- 8 min read
- You can consolidate your debt yourself!
- It takes planning, perseverance, and staying organized.
- The key is creating an accurate budget.
What to Know Before You Consolidate Your Debt
Consolidating your debt requires a little bit of planning and a lot of execution. Look at your debt like a carpenter looks at building a cabinet — you need the right tools (in this case, knowledge), the right materials (money), and time to complete your project. Let's put together a plan to consolidate your debt.
Before we get to the action-oriented part of this article, we need a brief discussion on the word "consolidation." The dictionary defines consolidation as combining two or more items into one. In the personal finance world, people use the word when they refer to credit counseling or debt settlement. Neither of these approaches fit the dictionary definition because neither combines all of your debts into a single debt. Both, however, allow you to make one monthly payment, which a credit counselor or debt settlement company use to resolve your enrolled debts. Let's get back to the fun part of this article.
Consolidate your debt yourself by taking these six steps:
- Step 1: Tally Your Debt
- Step 2: Add Up Your Household Income
- Step 3: Create a Budget
- Step 4: Create an Action Plan
- Step 5: Negotiate!
- Step 6: Evaluate Your Progress
We start with, naturally, step 1.
Step 1: Tally Your Debt
Collect your monthly statements and write down the information in a table like the one below. Get a copy of your credit report from AnnualCreditReport.com to see if you missed any debts. Two brief asides: AnnualCreditReport.com is a no-cost, no-gimmick way to get copies of your credit reports. Also, credit reports are not infallible records of consumer debts. You may have debts that do not appear on your credit reports because the creditor does not report this information.
Although you should include your home and student loans on this table, you will focus your debt consolidation energies on the other, high-interest debts first.
|Type of Debt||Balance||Interest Rate||No. Payments Remaining||Monthly Payment|
|Mortgage / Rent|
|Credit Card 1|
|Credit Card 2|
|Other Account 1|
|Other Account 2|
Step 1: Tally your debts in a spreadsheet like the one above.
Sum the Balance column to see the total of all debts. Add-up the Monthly Payment column, too. We will need the Monthly Payment total later.
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Step 2: Add Up Your Household Income
Why do we need to know our household income? To figure out how much you can devote to retiring debt, you need to start with your household income. Write down your monthly income after taxes, insurance, and retirement savings. If you are paid every two weeks, multiply the average amount times 26 to get your annual after-tax income. Then divide your annual after-tax income by 12 to get your average monthly income. We will need this number in Step 4.
|Your Monthly Income|
|Source||Monthly Gross Income||Monthly Net Income|
|Borrower 1 Wages|
|Borrower 2 Wages|
Step 2a: Add Up Your Household Income
Now subtract your monthly mortgage/rent, student loans, and vehicle loans from your monthly after-tax income.
|Subtotal from Step 1|
|(Here, subtract Monthly Net Income we found in Step 2)|
|Amount Available For Budget and Debt Payments|
Step 2b: Determine Available Income for Expenses and Debt Payments
Step 3: Create a Budget
One we know our income and debts, we can start to home in on the amount we can use to pay-down our debt. Write down all of your monthly expenses in a table similar to the following. "Priority" is your relative importance for each expense. Set a scale or range that seems natural for you. For example, your rent or mortgage should be a "1," and treats like cafe-bought coffee drinks should be a "5."
|Your Monthly Expenses|
|Expense||Priority||Average Monthly Amount|
Step 3a: Your Monthly Expenses
Total your monthly expenses. Compare your expenses to your income, which we learned in Step 2. The next step is where the magic happens.
How much do you have left to pay off your debts? If the amount is small, look for ways to cut spending. Try the Bills.com My Saving Machine to learn ideas for saving money, and how much little expenses add up over time. Remember, the more you have available to pay to your debts each month, the sooner you will be debt free.
How much can you set aside to retire your debt? We answer that next. Fill in the following table with the information you gathered in the first three steps:
|Your Debt Retirement Number|
|Item||Your Plan Amount|
|Amount Available For Budget and Debt Payments (Step 2b)|
|Monthly Expenses (Step 3)|
|Amount Available for Debt Payments|
Step 3b: How Much Can You Use To Retire Debt
Step 4: Create an Action Plan
This step requires you to make some tough decisions. How do you want to handle your debt? Most of us would like to repay our creditors in full, but circumstances may not allow that. Let us look at three debt repayment options.
Rank your debts by interest rate. Pay the minimum amounts on all other debts, and pay the maximum amount on the one with the highest interest rate. Repeat each month until you pay-off the account with the highest balance. Move on to the next-highest account and pay the minimums on the others and the maximum on that account. Repeat these steps until all of your accounts are paid.
The debt avalanche pays the account causing you the most financial pain first. This results in you achieving debt freedom faster and at lower cost than paying a little more on all of your accounts.
Here, you stop paying your debts, such as credit card balances, and instead save as much as possible in a separate account each month. You start to receive collection calls. At some point, usually after 180 days, the creditor will sell your collection account to a third-party collector or move the account to a separate department for debt negotiations. At this point, you can start to negotiate lump-sum settlement agreements for your unpaid debts. How much the settlement amount will be depends on the creditor and your skills as a negotiator. For credit card debts, expect to settle for 40 to 60 cents on the dollar. For other debts, such as medical debts, the range varies widely.
Debt settlement/negotiation is not for you if you are not disciplined about banking your savings every month. It is also not for people who negotiate by giving in to an opponent's every demand. It is also not for people who need to maintain a high credit score, or will be kept up at night worrying about the possibility of a lawsuit.
If you want to pursue this option but avoid the do-it-yourself heavy lifting, consider working with a commercial debt settlement company.
Many creditors, such as credit card issuers, offer hardship programs that cut interest rates and waive some fees. Credit card issuers do not publish the terms and conditions of hardship programs. Call the customer service department and ask is your issuer offers one. Some steer customers into credit counseling programs. Some close the account, so be sure to ask about this detail. Because creditors do not publish the terms and conditions of their hardship programs, these change at any time, and may vary by the customer and their circumstances.
Step 5: Negotiate!
It is beyond the scope of this article to discuss the skills you need to negotiate debt. Fortunately, the Bills.com article Debt Settlement Advice discusses seven points you need to remember when negotiating a settlement. If you follow the steps here on this page, you will be well on your way to negotiating from a position of strength because you will know exactly what you can afford.
Step 6: Evaluate Your Progress
Every two months, complete an updated version of the table you completed in Step 1. Expect occasional setbacks, but your progress should be forward. If you are staying in place, then redo Steps 2 and 3 to learn why. A plan is a process, and sometimes it takes several attempts before fine-tuning a plan that consolidates your debt.
Dealing with debt
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q4 2022 was $16.91 trillion. Housing debt totaled $12.26 trillion and non-housing debt was $4.65 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in Arkansas, 35% have any kind of debt in collections and the median debt in collections is $1553. Medical debt is common and 18% have that in collections. The median medical debt in collections is $561.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.