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Re: How can I manage my debt?

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Message 21 of 31

Lynne it has been a pleasure to engage with the online community on such an important topic. Thank you for having me throughout this week. This is a great question and there are a few things to do in the moment of feeling overwhelmed with debt.

 

First, stop and breathe- You may feel like you will never get out of debt or that you want to retreat from the situation but take a moment and to calm yourself and know that there are solutions to address this issue. Taking time to breathe will help you from making irrational decisions due to being overwhelmed. In the past when I’ve sat down with people and they would tell me how much debt they have, it was always a smaller amount when we actually pulled their credit report and calculated the debt. We tend to make issues larger in our own heads.

 

Secondly, get organized- I was once told that you can’t fix what you don’t face. You have to find your debt and organize them so that you know who you owe and how much. This will help with a plan of action to pay it back. Also, having a budget will help you to know how much income you have available to pay toward debt.

 

Your third step is to gather the critical data- At the moment of being overwhelmed and hitting your tipping point, you may already have some loans that are past due or defaulted. You may also have multiple loans to manage. At this point, you will want to know the critical details of each loan such as the past due balances, current balances, interest rates and due dates. This will help with the strategy for paying down debt. For example, if you know the past due amounts, you can also find out how many months behind each bill is at the moment. You may want to begin paying on the bill that is likely to go into default status first to avoid further damage to your credit.

 

Lastly, use the Avalanche or Snowball method to lower debt- Once you have this critical information in the steps above, you can begin paying down your debt. The debt snowball focuses on paying the smallest debt balance first regardless of interest rate. The idea is that consistent small wins will keep your momentum high while reducing debt. The debt avalanche is a method of paying the loan with the largest interest rate first regardless of the debt balance. The idea is that this method will cause you to pay the least amount of interest while paying down your debt.

 

Throughout any of these steps, you may want to find a financial professional or trusted friend/family member to assist you with getting organized. At times, a second set of eyes can be helpful in getting back on track. Also, the accountability and encouragement from another person can be beneficial. Before reaching out to a paid professional, check in your area for a local Financial Empowerment Center or other nonprofit group that offers financial coaching and other financial services.

 

Review our AARP Money Map for more tips on how to overcome unexpected debt https://moneymap.aarp.org/

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Re: How can I manage my debt?

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Message 22 of 31

@MartinBooker, what advice would you give someone if their child (or grandchild) is asking them to cosign on an auto or home loan? Should they consider doing it?

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Re: How can I manage my debt?

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Message 23 of 31

This needs help with a person evaluating my situation.

lawsuit award bill $31,000 attorney has a $7,400 Bank check 6/1/2019
in Florida 6% with a "multiplier". Feds ask for less

 

tax debt $7,000

 

 

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Re: How can I manage my debt?

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Message 24 of 31

Hello @marylouisemcroberts ,

 

Thank you for sharing your information. To make sure that I’m understand what you’re saying, you have $31,000 in a lawsuit bill but paid $7,400 towards it? Plus there is a $7,000 tax debt that has a multiplier?

 

It is common that tax debt has high interest rates. It is good to get copies of your tax bill and understand the interest. Also ask about your options for addressing your tax liabilities. It would be worth looking into https://www.greenpath.com/ who has nationwide financial coaching and can be a resource to help you. Another resource that may be helpful is https://www.auntbertha.com/

 

Feel free to provide more details or reach out to one of these resources to sit with someone in person. Also, if you are currently working a full time job, your employee benefits will often offer some financial coaching and legal advice. Reach out to your Human Resources to learn more.

 

Have a great weekend. 

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Re: How can I manage my debt?

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Message 25 of 31

@MartinBooker I've have been paying into Freedom Debt Relief to manage my credit card debt. I got a call from their sister company,a debt consildation group. They want me to take out a loan to pay off my credit cards so I'm not hit with the instrest payments and taxes on whatever Freedom Debt is able to get my ddebt down to. Apparently the difference is taxable income. I don't know weither to trust them or not'

What do you think? I can't afford to make a mistake

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Re: How can I manage my debt?

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Message 26 of 31

Good morning, @MartinBooker, generally speaking is it better to save money or pay down debt first?

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Re: How can I manage my debt?

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Message 27 of 31

@MartinBooker, we thank you again for being our guest AARP Expert over the last week. As we wrap up the special event today, are there some additional resources or reading materials you'd like to share with our audience?

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Re: How can I manage my debt?

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Message 28 of 31

Hello @ChristeenM320015 

 

Thank you for sending in your question. If your debt is not in collections, there should not be a settlement which is what leads to taxable income. To further clarify, if my $1000 debt is owned by a collection agency and is settled for $500, then I can have an additional $500 of taxable income. If Freedom Debt Relief is simply paying on debt that you currently have that is not in default, you will not be taxed on paying down your debt. If they are paying on debt that is in collection then it is should no longer be collecting interest. Having your debt consolidated could lower the amount of interest you pay (on active loans) but this is also something that you can do through your own bank or credit union (I would suggest credit union).

 

Prior to making a decision on the debt consolidation group, you may want to meet with a local credit counselor in your area. It is free of charge and will be worth the time to discuss your options. Please visit National Foundation for Credit Counseling (NFCC) at nfcc.org or https://www.greenpath.com/ and get a second opinion on their debt counseling and debt management. It would be worth explaining to them what you’re doing with Freedom Debt Relief as I have found that people are being scammed by some of the Debt Relief groups. I have read through contracts in the past and found that people pay large amounts of money to these companies to do practically no work.

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Re: How can I manage my debt?

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Message 29 of 31

Hello @AARPLynne,

 

Great Question! Overall, clearing out consumer debt (credit cards, personal loans and some would argue car loans) is better to pay off before saving your full emergency fund. This reason for this general rule is to minimize the amount of money you will lose in paying interest. Saving money in some of the highest interest rate savings accounts will gain less than 2% annually, while the consumer debt can range from 7% to 25% annually.

 

Although that is the general rule, it is wise to factor in your lifestyle and situation. If you do not have a safety net in case of an emergency, you would want to have a larger emergency savings than someone who has family to rely on or friends that can cover emergencies for them. It is always good to consult an expert or talk your situation over with someone who can help you think through your strategy holistically.

 

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Re: How can I manage my debt?

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Message 30 of 31

RE: @MartinBooker, what advice would you give someone if their child (or grandchild) is asking them to cosign on an auto or home loan? Should they consider doing it?

 

For anyone that is being asked to co-sign on a loan, I would advise them to consider the following:

 

1. Can you cover the debt in totality if this person does not pay? -  If you become a co-signer, you have signed up for the debt along with the other person. Between the two of you, the debt must be paid on time monthly or both of your credit scores will be damaged. If you decide to cosign, be willing to take on the debt if the person is no longer able to pay.

 

2. Are you willing to add debt to your credit report? -  If you are in the process of needing to use debt for a personal matter such as purchase a home, you will be limited in the amount of debt you can access after adding debt as a co-signer. Be sure to think about any future purchases that you will be making that will require debt before co-signing.

 

3. Do you have the income and credit score to do so? - Co-signers are needed to meet income and credit requirements. If you do not have a low enough debt-to-income ratio or enough income, you may not qualify to co-sign.

 

If you have family or close friends that need to build their credit, you can help them by allowing them to become an authorized user. Being an authorized user will allow them to piggyback on one of your credit cards to build their credit history. You can do this with or without providing access to the credit card. If you make someone an authorized user, be sure to manage your debt well so that you don’t hurt their credit score.

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