“Help, My Debt is Kicking Me in the Nuts!” — How to Overcome Debt in Today’s America

We are up to our eyeballs in debt. An American without any debt is a rare sight indeed in 2019. Currently, the New York Federal Reserve estimates that in the third quarter of 2018, America’s personal consumer debt total topped $14 trillion.

Every type of debt continued to rise. As inequality continues to grow, expect this number to continue to rise.

It’s why you often hear economists and investors say that the next crash is going to be the largest one in our history. And it makes sense.

The doomsayers are right because the more people that are pushed closer to the edge the harder the fall.

Dealing with Debt in Today’s America

You should worry about the amount of debt you hold.

Maybe you’re out of debt, in which case why are you here? But if you’re one of around 80% of Americans who have some sort of debt, you need to know how to tackle your debt.

In the survey I just linked, 81.5% of millennials are in debt, 79.9% of Generation Xers are in debt, and, yes, 80.9% of the much-maligned Baby Boomer generation is also in debt.

Not having any debt at all makes you a rarity, and these people are the ones in the most powerful position of all.

I’m proud to say that I’m not in debt and have never been in debt. I’ve always refused to own credit cards, I never went to college, and I bought my first house overseas. Some people say that building a credit score is a good thing. I say it’s one of the greatest scams in all of capitalism — but more on that another day.

So how should you deal with debt without ruining that ridiculous credit score concept that the average American has to live in the shadow of?

Start by understanding the right way to tackle your debts.

The Right Strategy for Tackling Your Debts

First of all, I’m going to assume that you already know about your debts. If you don’t know what you owe, to whom, and the interest rates attached you need to find out about that right now.

Go on, I’ll wait.

Okay, now you’re back and you know about your debts it’s time to look at the right strategy. First of all, can you pay it?

Look at your monthly payments, add them all up, and determine if you can pay them. And when I say pay them I mean pay down your debts. Simply paying off the interest rate is useless and doesn’t get you any closer to becoming debt-free.

If you can’t pay them off, you’re going to have to negotiate with your creditors. If they don’t negotiate, you’re in the position where bankruptcy could be your only option. I don’t believe in dragging an impossible situation out unless you have a damn good reason. So rip off that band-aid and get it over with.

For most people, however, paying off their debts is possible and advisable.

Consider looking into loan consolidation as a start. For some people, it can mean lower interest rates and lower monthly repayments in the long-term. Not always, naturally, but it’s worth looking into.

Once you’ve done this, you should always begin with the debts that come with the highest interest rates. For most people, this will be a credit card of some kind. The average interest rate for existing credit card account holders is 14.4%.

Focus on paying down the highest interest rates first. These cause the most damage. Place an extra priority on paying these. For everything else, make the minimum monthly repayment.

Some financial gurus may advise that you simply don’t make payments every month on your lesser debts, but this will make it much harder to get credit in the future.

I don’t recommend getting into this game of chicken unless you have no other choice.

What are the Different Types of Debts and What Can You Do About Them?

There are five main types of debts that hurt Americans today. There’s no doubt that we are in the middle of a debt crisis and most people don’t know what they can do about it.

Some debts are easier to deal with than others. I’m going to discuss the different types of debts in America and how you should approach them.

Mortgage Debt

The current mortgage debt is set at 15,526,387…in millions for the first quarter of 2019. That number sounds utterly insane, and it is.

Some would argue that this is the sign of a booming housing market. I would argue that with stagnating wages and rising rates this is a sign that people aren’t going to pay off their debts.

The problem with dealing with mortgage debt is it revolves around whether you made the right decision when you bought your current home and where you got your mortgage from.

Did you shop around and did you purchase a home you could really afford?

It’s time to take an honest look at yourself when it comes to this because you can’t simply discharge a mortgage. Throwing away your mortgage ultimately means finding a new place to live.

If you made a stupid decision and purchased a house you couldn’t afford, you may need to downgrade. Don’t be stubborn and continue dealing with an unruly mortgage. If half of your income is going just towards your mortgage this is unsustainable. Is this how you want to live for the next twenty or thirty years?

Do away with your pride and be honest with yourself if you made a mistake.

Auto Debt

One of the most alarming rises in US debt is auto debt. It now makes up 9.28% of all US consumer debt, which has been driven primarily by record low-interest rates.

Current Federal interest rates are 2.5%. They were at a record low of 0.25% at the end of 2008. We are living in an unprecedented time where interest rates are well below average and don’t look like they’re going to rise anytime soon.

Americans are taking advantage of these interest rates by visiting their local banks. Across the US, banks now hold $368 billion in open car loans.

The problem with auto loans is that they’re a few hundred extra dollars every month. You need to consider whether you have the right car for your budget. It’s so easy to buy a flashy car and not take into account the long-term implications of those repayments.

Can you downgrade your vehicle and pay less while still getting where you need to go?

If so, why shouldn’t you?

Of course, if there’s only a year or two left on your auto loan it makes sense to pay it off totally, but if you’ve still got a long time or those repayments are unsustainable it’s time to take that L.

Depending on where you live, you may want to consider getting rid of your car completely. Naturally, this is reliant on where you live. If you live in a densely populated area, you may be able to take advantage of public transport.

Do your research and found out whether it’s reliable. If you live in Downtown Seattle and need to get across town, I’d take the metro any day and wouldn’t think about a car. But if I lived in LA you couldn’t pay me to use that hot garbage heap of a public transport system.

Again, you need to examine your own circumstances and decide what’s viable.

What Can You Do About Student Loans?

For me, student loans are the worst possible loans around. They’re practically impossible to get rid of unless you intend to die soon.

To put it simply, I’d recommend most US kids don’t go to college at all. Start your own business and stop wasting your time. Better yet, study overseas where it’s less costly to study. I will not attempt to hide my disdain for the US college system. I believe it’s a disgrace that consistently exploits students in pursuit of the almighty dollar.

If you don’t pay a Federal student loan, the government can take your tax refund and garnish your wages by up to 15%. Private loan providers can even sue you.

I find this sad because in the UK student loans are always written off after 30 years, or if you’re declared permanently unfit to work. I know plenty of people who studied, went abroad, and never paid a cent towards their student loans.

In the last 11 years, student loan debt has grown by 157%, and it’s perhaps the most dangerous type of loan.

My recommendation is you simply bite the bullet and pay it off. Any other debt you can get rid of by declaring chapter seven bankruptcy.

It can be done with student loans, despite what some lawyers like to say, but it’s exceedingly difficult. You need to demonstrate something known as ‘undue hardship’.

Undue hardship means that you are unable to maintain a minimal standard of living. What this means depends on the jurisdiction and the interpretation of the judge in question. But you basically should be starving and you should have attempted to make some ‘good faith’ repayments on your student loans.

This is an arduous process and it’s not the right option for most people. It’s only relevant if you’re truly on your ass.

Personal Credit Card Debt

Personal credit card debt is a particular problem in the US. The average US household now owns $8,284 in credit card debt. These numbers vary depending on the study, but they always amount to thousands of dollars for every household in the country.

The point is that credit card debt is a problem that afflicts nearly everyone in the US. In my opinion, it’s also one of the simplest types of debt to deal with.

The problem comes down to too many Americans using it as a means to survive. Together, 48% of Generation Xers and Baby Boomers claimed credit cards are now a survival tool. They were never designed for this. It’s symptomatic of a real problem experienced in the US.

So what should you do about credit cards?

We discussed how you should go about paying them off earlier in this article. It’s also clear and obvious that you need to use credit cards, to some extent, in order to improve your credit score. I hate that fact, but it’s just where Western society is these days.

My advice is to always adopt the principle of only spending on credit cards when you know you can immediately pay it off. That’s credit score building. You’re never actually going into debt when you treat credit cards like this.

Try to stick to no more than a few credit cards. If you have hundreds of store cards clogging up your wallet, it’s probably time to get rid of them. People often start making mistakes when they lose track of their cards.

Bear in mind that the Bankruptcy Protection Act of 2005 made it harder to declare bankruptcy to avoid debts. That’s why people turned to credit cards in the first place. So don’t assume you can get out of your debts just by declaring bankruptcy.

You can only do this successfully if it’s mathematically impossible for you to pay off your debts.

What About Medical Debts and Other Emergency Expenses?

There’s no doubt that the US healthcare system is a piece of trash. That’s why smart Americans who can travel are getting treatment in Mexico and Canada. But sometimes it can’t be helped and you’ll have to get treatment in the US.

You can’t avoid sudden expenses, but what you can do is fortify yourself against them going forward.

The common advice is that you should always have six months’ worth of expenses should you lose your job.

For me, this is nonsense. It’s far too low for things like medical debts. I have over ten years’ worth of expenses and I still don’t feel that comfortable because you never know what might happen.

Don’t aim for some arbitrary figure. Aim for as much as humanly possible. A bad accident could wipe you out overnight if you don’t have a significant sum in the bank to prepare for it.

Living Out of the Shadow of the Valley of Debt

My personal philosophy is that I prefer not to take on any type of debt at all. I can do that because I have no need for mortgages or auto loans. And I come from a land where healthcare is free.

But even I acknowledge that some debt is good. A mortgage is not a bad thing and controlled credit card spending is smart in the world we live in today.

However, you need to keep it under control. Always make sure that the debt you have doesn’t push you close to the limit.

Opt for an aggressive savings plan and don’t be afraid to stick your middle finger up at FOMO (Fear Of Missing Out).

Do you have any tips for those who are struggling with debt?