Working backward to move forward: Debt management strategies

By Renee Hanson

Tackling debt can feel like navigating a maze. For individuals burdened by high levels of debt, the journey towards financial freedom may seem daunting. The overwhelming nature of high debt makes it difficult to understand where to start. The client could be filled with fear of the situation and put off finding a solution.

Advisors can provide a safe space for clients to seek advice free of judgment. Our goal should be to help clients feel excited to pay off debt rather than feel burdened by guilt. Understanding the root causes of a client’s debt and addressing them head-on can help clients create positive habits and a better financial future.

Starting from the beginning

A key step in tackling debt is understanding how your client accrued it. Keep in mind that debt is often a result of a poor relationship with finances – maybe the client has struggled with finances their whole life and just needs a push in the right direction.

Money alone can cause stress for some clients, which can increase debt, as the client may lack the emotional space to find a solution. By working backwards to analyze the series of financial decisions and circumstances that created the debt, it becomes possible to identify patterns and triggers.

When discussing debt with clients, avoid prompting feelings of guilt or shame by using specific, intentional language. Emphasize the potential for growth and progress rather than focusing solely on the negative aspects of debt. Using words with positive connotations helps the client feel at ease and open to your advice. You can reframe the debt as a temporary obstacle rather than an insurmountable burden when you are attentive to the emotions tied to money and debt.

Understanding a person’s relationship with money, from psychological habits to unexpected circumstances like medical debt or income loss, can help you create personalized solutions for the client. These solutions depend on the nature of the debt and the individual's financial goals, but always start by asking thoughtful questions to sort out the root issue. From here, you can research and define next steps for the client based on their personal situation.

Exploring options

It’s important to let clients know they have many options to get out of debt. Explore all available options and assess their suitability based on individual circumstances and goals. Some of options to consider include:

Debt Consolidation: This involves combining multiple debts into a single, more manageable payment for clients. Instead of juggling with an overwhelming number of payments to different creditors, individuals can consolidate their debts into one single loan, often with a lower interest rate and an extended repayment period.

Debt Settlement: This gives clients the opportunity to negotiate with creditors to reach an agreement to pay a reduced amount of their outstanding debt. This is often best for clients with considerable debt looking for immediate solutions.

Debt Restructuring: This entails modifying the terms of your clients’ existing debt agreements to better suit their financial situation. With this they can renegotiate interest rates, extend repayment periods or even have a portion of their debt forgiven.

Your role as an advisor

Managing debt can be daunting not only for the client, but for advisors as well. Confidence is paramount when guiding clients through the complexities of debt management. By articulating your recommendations with clarity and conviction, you will instill confidence in clients as they commit to their debt resolution plan. Through empathetic communication, you can build a trusting relationship with your clients and ultimately help them manage their financial stressors.

Effective debt management requires a holistic approach, leveraging both psychological insights and practical financial strategies. When you understand the root causes of your clients’ debt and address them in a constructive manner, clients can feel positive about achieving long-term financial success.

You can provide high-debt clients with a sense of empowerment through their financial journey simply by providing a judgement-free, positive conversation. With the guidance of knowledgeable advisors, the path to financial freedom becomes clearer, one decision at a time.

 

About the Author
Renee Hanson, CFP®, BFATM, CEP®, CDFA®, CFS®, ChFC®, APMA®, is a Private Wealth Advisor with Affinity Wealth Advisory Group, a private wealth advisory practice of Ameriprise Financial Services, LLC with more than 30 years of experience. Renee is a 10-year MDRT member and Top of the Table qualifier. She specializes in fee-based financial planning and asset management strategies. To contact her, visit her website.