A question that I am often asked is: how do I prioritize which debts to pay off? Do I start off with the highest interest rate debts?

Assuming you have a money management strategy already in place (this is a prerequisite before dealing with any debt), and let’s say we have determined that we have $600 going to your emergency fund every month and we want to pay down debt, say we have $10,000 on one credit card, we’ve got $5,000 on another credit card, and we’ve got $2,500 on another credit card; the minimum payment is $200 a month for the 1st, $100 for the 2nd, and $50 for the 3rd card. And let’s assume that the interest rates are somewhat within reason, four points worth of difference between them.

Here’s what I’d do…

I’ll start with the one with the lower balance first because, as a human being, I love the feeling of success. We’ll need to start off with a number that is attainable. If it takes me month after month and I feel like I’m not getting anywhere, I’m a human being, I’ll abandon the ship and I won’t stay with the plan. If I can raise my arms in four months and say, “I’ve got this one done, it’s knocked out! I can move on to the next one”, then I’ll feel like I’m succeeding!

When you consider how long it could take to pay down debt, don’t get discouraged. It will take some time. Okay, so if I don’t want to wait that long, what’s the alternative? When you have debt, one of the things I talk about in my class is that you only have three available options, this is all there is and there is no more. Forget what you hear elsewhere.

You have three options:

1. Pay 100% and quit complaining about it.
2. Negotiate it at some level and if you going to do that you’re going to have to become at least 90 to 120 days delinquent and trash your credit to do that. Your file will have to go from general collections to loss mitigation before they will cut the principle debt. if you want to take your $20,000 credit card debt and negotiate it for $.50 on the dollar, your file has to go from general collections to loss mitigation and that won’t happen until you become at least 120 days delinquent. Otherwise, these people in this department, general collections, will not be granted the capacity to negotiate with you.
3. File bankruptcy and discharge the debt.

Most people believe that there are other options than the ones described above; I am sorry to say that there are not. Remember that getting rid of debt using one of these three options is not the end goal here.

These are the options that you have, which one do you want?

When people come to my office and I counsel them, I say this is it. You’ll need to create a comprehensive money management plan to avoid ever having to be in the same situation again. That’s the bottom line.

About the Author: Todd Rooker’s primary mission and objective is to offer education and information in the areas of Financial Crisis Recovery. With over 20 years of experience in this highly specialized field, Todd’s expertise in comprehensive money management strategy, credit, debt settlement, real estate options, asset protection and bankruptcy allows him to take into consideration all the complex issues a consumer could be facing, and map out a strategy that works. Understanding that managing money is the key to stability, strength, recovery and growth, Todd has developed a unique and highly effective program to assist people in creating and managing comprehensive personal budgets so that financial decisions are accurate and easy. To get more information about his Money Management Secrets course, go to www.moneymanagementsecretslive.com.