Consumer Debt Myths

Borrowing is an essential component of the modern economy, but debts can lead to financial hardship. Managing debt and spending money responsibly are necessary to build wealth and enjoy a high standard of living in retirement. Many common misconceptions and myths are associated with consumer debt.

  1. If I Go Bankrupt I'll Lose Everything

    • A common debt myth is that filing for bankruptcy causes you to lose everything you own. The bankruptcy code offers different options to filers, one of which is known as "liquidation," or Chapter 7. When you file for bankruptcy under Chapter 7, the process involves selling various assets to pay off creditors, but you are not required to sell a single piece of property you own. According to the U.S. courts, filers are allowed certain exemptions that allow them to keep basic things like clothes, furniture and possibly a car and a home.

    Debt Consolidation Saves Money

    • Debt consolidation is a common method of debt management whereby a lender buys your debts and offers you a single, large loan in exchange. Debt consolidation can make paying debts less confusing by making it easier to keep track of a single, large debt payment rather than many small payments due at different times of the month. It is not a given, however, that consolidation saves money, since interest rates may be high and you may be subject to fees and other setup costs.

    I'll Get Out of Debt if I Make Minimum Credit Card Payments

    • Credit cards are one of the most dangerous debt instruments available to consumers. They allow consumers to borrow money, usually at very high interest rates, for spur-of-the-moment purchases, which enables impulsive spending. Credit card companies require borrowers to make minimum monthly payments. But minimum payment amounts are often extremely low, to the point where it can take years for a borrower to get out of debt. If you continue using the card, chances are your balance will increase over time, even if you faithfully make minimum payments. Paying more than the minimum payment is the best way to get out of credit card debt.

    I Should Refinance a Mortgage if Interest Rates Fall

    • When you refinance a mortgage, a lender buys your current mortgage and offers you a new one with different terms. If interest rates have fallen recently, you may be able to get a lower rate by refinancing. Even if you get a lower interest rate, however, you may not save money because refinancing can be expensive because of legal, application and home appraisal fees and other costs. It is important that the savings realized from a lower interest rate exceeds the costs of refinancing.

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