Lump sum debt recycling
Is taking the net proceeds from an inheritance or from the sale of investments or other assets. You can also use the net proceeds from employment bonuses, termination payments or prizemoney to repay any of your loans classed as bad debt or inefficient debt. You then borrow an equivalent amount to purchase investment assets.
This results in the same overall level of debt. However, the investment component of your debt would be income producing and therefore tax deductible. You have decreased your amount of bad debt and replaced it with an equivalent amount of good debt.
If you were to invest the net proceeds directly, none of your debt would be tax deductible.
Regular debt recycling
To accelerate the repayment of bad debt and the creation of wealth you may recycle your debt on a regular basis, this could be monthly, quarterly, six monthly or annually. That is, at the end of each period you top up your investment loan by an amount equivalent to the reduction in your bad debt. The proceeds you receive from topping us your investment loan must be used to purchase investment assets.
This means that you maintain your overall debt level yet continually reduce your bad debt and replace it with good debt. If you continue this process you will eventually extinguish your bad debt and be left with an investment loan with fully deductible interest.
In order to maximise the reduction of bad debt you direct all surplus cash (except for the interest expense on the investment loan) towards repayment of the bad debt. This includes salary, investment income and tax benefits (eg tax refunds and franking credits).