San Wants To Know “We Need Some Way To Pay Off Our Debts”
San wrote to me through the GetOutOfDebt.org site and wanted some free help. I’m happy to help as always and if you have a question you’d like to ask, just go the the GetOutOfDebt.org site and ask. I’m here for you too.
“Dear Steve,
We need some way to figure out how to pay our debts off. We have credit card debt, car loan, a home equity loan that has a balloon next year, medical bills and owe a balance to my brother for his half of property we inherited jointly. We have two incomes and we should be able to live on them. We have about 15 years to retirement and we would like to be totally out of debt in 5 years so we can save for the rest of the time. We are behind on mortgage and 2 other creditors and are trying to get that caught up and current.
How do we straighten out our finances and make a budget that we can live with and still get things paid off in 5 years?
San”
Dear San,
I’m sorry to say you’ve got all the ingredients for a financial disaster brewing here. Here are the things that concern me the most.
- Home equity loan has a balloon payment due next year.
- Can’t make it on two incomes.
- Need to cash out brother.
- Retirement looming but not enough savings for it.
- Behind on mortgage.
- Behind on two other creditors.
- Want to be paid off in five years.
San, wishing and wanting don’t add up to reality all the time. But the good news is that with some adjustments there may be some solutions.
The issue of making enough money but not having enough to live on tells me that you don’t have a basic understanding of where your money is going each month. Don’t worry, most people don’t.
The fix for that is to use an online program like Mvelopes or just write down every penny you spend for thirty days and at the end of that period, categorize your spending and total it all up.
Either method will help you to clearly see where you might be able to make easy budget adjustments to reduce your outgo. I think the Mvelopes method is just easier. Every dollar you save by making budget adjustments way remains in your pocket for debt reduction.
The best and most logical method of debt reduction is the debt snowball method.
Debt Snowbal Debt Reduction
The basic steps in the debt snowball method are as follows:
- List all debts in ascending order from smallest balance to largest.
This is the method’s most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.- Commit to pay the minimum payment on every debt.
- Determine how much extra can be applied towards the smallest debt.
- Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off. Note that some lenders will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction.
- Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
- Repeat until all debts are paid in full.
In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).
The theory works as much on human psychology as it does on financial principles; by paying the smaller bills first, the individual, couple, or family sees fewer incoming payment requests as more bills are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt. Source: debt snowball
You see San, without a major expense reduction or income increase it does not look good for a happy outcome here.
When people fall behind on their mortgage it is a priority to get that caught up. To do that means you typically have to fall behind on your other bills. But you’ve got that balloon coming up next year and the problem with balloons is that they explode. You might not be able to refinance that due to your current bad credit or because the mortgage industry is in a bit of a meltdown, then like now.
I’m sure your brother wants to be paid as well. Rightfully so. I’ve seen issues like this tear families apart. Don’t let that happen to you. Your brother is a creditor like the others and you need to treat him just as fair.
If you apply all those techniques and you still can’t make it them I’m afraid we are going to have to talk about the big B word, bankruptcy. Bankruptcy is a legal and viable option for you and before you make any sort of emotional decisions about bankruptcy I insist that you get a free bankruptcy review and talk to a bankruptcy attorney to get the facts rater than the assumptions.
If you go bankrupt you will have to move and you may lose some stuff but it would allow you to clear the debts and start saving for your retirement sooner rather than latter.
Big hug.
Steve
Lourdes Writes In “What Should I Do to Get Out of Debt?”
Lourdes wrote to me through the GetOutOfDebt.org website. If you have a question about consumer credit, consumer debt or about getting out of debt, you can write to me through the site also.
“Dear Steve,
I’m in debt really heavy from credit cards and other loans.
What should I do to get out of debt.
Lourdes”
Dearest Lourdes,
Wow, I really want to help you with some great advice and awesome guidance but gee-whiz a little more information would be really helpful. Maybe next time you write in you can share a bit more, please.
Based on what you told me, here are some things you can do that will cover the basics:
- Reduce Expenses - Use extra money saved to pay down your debt.
- Increase Income - Get a new job or a second job to help bring in more money to pay down the debt. Look on the job board or job bank page for a new job in your area.
- Maybe Consider a Debt Management Company - If you are just paying the minimums you might want to take a look at a debt management company to see what debt reductions they can offer you. Warning: It will hurt your credit.
- Save Extra Cash - Before you start sending all your extra cash to the credit cards and loans, save it up in a savings account so you’ve got emergency cash available. At the end of the year you can use some of your cash to then pay down the highest interest rate debts or smallest balance debts, whichever gives you the most emotional satisfaction.
- Bankruptcy - If you are unable to pay your debts and you’ve done all of the above, maybe now is the time to get a free bankruptcy review from a bankruptcy attorney in your area.
Keep us posted on what happens.
Big hug.
Steve
Ben Wants To Know, “Will I Ever Get My Life Back After Bankruptcy?”
Ben wrote in through the GetOutofDebt.org site and asked for help and advice.
“Dear Steve,
At times I feel like my life is over. This year I did something I never thought I’d ever do, I went bankrupt. I was raised to pay my bills and I’ve always done that, but last year my overtime go cut and we were just making it by and this year my regular hours go cut and we started to fall far behind.
I contacted one of those credit counseling groups and asked for help but the monthly payment they wanted was just out of my reach. We could not afford that and the truck payment. I spoke to a bankruptcy attorney and then we gathered up the money to go bankrupt.
Now that is over and I feel terrible that I went bankrupt. Will I ever have a financial future again?“
Dear Ben,
The answer is that you will have a financial future again and you life is not over.
Bankruptcy can make you feel like a complete failure and a big loser but the reality is that what ever brought you to the point of not being able to pay your bills, happened. It’s a lot like the farmer that plants this years crop but it does not come in because of a drought. The lack of rain doesn’t make the farmer a loser, it’s just unfortunate that water did not fall from the sky in sufficient quantities to make the crop grow into cash to repay his debts.
Sure, if you want to be narrow minded and a big dick you could make a claim that you just walked away from your debts and didn’t man-up to them, but honestly, you know that’s not the truth.
I’d love to see all the people that bitch and complain about people that go bankrupt, lose all their shit and then try to put on a happy face and bound joyfully through the day.
Bankruptcy is hard and painful but believe it or not, what you have done is probably more responsible that limping along for years to come.
Bankruptcy is a legal solution that exists to help people out from situations where no reasonable hope exists to resolve the debt problems at hand.
When faced with huge debts people often live from paycheck-to-paycheck just making it by. They cut out things like needed medications, medical care, dental visits, etc. They also take away any fun times for the kids, a cheap vacation and saving for retirement.
Basically they make the future less safe to make up for past financial mistakes. Honestly, when faced with a bad debt problem you are better off facing it honestly, being real about how long it will take you to recover and determining if years of just getting by are something that you can do. You’re also better off going and talking to a bankruptcy attorney and getting the facts before emotionally deciding that bankruptcy isn’t for you.
My thought is that people at times like these have a greater responsibility to make the future better for their families than to unreasonably try to repair the past. And when I say better, I don’t mean a life of luxury, no, I mean proper health and dental care, caring for the children, not punishing them for your financial misfortune, and creating a caring, loving and safe environment for the kids to grow up in.
Ben, you’ll be surprised that now that you have gone bankrupt, creditors will be lining up again to give you unsecured credit again. In fact you’ll want to get credit again so that your credit report and credit score don’t just suddenly end with “Ben’s Bankruptcy”. If you want to get credit in the future you’ll need to start replacing your current financial problems on your credit report with good credit.
One of the ways of doing this safely is to get a secured card that will report to the credit bureaus that you are paying the card off. You can get a secured card online here.
Just remember this, Bad Debt Happens To Good People.
Big hug.
Steve
Mark Writes In “I Need to Go Bankrupt in the UK”
Mark wrote in about his financial situation.
“Hi Steve,
My wife and I need help. Since 2001 we’ve been living in the U.S. and we’ve just got our green cards. We moved to the U.S. from the UK and for years I’ve been struggling to pay back debt there using dollars to pay back British pounds. The conversion rate has not been in my favor.
I do not have any property or belongings in the U.K.
I’ve used up all my savings now and don’t have any more money to send back to the UK to pay these debts. I’ve only been able to pay about £100 a month on £25,000 worth of debt. What should I do?”
Mark,
If you had lived in the United States, or anywhere outside the UK for less than three years, you could have still gone bankrupt in the UK using a foreign bankruptcy service.
But since you’ve been gone longer, bankruptcy back in the UK is no longer an option.
You have a few of options.
- You could make payment arrangements the UK creditors but that makes it hard to pay off £ with $. But as you have learned, a repayment plan without an expectation that it will resolve the situation only drains you of cash and does not eliminate the debt.
- You could speak with a US bankruptcy attorney and consider a US bankruptcy and include your UK debts. There are more cross border bankruptcies these days.
- You could do nothing, stop paying the UK debt and then deal with any creditor that comes after you in the US.
As silly as it sounds, option 3 might be the best at this time, certainly making more payments isn’t going to help at all. But I would still suggest speaking with a US bankruptcy attorney to learn about how that solution may help you.
Any more payments to creditors, I’m afraid, is just going to be throwing more good money after bad.
Big hug.
Steve
Lenora Asks The Squirrel - “What Should I Do About My Debts?”
Lenora wrote to me and asked:
Dear Get Out of Debt Squirrel,
What should I do about my debts? I am trying to set up a budget, but even with a budget, I can’t make all my payments. I need help now? I have over $23,000 in credit card bills and I want to get free of all of them. My husband thinks bankruptcy is the answer. But I am not sure God wants one to do that. Help!!!!!!!
My Dear Lenora,
While it feels like the walls are closing in on you and that you are living through desperate times, rest assured there is a way through this mess.
It doesn’t really matter what the number is that you owe. What is important is that there is not enough money coming in to take care of the bills.
As you say, even if you take your expenses down to the bare minimum, you still can’t make it from month to month. That is a clear indication that no amount of catching rain water to flush toilets, washing out Ziploc bags or reusing aluminum foil is going to do the trick.
Your husband has mentioned that maybe you should go bankrupt, and maybe you should. After all it is a legal and valid solution for dealing with overwhelming debt.
You mentioned what would God want you to do and I think it would be a mistake to automatically discount bankruptcy as an option simply because of what you think God might want for you. Think about it, she led you here for a reason and maybe that reason was to read this answer and to talk about bankruptcy?
Your options really come down to a few basic choices:
- Do Nothing.
- Increase Income and/or Reduce Expenses.
- Go Bankrupt
- Enter a Reduced Payment Plan.
Lenora, it’s not rocket science, just tough, difficult, emotional and gut wrenching. As a furry squirrel sitting on a distant branch the path you should take seems clear. Here is my plan for you.
Lenora’s Plan of Action to Get Out of Debt
- First thing I would suggest if you need immediate relief from debt collectors or collection calls and you are not yet ready to go bankrupt is to enter a reduced Payment Plan where you can consolidate your debts.
- I would also suggest that either now or as soon as you are ready you should talk to a bankruptcy lawyer. This doesn’t have to be with the intention of going bankrupt but to educate yourself about the realities of what bankruptcy means to you and your husband.
- At some point following the meeting with the bankruptcy lawyer or during the early months of your consolidated debt plan you may decide that you can’t continue to make payments and live in the stress and pressure that you are currently in. You might opt for bankruptcy.
The advantages of this approach are that this does not force you to go bankrupt now if you are not mentally ready for it. And it allows you to make a good faith effort to repay your debt based on what you can afford to pay with professional help in the meantime.
Only you can decide if bankruptcy is right or wrong for you. But I ask you to consider this as you say your evening prayers. Lenora, do you have a greater responsibility to fix the past or attempt to fix the future? If you want to fix the future then it just might make more sense to go bankrupt now, get yourself back into a safe position where you can afford to live, and then if you have extra money leftover, you can always repay your creditor for moral reasons.
Going bankrupt does not mean you can’t still honor your debts. It just gives you legal protection and a fresh start, or you can keep living in the past. The choice is yours.
From a squirrel point of view I always prefer to hunt for as many nuts as I can and save them for the winter to come rather than worry about how many I didn’t have last year.
Do You Have a Debt Question You’d Like to Ask?
It’s easy, ask your question online. It’s painless.
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