Debt Management: Get Out and Stay Out of Debt

When Debt Becomes a Problem

There is a difference between having debt and having a debt problem. A mortgage at 3.5% CAE in UF on a property that appreciates is strategic debt. A $2,000,000 credit card balance at 45% CAE that grows every month despite your payments is a debt emergency.

Signs you have crossed from manageable debt to a debt problem:

• Total debt payments exceed 40% of your net monthly income
• You are paying minimums on multiple credit cards simultaneously
• You are borrowing from one source to pay another
• Debt is growing despite regular payments (because interest exceeds what you pay)
• Collection agencies are contacting you
• You are losing sleep over financial obligations

If any of these apply, this lesson gives you the concrete steps to take control.

The Math of Getting Out of Debt

Step 1: Map Everything You Owe

List every debt with these details:

Step 2: Choose Your Repayment Strategy

Avalanche Method (Mathematically Optimal): Pay minimums on all debts. Put every extra peso toward the highest-CAE debt first. In the example above: attack the 48% credit card first, then the 42% store card, then the 38% línea de crédito, and finally the 24% consumer loan.

This method saves the most money in interest over time.

Snowball Method (Psychologically Powerful): Pay minimums on all debts. Put every extra peso toward the smallest balance first. In the example: pay off the $300,000 línea de crédito first, then the $400,000 store card, then the $1,200,000 credit card, then the $2,000,000 loan.

This method costs slightly more in interest but creates quick wins that maintain motivation. Research shows many people are more successful with the snowball method because early victories keep them going.

Hybrid Approach: If the smallest balance also has a high interest rate, you get both benefits. Start with the $300,000 línea at 38% — it is both the smallest and the second-highest rate.

Step 3: Find Extra Money

Every extra $10,000 you apply to debt accelerates payoff dramatically:

• Cancel subscriptions you do not use: $10,000-$30,000/month
• Reduce dining out by half: $25,000-$50,000/month
• Sell unused items on Mercado Libre or Yapo: one-time boost
• Direct gratificación or bonuses entirely to debt
• Take on temporary extra work (freelance, weekend jobs)

Repactación: Restructuring Your Debt

Repactación is the process of renegotiating debt terms with your creditor. Chilean banks and financial institutions regularly offer repactación to struggling borrowers because recovering some money through modified terms is better than getting nothing through default.

What You Can Negotiate

• Lower interest rate: Especially if you have been a long-term customer with a previously clean record
• Extended term: Spreading payments over more months to reduce the monthly burden
• Payment holiday: A temporary pause on payments (interest usually still accrues)
• Reduced balance: In some cases, creditors will accept less than the full amount owed (most common with very old debts)
• Consolidation: Combining multiple debts with the same institution into a single lower-rate loan

How to Request Repactación

1. Contact your bank’s customer service and ask about restructuring options
2. Prepare a clear picture of your financial situation (income, all debts, expenses)
3. Propose specific terms you can realistically meet — do not agree to terms you will fail again
4. Get everything in writing before signing
5. Verify that the new terms are reflected in your CMF records

Warning About Repactación

Repactación that simply extends the term without reducing the rate can increase the total cost significantly. A $1,000,000 debt at 30% CAE over 12 months costs approximately $1,160,000 total. The same debt repactated over 36 months at the same rate costs approximately $1,520,000. Make sure the new terms actually improve your situation, not just reduce the monthly payment while increasing the total cost.

Your Rights During Debt Collection

Cobranza Extrajudicial Rules

Chilean law regulates how creditors and collection agencies can pursue unpaid debts:

What collectors CAN do:

• Contact you by phone during reasonable hours (typically 8 AM to 9 PM)
• Send written notices to your registered address
• Inform you of the consequences of non-payment
• Negotiate payment arrangements

What collectors CANNOT do:

• Contact you at work unless you have authorized it
• Threaten you with violence, imprisonment, or harm
• Contact your family members, neighbors, or employer about your debt
• Use deceptive practices or misrepresent the amount owed
• Harass you with excessive calls (legally defined limits apply)
• Charge you fees for collection activities beyond what the law allows

Cobranza Fees

Chilean law limits the fees that can be charged for extrajudicial collection. These fees are regulated based on the debt amount and cannot exceed specified percentages. If a collector charges excessive fees, you can file a complaint with SERNAC.

If You Feel Harassed

1. Document every contact (dates, times, what was said)
2. Send a written notice requesting communication through specific channels only
3. File a complaint with SERNAC if the collector violates the rules
4. Consider filing a complaint with the CMF if the creditor is a regulated financial institution

SERNAC and Consumer Protection in Debt Situations

SERNAC Financiero provides several protections for debtors:

Right to clear information. You have the right to know exactly how much you owe, including the breakdown of principal, interest, and fees.

Right to prepay. Chilean law gives you the right to prepay any consumer debt at any time. The creditor cannot refuse prepayment and must recalculate the balance, eliminating future interest. There may be a prepayment fee, but it is capped by law.

Right to dispute. If you believe the amount claimed is incorrect, you can dispute it through SERNAC’s mediation process.

Right to information about restructuring. Banks must inform you about available repactación options when you indicate financial difficulty.

Ley 20.720: When Debt Becomes Unmanageable

Chile’s Ley 20.720 (Ley de Insolvencia y Reemprendimiento), enacted in 2014, provides formal procedures for individuals who cannot pay their debts. It is overseen by the Superintendencia de Insolvencia y Reemprendimiento.

Renegociación de Deudas (Debt Renegotiation)

This is the first option and is designed to help you reach an agreement with all your creditors simultaneously:

1. Apply to the Superintendencia de Insolvencia
2. A renegotiation hearing is scheduled
3. All your creditors are notified and collection activities are suspended
4. A proposal is presented (reduced payments, extended terms, partial forgiveness)
5. If creditors representing a majority of your debt agree, the plan is binding on all creditors
6. You make payments according to the approved plan

Advantages: Professional mediation, temporary protection from collection, possibility of reduced total debt Cost: The Superintendencia charges fees based on your debt level (can be waived for low-income individuals)

Liquidación de Bienes (Asset Liquidation)

If renegotiation is not viable (usually because your debts far exceed your ability to pay even with restructuring):

1. Your non-exempt assets are liquidated (sold) to pay creditors
2. Certain assets are exempt from liquidation (basic household items, tools of your trade, a modest vehicle)
3. After liquidation, remaining unpaid debts are discharged — you get a fresh start
4. The process typically takes 6-12 months

Important: This is a serious step with lasting consequences. Your DICOM record will reflect the insolvency, making access to credit difficult for years. However, for people drowning in unmanageable debt, it provides a legal path to a fresh start.

Who Should Consider Ley 20.720

• Your total debt exceeds 2+ years of income
• You have no realistic prospect of repaying even with restructuring
• Collection activities and lawsuits are causing severe personal distress
• You have exhausted all other options (repactación, family support, income increases)

Consult a lawyer before pursuing insolvency proceedings. The Superintendencia de Insolvencia also provides free guidance.

Debt Consolidation: When It Works

Debt consolidation means taking out a single loan to pay off multiple higher-interest debts. In Chile, this can make sense when:

• The consolidation loan has a significantly lower CAE than your existing debts
• You commit to not accumulating new debt on the cleared credit cards
• The total cost (including fees) of the new loan is less than the combined cost of existing debts

Warning: Many Chileans consolidate debt, then run up their credit cards again, ending up with the consolidation loan PLUS new card debt. If you consolidate, consider closing or drastically reducing limits on the cards you pay off.

Preventing Future Debt Problems

Once you are out of debt (or managing it successfully), prevent recurrence:

1. Maintain your emergency fund — most debt spirals start with an unexpected expense
2. Use the 24-hour rule for all non-essential purchases over $50,000
3. Set credit card limits deliberately low — enough for convenience, not enough for trouble
4. Never use avances en efectivo — if you need cash, your budget needs adjustment
5. Review your finances weekly using the tracking system you built in Module 2
6. Build savings so you can self-fund purchases rather than financing them

Key Takeaways

• Map all debts with balances, rates (CAE), and payments. Prioritize by highest interest (avalanche) or smallest balance (snowball).
• Repactación can reduce monthly payments, but verify that new terms actually reduce total cost, not just extend the timeline.
• Chilean law protects you during debt collection: collectors cannot harass, threaten, or contact you outside reasonable hours or at work without permission.
• Prepay debt whenever possible — Chilean law guarantees your right to prepay consumer debt with capped fees.
• Ley 20.720 provides formal insolvency options: renegociación (restructuring with all creditors) and liquidación (asset sale with debt discharge). Use as a last resort.
• Debt consolidation works only if the new rate is lower AND you stop accumulating new debt.
• Prevention is the best strategy: emergency fund, spending awareness, deliberate credit limits, and weekly financial reviews.

In the previous lesson, you learned how credit cards work. In the next lesson, you will explore every major loan type available in Chile — from consumer loans to mortgages to the CAE student loan.