9 Times It’s Smart to Be in Debt

Couple paying interior designer with credit cardIt’s never advisable to rush out and take on debt, but there are times when it actually makes sense not to pay off debt.

Debt, it turns out, can be a kind of friend, even if it’s just that flaky friend who can’t really be trusted. You see, all debt is not alike. Some of the worst kinds, such as unsecured credit card debt, can wreck your budget, but even there, you have cases where it won’t and could even work to your advantage. Other kinds of debt might seem imposing with those big red “Past Due” stamps but pose less of a threat to your financial future.

Here’s a guide to handling that debt — rather than bemoaning your inability to pay it all off — either by slowing down the payment process or leveraging or reorganizing what you owe in clever ways. These are the nine instances where it might make sense not pay off debt.

1. Leveraging Zero Percent APR Credit Cards

Many zero percent APR credit cards have hit the market, and the idea behind them is great if you’re part of the credit card industry: Lure customers in with a low-low introductory rate, and then make money off them when that rate expires and a new high interest rate soars into the double digits. While there are many dangers to treating a zero percent card properly — from having new store purchases accrue at a high interest rate to overlooking the balance transfer fees — there’s a way to play this game and win.

Many zero percent offers have 12 months or more of interest-free financing — even 18 months isn’t uncommon. Keep in mind that if you tap the full amount available, you’ll typically have a 3 percent fee to pay ($300 on $10,000). The idea here is to find a safe investment with a rate of return that will far outpace the transfer fee — while taking advantage of the special offer’s time frame. So if you’re lucky enough to find a $10,000 investment with a 10 percent rate of return, and can liquidate the investment after a year, you’ll have $1,000 in your pocket against the $300 you paid in transfer fees, while still paying off your credit card balance.

The only caveat — and it’s a big one — is to make those minimum payments every month so you don’t lose the zero percent perk. Then when the promo rate is finished, cut up the card and go in search of another similar offer. “If you are responsible and do not have a lot of debt, you can use this feature as a short term gap to fund something,” said Bijan Golkar, senior adviser and principal at FPC Investment Advisory in Petaluma, California. The only caveat — and it’s a big one — is to make those minimum payments every month so as not to lose the zero percent perk. Golkar cautions: “If you are not disciplined, do not even think about it.”

2. Negotiating Medical Provider Debts

The decision to pay here depends on several factors including the medical provider, the amount of the debt and whether or not interest charges are applied. In many cases, especially with private practitioners, bills do not accumulate any interest, so it makes no sense to pay them off in full when you may have other high-interest debts sucking at your wallet.

That said, you don’t want collection agencies flagging you down. In March, the three major credit bureaus — Equifax, TransUnion and Experian — also agreed not to report bad medical debts until after a 180-day waiting period. “This provides time for insurance to pay their portion and patients to pay their bills or work out a payment plan to pay them,” says Todd Antonelli, managing director of Berkeley Research Group in Chicago. “When payment plans are devised and agreed to, this debt will not show up on your credit reports preventing one’s ability to take out a loan, get a credit card, buy a car or a home.”

Negotiate directly with the medical provider whenever possible to get a minimum payment schedule set up, and always see whether you can negotiate payment charges on a sliding scale — so that $90 an appointment, for example, is reduced to $70 an appointment. This is common practice in disciplines such as psychology.

3. Fighting the Meter

In America’s cash-strapped cities, a proliferation of red-light cameras and parking meter tickets has created a near epidemic of frustrated, frightened motorists. The sight of a ticket stuck to your window is enough to churn your stomach, but the next time you get one, use your head instead. Dispute every ticket you possibly can, because there’s no telling how many will get thrown out by a judge or lost in the bureaucratic maze.

The Expired Meter website, for example, has become a big hit in Chicago, where motorists are taught how to fight back; many of the strategies here can be used in other cities as well. Every time you fight a ticket, you automatically delay the debt due without accruing a single cent of interest and penalty — and you might just get off the hook.

4. Holding on to Mortgage Debt

Hurry up! Convert that mortgage from a 30-year loan to a 15-year loan! Your mortgage payments will skyrocket. But you’ll pay a lot less in interest charges, and you’ll own your home twice as fast. Sounds smart, right? Not so fast.

Assuming you live in an area where home prices are appreciating rapidly, the opposite strategy is more profitable. If a $300,000 home appreciates to $500,000 in five years, you’ll get a much bigger return on investment a dollar when you actually put less money into paying your mortgage, not more. The uptick in local prices will still create gobs of new equity, and lower mortgage payments will give you breathing room to enjoy your home instead of being a slave to it.

5. Keeping up Low-Interest Car Payments

In recent years, low interest rates on car loans have been a boon to consumers, with some dealerships still offering zero percent promotional financing. If your interest rate is low, most of your payments will go directly into paying off the car as opposed to interest. And in this case, the debt is secured, meaning that the car acts as collateral to the loan money. If it’s a long-term loan with low interest — a five-year loan for example, which has an interest rate as low as 2.49 percent — then please, pay off the car slowly to take advantage of the favorable rate.

6. Declaring Bankruptcy

If you find that bankruptcy is the one option you face due to your mounting debt, there’s little sense trying to make a goal line stand. Virtually all of the 910,000 personal bankruptcies that were filed in 2014 were either Chapter 7 or Chapter 13 bankruptcies, according to the United States Courts website. What’s the difference? With a Chapter 7, the debtor’s nonexempt assets are gathered and sold, with the proceeds used to pay off creditors. Certain possessions are exempt, but this varies widely from state to state. It takes three to four months to complete a Chapter 7 bankruptcy and obtain a discharge.

With a Chapter 13 — also known as a “wage earner’s plan” — individuals with regular income repay all or part of their debts. Under this chapter, debtors propose an installment plan to creditors over three to five years. It also offers individuals an opportunity to save their homes from foreclosure by catching up on delinquent mortgage payments over time. You must make all mortgage payments that come due during the Chapter 13 period on time. But if this bankruptcy succeeds in restructuring your debt for a smaller amount, you could come out paying off less in the end.

7. Using Credit Counseling and Negotiation

If you are looking at $20,000 in credit card debt, for example, making minimum payments at 19.99 percent APR is the equivalent of spinning your wheels: The minimum payment will barely make a dent in the balance due. But nonprofits such as Money Management International can take on such cases and help you negotiate new payment plans with your creditors — and at lower rates.

If you think this is a viable option — especially after having positive conversations with a nonprofit counselor — then you won’t want to keep throwing good money down the drain just to keep up on the high-interest hamster wheel. You may even be able to negotiate a short break period where you take some time before resuming payments. In the short term, you can also try calling credit card companies directly to negotiate a lower interest rate.

8. Borrowing From Parents

Borrowing from your parents can be painful. And for sure, the idea here is not to borrow from your parents and stiff them, for hell hath no fury like the Bank of Mom and Dad when it has been scorned. You might, however, find your parents to be strong allies in your attempt to get rid of debt.

If you owe $5,000 on a high-interest credit card, be proactive. Go to them with a short review of how you accumulated the debt. Tell them that every penny of their $5,000 loan would go to zapping the high-interest card — not even a slice of pizza or a can of beer would be deducted. Then you might try proposing repayment of only half the loan, with the other half taken out in grunt work. Does the house need painting? Can you perform basic home repair tasks or help out with a major family project? The barter system works well in scenarios where cash is short but the ability and willingness to pay back in other forms is not.

9. Letting Moldy Oldie Debts Lie

Some debtors will go after you with all the ferocity of a jet-powered hellhound, but even jet engines run out of fuel after a time. Again, this is not so much a way to game the system, as to start afresh. Federal law requires that credit-reporting companies remove most debts from your credit report after seven years from the time it became delinquent. Since the debt has already done its nefarious deed and put a dent in your credit score, by making a payment you only reaffirm the debt and reset the clock giving the debt collector more time to go after your cash.

5 Surprising Sources of Debt

Caucasian car driver woman smiling
Unemployment, medical bills, a shopping addiction — these all may be obvious causes of debt, but they certainly aren’t the only ways people end up in the red.

Other forms of debt are more insidious. They arrive looking like a big break or a money-saving option. But instead of getting you out of your financial hole, they actually dig you in deeper.

Don’t let these five hidden sources of debt say “Gotcha!”

Your New Job

The problem: Your new job is supposed to be your ticket out of paycheck-to-paycheck living, but a big boost in income is often accompanied by a big boost in spending.

“When people get a new job, it looks like a limitless amount of money so they splurge on a new car or a buy a lot of clothes,” says Joe Heider, founder of Cirrus Wealth Management in Cleveland.

Cecilia Beach Brown, a certified financial planner at Lincoln Financial Securities in Annapolis, Maryland, says it’s a common trap. “When the money’s there, it’s hard to say ‘no.'” Then people lose their job or are otherwise unable to maintain their new lifestyle.

The solution: Rather than increase your spending, continue to budget based on the amount you previously earned. Then, bank the extra for retirement, travel or a big spending goal, whether that be paying cash for a car or a 20 percent down payment on a house.

A Financial Windfall

The problem: Like a new job, a windfall can be your financial undoing. Whether it’s an inheritance, divorce settlement or lottery winnings, Brown says people notoriously mishandle large sums of money that fall into their laps.

“People tend to spend money more than once in their head,” Brown says. “It’s the mental accounting that gets them in trouble.”

By spending without a plan, people blow through their money and end up financing big purchases they can’t afford that push them into debt.

The solution: Brown advocates that everyone use the one-third rule when dealing with an inflow of cash of any kind. One-third of the money should be set aside for taxes, the second third should be put in savings for the future and the final third can be used for fun.

Leasing a Car

The problem: Leasing seems like a good way to get more car for your money, but contracts can include expensive provisions that make it difficult to simply turn in a vehicle without owing cash.

When people lease a car, they’re excited and don’t pay attention to what happens when they turn it in.

“When people lease a car, they’re excited and don’t pay attention to what happens when they turn it in,” Heider says.

Leased cars have strict mileage limits, and people who go over could get hit with fees that run from 10 to 20 cents a mile driven over the limit. In addition, there may be acquisition fees, disposition fees and early termination fees. In many cases, Heider says drivers roll one lease into another to avoid paying fees out of pocket. Then, they never get out from under their monthly vehicle payment. The solution: Think twice before leasing a vehicle, or at least read the fine print more carefully. Be realistic about how many miles you drive, and add up the total cost, including taxes and fees, to determine whether buying a reliable used car is a better deal.

A New Cellphone

The problem: You want that shiny new smartphone, and the cellphone company is happy to give it to you — provided you sign up for a two-year contract. The phone seems like a freebie, but you have, in fact, just signed up for more debt.

“Really what you’re doing is taking a loan out to pay for the phone,” says Phil Jacobson, managing director at United Capital in Rockford, Illinois. You’re not getting the phone for free; you’re financing it with your cellphone contract.

Your new phone could also cause further problems if you have an expensive data plan you can’t afford. There’s no way to cancel most cellphone contracts without paying a sizable fee.

The solution: Reconsider contracts. Many wireless providers now offer non-contract service options, and those may be a better choice. While it costs more to buy a new phone out of pocket, you might save money on a monthly plan. If you still want a new phone, look for a cheaper, refurbished one or get a used one from a trusted source.

Buying a House

The problem: Obviously, buying or building a house typically comes with the debt of a mortgage. However, some people compound that debt by insisting on new furnishings or expensive renovations before moving in.

“What’s a couple hundred here? What’s $500 there?” Heider says of many people’s mindset when constructing a new home. “Then they realize they’re $20,000 to $30,000 over budget.”

Buying or building a house can feel like permission to replace appliances, furniture and electronics. However, it’s a trap that can create a vacuum of debt and turn a dream home into a nightmare.

The solution: Having a written budget for building or renovating a house is the first step to avoiding this debt trap. The second step is to stick to the budget. Also, consider whether an existing home will have expensive maintenance issues in the near future and look for a house that is move-in ready. If you don’t start a renovation project, you can’t overspend on it.