PAYING DOWN YOUR DEBT FROM SAVINGS

Paying down your debt from savings may seem like a senseless option in that you are urged to take money out of savings/investment plans to pay down debt. In the long-term, this approach can increase your net worth, however, particularly if the debt that you are paying down consists of high-interest credit cards. Borrowing at 12 to 18 percent per annum means that your investments need to earn in excess of these rates in order to justify not paying down debt from savings/investment accounts.

If you have a good credit record, you can consolidate your high-interest credit card debt and determine your debt capacity into a lower-rate bank loan, or home equity loan if you are a homeowner. This will reduce the amount of your monthly interest and principal payments. The downside to this strategy is that if you are unable to pay the monthly payments on your home equity loan, you could eventually lose your house.

If you have a good credit record, you can ask your credit card issuers to roll over your accounts into lower-rate credit card accounts. If this is not possible, look for other lower-rate credit card issuers and arrange for your balance to be transferred into these new accounts. Beware of low introductory rate credit cards that revert to high interest rates after a few months.

If you are having difficulty making your payments to your creditors on time, you should contact them. Tell them of your diffculties, but stress your intentions to pay them in full at a later date when you get your financial affairs back in order. Ask if they can stretch out your payments and waive interest and penalty fees until you can get on your feet again. If they agree, put it in writing so that it is more difficult for them to change their minds.
If they will not agree, seek credit counseling from a nonprofit credit counseling service. The toll-free number of a national nonprofit credit.

If you are so swamped with debt that you are unable to take corrective action or if the amounts that you are able to repay are so small that it will take years to pay off your debt, there is a last resort—personal bankruptcy.
If you choose bankruptcy, you need to decide whether to seek legal help. Bankruptcy lawyers may charge a fee, which would depend on the nature and dif.culty of the case. Legal help is expensive, but if you have a significant amount of assets that you want to retain after filing it may be advisable to seek such help.

Chapter 13 of the Bankruptcy Code allows you, under a court-approved plan, to repay debts in part or in full over an extended period of time. This is also known as the wage earner’s plan because it protects the wages and essential property from being surrendered. Filers pay their debts over an extended period of time and are protected from being sued by creditors.
Filing for bankruptcy may offer some relief from creditors, but there are some major disadvantages. Personal credit records are tainted for a period of 10 years, and many people (employers, landlords) may view you with disfavor. Finally, bankruptcy is an expensive way to correct the excessive use of credit.

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