Answers to Our 5 Most-Asked Debt Questions

Today, I'm tackling five of our most-asked debt questions, including, "Should I invest or pay off debt?" "Should I file for bankruptcy?" and much more.

1) Should I invest or pay down debt?

Before I can answer this question, I need to know one thing: what is the interest rate on your debt? Specifically, is it above or below 7%?

Why 7%? Well, this is the average annual returns you can expect to earn from a diversified stock portfolio over the long term, which is how we recommend most people invest.

So, if you have a low-interest debt, like a mortgage or student loans, where the interest rate is below 7%, then you can choose to prioritize investing before paying off your debt in full.

On the other hand, if you have high-interest rate debt, meaning debt with an interest rate of 7% or more, like credit card debt or a high interest car loan, then you'll want to pay that off before you start investing. Otherwise you won't be able to build any wealth from your investments because your debt will grow faster than your investments. You are better off using your money to clear your debt first.

Now, there are a few other things that you want to have in place to have a solid financial foundation before you start investing.

First, you want to make sure you are spending less than you make every month. This way you aren't creating any new debt and you will actually have money left over to invest. You can't invest what you don't have.

Second, we recommend that you have a decent emergency fund built up. This is to protect you and your investments if something unexpected happens. After all, the last thing you want to do is have to pull your investments out prematurely and risk losing on the upside, or actually have take the money out at a loss because you need money to pay for something in your life.

Learn more about building an emergency fund.

https://youtu.be/AMgUUbh8--A

2) When should I consolidate my debt?

If you're struggling to pay off a large amount of debt or a large number of debts, then debt consolidation may make the situation more manageable and less complex.

Debt consolidation rolls multiple debts and typically high interest rate debt, such as credit card debt, into one single payment.

Debt consolidation might be a good idea for you if you can qualify for an interest rate that is lower than what you are currently paying on your current debts. That will help you reduce the total amount that you pay to get out of debt overall and help you reorganize your debt so you can pay it off even faster.

You may want to consider debt consolidation if...

• Your monthly debt payments, including your rent or mortgage, are below 50% of your monthly income before taxes.
• Your credit is good enough to qualify for a 0% balance transfer credit card or a low interest personal or debt consolidation loan. This means having a credit score of about 690 or higher.

Need help raising your credit score? Click here!

• Your monthly cash flow consistently covers the payments towards your debt.
• You can choose a consolidation loan that you would be able to pay off within five years.

3) How do I pay off student loan debt?

Student loans are a double-edged sword. On the positive side, you receive a higher education, which should allow you to get a higher-paying job. But on the other hand, you're now saddled with debt. The average person spends the first 20 years of that job paying off their loans.

This question comes from one of our Million Dollar Year members: How does one even begin to tackle $130,000 in student loan debt?

It's a great question, and you'd start the same way you would tackle any other debt.

1) Look at your spending habits

Are you spending more than you make every month? If so, it is impossible to get out of debt. You need to figure out ways that you could save.

This may mean cutting back on non-necessities or finding ways to increase your income, like getting a side hustle. Look at your lifestyle and figure out what you can live without to save as much as possible and have more money to start putting towards your debt.

2) Talk to a student loans consultant

There may be loan forgiveness programs that you're not even aware of that you're eligible for.

We recommend finding a reputable student loans consultant, someone who's an expert in this, and booking a free consultation with them to see what options are available to you.

3) Pay more than the minimum payment

Most student loans have a relatively low monthly amount, which means that it takes a long time to fully pay off the debt if you're only meeting the minimum.

But if you can pay more than just the minimum amount, you will pay the debt off much faster and you'll pay less overall since you'll pay less in interest.

So, every time you get a promotion or a tax return in your favor, put that money towards paying off your debt.

4) Apply for loan forgiveness

Each student loan forgiveness program has unique requirements and usually strict approval standards, so you should do some research.

Like I suggested before, you can talk to a student loans consultant to help you in this process, but you can also do it on your own and see if there's any programs out there that you qualify for.

5) Lower your interest rate through discounts (if possible)

Some lenders will offer a 0.25 to 0.5% discount just for setting up automatic payments on your loan.

6) Refinance your student loans

Essentially, when you refinance, you give all of your loans, federal and private, often a mix of both, to a lender who will pay them off for you, and now you owe this new lender the money that they just fronted you.

The goal is to get a lower interest rate and a better payment plan than the one that you currently have.

Now, this won't be the right answer for everyone, but it is worth looking into to see what you might qualify for.

4) How do I handle debt in collections?

Picking up a call and hearing a debt collector on the other side of the phone is scary. It stirs up stress and anxiety and uncertainty. But if you have a debt that is in collections or it's on its way there, don't panic. I got you covered.

So, what should you do if your debt is in collections? Well, we have a whole 'nother video where we explain this in depth, but here's the simple things I want you to know.

1) Know your rights.

There are are laws in place to protect you as a consumer from predatory collection tactics. For instance, you can specify how and when debt collectors can contact you and you can actually request that they cease communication with you all together.

So, check out the Fair Debt Collection Practices Act to understand your rights.

2) Don't admit to the debt

Some debts come with a statute of limitations, and once that statute of limitations expires, collectors actually cannot legally win a court order for repayment.

But if you admit that a debt is yours, it can actually end up resetting the clock on the statute of limitations, so do not confirm the debt, especially on first contact until you do number three...

3) Get the facts straight

Without admitting that the debt is yours, ask who the original creditor was, the original debt amount, and how much is owed. The more details the better.

When your debt has been sold, there's often misinformation about the amount of debt or who owes it and who it's owed to, so you want to just get the facts first.

4) Decide if you want to pay off the debt

Once a debt has gone into collections, it's already done its damage to your credit score, and it will continue to have a negative impact on your credit score for up to seven years, until it falls off your credit report.

In some cases, you may be able to negotiate a removal of derogatory mark on your credit report as part of the negotiation for paying the debt, so if you have a debt that has gone into collections and is close to being seven years old, it will likely fall off your credit report soon and it may not be worth paying, especially if you have any current debts that you're struggling with.

Focus on maintaining good standing with your active debts first, before paying off debts that are in collections.

If you are going to pay off the debt, then make sure you follow the next step, five...

5) Negotiate the debt

At the end of the day, whoever's on the other end of that phone just has your case in a file on their desk. And all they want is some money for it.

Usually that debt collections company bought the debt for much less than the amount that you actually owe on it, so they might be willing to consider either lowering the debt so you can pay it all off in a lump sum or setting up a payment plan that you can reasonably manage. And always, always, always get any agreement that you come to in writing before you take this final step...

6) Pay the debt

https://youtu.be/n5Iwz6Cabtc

5) When should I file for bankruptcy?

If you are currently struggling under the weight of a large debt or you're behind in your mortgage payments, or you have bill collectors knocking on your door, or all of the above, declaring bankruptcy might be an answer...but it might not be your best one.

Bankruptcy can help relieve your debt, but it also has negative consequences that usually affect you for years, so it isn't a decision that should be taken lightly.

If you are in one or more of the following situations, you may want to consider filing for bankruptcy (and by that, I mean consider doing research into whether filing for bankruptcy is a good option for you):

• The amount of debt that you owe 40% or more of your annual income.
• Creditors are suing you for the failed payment of debts.
• The home you own is in danger of foreclosure.
• The only way you can pay for things is by using a credit card.
• You have to use one credit card to pay off another.
• You're struggling financially and you're in the middle of a divorce.
• You're considering withdrawing money from a 401(k) account to pay bills.

In the meantime, be sure to explore these options before filing for bankruptcy:

• Negotiate with your creditors to get your debt down to manageable numbers.
• Call your loan servicer to see what options are available, like forbearance, which would allow you to stop making payments for a specified period of time.
• Add a new repayment plan or a loan modification, which will change the terms of your loan, such as lowering the interest rate.

A couple other questions to ask yourself...

• Is my current status permanent? Or is the situation expected to improve soon?
• Do I have a big bill or a series of big bills coming due soon? If so, you might want to hold off on paying them until you decide whether or not you're going to file bankruptcy since those bills could be dismissed through the bankruptcy itself.

I don't want to say that bankruptcy is never an option, but it is a last resort type of solution. And you want to be well-informed before making this choice, so make sure that you consult a bankruptcy lawyer to help you make this decision.

I hope this helped clarify for you whether or not you should do some more research into bankruptcy based on your situation.

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