Although there appears to be little equity in the family residence, the existing mortgage is held at a rate of 4.24 percent. It is recommended that Maria and Joseph use this asset at a favorable rate and continue it in its current status.
One car is for Joseph’s business use and has a deductable payment of $450 per month. This is viewed as reasonable. Maria’s BMW has two more years of payments of $1,175 per month. It appears that it would be difficult to liquidate the vehicle at this time. So it is recommended that it be retained after the loan is paid and that the payment be added to current cash flow as a resource for regaining control over consumer debt.
The student loan is large and carries an interest rate of 7.75 percent, but compared to the rate on the consumer debt, it is relatively inexpensive; therefore, it is recommended to apply for forbearance while retiring the consumer debt. The Consumer Credit Counseling debt has a balance of $43,000. It is a serious consideration, but the retained debt carries a higher interest rate debt and should be addressed first. Even though the main justification for forbearance may have passed (unemployment), the recommended schedule for payment does not include relief of the student loan.
Joseph and Maria decided that several credit cards should not be turned over to Consumer Credit Counseling as they were used in their daily lives. With the exception of a $16,000 debt on a credit card used for business purposes, this retained the debt totals only $1,530 and yet consumes $350 per month in cash flow. If they add only $150 per month to their current payments, and do not add further purchases to these cards, they can all be paid off in only four months, freeing that $350 for other purposes. Of course, they should pay the highest interest rate cards first.
Next, we suggested they turn their attention to the American Express balance for a suggested payment of $1,200 per month. As a result, it would take 16 months to pay off the $16,000 credit card balance.
At this point, the car loan has only four months of payments remaining. Once the BMW is paid, an additional $1,175 per month is available for debt reduction purposes. The new total to be applied to outstanding debt, without impacting their lifestyle, is $2,375 per month ($350 from old consumer payments, $150 from free cash flow derived from re-employment, $700 per month from American Express card, and $1,175 from the car payment). The Consumer Credit Counseling debt has been reduced from $43,000 to $25,000 from the $1,099 payments during this period. By applying all of the newly created cash flow to this one last bill, it will be paid off in less than one year.
In only three years, Maria and Joseph can go from a helpless cash flow to having $41,688 free cash flow per year. Also, their net worth will go from negative $79,330 to a positive $69,000 due to debt reduction — a swing of almost $150,000 in only three years with no impact on their standard of living. This will take dedication on their part to avoid charging anything that cannot be paid off in the same month and continuing with the debt reduction plan outlined above.
During the previous three years, the $74,000 student loan debt has been reduced to $65,000 with the regular $700 per month payment. If we apply the entire $3,474 of free cash flow plus the $700 regular payment to this debt, then it will be retired in less than two years.