Debt management

0:00- [Instructor] Let's say that you have three loans, $5,000 at a 9% interest rate, $10,000 at a 19% interest rate, and $100,000 at a 7% interest rate. And let's say that the monthly payments here are becoming very difficult. Let's say that payment is over $1,000...

0:18Let me write 1K to be consistent. Over $1,000 per month. And for various reasons, you're having trouble paying for housing, and for food, and for gas, and these other payments that are over $1,000 a month, maybe you lost your job, or maybe something else is happening in the family.

0:37So the focus of this video is what do you do? How do you actually try to manage your debt? Well, the first place to think about is take a hard look at your budget. Where are you spending money? And actually, if you can look at your sources of income, obviously if those could increase in any way, that would be great.

0:56But usually, for people focus on expenses and how you can reduce those expenses and figure out which of those are must haves and which of those are nice to haves. Now the other thing that is good to do is not to just put those bills under a mattress or throw them away and pretend that they're not there.

1:12Communicate. You can communicate with your creditors, these are the people that you owe the money to. You could also communicate to other people in your family. Maybe they could have advice on how you might want to approach this. And when you think about how you wanna approach this, we already have videos on debt repayment.

1:32There's different methods. Sometimes one is called the snowball method, where you start with the lowest amount of debt first, which in this case would be the $5,000 loan, maybe this was for a car that you bought. And that's psychologically powerful because you can get rid of that debt faster than you can get rid of these other debts.

1:48The more rational thing to do is pay off the most expensive debt first. So that's this one right over here. That's 19% interest. Maybe that is credit card debt. And maybe the one that you pay off last is gonna be the one that's lowest interest rate. In this case, let's say that $100,000 is mortgage debt.

2:06But either way, budget, so that you have as much money as possible to try to make the payments and then hopefully pay down some of this debt. The rational thing is pay the highest interest first, but sometimes psychologically, it might be valuable to just get some of it out of the way, so pay some of the lower ones first.

2:22You can think about which one you would rather give. Now, another thing that you can do in certain situations is consolidate your debt. Consolidate your debt. What this means is, you might be able to take out a loan that you can then use to pay off these other loans.

2:40So let's say your house is worth a lot more than $100,000. You might want to take out a $115,000 loan against your house. So you are refinancing your mortgage. So you take out 115,000 and maybe you can get that at 7%, and then you can use that to pay off all of this.

3:03That has two potential benefits to it if you have that at your disposal. One is you're getting that low interest rate across all of your loans now. And then also, you now only have one loan to service. But let's say that you don't have access to this or for whatever reason, you're just not able to pay and you communicated with the lenders and they're not so sympathetic to your situation, well then you can start going to third parties.

3:30You could go to credit or debt counseling. These are typically run by nonprofits. And if it's a for-profit, you should be a little bit worried, or not worried, but you should at least think about how they're making money and whether they are legitimate. But especially many of the nonprofits that are trying to help people manage their debt, they might figure out ways that, well, maybe you could consolidate, maybe you can budget in a certain way.

3:55They might help you come up with a debt management plan. Now there's other groups, and these tend to be for-profits, that will focus on debt settlement. The people who are lending you money would rather get something than nothing. So many of these players will try to negotiate on your behalf.

4:13They say, "Hey, Sal's not in a position to pay $115,000. Wouldn't you rather just get $100,000 than get nothing at all?" But be very wary of folks like this, because you have to worry about how are they making money. Are they making promises to you that they can't really do?

4:32And then they're taking fees from you and you'll never get your debt actually settled. Now, when things get tough, you might, in fact, you will get letters from the lenders, and they're going to focus on debt collection. And debt collection can be very scary. People are sending you these letters.

4:51They could be very strongly worded, first and foremost, and they can even call you on the phone. Be very wary that it is actually someone you owe money to. So be very wary of scammers. Don't give information. Ask them to say, "Hey, well if you say I owe you money, what do you know about my loan?"

5:07Make sure that they're actually one of these parties that you owe money to, and they're not just trying to do identity theft. But once again, you need to talk to them about what is possible, what's not. You can go to some of these other lines of action. But depending on the type of loan, they're going to start hitting your credit report, which is gonna make it harder and harder for you to not only get loans, but to get a lease, to rent out an apartment, et cetera, et cetera.

5:33If any of this debt was secured, let's say this was secured by a car over here, you might've heard of the repo man. In the middle of the night, someone might come and take that car back. If this is secured by a house, then they might start going into foreclosure if you're not able to pay that one off.

5:49So that's another thing to think about. Which ones are going to have the highest stakes for you if you're not able to pay them off. And in the last resort, you have bankruptcy. And this is where you essentially negotiate with a court. You're saying, "Look, this is just an unsustainable amount of debt."

6:07And then they will work with all of the people you owe money to to come up with a different plan or maybe a different amount of debt. But be very careful. Any of these situations where you start defaulting on your debt, and especially when you go into bankruptcy, these will really hurt your credit.

6:23Hurt credit. And credit is not easy to repair. It takes many years. It goes up a little bit at a time. You have to have many years under your belt of paying things off, regularly paying, making all your bills due. So it can take seven, eight, nine years, especially if you do something like bankruptcy, to get your credit back to a reasonable place.

6:41So this is really something of last resort.