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Reduce debt: Know the difference between good and bad debt

For individuals who are struggling with debt, the questions surrounding how to pay for necessities and wants can become complicated. However, keeping a few basic rules about debt in mind can help consumers manage their finances more successfully and fend off monetary problems.

The most basic rule to remember is that not all debt is the same. "Good debt" could be described as debt that is necessary to achieve a long-term goal and will bring some type of benefit to an individual in the future. An example of good debt is a mortgage. Purchasing a house involves a long-term debt commitment for most people, but it also funds an asset that should continue to rise in value.

On the other hand, racking up debt for things you don't use -- like a club membership or expensive cookware -- is an example of very bad debt. This type of spending can cause credit card bills to pile up, and if you have one that charges a substantial amount in interest, you could end up paying a lot more than you need to.

This basic rule of financial health can help you evaluate debt before you become overextended. However, a job loss or other problem can also lead to financial problems. In those cases, a bankruptcy attorney can offer valuable advice about how to discharge debt and get a fresh financial start. In many cases, bankruptcy is a viable option to clear debt, but debtors must still learn the basics of money management so that they can take control of their finances after the bankruptcy case is discharged.

Source: Forbes, "Good Debt Bad Debt," Panos Mourdoukoutas, Nov. 24, 2012

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