Debt Resolution and Financial Responsibility
Debt resolution programs offer alternatives to traditional repayment methods and can ease the burden of debt, but are they a responsible choice for you? To understand if debt resolution is a financially responsible option, you should consider how it would improve your short and long-term finances.
What Is Financial Responsibility?
At its core, financial responsibility is living within your means and prioritizing your money decisions to meet the current and future needs of you and your family. Paying your bills on time, budgeting, saving, investing, monitoring cash flow and managing debt are a few important aspects of a financially responsible lifestyle.
Responsible financial decisions can look different for everyone because the amount and type of debt you have significantly impacts your financial priorities.
Debt Affects Your Financial Priorities
While having some debt is fine, too much can derail your financial wellness and lead to a high debt-to-income ratio (DTI). DTI is a key indicator of financial health and is determined by dividing your monthly expenditures by your monthly income.
A DTI ratio below 28% is considered low-risk, while percentages over that might indicate that your income isn’t sufficient to support your debt.
If you have a low DTI, you’ll likely have the cash flow needed to prioritize saving and investing. On the other hand, if you have a high DTI and have a lot of debt, a large amount of your income is likely going toward maintaining it, and getting out of debt should be your top priority.
It’s Normal To Feel Guilty About Your Debt
Negative feelings such as shame, guilt, or embarrassment often come up for people who struggle with debt. These feelings can even delay efforts to get help or find relief. You may blame yourself and think “I should be able to pay” or “I have a responsibility to pay” no matter the cost.
Instead of blaming yourself, put your debt in perspective and find the most responsible way forward.
Put Your Debt in Perspective
Sky-high interest rates, job loss, medical emergencies, and more can impact your ability to pay your debt using traditional means.
Whatever the reason, when your ability to repay your debt is compromised, your first financial responsibility is to resolve your debt quickly and for as little money as possible.
Debt has a way of derailing all other financial priorities. For example, when you are struggling with debt, it’s easy to become distracted by worries about your credit score. You need to remember that poor credit is a symptom of poor financial health and debt is often the underlying condition that must be treated first.
Once your debt is resolved, your credit score can improve and you can safely leverage it to achieve your financial goals.
Weigh Your Concerns About Debt Resolution
Some debt solutions may concern you because of their short-term effects. It is important to remember that your number one priority is to deal with your debt as quickly and affordably as possible.
| Delaying Payments | Creditworthiness | Creditor Calls |
|---|---|---|
| Delaying payment to creditors is a temporary part of debt resolution. Instead, your reduced monthly payment is saved in a Dedicated Account and used as leverage to reach resolutions. | Temporarily delaying payment to creditors can lower your credit score. Rerouting those funds to your Dedicated Account is an essential part of your program and creditworthiness should improve after debts are resolved. | When you start a debt resolution program you may notice an increase in creditor calls. Creditor calls are a good indication that the program is working! If they are disruptive, you can stop creditor calls in a number of ways. |
Is Debt Resolution a Responsible Choice for Me?
Making traditional minimum payments is an inefficient and expensive way to pay off debt. On the other hand, debt resolution programs can significantly reduce your monthly payments and the amount of time necessary to resolve your debts.
If you have a total debt of $25,000…
| Total Debt $25,000 | Debt Resolution | Traditional Minimum Payments* |
|---|---|---|
| Monthly Payments | $408 | $729 |
| Total Repayment | $18,750 | $72,262 |
| Debt Free In | 46 months | 443 months |
| Interest Rate | 0% | 23% |
Debt resolution may be a responsible choice for you if:
- You cannot afford your monthly minimum payments.
- You have high-interest debt.
- Your debt-to-income ratio is over 28%
- You live paycheck to paycheck.
- Your debt balance stays the same despite regular payments.
- You don’t have an emergency fund and are unable to establish one.
- Your total debt payments account for more than half your income.
Debt resolution may not be a responsible choice for you if:
- You have the means to pay off your debt in a lump sum.
- You can afford to pay down your debt quickly with regular payments that are more than the monthly minimum.
Resolving Debt Responsibly
Borrowing money is a serious commitment. When you take out a loan or spend money on a credit card you agree to pay back what you borrowed based on the terms and conditions put forth by the lender. Sometimes, however, circumstances outside your control or a lack of information about how your debt works can affect your ability to pay.
Fortunately debt resolution is a responsible alternative to traditional repayment methods. It allows you to take control and change the terms of your debt so that you can afford to move beyond that debt and put your hard earned money toward other financial goals.