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Debt Restructuring

Overview of Debt And How Restructuring It Can Save You Thousands

Over the years, I have had a lot of different loans. I have had student loans, credit card debt, auto loans, mortgages, private loans and business loans. I’ve even had loans from friends.

I never had a payday loan.

In this post, I would like to talk briefly about debt restructuring. There are many ways a debt can be restructured. One can pay down a portion in order to qualify for a refinance, one can use a particular credit line to pay off another, do a traditional refinance, build a debt payoff ladder, etc.

1. Student Loans

Doctors tend to have much higher mortgages than student loan debt, but for various reasons, SL’s take up most of the debt bandwidth.

Debt can be restructured by simply refinancing. However, this requires a bit of research on the part of the doctor because some federal loans may qualify for debt forgiveness while some can get help with the repayment through NHSC.

Before making a move on your student loan debt, it’s helpful to have a really good idea of all the options out there, some moves will negative future options. I recommend talking to this dude before taking your first step.

2. Credit Cards

For some credit cards are never an issue, they wouldn’t be caught dead with them. For others, it’s a convenience factor and the balance is often paid well before any interest can accumulate.

Then there are those who carry large credit card balances or use them to handle emergencies. It’s common for medical students and residents to start their attending career with quite a few of these.


Credit Counseling Services

Most consumers are warned to stay away from Credit Counseling Services. The reasons are many but it’s often written by those who either never had credit card debt or have never used such services.

At one point, I had $40k in credit card debt and was drowning in it, making only a resident income. My credit history wasn’t adequate to qualify for lower interest rates, I was stuck with 20-29.99% rates.

Using a CCS can help you, and helped me, negotiate down the rates quite a bit, though often leaving your credit report tarnished temporarily.

You can handle the negotiating yourself which might save you a couple of bucks but it will have the same consequence on your credit report.


Balance Transfers

For those who are further along, with better credit and lower rates, they can use zero-interest cards to pay off high-interest ones. There is often a fee associated with this, so be sure to sit down and do the math. There are nifty calculators online which can help you do the math.

Wanna get a little fancier? You can take large chunks from your credit card and transfer that balance to your individual private student loans. For $400 Bank Of America transfer fee, I was able to pay off $15k of an 8% private student loan balance.


3. Private Line Of Credit

A line of credit at the dentist, the plastic surgeon’s and Macy’s is a private loan. Doctors can even apply for private lines of credit from companies such as Lending Club and Suntrust Bank.

Another time doctors can get suckered into a personal loan is when it comes to buying jewelry. You’re there, buying an engagement ring and you’ll get offered an extra $20k line if credit so that you can bump up to the bigger carat.

4. Mortgage

A traditional mortgage of 30 years can be refinanced to 15 years which would allow us to save quite a bit on interest rates. Quite a few doctors already take advantage of this.

It’s not just the shorter duration of a 15-year mortgage but also the lower interest rate that’s often offered on such loans that will help you save.


Mortgage And Student Loans

A buddy of mine is in the process of refinancing his home and because of his sizeable equity, he is planning on rolling his student loans into the mortgage.

There are a few good reasons why not to do this, the main being that you now turned an unsecured debt to a secured debt, risking your home in case of a financial disaster.

However, at his income level, he no longer qualifies to get a tax deduction for his student loan interests. However, he would still be able to deduct a portion of his mortgage interest.

Though mortgage interest rates might be lower currently (in 2017), the length of the student loan would undoubtedly have to be extended, which will eat up any potential savings.


5. Auto Loan

There are 2 common car loans that physicians have, a traditional purchase finance and a lease. We may not think of a lease as an auto loan but it is exactly that.

A lease is the amount of money a car is depreciated over the time-frame that it’s leased out for. That amount plus some chunky interest is broken up into equal monthly payment for 24-36 months and billed to the customer.

Doing the swapping game here could be beneficial. Again, using a low-interest credit card line of credit or a business line of credit to pay off an 8% auto loan might make a lot of sense.

For a lease, I recommend that you look into either selling the car, returning it to the company or putting up on secondary lease sites. Back in my flagrant days, I did this successfully with my Hummer and was able to get rid of my $730/month lease payments by canceling the lease and returning the car to the dealership who sold the car and paid off my remaining lease.

Back in my flagrant days, I did this successfully with my Hummer and was able to get rid of my $730/month lease payment by canceling the lease and returning the car to the dealership who sold the car and paid off my remaining lease.

How To Approach Debt Restructuring

The process of shuffling one debt around to pay off another can be a powerful tool to pay down debt, consolidate and lower either the duration of payments or the overall interest owed.

The obvious steps are to refinance and lock in lower rates. However, it’s important to look beyond the potential new rate and look at the APR which takes into account any financing costs and other fees paid in order to secure the new rate.


What’s Your Goal?

Is your main goal to be debt free ASAP? Or is your goal to pay the least amount back to your debt holders?

I never realized how hard the job of a financial adviser is until I considered being one. Fuck, so many individual preferences to take into account! I guess medicine is the same way. One patient wants to treat their gonorrhea holistically while another wants Ertapenem for their abrasion.

My debt at first was to pay the least numeric amount back on my debt until my friend M. convinced me otherwise. That’s when I began my debt destruction mode to pay off all my credit cards.

I would recommend paying off your debt as soon as you can. Why? Because you’re a physician, you have the earning power to actually accomplish this, still max out a 401k for the tax savings, and then follow it up with hardcore savings towards your remaining financial goals.


Consolidate If You Are Easily Overwhelmed

I got overwhelmed with all the different bills I had when I was carrying 6 credit cards. I got the urge to pay the card off first which had 20%+ interest rate while the lower-interest $8k balance was the easiest to annihilate.

Apply for a private line of credit and consolidate your debt into 1 payment with hopefully a shorter term, a decent APR, and less payment scattering.


Spreadsheet It

It takes a massive nerd with glasses to spreadsheet their finances, I realize that. Yet, it’s the incremental steps which make for sizeable changes.

Writing down daily debt balances, entering each payment, counting the date towards payoff, are all really effective psychologic exercises to abolish debt.

You can download apps or even use free websites like Ready For Zero. These services send out reminders and help you count down your time to zero balance. Their graphic feedback can be helpful to visualize how close you are to your goal.


Again, what’s your goal?

Yea, I’m repeating myself, but what’s your goal? I mean the bigger picture goal. 

The first time around when I paid off my $40k credit card balance using a consumer credit company, I had no actual plan to stay out of debt. I had no financial goals besides saving. 

After a year of being debt free, I accumulated another round of unsecured debt. I was back where I started.

Saving is so 90’s! A goal of simply saving is not enough for most households. It’s better to have more tangible goals. Being debt free is a good one, but what will you do with your extra income once your debt is gone?

If you don’t have a plan for the disposable income then for sure someone else will come up with a plan for you. There is a financial disaster around every corner. A new car is needed every time you blink. A home remodel is absolutely necessary every 2 years.

I wanted financial independence. I wanted to not have to work a job for income. I wanted complete dominion over my free time.

What is it that you want?

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