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The Guide to Living Debt-Free: Learn to Prioritize Debt

In order to handle debts wisely, they must be prioritized: decide which debt is important to handle first and which later. Is it hard to know what is important to start and treat? The following are considerations that should guide you in setting priorities for handling your debts:

a. The amount of the monthlyrepaymentrelative to the amountof the loanremainingto be paid

This will help you understand which loans make it harder for you to meet the monthly repayment required to repay them, and you may want to consider refinancing them. To do this, it is necessary to examine what is the ratio of the monthly repayment amount to the loan amount. This ratio (in percentage) reflects how much the loan burdens the monthly budget. The more burdensome the loan, the higher it should be on the list of priorities for treatment.

For example:

Suppose there are two debts: one in the amount of NIS 5,000 to the credit card company, without interest, and with a monthly repayment of NIS 1,000. The second is NIS 45,000, with an interest rate of 8%, and a monthly repayment of NIS 1,000.

How do we calculate the load of each of them, so that we know what to treat first?

In the first loan, the load is 1000/5000=20%

In the second loan, the load is approximately 1000/45000=2.2%.

It can be understood that the load of the first loan is greater than that of the second, therefore, due to load considerations, the handling of the first loan is a higher order of priority.

b. Interest rate

In the example we examined, the second loan is at a high interest rate (8%), while the first is without interest at all. Doesn’t this mean that the second loan is less worthwhile, and that it should be a high priority for treatment?

The interest rateis indeed another consideration, and it must also be taken into account when building the prioritization. The higher the interest rate, the higher the repayment on the entire debt, so we usually want to deal with high-interest debts. At the same time, the interest rate will always be treatedas asecondmost important factor in the debt settlement process.

The most important factor is the amount of the monthlyrepayment and the load it creates.  

c. Arethereguarantorsfor the loan?

There are two possible approaches when there are guarantors for a loan. The decision on which approach to take depends on who the Arabs are and the nature of relations with them. In any case, any approach you choose must be in full coordination with the Arabs.

One approach is to give high priority to the repayment of a debt that has guarantors, so that the creditors do not reach the guarantors for collection.

A second approach is to see Arabs as a factor that helps solve the debt problem. In other words, they will bear the payment of the debt in your place, while you will pay them back what they are entitled to with repayments that are appropriate to your ability.

D. ConsequencesofDeferredPayment

What happens if you fail to make the payment and there are arrears in repaying the debt?

When it comes to debts to family or friends, there can be a wide range of consequences ranging from a comfortable state of agreement and understanding, through unpleasantness, to an intolerable state of deep family strife.

E. SanctionsforDeferredPayment of Debts

In case of late payment of the debt, there may be sanctions. The type and intensity of sanctions will affect the prioritization of duties. Thus, for example, arrears in repayment of debts to the municipality can lead to foreclosure, and failure to pay a debt to the authorities (such as VAT) is even considered a criminal offense.

It is necessary to carefully examine which of the debts may end up in legal proceedings if not addressed with high priority. Handling debts that have reached legal proceedings is more complicated and more expensive.

f. Preservation ofpossiblesourcesfor obtainingan additional loan

In order to repay debts, you sometimes need to take out new loans and use them to repay existing debts.

Mark which of today’s existing creditors may be a source of new loans, and take this into account in the priorities for treatment. In this way, you will take care of preserving possible sources for obtaining another loan. If, for example, you are considering taking out another mortgage from the mortgage bank, you should very well meet your current mortgage payments. Even one late repayment can result in your application for another mortgage being rejected.

Setting priorities according to these guidelines will put your debts in order – and eventually you’ll begin to see the light at the end of the tunnel. So what do you do after prioritizing debt? Moving on to the next chapter –

calculating the payback capacity

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