Over-indebted and default: how to manage debt

Introduction

Taking a loan, using credit cards or using other credit ways makes a lot of things possible. But borrowing can be expensive and it can even ruin your finances if you don’t be aware of all the consequences of it.  Some people use terms as “good debt” and “bad debt” and others see all debt as bad. Debt must be managed. That is the most important.

Before take a loan people should think if they afford to pay it, anticipate different scenarios and adversities that may come and after doing it, they must manage the debt payoff plan.

Even if you borrow wisely with affordable payments, things can change. A job cut or a change in family expenses can leave you regretting the day you got a loan. It’s never fun to make loan payments, especially when they take up a large part of your monthly income, but most of all, one must control it, avoiding default, because that may became a serious problem an make your life hell.

Tasks
  1. Create a tool to help manage a debt payoff and a monthly budget in an over-indebted family scenario
    In order to create a tool to help managing a debt payoff and a monthly budget in an over-indebted family scenario, you should reflect about the impact of loan payments on a monthly budget and analyse how a debt payoff plan should be realistic. Analyse some existent tools and be free to create one that suits the objective. 
  2. Promote a responsible credit card use in your family
    Aiming the objective of promoting a responsible credit card use in your family, you should outline major difficulties people usually face with credit cards and discuss why people get into debt too much.
  3. Showcase alternatives when facing a major difficulty
    Bearing in mind that not always things happen as we predicted, it is important to recognise alarm signals, being able to identify uncertainty factors in our lives that may compromise our responsibilities. The most important is that if those scenarios become real, to have alternatives to face and overcome it.
  4. Evaluate different tips to avoid default
    Because not being able to pay your loans could be a serious problem, you should be aware of the consequences of it as well as identify what measures could be taken when facing a default. In the end, you should be able to evaluate different tips to avoid a default situation.
Process & Resources
  1. Create a tool to help manage a debt payoff and a monthly budget in an over-indebted family scenario

    You may use these links or others to collect some information about the impact of the debt payoff plan on a monthly budget, analyse how a debt payoff plan should be realistic and get some ideas about tools that help manage debt payoff as also a monthly budget in an over-indebted family scenario:

    https://www.realpeople.co.za/blog/posts/2017/december/what-is-over-indebtedness/
    https://www.bankrate.com/debt/how-to-stick-to-debt-payoff-plan/
    https://www.nerdwallet.com/blog/pay-off-debt/
    https://www.thebalance.com/free-debt-reduction-spreadsheets-1294284
    https://www.daveramsey.com/blog/how-to-pay-off-debt

    Afterwards, you should create your own tool, that may be based on one that already exists or a new completely one.

  2. Promote a responsible credit card use in your family

    You may use these links or others to collect some information about major difficulties people usually face with credit cards and discuss why people get into debt too much:

    https://www.stepchange.org/debt-info/paying-off-credit-card-debt.aspx
    https://www.nerdwallet.com/blog/credit-cards/what-is-a-credit-card-hardship-program/
    https://www.citizensadvice.org.uk/debt-and-money/borrowing-money/credit-cards/if-youre-struggling-with-credit-card-debt/
    https://www.fool.com/the-ascent/credit-cards/articles/why-do-so-many-people-end-up-with-credit-card-debt/

    Then, you should use a form of presentation (poster, film,...) to promote a responsible credit card use in your own family, including best practices regarding credit card usage.

  3. Showcase alternatives when facing a major difficulty

    You may use these links or others to get some ideas about recognising alarm signals and uncertainty factors that could compromise your assumed responsibilities regarding credits, as well as alternatives when facing difficult times in those contexts:

    https://www.stepchange.org/debt-info/debt-collection/default-notices-and-missed-payments.aspx
    https://www.thebalance.com/hard-to-pay-off-debt-960855
    https://www.nidirect.gov.uk/articles/dealing-debt-problems
    https://www.thebalance.com/options-for-when-you-cannot-make-a-loan-payment-4083188
    https://www.citizensadvice.org.uk/debt-and-money/borrowing-money/credit-cards/if-youre-struggling-with-credit-card-debt/  

    Then, you should make a map with: 1) possible alarm signals that should be considered in this context; 2) uncertainty factors that could compromise a payment of a loan 3) alternatives when facing a major difficulty.

  4. Evaluate different tips to avoid default

    You may use these links or others to collect some tips that could help preventing a default situation, as well as be aware of the consequences of a default and about what can be done in those cases:

    https://www.moneysense.gov.sg/articles/2018/11/managing-debt-what-you-can-do
    https://www.citizensadvice.org.uk/debt-and-money/help-with-debt/
    https://www.thebalance.com/steps-to-avoid-bad-credit-960095
    https://www.thebalance.com/using-credit-cards-4073400

    To do this, you should get your perspective and also talk to other members of your family that could have a relevant experience in this kind of situation. Then, sum up and use a form of presentation (poster, film,...) that suits best your objective.

Self-Evaluation

After complete this WebQuest, I can:

Prepare a plan for repaying the debt of an over-indebted family
Describe some recommendations that an over-indebted family can use to reduce debt.
List several advantages and disadvantages of using credit cards.
Explain how credit card debt occurs.
Follow the rules of responsible credit card use.
List some unexpected life situations that may worsen my financial situation.
Decide how to proceed in unexpected life situations to minimize their impact on personal and family finances.
Explain what a debt trap is.
Describe the ways in which people fall into debt traps.
Behave so as not to fall into the debt trap.

*If you answered NO to more than half of the statements, you should go through WebQuest again and acquire more knowledge and skills if you answered YES to almost all questions; congratulations on your great success!

Conclusion

Debt is a double-edged sword: it can be useful when you invest in the future, but you eventually need to pay off debt so you can build net worth. That’s why is so important to manage it well. When you’re unable to pay off debt (for whatever reason), the result is a debt cycle that’s difficult or impossible to get out of. For that reason it’s essential to understand your finances: you need to know exactly where you stand, how much income do you bring in each month, and where does all of the money go. Creating a “spending plan” that helps you to know how much you can afford to spend (your income) and how much you’ve been spending can be very useful. 

By doing this WebQuest, you will be challenged to reflect about managing debt, namely the risks you should be aware and good practices you could use.