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San Wants To Know “We Need Some Way To Pay Off Our Debts”

“Dear Steve,

We need some way to figure out how to pay our debts off. We have credit card debt, car loan, a home equity loan that has a balloon next year, medical bills and owe a balance to my brother for his half of property we inherited jointly. We have two incomes and we should be able to live on them. We have about 15 years to retirement and we would like to be totally out of debt in 5 years so we can save for the rest of the time. We are behind on mortgage and 2 other creditors and are trying to get that caught up and current.

How do we straighten out our finances and make a budget that we can live with and still get things paid off in 5 years?


Dear San,

I’m sorry to say you’ve got all the ingredients for a financial disaster brewing here. Here are the things that concern me the most.

  1. Home equity loan has a balloon payment due next year.
  2. Can’t make it on two incomes.
  3. Need to cash out brother.
  4. Retirement looming but not enough savings for it.
  5. Behind on mortgage.
  6. Behind on two other creditors.
  7. Want to be paid off in five years.

San, wishing and wanting don’t add up to reality all the time. But the good news is that with some adjustments there may be some solutions.

The issue of making enough money but not having enough to live on tells me that you don’t have a basic understanding of where your money is going each month. Don’t worry, most people don’t.

The fix for that is to use an online program like Mvelopes or just write down every penny you spend for thirty days and at the end of that period, categorize your spending and total it all up.

Either method will help you to clearly see where you might be able to make easy budget adjustments to reduce your outgo. I think the Mvelopes method is just easier. Every dollar you save by making budget adjustments way remains in your pocket for debt reduction.

The best and most logical method of debt reduction is the debt snowball method.

Debt Snowbal Debt Reduction

The basic steps in the debt snowball method are as follows:

  • List all debts in ascending order from smallest balance to largest.
    This is the method’s most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.

  • Commit to pay the minimum payment on every debt.
  • Determine how much extra can be applied towards the smallest debt.
  • Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off. Note that some lenders will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction.
  • Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
  • Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).

The theory works as much on human psychology as it does on financial principles; by paying the smaller bills first, the individual, couple, or family sees fewer incoming payment requests as more bills are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt. Source: debt snowball

You see San, without a major expense reduction or income increase it does not look good for a happy outcome here.

When people fall behind on their mortgage it is a priority to get that caught up. To do that means you typically have to fall behind on your other bills. But you’ve got that balloon coming up next year and the problem with balloons is that they explode. You might not be able to refinance that due to your current bad credit or because the mortgage industry is in a bit of a meltdown, then like now.

I’m sure your brother wants to be paid as well. Rightfully so. I’ve seen issues like this tear families apart. Don’t let that happen to you. Your brother is a creditor like the others and you need to treat him just as fair.

If you apply all those techniques and you still can’t make it them I’m afraid we are going to have to talk about the big B word, bankruptcy. Bankruptcy is a legal and viable option for you and before you make any sort of emotional decisions about bankruptcy I insist that you get a free bankruptcy review and talk to a bankruptcy attorney to get the facts rater than the assumptions.

If you go bankrupt you will have to move and you may lose some stuff but it would allow you to clear the debts and start saving for your retirement sooner rather than latter.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

1 Comment

  • I’m thinking debt reduction here. If you owe a large amount of money that not secured you may be able to reduce what you substantially.

    With the balloon payment I would be running to the lender and asking for a restructured loan.

    Keep track of what you spend your money on and make a budget. Do whatever it takes to reduce your debt to zero. A litle pain now will save you a lot of pain later.

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