Getting Out of Debt: Part 3

By pgm on Aug 12, 2008 in Financial Planning

This is the fourth of a five part series on ‘Getting out of Debt’: Go to Part 1, Go to Part 2,Go to Part 3, Go to Part 4, Go to Part 5.

Set Up a Plan for Paying Back Your Debts

By now, you should have a clear picture of how much money you can manage to pay back and when you will be able to pay it back. The next step is to decide how much you will pay each creditor per month and how long it will take to fully pay each creditor. Try to set up your plan so that you pay your creditors back within three years.

The actual debt payment plan may take several forms. You may choose to give each creditor an equal amount. Or you may choose to pay a larger portion to the creditors you owe the most money, or a larger amount to the creditors you owe the least money. The amount paid to each creditor is confidential. Creditors do not have to know the amount other creditors are being paid. However, it is helpful to tell the creditor the total amount you owe. For example, you are $3,380 in debt and your monthly take-home pay is $1,200. If you use 25 percent of your income for debt repayment, you will be paying back $300 per month ($1,200 times 0.25 equals $300).

Method A. You pay each creditor equal amounts.

Debts	Amount Owed	Required Payment	Amount You Can Pay
Car loan	$1,145	$180	$60
Bank card	680	35	60
Bank loan	525	170	60
Bank loan	755	190	60
Jewelry	275	25	60
Totals	$3,380	$600	$300

Amount available from monthly income for debt repayment is $300. You pay each creditor an equal amount: $300 divided by 5 equals $60 per month.

Method B. You pay back the percentage of total debt represented by each individual debt.

Debts	Amount Owed	Payment Required	% of Total Debt	Amount You Can Pay
Car loan	$1,145	$180	34	$102
Bank card	680	35	20	60
Bank loan	525	170	16	48
Bank loan	755	190	22	66
Jewelry	275	25	8	24
Totals	$3,380	$600	100%	$300

To determine the percentage of total debt owed, make the following calculation: Amount owed divided by total debt equals the percent of total debt owed. If one of your debts is $1,145 and you owe a total of $3,380 to all of your creditors, you divide $1,145 by $3,380 to get .34 or 34 percent.

To determine the amount you can pay, work this math problem: Total amount you can pay times the percent of total debt owed equals the amount you can pay. $300 x 0.34 = $102

Method C. A third method of repayment is to pay back a percentage of the total monthly obligation based on the amount of money available for debt payments.

For example, if you need $600 per month for debt repayment but only have $300 per month available for debt payments, this is 50 percent of the amount required. Each creditor is offered a payment in proportion to the amount of the debt (called a prorated payment). In this case it is 50 percent of their regular monthly payments.

Method D. You can pay more to the smallest debt so you pay it off fast. Then apply the amount paid to the smallest debt to the next largest debt. How long it will take to you prepay a debt depends on the amount owed and the interest rate. Your county Extension agent may have a program that will figure repayment plans including the interest rate. There are also calculators on the Internet that will figure out how long it will take you to pay off a debt including the interest. The advantage of this method is that you see the number of debts you owe being reduced at a faster rate. Sometimes it is easier to stick to a strict spending plan when you can see quick results for your efforts.

As you can see, you can pay all of your debts, except the car loan, off in 12 months. In this example, the car loan would be paid off in the thirteenth or fourteenth month depending on the interest rate. The time to actually pay off the loans will depend on the interest rates but the principle is the same.

Debts	Amt. Owed	Mo 1	Mo 2	Mo 3	Mo 4	Mo 5	Mo 6	Mo 7	Mo 8	Mo 9	Mo 10	Mo 11	Mo12
Jewelry	275	80	80	80	80
Bank Loan	525	55	55	55	55	135	135	135
Bank Card	680	55	55	55	55	55	55	55	190	190
Bank Loan	755	55	55	55	55	55	55	55	55	55	245	245
Car Loan	1,145	55	55	55	55	55	55	55	55	55	55	55	300
Total	3,380	300	300	300	300	300	300	300	300	300	300	300	300