06-10Creating a debt repayment plan can be a daunting task. You feel like you are in a hole that you might not be able to climb out of. If you have a lot of different credit accounts to consider, it can be difficult to know where to start. However, a plan can help you move forward and start taking back control of your finances. There are some things you can take into consideration as you decide which debts to pay off first:

Interest Rate

“When evaluating the order in which to pay off debts, the first thing to look at is the interest rates,” says Trevor McClain-Duer, a CFA and CPA. “All things being equal, you should concentrate on paying off the debts with the highest interest rates before the lower ones, as they cost more.”

Another interest rate consideration is which debts come with tax benefits. Student loan interest and mortgage interest are both tax deductible. These are also often debts with lower rates. Saving them until last costs you much less than tackling them first.

Can You Get a Deal?

In some cases, it is easier to handle your debt if you can get a deal on some of it. “Many student loan companies will lower or even postpone your monthly payment if you let them know you are having trouble,” says McClain-Duer. “This frees up cash flow and gives you more time to pay off other debts first.”

With federal student loans, the government offers income-based repayment and pay-as-you-earn programs that can help you better manage your debt as you repay your other loans. This is something to consider as you pay off other debts first.

Secured Debt vs. Unsecured Debt

You should also look at whether or not you are dealing with secured debt or unsecured debt. While you might not want to pay off your mortgage early, you still need to make sure that you regular mortgage payments are made on time. “If you have a mortgage or you need a car, you should probably pay those bills first to avoid becoming homeless or car-less,” McClain-Duer points out.

Skipping credit card payments can be unpleasant and result in collection calls, but that debt isn’t secured by anything, so you might not have to face the loss of the car you need to get to work or the loss of your home.
Sometimes, when you are trying to fix a serious situation, it’s more about what can be done immediately, and which bills need to be paid this month, rather than aggressively paying off loans.

What About Bankruptcy?

Finally, Micah Fraim, CPA, points out that sometimes you need to consider which debts can be discharged in bankruptcy. “If a person has a bunch of different debts, that is at least always a possibility,” he says. “Tax debts and student loans cannot be discharged by a bankruptcy, while many other debts can.”

Even though bankruptcy shouldn’t be considered a first option, Fraim recognizes that it is the only choice in some instances. “If bankruptcy looks like a viable option, then non-dischargeable debts should be paid down first.”

Before you make your debt pay down plan, carefully consider your options. Think about your debts in terms of monthly bills, as well as in terms of overall amounts. Determine your priorities for debt pay down, and understand the implications. Any time you miss a payment, you will take a hit to your credit score. However, if you have to start choosing between bills, you want to make sure you manage the situation in a way that allows you the best chance of starting over again as quickly and easily as possible.

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