Finding the Debt Management Strategy That’s Right For You

March 4, 2022

By Sky, K-Staff

Credit, Insighter, Personal Finance

Living with constant collection calls and a mailbox full of bills can be a daunting feeling, but not a hopeless situation. The good news is you have options and understanding them is the first step! During the pandemic we’ve seen credit card debt decrease while all other debt, including mortgage, auto and other types of loan debt have increased.

You’re not alone in figuring out how to deal with debt. A fact of debt is the more behind you are, the fewer choices you may have. Tackling debt early is key to open up as many options as possible to get your finances back on track.

Paying just a little extra on credit cards can make a huge impact. According to Nerdwallet, by doubling your payment on a card with a balance of $2,000 and a minimum payment of $30, you could save 14 years and more than $3,600 in interest.
Create a balanced budget. The 50/30/20 rule is a good starting place when creating a budget.
Allocate 50% of your income before taxes and deductions to go to necessities, things like; housing, food, transportation, utilities, insurance, minimum loan payments, and any other needs that must be covered for you to work and live.
30% is allocated to wants—these are any of the extras you enjoy but are not essential to living and working. This would include streaming services and other subscriptions, travel, entertainment, and meals out.
Finally, 20% of your income will go to savings and debt management, including any emergency funds, any extra paid toward credit cards or other debt, or any funds that go into a 401(K) or retirement plan.
Check out our Money Management service for powerful tools to take control of your personal finances. There you can set a budget, view your accounts, and manage your spending.
Debt consolidation is a popular option for repaying debt. This method involves combining multiple debts into one larger debt with the goal of receiving a lower interest rate and fewer monthly payments. Getting started with a consolidation plan involves exploring and pricing a diverse range of products, interest rates, and other associated costs. There are companies that specialize in debt consolidation, but these loan options can be expensive with very high interest rates. Plus, you’ll want to consider closing costs, balance transfer fees, and other associated costs and variables to take into consideration. Closing accounts that you repay with the consolidation loan will lower the average age of accounts and increase your credit utilization, both of which may negatively impact your credit score. Unless you’re paying annual fees, consider keeping some of those accounts open after they’re paid off.
Kirtland FCU offers a great personal loan for debt consolidation. With a fixed rate as low as 8.99% APR*, the Debt Consolidation loan could be an excellent option. and if you finalize your loan before May 31, 2022, you could receive up to $1,000 toward the principal balance of the loan.
A Debt Management Program, or DMP is a structured plan for repaying debt in full. These plans tend to offer reduced interest rates and waived fees administered and negotiated by a credit counseling agency. When considering this option, make sure to work with an accredited agency.
Getting started with a DMP usually begins with a free counseling session. The counselor will conduct a thorough review of your situation and help you develop an action plan to meet your financial goals and determine if a DMP is right for you. If you decide the DMP is right for you, you begin paying a monthly payment plus small fee. The counseling agency then takes that payment and pays the individual creditors.
While this method takes a little longer, usually 3-5 years, it is favorable to your overall credit score, according to NFCC.org.
Debt settlement can be another option for repayment. There are two types of settlement options — professional settlement and a DIY approach.
Professional settlement is usually considered to be ill-advised and risky, involving sending payments to a firm that then attempts to settle your debts with the firms that hold your debt with the goal of reducing principal, which is where a creditor considers your debt satisfied for an amount lower than the full amount due.
The DIY approach tends to be less risky and less expensive since it is you who negotiates with your creditors to settle the amounts due. The premise of this option is built around the idea that if you aren’t paying your debts, your creditors would rather take a smaller amount than nothing. There are several factors that make this option problematic. By intentionally not paying debts, you open yourself to collections or lawsuits where the creditor could obtain a judgement that could result in garnished wages. If you have debts with multiple creditors, you or the firm you hire will have to negotiate with all of them, and they may not be able to reach settlements with all of them.
A recent study from the American Fair Credit Council found that only 43% of people settled their debt by month 36, that people were only able to receive a 22% reduction is debt. These factors in addition to the toll taken on your credit score make debt settlement a risky and complicated strategy.

Bankruptcy is the legal last resort proceeding for paying off debt. There are two types of bankruptcy: Chapters 7 and 13.

Chapter 7 requires a means test; this test looks at your income, expenses and that you meet other requirements. Then all non-exempt assets ate liquidated by a trustee and used to pay off any debts; anything left over is discharged.

Chapter 13 requires a trustee to administer a structured repayment plan. To file for bankruptcy, you will be legally required to take credit counseling, then near the end of the process, you will be required to take a debtor education course.

There are filing fees associated with both forms of bankruptcy, and if you work with an attorney, there are fees associated with that too. Chapter 7 takes about four months to complete and Chapter 13 can take up to five years.

Secure and unsecured debts may be repaid or discharged in bankruptcy. However, not all debts are dischargeable. Student loans, for example, are only dischargeable in extremely rare circumstances.

While bankruptcy offers a clean slate, it comes at a considerable cost. Bankruptcy significantly damages your credit score, involves significant attorney fees, and if you’re not eligible for Chapter 7, can take between 3 and 5 years. Bankruptcy also remains on your credit report for 10 years with Chapter 7 and seven years for Chapter 13. Therefore, this method of repayment is only best if you’ve tried everything else and are in a dire situation.

Remember: the simplest solution is to manage debt and make plans as soon as possible to open up the most options as you begin your journey to live debt free.

Ready to consolidate debt with a lower rate and predictable monthly payment? Borrow up to $50,000 to consolidate debts with a rate as low as 8.99% APR* before May 31, 2022, and you could win $1,000 to be applied to the principal balance of the loan!

*APR=Annual Percentage Rate. Actual rate varies based on creditworthiness and other factors. See a representative for complete details.

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