The Federal Reserve Bank of New York recently reported that consumer household debt increased by $226 billion to $12.6 trillion in the fourth quarter of 2016, the largest gain in the past 10 years. This debt includes credit card debt, auto, personal and student loans and mortgages. Financial advisors who ignore the debt side of their clients' balance sheets do so at the peril of both themselves and their clients. Here are some practical ways that advisors can help clients to manage their debt issues.
1. Create a Budget
If a financial advisor's clients are having problems with debt, then it means they've had a problem with spending. Advisors can attack this problem at the source by helping their clients to create and maintain a realistic budget using tools such as Mint.com or other budgetary apps that can track client spending and provide email and text alerts when they exceed their budget in a given area. (For more, see: How Advisors Can Help Clients with Cash Flow Issues.)
2. Home Equity Lines of Credit
Although this is not always an optimal solution, it can allow clients to get out from under high credit card debt or auto loans and convert debt that was charging nondeductible interest into debt that is charging deductible interest. Advisors need to be aware of the perils of using a home equity line of credit (HELOC) with an adjustable rate, since rates are likely to increase in the near future. But even a rising interest rate on this type of loan may be superior to making minimum payments on a credit card that charges 20% interest.
3. Repayment Plans
Advisors need to form an alliance with local consumer advocate groups that can help clients to structure a debt repayment plan that will allow them to get back on their feet. But not all debt solution companies are legitimate. Advisors should stay away from any company that charges a large up-front fee and makes unrealistic promises about what it can do. Fortunately, there are some debt consolidation companies that are genuinely geared towards helping consumers to pay off debt. (For more, see: Advising FAs: Explaining Debt to a Client.)
4. Negotiate with Creditors
Advisors may need to be prepared to do some hard bargaining on behalf of their clients in order to get a better deal on the terms of their debts. Collection agencies may be more willing to reduce balances that are owed if they know that a financial advisor is involved and cannot be intimidated by their tactics. This can make a substantial difference in the total amount that the clients owe. If an advisor is not skilled at dealing with creditors directly, then enlisting a consumer credit counselor can be a good idea. These professionals are experts at negotiating with creditors and know all of the rules relating to consumer debt and what rights the advisor's clients have under current law.
5. Choose the Payments
If a client is unable to make payments on all of his bills at this point, then it becomes necessary to decide which bills should be paid for the time being. Credit card bills can likely wait, but car payments should probably be made. Utility bills may be able to be put off for a month or two, but no more than that. Groceries are an obvious necessity. Student loans may be able to be put into deferment, but this is not always possible.
It goes without saying that bankruptcy of any kind should be a last resort. And if it is the only alternative that a client has, then a Chapter 13 bankruptcy should be chosen over Chapter 7 if the client will have the income necessary to carry out the repayment plan. But advisors can still advise their clients on the best manner in which to proceed.
The Bottom Line
There are several things that advisors can do to help their clients deal with consumer debt. Creating a budget and negotiating with creditors can go a long way towards helping clients to stay solvent and pay off their bills.