Get out of debt, permanently

QUESTION: During the holidays, my debts further piled up. I haven't even fully paid my outstanding balance from previous years. I think I will barely have enough money to pay my debts in the coming months. Can you help me manage my finances? -asked at "Ask a friend, ask Efren" free service available at and Facebook.

Answer: We at Personal Finance Advisers have a three-phase approach to people in your situation.

Phase 1: The lifeline. A sailor who had fallen overboard will not be thrown a thick manual on safety procedures. In the same manner, no amount of "I told you so" or even training can get you out of your present rut. What you need to do is figure out first how much you can afford in terms of monthly debt repayment while still enjoying a modest lifestyle. Computations on how much room in your budget you can make for these monthly non-discretionary cash outflows must be quick yet accurate.

Then you can request your current lender/s to restructure your loans based on what you can afford to repay. This may mean they would have to extend the repayment period or take a haircut (condonation) on their loan exposure to you.

If the restructuring does not work with your current creditors, you can get a new creditor to refinance all of your debts at an affordable interest rate and long enough term to allow you the monthly payments you can afford. It would be great if you could get a condonation of part of your debts from your current creditors.

Refinancing will allow you to consolidate your debts with one lender so that you need to remember only one due date and one amount to pay.

Doing Phase 1 quickly will avoid past dues and having your name fall into the negative file information system (NFIS) of lenders, which will make it more difficult for you to get restructuring or refinancing loans. Plus, when your name falls into the NFIS, it cannot be taken out even if you have fully paid your past dues because it is a record of your repayment history.

Make sure though that the restructuring or refinancing loans that you contract do not have provisions for processing fees when you decide to fully prepay them. These loans should also not have restrictions on when you can fully repay or make advance payments. The Consumer Act of the Philippines provides that any consumer loan may be repaid at any time and without penalty.

Phase 2: The origin. Once the "bleeding" from debt repayment has been arrested, you will need to go into soul-searching mode to find out why you seem to be perennially in debt. Could it be because you blindly follow money rules that you grew up with? Giving not-well thought of gifts every occasion there is, getting a house through a loan instead of simply renting, buying the most expensive house you can afford and treating it as an investment are just some of these money rules that some tend to follow.

Perhaps you just allow your primal urges that evolution has planted in the human brain to control your spending urges. Retailers know of these primal urges. Why do you think they come up with tactics like zero per cent interest, coloured packaging, making you wait to be seated at restaurants, and others?

Phase 3: No return, no phase change. To avoid a relapse in your debt management, you will need to come up with a financial plan where your non-negotiable goals are enshrined and quantified while the strategies and tactics to realise such goals are detailed in terms of cost management to generate savings and turbo-charge these savings through investing to make your future more affordable. Such a plan can include a provision for increasing income through aiming for a higher paying job or setting up a (new) business.

Your progress versus this financial plan must be reviewed tactically every month and strategically every year together with responsible members of your household. Be each other's check and balance. More importantly, a plan will only be great and successful if you and your household members work with diligence, patience, understanding and discipline. Remember that there is no "I" in plan.

If you want to know more about debt management, avail yourself of our free tools at You may also check out our personal finance training schedules.

Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and author.