Before deciding to file bankruptcy we always ask our clients to look at alternatives to getting out of debt. The most obvious option is to pay everything off. We created the following exercise to figure out if you can afford to get out of debt and how long it will take.
1. The Form: Take out a piece of paper and draw a table with five columns and enough rows to include all of your creditors. Label the first column CREDITOR, the second column BALANCE, the third column INTEREST RATE, the fourth column MNIMUM PAYMENT and the last column MONTHS. Click here to download the form.
2. Gathering information: Fill out the first four columns by looking at your account statements or calling your creditors. If you don’t know who all of your creditors are visit AnnualCreditReport.com and request a free copy of your credit report.
3. Total Minimum Payments: Add up all the minimum payments and put the total under that column. Circle the number.
4. Budget: Look at your budget and figure out how much a month you can afford to spend on getting out of debt. Write that number under the circled number on your debt list and draw a square around it.
5. Can You Do It?
If your squared number is less then your circled number go back to step four and adjust your budget.
If the squared number is equal to your circled number move on to step 6.
If the squared number is greater then your circled number increase your payment amount on the debt with the highest interest rate. Increase the payment by exactly how much more you have in your squared number. (Redo this every time you pay a debt off.)
6. How Long Will It Take: Use the calculator below to figure out how many months it will take you to pay off each creditor. Fill out the final column for each creditor. (If the calculator says 0 months it is because your payment is not high enough to ever pay off the debt. You have to increase the payment amount.)
7. Are You Willing to Commit?
If you are happy with your results start following your plan to becoming debt free.
If you are not happy with your results consider going back to step four or seeking professional advice regarding other alternatives.