Pam Is Out Of Cash And Out Of Time

Pam wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

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“Dear Steve,

I am no longer making ends meet. I have my daughters Sallie Mae $20,000 loan payments starting in one month, I can only afford to put little bits of gas in my car at a time, I have a $5,000 car loan and about $12,000 in credit cards.

I have not bought anything that I did not need only used my credit to make ends meet and now I have no more credit. I’m hanging on to a 700 credit score and wonder if theres any use to even worry about keeping my score since the market is crashing and the FEDS are ruining our economy.

I make $45,000 per year and am a single mom with two daughters Should I stop paying my credit card bills and use that money to live off of?

Pam”

Dear Pam,

Often times the hardest thing to admit that a moment of change has been reached and now is the time for radical or bold action.

From what you so kindly shared with me it is apparent that continuing the path of yesterday will not work for you tomorrow. You have student loan payments getting ready to kick in and you are all ready maxed out.

It does not sound like there is any reasonable expectation that your income is suddenly going to increase and allow you to pay both the student loan and the credit card debt.

I would suggest that you only make payments on the credit cards if you can afford them after all your other expenses. You don’t need to file bankruptcy right now but it is probably in your future if things don’t change.

While you can’t discharge or get rid of the student loan in bankruptcy, you can contact the Department of Education and see about getting on an ICR plan to pay what you can afford. See this previous answer for more information on that.

It is unfortunate that you have found yourself in your current situation but I think most people would recognize that when you are in a situation where you can only put a little bit of gas in your car at a time, that things are pretty severe.

I would not suggest that you enter a debt management or credit counseling program. That is not going to help you as tight as your finances are. The best way out of your current situation is to increase your income or reduce your expenses. And with your budget already trimmed to the bone, getting into the Department of Education ICR plan for the student loans and discharging your credit card debt is probably the best approach at the moment.

It would also be a good time for you to explain the reality of your situation to the kids and ask them how they can help in this difficult time. Maybe your daughter, with the student loan, can contribute some money each month towards the loan.

The reason I think that is important is that it sounds like you are living month-to-month and all it is going to take, even with bankruptcy, will be one unexpected and unaffordable expense and being homeless won’t be that far off.

The thing I’m least worried about is your credit score. Take your eye off your credit score right now and find a way to live within your income without resorting to credit. And every extra dollar you can manage to save, put it in a savings account for unforeseen expenses.

I’m worried about you. Be safe.

Big hug.

Steve

October 11, 2008 | Filed Under Ask The Get Out of Debt Expert | Leave a Comment

When In Debt, Think of Others, Kindness Counts

I saw this story below on CNN and for me it typifies the type of kindness and compassion that is needed to help someone you know with money troubles. Sometimes the best thing you can do is just to be a friend.

If you know of someone that is struggling with debt problems, do something random and nice for them. Surprise them, take them to lunch, or fill their gas tank for them. If you can’t afford to do that stuff, hugs are free and priceless.

You don’t have to offer pity to offer a shoulder to lean on and rather than let another person suffer in silence, let them know you care.

Steve

October 11, 2008 | Filed Under Debt Articles | Leave a Comment

Carolyn Writes In And Wants a New Mortgage In Bankruptcy

Carolyn wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

“Dear Steve,

My husband and I are in bankruptsy, we have a 3 year plan with one year left on the plan. Our mortgage company has us on an ARM and wont remodify our loan.

How can we get out of chapter 13 and get into a fix rate mortgage?

Carolyn”

Dear Carolyn,

I’m afraid it isn’t as easy as it sounds. Before you do anything to impact your bankruptcy I would advise you to talk to two people, your bankruptcy lawyer and a mortgage broker.

There are so many different types of mortgage loans available that it would be unwise for you to do anything here without getting the specifics about what mortgage loans are actually available for someone that has just emerged from bankruptcy.

I’m not sure that breaking out of your bankruptcy is an idea even worth considering if you have other debts in your bankruptcy. If the Chapter 13 bankruptcy plan fails or stops before a successful completion then your creditors could come back after you for the full amount due.

If the mortgage is the only debt left in the bankruptcy plan than I have seen situations when it can make sense to let the bankruptcy fail and then go for a loan, but there examples are rare.

There is no way I would make any move here without input and a coordinated approach by your bankruptcy attorney and the mortgage broker that will handle any possible mortgage refinance that may be available to you.

Just remember that no matter what you do right now, your credit score and recent credit history are horrible because of the bankruptcy and the chances of you getting a really good fixed rate mortgage are slim at best.

Big hug.

Steve

October 11, 2008 | Filed Under Ask The Get Out of Debt Expert | Leave a Comment

Ed Is Scared But Courageous In The Face Of His Debt

Ed wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

“Dear Steve,

Let me start by saying it has been very hard for me to get to this point and ask for help. I hate that I am where I am financially (due to factors both within and not within in my control). I’m 45 years old and for most of my life used to stay very on top of my accounts.

Now, I have approximately $41,000 in credit card debt (two different Amex cards at max interest rates, i.e. 27%), and I’m cosigner for a mortgage and home equity loan with my girlfriend. The home equity loan was used to help my girlfriend buy a business (I know, I know, BIG mistake. Lesson learned) that ultimately didn’t work out.

Anyway, the mortgage is $1550/mo (which was just recently reworked because we were more than 30 days behind so they let us skip a month and start over), and the home equity is $900/mo. Except for the mortgage and home equity loans, we predominantly haven’t been more than 30 days late (except sometimes for cell phone or water bills).

I’m guessing this is enough information for you for now (on a positive note, both cars were recently paid off, mine was used, hers was new).

I’ve been reading online about different options between debt settlement and bankruptcy. Between reading about the pros and cons and trying to sort out the facts and which companies are legitimate, is it better to go with debt settlement (and still have to pay half of what I owe plus (my guess) approximately $6,000 in fees) or stand a chance of wiping all the credit card debt via bankruptcy for whatever fees that may cost?

At this point (even though my credit score is still around 670, not great but not terrible), I don’t care about not having credit cards or my credit report being “marked” for something like 10 years. With the cash this would free up, who needs credit cards? Thanks so much for taking the time to read this and I’m looking forward to your response.

Ed”

Dear Ed,

Thank you for being brave enough to write me about your situation. Asking for help is not a sign of weakness, it is actually a sign of responsibility and strength. The minute you can lean on others then it allows you to open up for more information and different points of view that you may not have otherwise had. That will allow you to make a better choice on the solution path you choose.

There is no need for me to lecture you about the lessons learned here about financing a business. I think you learned more from the experience than any expert or book can ever teach you.

I’m glad to hear the the mortgage company allowed you to make an arrangement to get back on track. It is unusual for a mortgage company to be so understanding and reasonable. You are a lucky guy.

Debt settlement and bankruptcy are not necessarily tools used to solve similar situations. There are two approaches to debt settlement. One is when you have a lump sum amount of money on hand that you can use to negotiate a settlement in one fell swoop. That allows you to put that debt behind you and move on. It does blister your credit report but it is not bankruptcy.

The second use of debt settlement is when the consumer stops paying their creditors and makes monthly payments to a debt settlement company. The company then accumulates the monthly payments until they have enough on hand to settle a debt. The problem is that in the meantime the consumer is getting collection calls, notices, pressure, and could actually be sued by the creditor.

This approach to settling debts seems to drag on the debt situation for a longer period of time as money is accumulated and offered in lump sums to creditors. Actually this approach could hurt your credit for longer since negative information would be reported on your credit report for almost seven years from your last payment on the last delinquent account.

Bankruptcy is not necessarily a debt reduction tool for those that have the money on hand. It is a legal process to reduce or eliminate debts through the courts. If you go to see a bankruptcy attorney for a free bankruptcy review and decide to go the bankruptcy route then you may have to do a Chapter 13 bankruptcy, which is a payment plan over three to five years, or a Chapter 7 bankruptcy which would wipe the unsecured debt out. The choice of Chapter 13 or Chapter 7 is going to be guided by your bankruptcy lawyer and the statues.

If you went and had to do a Chapter 13 bankruptcy your credit report would take a hit but it would be reported for seven years from the date you filed bankruptcy. That would probably end up being less time than the monthly payment debt settlement approach.

If I had to prioritize the three possible options I would rate lump sum debt settlement as the preferred solution, bankruptcy, and last the monthly payment debt settlement.

Don’t forget that the amount of debt forgiven in the debt settlement approach must be reported as income and you will have to pay income tax on that but you don’t have to pay tax on forgiven debt in bankruptcy.

Big hug.

Steve

October 11, 2008 | Filed Under Ask The Get Out of Debt Expert | 1 Comment

Mary Lou Writes In And Wants To Know “Why Does My Credit Score Keep Going Down?”

Mary Lou wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

“Dear Steve,

My FICO score does not keep going up:

3/99 I filed bankruptcy-it will be 10 years next March and should come off my credit score.
I owe $5,400 on one credit card and $7,300 on my car for a total of $12700. In January 2008, I owed over $26000.
All bills are paid on time or better than agreed.
Other than the bankruptcy, there are no negatives on showing on my credit.
My income-after taxes is $3266 monthly

My FICO score is as follows: July, 720/August, 726, September 715. Why does it go down rather than up as my bills are being paid off?

Thank you

Mary Lou”

Dear Mary Lou,

As silly as this may sound, one of the issues is that you don’t have enough credit. Good and proper use of a credit card will help to increase your credit score. Since your bankruptcy you’ve probably been credit adverse, avoiding credit like the plague.

Unfortunately the credit bureaus can’t put your credit rehabilitation into turbo unless you have multiple cards reporting about how good you really are.

I’d suggest applying for another credit card now, using this link. Just apply for one now and another one in a few months. You might even want to transfer part of the balance from the current card and divide it among your new group of cards. This will help also as it will lower your balance to limit ratio. Ideally you don’t want the balance to creep up over 30% of your credit limit or that will hurt you as well.

If you want additional specific information I recommend this consolidated credit report but be sure you order the consolidated report with your credit score. You will be able to download your report online and it will tell you specific things you can do to increase your credit score.

I do find it ironic that this consolidated credit report and credit score tells you specifically what you can do to increase your credit score. I guess credit reporting agencies are all for giving you the exact information you need to increase your credit score as long as you are paying them for the information.

I think you will find that the advice I gave you will do the trick and increase your score for you over the next six months.

Big hug.

Steve

October 9, 2008 | Filed Under Ask The Get Out of Debt Expert | Leave a Comment

Rita Asks “Should We Consolidate Our Debt?”

Rita wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

“Dear Steve,

I want to pay my credit cards off. I will like to consolidate them. We are $39,000.00 in debt. HELP

What should I do?

Rita”

Dear Rita,

Thank you for writing to me for help.

Debt consolidation is often the first and only solution that comes to mind when people what to get out of debt. However, you can’t borrow your way out of debt and most debt consolidation loan offers are bogus.

I realize that you’ve had this sudden motivation to pay off your credit cards but there are two approaches. One is that you can use the debt snowball approach and pay off the cards and improve your credit score and credit report at the same time.

The other way would be to consider joining a debt management or credit counseling program, make one monthly payment to them and they will in turn chop up your payment and send portions of it off to your creditors. While you make one payment in a debt management program, it is not a loan.

I would suggest that if you want to evaluate how a debt management or credit counseling program might benefit you that you do your homework by clicking here and checking it out.

Most people don’t build up big balances overnight, it happens over time. Getting out of debt can be a slow process that always feels like it takes longer than it should but that is because big sacrifices are needed.

When you were running up debt it was because your expenses exceeded your income and you used credit to make up the difference. To get out of debt you have to reduce your lifestyle to the point where you free up extra money to use to reduce your debt. That process is both painful and hard for people to sustain over the long amount of time it typically takes to pay off the debt in full.

Big hug.

Steve

October 9, 2008 | Filed Under Ask The Get Out of Debt Expert | Leave a Comment

“They’ve Asked Me To Take a Pay Reduction. What Do You Think?”

NoName wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

“Dear Steve,

I am 47, divorced, 2 teenagers, work full time as radiological technologist at privately owned company out of the state. The doctors group that read our films own our building.

After my divorce I filed chapter 7 bankruptcy. I reinstated my van, rent townhouse in mid lease. I have no debt except my van which is a 2000 and I owe about 8 months left. My company volume has gone down and we have less staff then we ever have because of eliminating positions.

Last week the company out of Florida called Presgar sent all 31 facilities in the US an across the board 7% reduction in pay, top to bottom staff.

I now make $20.00 an hour and I have a very strict budget with no extras, no savings, living pay check to pay check because I only make enough for that. I am putting a small amount into a 401K.

How do I know that my company will really be able to pull out of this like they are telling us they want to happen or they are in bankruptcy or something of the sort. I don’t know if I should assume the worst or hang in on my job. Jobs aren’t in big demand in my speciality. I could hang in and do nothing, get a second job, change completely or go to school for another more demanding in my field or get a bachelors degree.

I presently do mammograms with low reimbursement to company. I am loyal and in good favor there. What are your thoughts. What’s your wisdom on this?

NoName”

Dear No Name,

It is a terrible stressful situation to be just making it from month-to-month and then be asked to take a salary reduction. I’m sorry that you are going through that.

If you find that you are having to use credit to make it each month, you might want to consider suspending your 401(k) contribution right now so you can live within your income instead of supplementing it with credit.

As I write this the U.S. is facing some very uncertain economic times. But the good news is that the vast majority of people do have jobs. Our unemployment rate is not horrible, even though it is a bit higher than what it was before.

I never like to see someone give up a current job without a new job lined up. It is good that you have marketable skills and you can easily identify employers in your area that you might be able to work for.

Rather than wait for a job to appear, I’d suggest that you call all the local facilities in your area and see if they are hiring. Often the easiest jobs to get are the ones that have either not yet been advertised or are no longer advertised, but still open. I put together this America’s Job Bank page also that might help.

It really does not sound like you have much extra time in your life for a second job and going back to school isn’t necessarily a good thing to consider unless you would be able to get a degree that would allow you to make significantly more money in a position where there are openings in your area.

The major issue with going back to school as an adult is that it is enormously expensive. Not only will you have college expenses, but you’ll still have your current monthly expenses to deal with at the same time. Don’t go back to school unless you are certain you can manage those expenses and will really finish your degree. Read “Is Going to College Really a Smart Financial Move“.

I don’t think that you have to worry yourself sick by assuming the worst right now but the prudent thing would be to make a concentrated effort to look for a higher paying job in your area first. Always better to be proactive than reactive.

Big hug.

Steve

October 9, 2008 | Filed Under Ask The Get Out of Debt Expert | Leave a Comment

ChevGirl Writes In And Says “My Marriage is Suffering Because of Our Debt”

ChevGirl wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

“Dear Steve,

Well I am not thinking about death or anything, I am a Christian. I am just having a very difficult time with our finances. The stress is becoming unbearable. My marriage is suffering because of it.

Me and my husband work in agriculture, we do not make much and we are $55,000 in debt. I have payments to make almost every day of the month and hardly have anything left just to live. I don’t know what to do.

Should I avoid bankruptcy and try debt Consolidation?

ChevGirl”

Dear ChevGirl,

Not that long ago i wrote an article about getting out of debt from a Christian point of view. You can read it here.

I am so sorry that your debt is causing stress and hardship in your marriage. Those feeling seem to emerge as a byproduct of fear, loss and blame rather than as the result of anything either of you did. In a perfect world it would be much better for the two of you to sit down and have a quiet and open conversation about what you are feeling and why you think you each feel that way.

Here is what I have seen over the years of helping others and enjoying the luxury of observing these situations as a third party.

When you are up against the wall and the bills feel like they are closing in on you it is normal for people to feel tension and stress. I have found that a big component is the regret and pain that it creates in our lives because of lifestyle changes that reduced income impose.

When everything was going along great, we tend to enjoy a certain lifestyle. Maybe that is going out to eat more often, weekend trips, techno-gadget toys, clothes, or whatever. We begin to feel entitled to those luxuries and when our income can no longer support those things we begin to feel cheated and angry. Certainly we work hard and deserve to have those things, at least that is what we say to ourselves. The reality is that we are entitled to nothing, not even our next breath. Want to know more about this? Download my book about this, for free as my gift.

In a relationship, one person is typically the saver and the other one is the spender. It’s true, opposites do attract. In times of trouble the saver will blame the spender for all the troubles. That’s not fair. If that issue is not addressed in good times then throwing it up as the cause in bad times is not helpful and when