Problem debt is avoidable, especially if you are prepared for emergencies

The typical American family has a love and hate relationship with debt. Everyone loves spending money and no one likes paying it back. That leads to a nasty situation where we often owe more than we’d like. Most people handle that situation; paying the credit card bill each month is no different than paying the light bill or the mortgage. But sometimes situations that are well in hand can turn disastrous if a financial crisis occurs without warning or planning ahead. And when that happens, a manageable debt situation can quickly turn into a disaster.

The secret to avoiding such problems is to plan ahead. Granted, it’s not always easy to do, but a good financial plan beats figuring out what to do when everything goes wrong. In an ideal situation, you would like to have three to six months worth of expenses put aside in cash. This would be great to have put away in a fairly liquid place, such as a savings account or money market account at a bank. It would not be a good idea to have that money in stocks or a mutual fund, as the money is harder to obtain on short notice.

Of course, it’s not always possible to put away a half a year’s expenses in cash. A good alternative would be to arrange to take out a home equity line of credit. A line of credit is a loan against the portion of your home that you already own. If you have a house worth $150,000 and you owe $100,000, you have $50,000 in equity. You could borrow against that; a line of credit of, say, $30,000 would not be unreasonable. Unlike a home equity loan, where you would take the cash as a lump sum and pay it back on a rigid payment schedule, a line of credit simply represents cash that is available to you when you need it. You could take out a little at a time, or all of it, or none of it, as needed. Then you only pay back the amount you borrowed. It’s a great tool for emergencies, but you can’t get one in an emergency. You need to get it ahead of time, while your finances are still solid.

If you haven’t planned ahead and you find yourself suddenly with money problems, such as an unexpected job loss or illness, call your creditors right away. Don’t wait until you are delinquent in your payments; call them immediately and tell them about your problems. They will, in all likelihood, agree to work out something with you. They are far more likely to be in a mood to negotiate if you call early rather than after you have already defaulted on your debts. May people allow their problems to get worse because they are afraid to call their creditors. That, unfortunately, is often the first step on the road to bankruptcy.

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