What Are Your Thoughts on This Debt Repayment Strategy? | Personal Finance & Lifestyle | Yakezie Forums

We are paying off student loans and credit cards.  I just spoke to a financial planner who, contrary to popular advice, recommended that we pay off the student loans first before the credit card, even though the student loans have the larger balance and lower interest rate (6.8%), because credit cards can be written off in bankruptcy and student loans can't.  Of course, I don't plan to file bankruptcy, but he said this may become important if we had an unexpected injury or disability or if we were unemployed for a long period of time.

What do you think about this advice?

Melissa (Mom's Plans) said:

We are paying off student loans and credit cards.  I just spoke to a financial planner who, contrary to popular advice, recommended that we pay off the student loans first before the credit card, even though the student loans have the larger balance and lower interest rate (6.8%), because credit cards can be written off in bankruptcy and student loans can't.  Of course, I don't plan to file bankruptcy, but he said this may become important if we had an unexpected injury or disability or if we were unemployed for a long period of time.

What do you think about this advice?

Unless you have a reason to think you might have to file bankruptcy, I wouldn't advise this strategy at all.

I should clarify that we have a very small emergency fund of $2500.  We are gradually building it up to $5k, and then we will stop building it until the debt is paid off.  We have life insurance for both of us, and disability insurance for my husband.  I bring in half of our income as a freelancer, and I have no disability coverage.

I think his description of what could happen is accurate, and I would consider it; doesn't hurt to prepare for many possibilities even though of course you're not planning to file bankruptcy.  It would also depend on how long you think it will take to get out of debt period, and what the balances are on your credit cards vs. student loan, etc. I guess I'm giving a big fat "it depends on your situation" ;) 

Thanks Mighty Bargain Hunter.  I liked the post!

Horrible advice. Don't pay some idiot to tell you what you know is wrong.

Call Me What You Want Even Cheap said:

I agree that you should have insurance and an emergency of fund first. I would tackle the smallest balance first and work my way up to the largest.

I second this. I think tackling the smallest debt first is the best way to go. Then once that it is paid off, take the amount you were paying on that debt, and roll it into the next smallest one. That is what my wife and I did and we were able to Pay Off $52,000 in Debt in 18 Months. It is not the best strategy from a "numbers" perspective, but it is from an emotional and psychological perspective. You begin to gain momentum and the sense of accomplishment. 

The question is what are the balances and why is your financial planner talking about bankruptcy? Is the situation very dire? I have been paying off debt seriously for the past year (since June 2011) and even though it's been tight, bankruptcy doesn't make sense for me, not to mention I wouldn't want to do it. My student loan is my last priority, the balance is 6K and the interest rate is the same as yours. I'm paying down the high-interest credit card and changing habits of over-spending. I'm also taking advantage of balance transfers to lower the CC interest rate.  Since my credit cards are higher than my student loan balance, and the interest is higher, that's where my priority is. Unless the bankruptcy thing is serious, that would be the best way for you to save money as well.