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Law Offices of Nicholas Gebelt

How To Manage Debts Independently Of The Amounts You Owe


Many a times I have seen, people struggling to pay off debts, by focusing on the debt amounts, rather than concentrating on a debt payment strategy or a budget!

Debt amounts and values matter only upto a certain extent. When you are following a certain pattern for debt payments, the total debt you owe doesn’t seem to be a problem.

Financial analysis shows that when a certain amount of money gets paid at a fixed rate, then irrespective of the interest (which also gets added at a fixed rate), the amount does get paid off!

Only the duration gets extended or shortened, depending on the amount.

This post is designed to understand a few fundamental concepts of debt management.

Like what management strategies you should consider while paying off debts, what budgets to use, and what debt relief options you should choose if the payments get heavy!

Debt management means any method you are applying to manage your debts, so that you are able to pay them off in full, instead of negotiating the debt amounts with creditors. Even debt consolidation can be considered as a part of debt management, as it involves a payment plan and a budget. So, if you want to consolidate debt, then this post is equally important for you. Come on then, let’s evaluate how to manage debts independently of the amounts you owe.

Debt management follows the custom of budgeting at its core:

The most crucial part of managing debts is to have a well structured budget, that gives priority to every single section of your personal finances. These sections are namely savings, debt payments, medicine costs, utility bills, and anything else that you have.

There’s this percentage budget, and it has always proved effective for managing debts.

The $100 example will be the best to understand this. Say your income is $100, and you have 3 categories to fulfil. One is savings, 2nd is debt payments, and third is day to day living costs.

What you do is, you make up percentages of the 3 categories. It could be, savings demands 20%, your monthly overall costs make up 60%, and the debt payments make up the rest 20%.

For a $100 paycheck, it’s easy easy to divide the money into the 3 categories. But no matter whatever your income is, you should divide the amount into the categories as per their percentage values you have assigned. Be whatever your paycheck amount, you should not deviate from this percentage system.

But, here’s another budgeting system that I am about to talk of.
It’s the reverse budget that we financial advisors love to call.

Reverse budget has a history. It was made to address savings as the first priority of your earning. As per the conventional rule, you dedicate a certain amount to savings, each month on your payday. Then with whatever’s left you keep doing your normal expenses for the month.

But, when it comes to paying off debts, you will have to forget savings for the time being, and instead use a fixed portion from your paycheck for debt payments.

It’s a self made obligation that you have to follow under all circumstances. You should not break the rhythm and keep working hard with this budget to manage your debts.

An ethical discussion on why debt amounts don’t matter while managing debts:

When you have a budget in hand and a steady income, the debt amounts can never be a problem.

As I have just said at the start of this post, that it is only a matter of time for your debts to be paid off if you consistently keep doing your debt payments.

This is simple mathematics.

The interest charges on your debts get added on the amount left each month, after you have done a payment.
If the interest amount was fixed, irrespective of the debt amount, then until and unless you do a payment exceeding the interest amount, you can’t pay off your debts.
But, a fixed interest amount is a hypothetical case, which never really happens in reality.

So, even if you just pay $1 against your debts, then also you can still pay them off. But, the more are the payments, the faster you will be able to clear your debts.

Let’s take again the $100 example. Suppose you have $100 in debt to pay off that has a monthly interest rate of 10%.

Assuming you want to do a payment of $10 each month. This means, the debt chart will look somewhat like this:

Outstanding Debt after adding
10% interest
Payment of
$10
Resulting debt after
subtracting $10.
1st month: $100 (no interest) $10 $90
2nd month: $99 ($90 + 10% of $90) $10 $89
3rd month: $97.9 ($89 +10% of $89) $10 $87.9
4th month: $96.69 ($87.9 + 10% of $87.9) $10 $86.69
5th month: $95.35 ($86.69 + 10% of $86.69) $10 $85.35
6th month: $93.85 ($85.35 + 10% of $85.35) $10 $83.85
7th month: $92.23 ($83.85 + 10% of $83.85) $10 $82.23
8th month: $90.45 ($82.23 + 10% of $82.23) $10 $80.45
9th month: $88.49 ($80.45 + 10% of $80.45) $10 $78.49
10th month: $86.33 ($78.49 + 10% of $78.49) $10 $76.33
11th month: $83.93 ($76.33 + 10% of $76.33) $10 $73.93
12th month: $81.23 ($73.93 + 10% of $73.93) $10 $71.23

That’s a 12 month table to show how your debt gets reduced due to fixed payment, despite having an addition of interest charges.

Are bankruptcy and debt settlement also good ways to manage debts?

No financial institution considers debt settlement or bankruptcy as proper debt management. Chapter 13 bankruptcy however, is a bit different and might help you to manage your debts.

Debt settlement means you are negotiating your debt amounts with the creditors, because your are not able to pay off the amounts in full. The same thing kind of happens in bankruptcy chapter 7, where most of your debts get wiped out!

But chapter 13, gives you time and a repayment plan, so that you can practically pay off your debts in full. Even in chapter 13 most of your unsecured debts will get cleared, but they get discharged as per their level of priority.

It’s better you talk to a lawyer and see how to manage debts without hurting your social reputation and credit score.

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