- 6 min read
- Take Stock of Your Debt and Finances
- Learn About Your Best Debt Relief Options
- Use BIlls.com Debt Navigator Tool to Find a Personalized Debt Repayment Plan
Personalized Debt Payment Plan
Just as there is no one way to get into debt, there is no one path to get out of debt. However, no matter your financial situation, creating a debt repayment plan is the best place to start.
There are different ways to manage debt. Finding the best debt relief option depends on a number of factors including your income, credit, and net-worth, and your financial goals.
There are many different types of debt including mortgage, credit card, personal loans, student loans, medical, and tax debt. Each type of debt may have its own particular debt repayment plan. It is important to understand your overall financial situation and match that with available debt repayment tactics.
Here are three easy steps to get your plan in shape:
- Know your Financial Situation: Income, Net-Worth, Credit
- Create Your Financial Goals
- Find the Right Repayment Plan Your Capabilities
In order to create a debt repayment plan that is appropriate for your situation, you need to start by assessing your financial situation. The best place to start is by using three important financial tools
- Budget: Your budget includes a detailed analysis of your income and expenses. If you maintain a budget, then you will be able to calculate how much money you are saving each month. This includes retirement funds, savings accounts, and investment accounts. Your budget includes monthly expenditures and allowances for both seasonal and one-off expenses. In addition, you budget should include all of your debt and any court ordered payments.
- Credit: Your credit can be divided into your credit score, which is an indication of what type of rates you can expect to get when shopping for a loan or mortgage, and your credit score, which is based on your credit history. It is important to monitor your credit report and dispute any incorrect negative items.
- Assets: In order to come up with a debt repayment plan it is important to understand your overall net worth position. Do you have liquid assets? Is your emergency fund well stocked? While paying down debt is an important goal, it should not come at the expense of building a retirement fund, or a rainy day savings fund.
Your Intent – Financial Goals for a Debt Repayment Plan
Everyone has a unique financial situation. Many millennials have big student loan debt. Some retired people may be house rich, cash poor.
Many American's are struggling with their credit card debt. According to the NY Federal Reserve Household Credit Report for Q2 2016:
Credit card balances increased by $ 17 billion, to $ 729 billion, while credit card delinquency rates improved, to 7.2% in the second quarter of 2016 down from 7.6% in the previous quarter.
That means there is more than $52 billion dollars of credit card debt that is delinquent more than 90+ days.
In order to put together the most efficient debt repayment plan it is vital that you decide what tools you have available, and apply them to the debt. You can create long-term goals, such as improve credit, get debt free, Increase savings, bolster retirement fund, buy a home, and save for children's education. At the same time, focus on shorter term tasks, such as pay down $10,000 credit card in 3 years, create emergency fund of $8,000 in 16 months, save $15,000 for down payment over next 5 years, etc.
Debt Repayment Plan – The Tactics
Once you have a good grasp of your financial situation, you can turn to finding the best tactics to achieve your goals. Here are five common debt repayment plans to consider:
- DIY Repayment Plan: If you have excess funds each month (or start cutting expenses to have more funds available, or increase your income), then the easiest way to repay debt is to increase your monthly payment. The snowball or avalanche methods are two popular ways to pay off your debt quickly.
- Personal Loan: Assuming that you can afford a fixed monthly payment and have a sufficiently good credit score, you can repay your debts by taking out a personal loan. The lower interest rate and the constant payments create a double-effect of lowering overall costs. However, be careful not to run up credit card debt.
- Credit Counseling and Debt Management Plan (DMP): A credit-counseling program can help you organize your budget. If eligible, you can enroll your credit card debt into a DMP, which negotiates lower interest rates and consolidates your payments. You will need to have sufficient income to maintain a fixed payment schedule, similar to (or more than) your current minimum payment.
- Debt Settlement: A debt settlement plan is aimed to help someone with a financial hardship negotiate their debt with their creditor. If you are already beginning to slip and your credit is going down, then this debt repayment plan could get you debt free in about 4 years.
For people seriously struggling, they might want to consider a bankruptcy (either Chapter 7 or Chapter 13).
For anyone with a home a cash-out refinance or home equity loan might be an opportunity to restructure their debt to make more affordable monthly payments, at the expense of prolonging the amount of time to repay the debt. Given a low interest rate environment, the long-term mortgage debt is a great opportunity to lower immediate financial costs, free up money and divert funds to other uses.
Debt Repayment Plans for Mortgages and Student Loans in Trouble
The Best Debt Repayment Plan
As you can surmise, there is no one best debt repayment plan. Combining your financial situation with the type of tactic can be complicated.
Bills.com realizes that the unsecured debt, especially credit card debt, is very hard to deal with. It is very easy to run up debt, especially when a financial crisis jumps on you from nowhere. How many of us have suffered medical expenses, job losses, drop in income, or sudden emergency expenses? It seems like the only way to overcome the short-term problem is to run up more credit card debt.
However, even if you aren't suffering from a financial hardship, you can benefit by taking a good hard look at your situation and find a tactic that can lower your financial costs and get you debt free. Instead of making debt payments, you could be increasing your net worth with savings and investments.
Bills.com has come up with a free tool to help you find the best debt repayment plan based on your personal situation. By answering a few questions about your financial situation and preferences, together with a soft pull of your credit (no harm to your credit score), Bills.com Debt Navigator shows you available debt repayment plans and their relative costs.
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 Q2 2022 was $16.15 trillion. Housing debt totaled $11.71 trillion and non-housing debt was $4.45 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%.
Each state has its rate of delinquency and share of debts in collections. For example, in Montana credit card delinquency rate was 2%, and the median credit card debt was $462.
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.