Justin DeBrosse | Manager of Service Delivery | The Financial Clinic
It’s not uncommon for a customer to come into a first meeting feeling overwhelmed. Most customers already have a general idea of what their situation is – it’s very rare for someone to see their debt, their credit score, and so on, and have no idea how they got there. A lot of the time, they just don’t know where to start when it comes to tackling their debt. That’s where we come in! This blog post will lay out the process of debt planning and provide some tools and resources you can use to help guide your customers towards the right plan to tackle their debt.
Step 1: Gather all of the information in one place
When it comes to planning for debt, it’s important to have the key information about each piece of debt in one place. Before you meet with your customer, ask them to bring the following information:
- Name of the creditor
- Type of account (loan, credit card, charge account, etc.)
- Account balance
- Minimum payment
- Interest rate
A lot of this information can be found on a customer’s credit report, but not all of it. For example, interest rates can only be found on credit card statements or through a companies’ online customer portals. Federal student loan information can be found at http://nslds.ed.gov/, and private student loan information can be found by logging into accounts for each private loan servicer. Gov’t related debts, such as back taxes, child support, or civil judgments can require more digging. Information on taxes owed can typically be found by creating an online account with the IRS, most states have customer service portals where customers can find their child support balances (here’s Ohio’s, for example), and civil judgments can be found by searching through the website of the court in which the judgment was issued. Have your customer use the Debt Management worksheet, or a similar tool, to track the important information about their debt.
Alongside gathering this information about your customers’ debts, take the time to work with your customer to develop a spending plan. How much money do they have coming in each month? How much money is going out? Where’s it going? How much money is left at the end of the month for saving or paying off debt? Before your customer can come up with a plan to tackle their debt, they need to have good answers to these questions. If they don’t know much they’re spending each month, and on which expenses, they won’t be able to figure out how to change their spending to increase what they can put towards their debt. You can use the Daily Expenses and Monthly Income and Expenses worksheets with your customer to organize and calculate their expenses. Then, brainstorm with your customer which expenses can be reduced.
Now that your customer knows all of the important information about their debt, and how much money they can use each month to pay off their debt, it’s time to figure out how paying off debt fits into your customers’ other needs and priorities.
Step 2: Prioritize
Where should your customer start? The “Which Bills Do I Pay First?” tipsheet is a great starting point for coming up with a plan. Your customer wants to make sure their regular expenses are covered, and that they have money set aside for the future before they start putting more money towards their debt. Prioritizing monthly expenses helps to ensure that your customer doesn’t run into issues when they’re unable to pay for rent, utilities, food, or another important expense due to inability to pay. Setting aside money for the future ensures that your customer is able to handle unexpected expenses or variance in income. If either of these are currently an issue for your customer, seriously tackling debt may need to be delayed until their regular monthly expenses are met and they have an emergency fund saved up. Of course, your customer should continue to make all debt payments on time, they just may need to wait to begin putting more money towards their debt.
Step 3: Strategize
While paying down debt may need to wait, your customer can come up with a strategy for whenever they are ready. Exploring options now will arm your customer with the tools they need when the time comes. Here are a few options worth considering:
- Balance transfers or debt consolidation loans
- If your customer has good credit, and the issue is more the amount they have to pay, a no/low-interest balance transfer or a debt consolidation loan with a lower interest rate may both be good ideas. With balance transfers, a customer may be able to significantly lower the amount of interest they’re paying, saving hundreds or thousands of dollars over the life of the debt. Typically, the cost of a balance transfer is a 3-5% transfer fee based on the balance being transferred. Debt consolidation loans allow customers to consolidate multiple accounts with debt into just one account, often with a lower interest rate, again saving money over the life of the debt.
- “Snowball” vs. “Avalanche
- Once your customer has gotten their debt in order, it’s time to choose the best way to pay down the debt. Two common strategies are “snowballing” and “avalanching. When you “snowball” debt, you tackle the smallest debt first. Once the smallest debt is paid off, you use all of the funds that were applied to that debt to pay off the next smallest debt, and so on, until all debt is paid off. Over time, this method reduces the number of payments a customer needs to make each month. When you “avalanche” your debt, you pay off the debt with the highest interest rate first. This option saves the most money. More information can be found in the “Plan to Get Out of Debt” tip sheet.
- Debt Management Plans
- When the interest and monthly minimum payments are just too much for your customer to handle, a debt management plan may be a good idea. With a debt management plan, a third party company (most/all reputable debt management companies are nonprofits) negotiates with your creditors to lower the interest rates for accounts with high-interest rates and balances, saving your customer a significant amount of money over time. A customer pays the debt management plan company directly, and the company then disperses the funds to the customer’s creditors. More information can be found in the “Debt Management: Pros and Cons” tip sheet.
- If your customer’s debt is just too much for them, and none of the above options are available, they may be considering bankruptcy. The “Bankruptcy: Is It Right for Me?” tipsheet provides answers to some of the most common questions around bankruptcy, and can be a good starting point for your customer. It’s very likely that you, the financial coach, are not qualified to tell someone whether or not they should file for bankruptcy – and even if you do have some knowledge, they’ll likely need a lawyer to support them in the bankruptcy process. Your best strategy here is to refer your customer to a low-cost legal clinic or another service that can help them take a closer look at their current financial situation and determine if filing for bankruptcy is the best way to move forward.
Step 4: Take Action!
Your customer has gathered the information, analyzed their debts, and come up with a plan. Now it’s time to get moving! Since your customer likely has several steps they need to take, work with them to organize a list of the steps you have already laid out to get closer to getting their debt under control! Depending on the complexity of your customer’s situation, you may need to check in on their plan periodically to update the action steps and reassess as needed. This is also a great opportunity to take a moment to celebrate the hard work your customer has done, and how much money they’ve saved through the steps they’ve taken!