Simple Solutions To Financial Freedom

Debt Related Financial Terms You Need to Know

On Behalf of | Oct 2, 2019 | Firm News |

The attorneys of the Southern Illinois Bankruptcy Lawyers firm of Bankruptcy Advocates have compiled a listing of terms you should understand.

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There are a number of words used regularly as it relates to personal finance. However, if you are struggling to pay your bills, there are a few words that you may have heard but don’t truly understand. Let’s take a look.

Net Worth: We hear this term a lot as it relates to famous sports figures or actors. When we think of Bill Gates or Warren Buffet often their multi-billion dollar net worth comes to mind. However, you may not realize that the term is actually associated with everyday people as well. If asked your net worth, you may just think that the number is associated with the dollars in your wallet or checking account, but actually, the value is much higher.

The
technical definition of net worth as defined by Wikipedia is:

“For individuals, net worth or wealth refers to an individual’s net
economic position, the value of the individual’s assets minus liabilities.
Examples of assets that an individual would factor into their net worth include
retirement accounts, other investments, home(s), and vehicles. Liabilities
include both secured debt (such as a home mortgage) and unsecured debt (such as
consumer debt or personal loans).”

So
you see that your worth exceeds just what you have in your wallet. If you own a
home or car and they can be sold, there is a financial value that is added to
your current liquid cash. The same is true for any investments or retirement
accounts.

So
what is your net worth?

Capitalization: We hear
this word and may immediately think about grammar, but when it comes to your
money, capitalization has a different meaning. It is an important concept to
understand when it comes to loans and/or student debt. Debt.org defines it as:

“Adding unpaid interest to the original amount borrowed.”

It is important to understand that when you borrow money, you will pay back more than you borrowed and this is due to interest and interest capitalization. Sallie Mae helps explain the concept of interest capitalization this way:

“Interest
starts to accrue (grow) from the day your loan is disbursed (sent to you or
your school). At certain points in time—when your separation or grace period
ends, or at the end of 
forbearance or deferment—your
Unpaid Interest may capitalize. That means it is added to your loan’s Current
Principal. From that point, your interest will now be calculated on this new
amount. That’s capitalized interest.”

Credit Worthiness: The characters from Wayne’s World first coined the phrase “We’re Not Worthy,” and actually this phrase can be defined equally as simply. How worthy are you to receive this new credit card, car loan or mortgage? Creditworthiness put simply, is a creditor’s view of your ability to repay a debt.

Your credit score is often used to determine your creditworthiness as it shows a history of your credit payments and your debt to income ratio (which we will explore in more detail next). This is just one reason why it is so important for you to monitor your credit score. You want to make sure that your report is accurate and if there are any errors, to quickly contact the corresponding company to correct the mistakes.

Debt-to-Income
Ratio (DTI):

While it may sound technical, it is really a simple math equation. How much
income do you have coming in each month versus how much you owe in that same
time period? For a healthy debt-to-income ratio, companies look to see no more
than a 43% DTI ratio. Smart Asset explains it
further:

“Folks with higher debt-to-income ratios are more likely to default on
their mortgages and other debt. When you apply for a mortgage, calculating your
DTI will be part of the mortgage underwriting process. In general, 43% is the
highest DTI you can have and still get a Qualified Mortgage.” 

Use this formula to determine your DTI: total monthly debt
payments/gross monthly income

Debt Settlement: One of the ways to improve your financial picture is to contact your creditors and negotiate a lower monthly payment, lower interest rates or forgiveness of a portion of your debt. If the result consists of forgiveness of a portion of the debt, that is referred to as a debt settlement.

Credit.com offers 10 Tips for
Negotiating with Creditors
, and it is worth a read.
However, be aware that there are consequences when using debt settlement
as a way to improve your financial picture.

The IRS may recognize the amount forgiven (if over $600) to be taxable
income. Your credit score may be impacted if you are not making regular
payments to the creditor while negotiations continue. It is best that, if you
are considering debt settlement, that you seek advice from experts in the field
of debt relief, like the professionals at Bankruptcy Advocates. We have decades
of experience when it comes to managing debt and understanding the best avenue
to take based on your personal situation.

Give
us a call. The first consultation is always free.

Southern Illinois Bankruptcy Attorney law firm

Bankruptcy Advocates is located in Carbondale and serves a wide geographic community including Carbondale, Murphysboro, Marion, West Frankfort, Johnston City, Benton, Herrin, DuQuoin, and Pickneyville. We are a debt relief agency. Our southern Illinois bankruptcy attorneys help people file for relief under the Bankruptcy Code. Give us a call at 618-549-9800 or email us at [email protected]  to speak about your case or legal matter. Convenient appointment times are available.

For
more financial terms, check out Debt.org for their financial glossary.