Steps for Debt Settlement

In one of my previous posts, I mentioned about the difference between good debt vs. bad debt. In summary, good debt provides money into our pockets while bad debt drains money out of our pockets. In the long run, good debt becomes asset while bad debt becomes liability.

What will you do if you have an unsurmountable amount of bad debt? One of the easiest way to accumulate bad debt is through an undisciplined use of your credit cards. You keep on swiping and swiping that card without you knowing that you already have a burden of debt that you will work for to pay for the rest of your life.

One of the ways of settling debt payment is through debt consolidation. However, Kiyosaki devised a debt repayment plan as he himself got into debt. He found himself broke when his business went bankrupt. He left his hometown in Hawaii and sold everything to move to California. In his journey to get out of bad debt, Kiyosaki shared several key steps that he did for debt settlement:

Step 1: Tell Yourself the Truth

The first and probably the toughest step of all is to commit to tell yourself the truth. To face the grim reality of how much you owe and to whom you owe it. You can easily lie to yourself and pretend you are okay financially, which is what many people do. So how do you hold yourself accountable and face the hard facts? Face and accept the truth!

Step 2: Stop Accumulating Bad Debt
You should basically put a freeze on all bad debts. Don’t wait until you will have a mountain of bad debts. Discipline and commit yourself in paying all your debts on time to avoid penalty and interest charges.

Step 3: Make a List of all the Debt You Owe.
Write down every single debt you owe. This may include credit cards, school loans, car loans, and other debts to individuals including friends and family members, store credit accounts, home shopping and online balances due, vacation home, and your personal residence.

Do not include debt for investments, such as rental properties and business investments as these are all considered good debts unless they are not performing well and it drains money out of your pocket.

Step 4: Make a Visual Picture of Each Debt

This is yet another genius way of tracking debt devised by Kiyosaki.

From the list you’ve made in step #3, create a visual drawing of each debt and from there you can then determine which order each debt will be paid off. Here is how you do that as Kiyosaki instructed:

For each debt, draw a quadrant like this:

In the top left hand corner is the name of the debt, such as Visa. In the top right hand corner write in the total balance owed. In the bottom left hand corner write the minimum monthly payment due. Now, divide the total balance owed by the minimum payment due. For example, if you owe $2,000 on your Visa and your minimum amount due each month is $100, then $2000/$100 = 20. Write that number in the bottom right hand corner and circle it in red. It would look like this:

Do that for every debt on your list. If you owe money to an individual with no set minimum monthly payment then decide what you the want that monthly payment to be.

Step 5: Determine the Order for Paying Off Each Debt.

Looking only at the circled numbers of each debt, find the lowest number and place a #1 next to that debt. Find the next lowest number and write a #2 next to it. Continue to do that until there is a number next to each of your debts. Again, go from the lowest to the highest number. The circled numbers are the number of months it will take to pay off that specific debt.

For example, if the smallest circled number you find is a 3 (circled) then you would write a #1 next to it. This is the first debt you will pay off. If the largest circled number is 300 (circled) then this would be the last debt you pay off.

The question Kiyosaki often hear is, “Shouldn’t I pay off my debt with the highest interest rate first?”  Not necessarily… for this formula to work. The reason is this: It’s important that you see some immediate results in this process otherwise it is easy to get discouraged and quit before even paying off one of your debts. By settling off the debt with the lowest circled number, you are also paying off the debt that will be the quickest to pay off. So you see results quickly. You have a win early on. You can see what you are doing is working. This ‘progress’ makes it easier to keep moving ahead with this formula.

So now you have a clear outline of every debt you owe and the order in which you will pay off each debt.

Step 6: Find Extra Income Per Month

“Where am I going to find an extra income every month you ask.  Face it, if you cannot come up with an additional income each month, then what do you think your chances are of becoming financially set in life? Probably pretty slim.

So do whatever you need to do, that is within legal, ethical and more boundaries to create this extra amount of money each month. It may be a part-time job on Saturdays, selling items on e-bay, or creating a mini-seminar on your favorite hobby. You will probably surprise yourself with how easy it is. Set a fixed targetable amount of income – say $100 or P5,000. Of course, the higher the amount, the better.

Step 7: Except For Your #1 Debt, Pay Only the Minimum Payment Required of Each of Your Debts.

Kiyosaki said that a lot of us have been told that if we just pay a little extra on each credit card or loan then we will reduce our debt quicker.

However, for this formula to work, he said that you should pay only the minimum payment due on each debt and put the extra income you had in Step 6 towards debt #1.  So against debt #1 you are paying the minimum monthly payment required PLUS the amount of extra income you are making every month. By doing this, you will be requiring yourself to really make extra income every month as the income becomes a part of your debt.

Continue doing this each month until debt #1 is completely settled

Go back to your chart of debts and place a big red “X” through debt #1.

Step 8: Move On To Debt #2.

You made it through the first milestone. Congratulations! Turn to debt #2.

Except for debt #2, pay only the minimum monthly payment required for all other debts. For debt #2 pay the minimum payment required PLUS the full amount you were paying on debt #1.

For example, on debt #2 you will pay the following each month:

  • The minimum monthly payment required on debt #2.
  • The minimum monthly payment you were paying on debt #1
  • The additional income you were making each month.

So now you are paying more than simply the monthly required payment and the extra income.  With each debt you pay off you will be accelerating your payments on the next debt.

Continue each month until debt #2 is paid off. Then put a red “X” through debt #2 — and celebrate!

Move onto debt #3. Pay the following towards debt #3:

  • The minimum monthly payment required on debt #3.
  • The total amount you were paying on debt #2, which included:
    • The minimum monthly payment you were paying on debt #1
    • The minimum monthly payment you were paying on debt #2
    • The additional income per month.

Continue each month until debt #3 is paid off. Put a red “X” through debt #3.


Continue this process, always paying the minimum monthly payment due plus everything you were paying towards the previously paid-off debt.

Step 9: The Monthly Amount You Paid on Your Final Debt – Invest It!

This process does not stop once you’ve paid off all your debts. This is the point where you go from being debt-free to becoming rich!

Take the total amount of money you were paying each month on that last debt you owed and paid off, and invest it.  Do this every month. It’s very likely that the monthly amount has grown quite a bit since you started this process. Imagine having that much money every month to invest and to, more importantly, contribute towards you becoming financially free – never having to worry about money again. Living the life you choose… because money is not an issue!

What can I say about these steps devised by Kiyosaki on how to settle debt? One Word – AMAZING!

Source: Robert Kiyosaki’s Coaching Program

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Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

17 responses on “Steps for Debt Settlement

  1. I’m still trying to cut out my credit card bill and least I have one for my online usage. It’s hard to pay for the interest and its look like you’re a bank slave. Better be smart of using your credit cards.

  2. I wouldn’t say this is the most innovative way of eliminate debt but certainly it is a good and easy to follow system for anyone. Just like the most delicious burger vs mcdonald story. McDonald don’t sell the most delicious burger but they definitely own the most efficient business system. Very Robert Kiyosaki way of looking at thing. Great effort there Tyrone.

    • Thanks Zen. I was just amazed in the concept of debt quadrant by Robert Kiyosaki. That was a genius idea!

      Another thing that amazed me was step 9 in which if you accustomed yourself to paying your huge debts, once paid, you can leverage that habit to invest and build assets in the future. You are forced to invest because you treat your investments as “debts” that needs to be settled.

  3. Useful article. One of the reason why many still can’t get themselves out from bad debt (example credit card debt) is because they don’t want to accept the fact that they’re in bad debt. When they’ve acknowledged that they’re in bad debt, it’s much more easier to handle it.

  4. Fortunately I don’t have alot of debt outside of things like my car and home. I don’t believe in financing food and clothing which is what one does when they charge it on a credit care.

    This is a great post for those in debt and knowing the difference between good debt and bad debt makes all the difference in the world.

  5. Very good points. Many people sure need these tips. It’s amazing how so many individuals act like a toddler when dealing with debt. They think that not minding debt and ignoring bank statements will make their debt go away.

  6. You’re dead on. I have and am successfully using this strategy! It provides you with a good feeling by having some easy wins early (when you pay off those debts which take only a few months to pay off) and it accelerates how quickly you can get out of debt!

    Thanks for sharing this powerful technique.

  7. I had debt tribulations for many years. It was a horrible feeling to retain that persistent pressure day in and day out. People that are struggling really have to button down and get rid of all excess spending to get out of their debt problems. It is worth it to feel a lot better.

  8. You have alot of good advise packed into this article. I’ve used some of these techniques and they worked like a charm. My goal for 2010 is to have a financial plan in place so I’ve begun reading a book called “The Debt-Free Millionaire” by Anthony Manganiello. What you mention above is also what this author advocates…when you’re in (bad)debt, your money is working against you. He offers insight into the debt-relief services industry which has been really helpful.

  9. […] Credit cards nowadays are the leading sources of debt. If you did not handle your credit cards responsibly, you will end up paying for it for the rest of your life. It is our responsibility to manage our expenses in our credit cards. Before you swipe our credit cards, think twice if the expenses are worthwhile. If you are in deep credit card debt, here is a nice article that talks about steps for debt settlement. […]

  10. Your debt settlement objective is to hold your ground and ensure that the terms are agreeable to you and that you are not pressured into anything. You shouldn’t accept the new terms that you feel are not acceptable to you. Thanks for sharing information..

  11. if I will follow this,what will happen to debt # 4, if I am only paying debt #1 for a year? especially is debt#4 is from a credit card, that incur so much interest every month? Is it wise if I let debt#4 just set there for years?

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