend less, or take a more drastic approach, but something has to change.

P – A Workable PLAN

It is essential to have an effective strategy to retire your debt. (We don’t normally love the word retirement, which means “to take out of service” – but we love retiring debt!)

Your plan will take time and effort. There is no such thing as a “pain-free” plan, and you will be wise to be wary of such an idea. Ideally, you can find a way to increase your income, decrease spending, and pay off your debt quickly while preserving your good credit. But there are other options to consider if that is not possible.

A ‘debt snowball’ is when consumers commit extra funds to tackle a smaller debt first, then roll the extra money into the next debt until all each debt is satisfied. This can work well if you have enough income to pay off the debt aggressively. Sometimes creditors will even cooperate with you, lowering interest rates and payments your debt so it can be paid off more quickly.

If you don’t have the means to repay your debts with your current income, start by talking to your creditors. Some creditors are willing and able to help consumers whose payments are getting out of hand, while others are not as helpful. Some may hike up rates and add extra fees and harassment calls to boot, even if you are reaching out to them! But other creditors are willing to reduce interest rates and payments to keep you from defaulting. You just never know unless you ask.

Another strategy worth considering is to negotiate paying reduced balances on your debt – particularly if you have already defaulted. Your creditors would rather see you pay a lesser amount than take the debt you owe them into a bankruptcy.

Speaking of which, bankruptcy can be a viable alternative in some cases. When a person has debt larger than their annual income and they don’t have the ability to settle their debt or dramatically increase their income, bankruptcy may be an option.

S – The Necessary SUPPORT

Few people succeed in a vacuum. The media carpet-bombs the public with temptations to ‘buy more’. Consumers in financial shame and continue to spend money, too embarrassed to get the help they need.

Get expert help and advice, and perhaps even more importantly, get the personal support you need to get your debt paid off.

Bye-Bye Debt

Whatever strategy you choose, strive to be free of consumer debt as soon as possible so you can start saving and paying yourself instead of your creditors! Don’t stop at being “debt free.” Your aim should always be to go beyond eliminating debt to actually creating wealth.