Financial advisors helping their clients get out of debt can provide a number of services, such as investment management, income tax preparation and estate planning.

Managing debt is a key component of how they can help clients plan for a healthy financial future. Someone overwhelmed with debt is like someone bleeding from an open wound — the first step is to stop the bleeding. Mapping out a client's cash flow and identifying existing and potential problem areas are good places to start.

Clients should bring all relevant documents to meetings in order to ensure they can receive the full picture. This includes bank statements, credit card bills, installment loan statements, pay stubs, tax returns for the past few years and anything else that may have an impact on your financial situation.

Some clients might feel like having someone they just met criticize their spending habits and past money decisions is intrusive. For the meeting to be productive, advisors should help clients recognize that they are there to be told some hard truths.

Advisors helping clients with debt must look at the various restructuring options.
Advisors helping clients with debt must look at the various restructuring options. Bloomberg News


Once the client gets past this obstacle, advisors can draft a new balanced budget that covers the essentials while not adding more debt to the pile. This typically involves trimming unnecessary expenses, so that any excess funds are available to pay down existing debt.

There are many different types of debt. Some are relatively benign, such as mortgages (low interest rate and full tax deductibility), while others are downright toxic, such as credit cards with high interest rates and delinquent accounts generating penalty fees on top of exorbitant interest.

After analyzing the debt held by a client, the advisor can then begin to prioritize the client's debt payback strategy. The most expensive and delinquent accounts go on top, while the more modest ones go to the bottom.

For example, if a client has $600 a month to pay off existing debt in the new budget, the bulk of it should go to pay off the debts causing the most additional costs. It is important they continue making minimum payments on the lower-interest accounts too, so that they don't backslide into delinquent status and start racking up penalties.

Advisors must also look at the various options for restructuring debt. For example, a homeowner with equity in their property may be able to take out a second mortgage and use that money to pay off three credit cards in one fell swoop. The lower interest rate of the second mortgage would enable the homeowner to pay off a chunk of the new principal each month instead of just keeping up with the interest payments.

Another benefit of getting the levels of debt under control is that the client's credit score suffers every month they have high-balance or delinquent accounts. As the new budget takes effect, the accounts become current and the balances gradually sink. Their credit score increases accordingly, which opens the door to renegotiated terms with creditors (at lower interest rates) and may even lower seemingly unrelated things, such as insurance premiums.

The goal of meeting with a client isn't necessarily to them pay off all debt as quickly as possible. While the initial focus is debt reduction, there are often other considerations that arise once the immediate fires are put out. While each situation is different, it's the advisor's job to take a holistic view in order to establish a long-term plan suited to each client's specific needs.

For example, a person with dependents may need life insurance to provide for them in case of premature death. Advisors may recommend paying down a couple high-interest accounts first and foremost, but then slow down the debt payments to start a sturdy life insurance policy. The next step may be starting a retirement savings account once a few more debts are fully paid off.

Client should leave the meeting with a written plan explicitly spelling out the recommended course of action. Ideally, the advisor should provide milestones to check off and red flags to watch out for, so that the client can check their progress and catch any potential missteps early.

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