October 8, 2019
If you are buried in debt, you are not alone. There is no shame in being indebted to a bank or another creditor. What matters most is whether you have the right plan to pay off your debt. There are all sorts of different debt repayment strategies from consolidating the debt to the avalanche method and even bankruptcy. Let’s take a look at these options to help you determine which approach is optimal for your unique financial situation.
Also referred to as debt stacking, the avalanche method has become fairly popular. This method begins with listing all of the debts, each ranked from highest to lowest according to their unique interest rate. The debtor makes the minimum monthly payment on all lines of debt. Any money that is left over is put toward paying down the balance with the highest interest rate. Once the highest balance is paid off, the line of credit with the next highest balance is paid down and so on. The only problem with the debt avalanche approach is that it will likely take quite a while to pay down the entirety of each balance. However, the silver lining is that less is paid in total as the debts with the highest balances are paid the soonest, making the remaining debt at comparably low interest rates sting that much less.
Opt for the snowball approach and your sights will be set on paying down the line of credit with the smallest balance regardless of each line of credit’s respective interest rate. The snowball method has debtors list and attack their debts based on the lowest balance to the highest balance. As an example, a student loan of a couple thousand dollars will be paid down prior to a car loan with ten thousand dollars, regardless of whether the auto loan has a higher interest rate. The point of the snowball method is to eliminate debt obligations as quickly as possible. The only way to minimize aggregate debt obligations in a timely manner is to attack those with the smallest balances first. However, the downside to this approach is the debt with comparably high interest rates will continue to increase the balance the debtor carries until paid in full.
The average debtor has multiple loans/lines of credit and finds it difficult to keep track of all the monthly payments, due dates, interest rates, and other nuances. Consolidation is optimal for debtors who are stuck with high interest rate loans yet have a solid credit score. Take the debt consolidation route and you will end up with one or two larger loans in which the debt and subsequent payments are consolidated. A loan is taken out for the total debt to be repaid. This borrowed money is used to repay each of the individual loans/lines of credit that have existing balances. The new loan is subsequently repaid at a more affordable interest rate.
Debt consolidation is the perfect solution for those feeling overwhelmed by an abundance of debt as it makes everything quite simple. Once your loans are consolidated, you will have a single loan with one interest rate, one monthly payment, and one due date. Even if you do not mind carrying multiple loans at once, those loans will backfire in a big way if they have a comparably high interest rate. Consolidate at a lower interest rate and you will ultimately pay that much less to satisfy your debts as time progresses. The only caveat is there is the potential for some unexpected fees to pop up during the consolidation process. Though your debt consolidation loan will likely be provided at a reduced interest rate, there might be loan origination fees that nullify the savings. Be sure to crunch all the numbers before committing to a debt consolidation loan.
Declaring bankruptcy will ruin your credit for upwards of a full decade. If there are any other options suitable for your unique situation, opt for them rather than declaring bankruptcy. Declare bankruptcy and you will find it difficult to obtain a line of credit. Furthermore, the cost of court filing fees and attorney fees required to declare bankruptcy in the first place will cost several hundred dollars. Making matters worse is the fact that bankruptcy laws have tightened in recent years so those seeking bankruptcy are not guaranteed comprehensive relief. However, if you have no other option, it is better to declare bankruptcy than suffer beneath the weight of your debts for the foreseeable future. Chapter 7 bankruptcy permits the discharge of nearly all debts. However, it will likely be necessary to surrender property to satisfy debt under a Chapter 7 bankruptcy plan.
Chapter 13 bankruptcy allows debtors to keep their property yet they surrender control of their personal finances to the bankruptcy court. A repayment plan must be approved by the court so all or part of the debt is repaid across the ensuing three to five years. Satisfy the court-approved Chapter 13 bankruptcy plan and you will emerge from this process debt-free.
Different methods work for different people. Some people enjoy tackling the hardest debt first to get it out of the way, while others thrive off the little victories to keep their repayment momentum going. Find the method that works for you and be sure to run the numbers for different scenarios to make sure you aren’t actually paying more than you should be.
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