Managing Debt

The PICPA The Pennsylvania Institute of Certified Public Accountants (PICPA) is a professional association of more than 22,000 members working together to improve the profession and serve the public interest.

Managing Debt Outline your goals Make a plan to pay down your debt (your financial goal). Include: Your time frame for reaching each goal The benefits of reaching each goal The obstacles that may prevent you from reaching your goals and ways to overcome them

Managing Debt Budgeting Basics Before you can tackle your debt, you need to evaluate your budget. Calculate your current income and expenses Identify where you can cut costs Be honest with yourself about how you got into debt, and change habits if necessary Monitor your budget regularly

Managing Debt Budgeting Basics Tips to help you stay on track: Involve the entire family Make budgeting part of your daily routine Build rewards into your budget

Managing Debt Types of Debt Good Debt Mortgages Home equity loans Lines of credit Second mortgages School loans Bad Debt Credit Card Debt Debt Consolidation Loans from questionable sources (payday lenders)

Managing Debt Dealing with Debt Debt reduction tips: Never miss a payment Pay more than just the minimum If you’ve fallen on a hardship, consider explaining the situation to creditors

Managing Debt Dealing with Debt If you fall behind on your payments, be proactive— contact your creditors and let them know your situation Know your rights if your debts go to a collection agency. Debt collectors cannot use abusive or harassing language, make threats, or add arbitrary fees to your debt

Managing Debt Debt Consolidation If you are in a heavy debt situation, it may be time to consolidate. One large loan taken out to pay off several smaller loans with different interest rates Helps ensure debt gets paid on time Only use loan to pay off the debt!

Managing Debt Debt Consolidation Consolidation options: Equity loan Vehicle refinancing Cash-out refinancing Personal bank loan Negotiate better terms with original creditors

Managing Debt Bankruptcy If controlling your expenses and debt consolidation aren’t enough to tackle your debt, bankruptcy may be looming. Filing bankruptcy doesn’t make you a failure: it’s a responsible step toward improvement, but should not be taken lightly.

Managing Debt Bankruptcy Filing: Can be complex and difficult Will have lasting effects Won’t magically solve overspending habits or financial mismanagement

Managing Debt Bankruptcy Two types of personal bankruptcy: Chapter 7 and Chapter 13 Chapter 7: assets are sold to pay creditors, and debt left is discharged Chapter 13: all disposable income will go to pay creditors for a specific period of time, likely 5 years

Managing Debt Bankruptcy Test to determine if you are eligible for Chapter 7; if not, you must file under Chapter 13 Will not eliminate all times of debt, such as: – Child and spousal support – Most tax debts – Student loans

Managing Debt Bankruptcy Tax implications: Debt discharged through bankruptcy does not count as taxable income Discharged debt will be reported on 1099-C form

Managing Debt Bankruptcy Bankruptcy will have a long-term effect on your finances. Bankruptcy notice will appear on credit reports for 10 years May have to pay higher interest rates, get a cosigner, or provide collateral for credit Can’t declare bankruptcy again for several years

Good Debt, Bad Debt, and More! Debt Counseling A CPA or credit counseling service can help you develop a plan to climb out of debt. Beware of unethical companies. Red flags include: Unrealistic promises Fees before settlement Settling tax issues—only CPAs, attorneys, and enrolled agencies can represent clients before the IRS

Good Debt, Bad Debt, and More! Resources PICPA’s Consumer Center: Degrees of Financial Literacy IRS