Debt Risks

Americans owe billions in debt, most of which is wrapped up in real estate -- that is, mortgages -- and revolving debt like credit card debt. The commonality of debt, however, doesn't negate the problems of being financially in the red. Although it's sometimes not possible to live an entirely debt-free life, awareness of the risks associated with debt helps you be responsible with the debt you accept.

Future Financial Instability

When you take on debt, you must designate a percentage of your future income toward debt repayment. With a smaller percentage of your income available, you have less flexibility to deal with financial emergencies. That, in turn, increases the risk you'll have to rely on additional credit to make ends meet, perpetuating the debt cycle. In the larger perspective, debt means you have less to contribute to the economy. When the inability to contribute happens to thousands or millions of people, such as in periods of economic recession, businesses suffer. They may have to cut jobs, which makes the debt problem worsen for affected workers.

Property Loss

When debt is secured -- that is, when it is attached to some type of collateral -- you face the risk of losing the property you put up for collateral. Even if you have unsecured debt, if you don't pay, a creditor has the right to collect what you owe through the court. If a judge finds the creditor has a valid claim, you may have to liquidate your assets to pay what you owe, or the judge may garnish your wages or bank accounts.

Emotional, Physical and Social Distress

The anxiety associated with debt can cause major health problems like ulcers, headaches and even heart attacks. It can keep you from enjoying other areas of your life, including your social relationships. In some cases, debt problems even can end relationships including marriages.

Legal Problems and Harassment

When you become delinquent on a debt, your creditors will contact you to rectify the problems with your account. Some creditors are very aggressive and even if a creditor avoids harassment, you still are obligated to respond to legal notices the creditor sends you. You may have to appear in court and defend yourself, and if you have to hire an attorney legal fees may dig a deeper debt hole.

Ways to Reduce the Risks

The best way to reduce the risks associated with debt is to have a clear budget. Track everything you spend, and enter into debt only when you are in an emergency situation. Seek debt counseling and be upfront with your friends and loved ones about the debt you have -- let them help you. Negotiate with your creditors as soon as you think you're in trouble so they are less likely to pursue legal action. Know the difference in interest rates between unsecured and secured loans, and never enter a debt without a repayment plan -- think like an entrepreneur, not a debtor.