Good and Bad Debt

Is there really such a thing as good debt? Isn’t the only good debt really just a paid debt? Maybe. Don’t worry, we haven’t taken leave of our senses, and we’re not about to wholeheartedly embrace the concept of debt in any way, shape or form. However, we can at least acknowledge that not all debts are the same. And it’s definitely worth knowing how to distinguish between them; it will give you considerably more latitude in dealing with your creditors.

What we’ve called good debts and bad debts are actually Priority debts and Non-Priority debts. In most respects, they’re the same; they’re both sums of money that you’re obliged to pay, in respect of goods or services that you’ve already received. Where they differ fundamentally is in the consequences you’ll incur if you fail to pay them back within the terms of your agreement. (As we’ll see, it’s your creditors that count.)

Agreed; it might be stretching a point to describe a Non-Priority debt as a good debt, but it’s no great stretch to think of a Priority debt as a bad debt. Believe us when we say we use the term ‘bad debt’ advisedly. Priority debts are the kinds of debt that can have very significant repercussions, if they stay unsettled.

Significantly, it’s not the size of the debt that makes it a Priority debt; it’s the actions your creditors can take against you if you fail to pay. As a rule, these are the debts that relate to home and hearth: including mortgage arrears, rent arrears and fuel bills; and law and order: including fines, taxes and maintenance payments. Failure to maintain your schedule of payments and/or settle arrears can result in eviction, seizure of property and even imprisonment.

That is why it’s sensible, if not imperative to settle these debts first. Keep up to date with all your Priority payments and you can at least sleep a little easier at night, knowing that you’re not going to lose your home, your possessions or your liberty.

Non-Priority debts are no less serious. They can cause just as much heartache, frustration and pain; but, no matter how bad they get; they won’t result in imprisonment. That in itself is worth remembering when you’re struggling to meet your mortgage payments at the expense of your credit card payments. Non-Priority debts include credit card and store card debts, overdrafts and loans.

When dealing with Non-Priority debts it’s generally safe to say that your home and contents are safe, no matter how bad the debts get. However, it is incumbent on you to meet some part of your financial obligation, to the best of your ability to pay. Even if it means calculating the very minimum weekly / monthly repayment you can make, your creditors will respond to the fact that you have at least made the effort.

At the very worst, your Non-Priority creditors can appeal to settle the matter in court. Bear in mind that this will only ever occur in cases when debtors have refused to make any effort to pay their dues. Speak to a debt counsellor, telephone a debt helpline if you need to, and work out the most you can afford to pay; then stick to it. Believe it or not, your creditors will most likely accept a drip feed debt re-payment in preference to court action every time.

So, is there really such a thing as good debt? Probably not. But at least we know that there are different shades of bad debt! That in itself makes it easier for us to prioritize our obligations; stay in control and stay in our homes!