Is it true that there is good debt and bad debt, and how can that help me avoid bankruptcy?
It is a common belief that there is good debt and bad debt. Conventional wisdom states that good debt is debt used to buy an asset, such as mortgage debt. Since the house will increase in value, the debt has helped you increase your net worth, and therefore it is good debt.
Bad debt is debt incurred to purchase things that decrease in value, which probably everything you purchase with a credit card. You end up repaying the debt long after the vacation, or whatever, is gone, and therefore that is bad debt.
But is this true? Does good debt and bad debt really exist?
It is true that credit card debt is almost never good debt. It carries a high interest rate, and will only get you into trouble, possibly leading to personal bankruptcy. However, you should not assume that mortgage debt is good debt just because you are buying a house. If you borrow against your house you may be digging yourself deep into a financial hole, so mortgage debt can be bad debt.
If you take our a second mortgage to go on a vacation, that is not good debt. If you buy a house that is bigger than you can afford, that is bad debt.
So be careful. Whenever you borrow, ask yourself if you are borrowing for a good reason, and make sure you can pay it off, because if you are not careful, good debt can easily become very bad debt.
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