Managing Debt

Managing Debt

The PICPAThe 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 goalsMake 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 BasicsBefore 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 BasicsTips 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 DebtGood 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 DebtDebt 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 ConsolidationIf 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 ConsolidationConsolidation options:• Equity loan• Vehicle refinancing• Cash-out refinancing• Personal bank loan• Negotiate better terms with original creditors

Managing Debt

BankruptcyIf 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

BankruptcyFiling:• Can be complex and difficult• Will have lasting effects• Won’t magically solve overspending habits or

financial mismanagement

Managing Debt

BankruptcyTwo 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

BankruptcyTax implications:• Debt discharged through bankruptcy does not

count as taxable income• Discharged debt will be reported on 1099-C form

Managing Debt

BankruptcyBankruptcy 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 CounselingA 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:

www.picpa.org/consumers• 360 Degrees of Financial Literacy

www.360financialliteracy.org• IRS

www.irs.gov