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The best laid plans might often not come to fruition, due to factors that are out of one’s control, leading to complications in one’s financial portfolio. Being in debt is not just a practical problem from the point of view of one’s finances; it can cause great psychological distress. In business circles, it is often a matter of ignominy. It is common to panic in such a situation. People tend to withdraw from their social or practical obligations, ignore their utility or medical bills, and feel overwhelmed or scared at the impossible situation in front of them. It is necessary to keep a clear head in such circumstances, and try and approach the problem as objectively as possible. In this article, we try and discuss practical solutions to fight your way out of debt.
The repayment of your outstanding loans is not just a financial requirement, but also a legal obligation. Bank loans are often required not just to expand the scope of the business, but also to keep it fully functional. As long as the business is breaking even, or at least able to maintain operational efficiency and credibility in the market, the banks can be expected to co-operate. The problem arises when the finances do not balance out, and the business runs into losses that necessitate loans to be drawn from the bank for injecting surplus funds. This can initiate a downward spiral into debt, which needs to be managed patiently.
Following are some of the ways you can try and make your way out of debt:
Making a clear organization of all the debts that are outstanding is the first step that you need to take in order to deal with your debt issues. The person should make a clear list of all their various debts with their outstanding EMI’s, interest rates and tenure of the loans. While it is easy to get demoralized when faced with a staggering amount of debt, it is necessary to thoroughly break the outstanding amount into manageable figures. The insolvent should have an exact list of all the creditors that money is owed to. This list should be referred to periodically, when clearing your debts, and while taking care of your outstanding utility bills. The list should also be consistently updated, so that the person is in touch with the reality of their finances, and has a clear picture of the way forward.
Once the insolvent has made a list of the outstanding debts that they have, they should be clear about which loans they need to take care of first. For instance, the loans might be owed to financial and government institutions on one hand, while they might be owed to friends and relatives on the other hand. Of course, no creditor should be taken for granted, and everyone must be assured that they will be repaid their dues on time. Nevertheless, logic dictates that the government bank or the financial institution needs to be prioritized for repayment. There are two risks that are involved on that front. In case your reputation worsens with the banking authorities, there is the risk that legal action might be initiated against you.
In the situation of multiple debts, it might not be possible to try and handle all the outstanding debts at the same time. For instance, the credit card dues might be completely cut down upon. All unsecured loans need to be cut down upon.
Given the emergency nature of the situation, the incentive is upon the person to make sacrifices regarding their lifestyle choices. It is obvious that they need to cut down upon conspicuous consumption of any sorts. All luxury expenses should be eschewed at, including dining out at fine restaurants, holiday expenses, and the focus should be completely on clearing the debts. While this sounds easily doable, people often find that the natural impulse is to behave otherwise. The lifestyle that one is habituated to becomes a matter of one’s social identity, and it is not easy to accept a fall in one’s living standards. If the amount that is owed is relatively less, it would include sacrificing the consumption of frivolous items and any enjoyment expenses. If the problem runs much deeper, it might require much more serious compromises. For instance, the insolvent might have to relocate from their apartment and move to more affordable settings.
The priority should also be to try and prevent creation of new sources of debt whatsoever. It would make sense to completely cut down on the usage of your credit cards. Also, the businessman should try and not take any further loans. In case the insolvent is serious about getting out of debt, they need to learn to live on their income, whatever its scale might be.
Declaring bankruptcy can be depended upon as the last resort to deal with the debts that are piling up on one’s account, or in regard to your business. Ideally, it is advisable to defer this option till the very end. However, in the case of extreme circumstances, such as when there is absolutely no source of income, or when the burden of credit card dues or medical bills becoming unmanageable, filing for bankruptcy might be the inevitable choice. Filing for bankruptcy would mean that the insolvent would not be considered to be liable to repay their existing debts, and they may get the option to be waived from these dues. However, bankruptcy waivers do not include all sorts of debts. The businessman should make sure that they receive professional advice when applying for waivers. In case he becomes liable for things such as court costs or benefit payments that accrued before the bankruptcy was filed, it could be the case that those dues would need to be paid nevertheless.
Given the criticality of the situation, the savings that have been accumulated over a period of time will have to be deployed in order to clear the debts with higher interest rates. While it is advisable to not deplete the savings completely, debt is not the time when the insolvent should shy away from making the most of the funds at their disposal. Using cash reserves to clear large debts that are outstanding is a good move, since this would mean that the insolvent would stop accruing interest on these large debts.
While it may sound cliched, it is true that there is no alternative to good old fashioned hustle and hard work. The borrower needs to use his imagination and figure out ways to create additional sources of income. This could mean working at other jobs, in the plural if the situation so requires. Alternatively, they may try creating sources of passive income, which would supplement the main income that is coming in. Here are some quick ways to gather money when you’re trying to pay off a debt:
The insolvent should try and be prepared against any situations that might emerge in contingency. There should be an emergency reserve in order to take care of any urgent medical or health related expenses. Having liquid funds ready for disposal would help to handle the situation. In case the insolvent had had the foresight to keep term or health insurance, these should be seen as important assets. These would significantly mitigate the financial burden that would fall upon the junior dependents.
In case there are outstanding loans that are owed to multiple creditors, it can become quite a headache to keep track of all of them. If possible, the businessman may try and consolidate all of them into one single loan, which would leave him with the necessity of repaying just one EMI. Personal loans, credit cards and home loans can be used to repay this. This will help the businessman to close various debts, and he needs to worry about just the one loan. Also, when the businessman is burdened with too many loans, the thought of applying for any more loans should be completely avoided. At a time when the businessman is financially strained, the lender may offer them a loan settlement option. Such an opportunity should be immediately seized upon, and they may also try and negotiate with the bank to extend the tenure and reduce the amount of EMI.
Of course, the situation requires extremely practical decisions that need to be made. However, at the same time, a certain psychological approach is also necessary in order to find the mental strength to withstand the pain that will ensue. It is easy to get demoralized when one’s business enterprises, or finances collapse. The natural instinct is to take it as a sign of personal failure, and get bogged down worrying about it. The important thing is to understand that one’s economic situation should never define one’s self worth, and a period of financial struggle should not come to define you personally.