If you owe a lot of money to numerous creditors, then the idea of paying off all of your debts is probably overwhelming. With so many interest rates and factors to consider, it can be difficult to figure out which bills should get paid first. Should you tackle that small medical bill and get it out of the picture? Or should you focus on that department store past-due charge to stop its credit department from calling you daily?
As a bankruptcy and debt settlement attorney, Darren Hojnacki of the Atlanta-based firm Hojnacki & Hojnacki, LLC understands how challenging and frustrating the idea of debt prioritization can be. For this reason, he recommends that anyone in debt consult with an experienced attorney, as the right debt settlement agreement could be truly instrumental in reducing one’s overall financial burden.
When it comes to actually repaying debts, there are varying schools of thought as to how one ought to tackle the matter. Some experts are of the opinion that the debts with the highest interest rates should be paid first, while others feel that the debts that can best improve one’s credit score should be given priority. Hojnacki’s philosophy, however, is that debt repayment should generally be performed in a manner that allows for the maximum amount of cash flow.
When figuring out which debts to pay off first, it’s important to take a close look at what you owe and compare your outstanding balances to the amount of cash you have at your disposal. If you owe a total of $10,000 and have $2,000 available with which to start paying off those bills, then you’re obviously only going to be able to tackle a portion of your overall debt upfront. Therefore, what you’ll want to do is see what paying off certain debts will translate into each month. To figure this out, make a list of your debts from largest to smallest, but be sure to indicate what your monthly payment amounts are for each item on your list. When it comes to paying off debts, the key is to reduce your monthly debt payments to increase your overall cash flow. In other words, you’ll want to pay off the bills that will free up the greatest amount of money each month.
Of course, it’s natural to want to tackle some of your smaller debts first, especially if you can pay them off in full. That way, you can simply cross them off your list and never have to worry about them again. It’s also understandable that you might prefer to simply pay off as many individual creditors as you can to minimize the amount of collection calls you get each month. While these are certainly reasonable approaches, Hojnacki feels that they should be taken in conjunction with a degree of cash flow analysis. After all, if given the choice between paying off two separate debts with a monthly payment of $100 each, or paying off one debt with a monthly payment of $300, it makes a bit more financial sense to pay off the one debt and free up that extra $100. However, when it comes to paying back debts, a mental comfort level is at play as well. So, if the idea of eliminating two sets of creditor calls sounds much more appealing than ridding yourself of one, then by all means, pay off those smaller debts.
Another thing to keep in mind when tackling the repayment of debts is that you should never do so in a manner that renders you unable to pay your current expenses, as this will only result in – you guessed it – more debt. While it’s natural to want to rid yourself of debt once and for all, there’s no sense in spending too much on repayments and ending up in a situation where you can’t pay for necessary items such as rent, utilities, transportation, and food. Unless you have enough money to wipe out your debt completely, the key is to tackle your immediate expenses first and then do your best to prioritize.
One final thing to remember when it comes to debt repayment is that it’s important to be flexible with your finances. If you decide to pay off certain debts at the beginning of a given month but then come across an unexpected situation that prevents you from doing so, then try not to get discouraged. Sure, owing money isn’t fun, but the more stressed out about it you get, the less likely you’ll be to approach the repayment process with a clear head. By coming up with a plan and doing your best to stick to it, you’ll soon enough be able to finally live debt-free.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
