Circle of Debt .
Last week, we received a call from a lady who wanted to get financial planning done for her family. She was a smart and educated woman working as a top executive in a well known company, while her husband was running a successful business. One look at their joint income gives one an impression of an upper class well off couple. However our client wanted to meet us because they were in the middle of a financial crisis. The couple spent a very large part of their income paying off debt in the form of personal loans, EMIs and funding of a very expensive lifestyle. There were no savings while loans and EMIs were related to purchase of gadgets and cars and some land that was turning into a white elephant.
When in a debt crisis, following suggestions could help. They need to be however implemented with a time bound plan.
Restructuring -
You can speak to your bank or creditor to restructure the debt such that they can be paid off over a longer duration or at a reduced rate. Banks /creditors are more than eager to ensure that they get back their money and will help you redo the repayment schedule in way that does not choke your repayment ability. In the worst case scenario you can speak to them for a one time settlement (as in the case of credit card over dues). The creditor will in this case settle for a much lower rate of interest with better terms for you.
Selling Assets -
The first assets that must go are the ones bought on leverage. So the 15 lakh car that you bought on loan must go (even if it means that you lose a couple of lakhs in depreciation). Illiquid land may take time, but the effort to sell at reasonable market prices is important. It doesn't matter that you may be sitting on losses in a particular asset be it property or equities. If liquidation helps bring in positive cash to repay debt, then it must be done. This also means that if you need to sell the house in which you live, then do so. You can always move into a smaller apartment or rented apartment till you swim out of your situation .
Paying expensive loans first -
Costliest loans like personal loans and credit card loans need to go first.
Reducing expenses or increasing income -
Needless to say, you can increase your repayment capacity by either reducing expenses that are discretionary in nature and/or by increasing income. Taking up part time jobs, a second career or having more earning family members are some ways in which one can increase debt repayment ability.
To implement these suggestions, it is important to take the whole family (including children) in confidence. There needs to be firstly an acceptance that the situation is out of hand and then commitment from all family members to a long term solution. Most clients whom I have counseled on debt restructuring and repayments seems to find it shocking that I suggest that they sell off assets. There is a lot of societal and family pressure due to which people shy away from making their situation known. Besides because we work closely with stock markets, the general perception is that a financial planner will conjure funds by taking (speculative) big bets in the stock market.
Paying off debt and getting out of a crisis, requires a lot of financial discipline and the changes in lifestyle can be quite painful. However the peace of mind that a debt free life can give you is well worth the effort. Living within your means and avoiding over leverage are the best ways to avoid getting into a debt trap in the first place.
When in a debt crisis, following suggestions could help. They need to be however implemented with a time bound plan.
Restructuring -
You can speak to your bank or creditor to restructure the debt such that they can be paid off over a longer duration or at a reduced rate. Banks /creditors are more than eager to ensure that they get back their money and will help you redo the repayment schedule in way that does not choke your repayment ability. In the worst case scenario you can speak to them for a one time settlement (as in the case of credit card over dues). The creditor will in this case settle for a much lower rate of interest with better terms for you.
Selling Assets -
The first assets that must go are the ones bought on leverage. So the 15 lakh car that you bought on loan must go (even if it means that you lose a couple of lakhs in depreciation). Illiquid land may take time, but the effort to sell at reasonable market prices is important. It doesn't matter that you may be sitting on losses in a particular asset be it property or equities. If liquidation helps bring in positive cash to repay debt, then it must be done. This also means that if you need to sell the house in which you live, then do so. You can always move into a smaller apartment or rented apartment till you swim out of your situation .
Paying expensive loans first -
Costliest loans like personal loans and credit card loans need to go first.
Reducing expenses or increasing income -
Needless to say, you can increase your repayment capacity by either reducing expenses that are discretionary in nature and/or by increasing income. Taking up part time jobs, a second career or having more earning family members are some ways in which one can increase debt repayment ability.
To implement these suggestions, it is important to take the whole family (including children) in confidence. There needs to be firstly an acceptance that the situation is out of hand and then commitment from all family members to a long term solution. Most clients whom I have counseled on debt restructuring and repayments seems to find it shocking that I suggest that they sell off assets. There is a lot of societal and family pressure due to which people shy away from making their situation known. Besides because we work closely with stock markets, the general perception is that a financial planner will conjure funds by taking (speculative) big bets in the stock market.
Paying off debt and getting out of a crisis, requires a lot of financial discipline and the changes in lifestyle can be quite painful. However the peace of mind that a debt free life can give you is well worth the effort. Living within your means and avoiding over leverage are the best ways to avoid getting into a debt trap in the first place.
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