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
Crys Writes In And Asks “We’ve Been to Credit Counseling But Should We File For Bankruptcy?”
Crys wrote to me through the GetOutOfDebt.org site and asked me for help. If you have a question you’d like to ask, write me for free by visiting GetOutOfDebt.org
“Dear SteveHi! I am a piano teacher, and due the bad economy have very few students, even though I am used to having plenty.
We just moved because we could no longer afford where we lived. We gave up our house in a deed in lieu of foreclosure. My husband took a cut in pay.
We owe about $400 per month on credit cards, and owe a total of about $12,000. I also owe about $22,000 in student loans. Those will start next month, increasing our $400 to $620 or so with the loans. We barely have enough money at the end of the month to pay rent and other living expenses.
We make roughly $1,500 a month. This is not good. We have talked to credit counseling, and they have us paying about $320 to them and they will pay the credit cards. But we still are short. Our bills now, including food and gas, average about $1650. Obviously, we fall short. We have a 7 month old baby who needs things, and we can’t afford it.
Should we file for bankruptcy?”
Dearest Crys,
Here is a big virtual hug for you to help you through today. The stress of what you are living through surely is intense. I still remember what it was like when I lived through it.
I’m struggling to answer your question because there is so much to say. Your situation typifies the kind of bind that many good people are facing.
Your income is down through no fault of your own, you already made hard choices and downsized your living arrangements, you’ve got student loans looking for payments and you can’t hang on.
I used to run a credit counseling organization. Things were a lot different back then but I do understand the inside of the credit counseling industry. You went to visit credit counseling and they put you on a payment plan but they probably should not have done that.
Credit counseling today makes money not by giving the best advice, but by putting people into repayment plans. They get a percentage of the money they collect ‘donated’ to them by the banks. This is the same arrangement that debt collectors have with the banks.
Credit counselors are incentivized to put you into a debt management plan, unless people go into one and make their payments the credit counseling group does not make money. But they must make money to stay in business or they won’t be around to help people. It is a corrupted vicious circle with opposing motives.
Credit counselors do not put together a repayment plan that is affordable and best for you. They instead tell you what creditors will accept when you are working with a credit counselor. Ultimately the better solution is to take what money you can afford to repay each month and divide that among your creditors based on the percentage of debt you owe each. Let’s say you owe one Visa card an amount that is equal to 25% of your total debt. If we were going to be fair to all parties then that Visa card should get 25% of the available money you can afford to pay each month. That’s not the way credit counseling works. And furthermore, credit counselors do not ‘negotiate’ with your lenders, they are told by the lenders what your payment will be.
Based on what you’ve shared with me, thank you, it sounds like what you can really afford to pay after the student loans kick in is around $100 per month. You need to use more money to pay for the student loans but you can’t cut the budget so close that you’ve allocated every single dollar for repayment. You need to leave some room in your budget for fun and emergency savings.
Unless you budget in some fun it is highly unlikely that you will be able to live month-to-month for the next 5 to 7 years in a credit counseling program. You, like most, will fail along that path and all the funds you struggled to pay each month, until the plan fails will be wasted. It won’t eliminate your debt.
I’m absolutely not being cynical here, just honest and real.
You asked if you should go bankrupt, absolutely. You should go see a bankruptcy attorney for a free bankruptcy review and if you walk out of that office knowing that bankruptcy is for you, then file bankruptcy as soon as possible. I would strongly advise you to meet with the bankruptcy lawyer before you make any more payment to the credit counseling group.
I’ve slammed credit counseling pretty hard in this answer but there is still a time when credit counseling can be beneficial, that’s when you need to bridge a short term gap before your income will return and you can resume your regular payments.
In this economy and without any real hope that piano playing and paying students are going to return in droves, holding out for more income right now would probably be a mistake.
Go file bankruptcy and then come back and share with us your experience.
Super big hug.
Steve
Scott Writes Me and Asks For Help - “We Are Behind And Overwhelmed”
Scott wrote to me at GetOutOfDebt.org and asked me the following question. If you have a question you can visit GetOutOfDebt.org and ask for my free help also.
“Dear Steve,
We have too many bills and not enough money. We owe $30,000 in debt besides my mortgage. We are behind about 1-2 months are most bills and are overwhelmed. We have only owned our house for 4 months and cannot do a second mortgage.
Please suggest a solution.”
Scott,
First off, I completely understand and remember what it was like living through those days. There is nothing fun about it. The motto I adopted at that time was “At least I’m not on fire.” The situation might look bad but trust me, it can always be worse.
I remember the day I had two telephone appointments to help people. The first person was 8 months pregnant, living in her car and getting beaten by her boyfriend. She worked at a top 500 company as well. I hung up the phone with her and the next appointment just a few minutes latter was from a woman that wanted to beat her husband because he was unable to provide for her and buy Martha Stewart paint to redo the house. It is all relative.
Too many bills and not enough money is a guaranteed recipe for something to change in your life. It is an unfortunate lesson that just because someone will lend to you does in no way mean that you can actually afford it. Take a look at the bank lending mess that is demolishing Wall Street. It’s all because of stupid lending.
People are getting in over their heads every single day because they feel that the bank or lender would not give them credit if it wasn’t manageable for them to afford it.
What saddens me most about your question is that you’ve only been in the new house for four months and you are already running into tough times. Most commonly I see people in situations like you who just qualify, move in and then a lot of expenses land on the credit cards. Once those bills go up, they can be the tipping point into nothing good.
Since you are already behind on your bills, your credit report and credit score are already damaged. That’s a fact so let’s put that aside for now. You credit can be repaired latter once this situation is properly resolved.
You have three possible course of action. I’m listing these in no particular order.
- Debt Management - You could go into a debt management program and see if your credit card monthly payments could be reduced enough to give you some breathing room. But you need to know that a debt management program is not binding and your creditors could change or eliminate and concessions they might give you at any point moving forward. A debt management program might be a good short term solution if you want to try that first.
- Bankruptcy - Your debts are overwhelming and the good news is that you probably have little equity in your home. If legally eliminating your credit card debt would be enough to make a difference in your financial life and allow you to better make it from month to month then I urge you to speak to a bankruptcy attorney and have a free bankruptcy review about your situation. Before you decide if bankruptcy is right fo you, talk to the bankruptcy lawyer and get all the facts.
- Adjust Lifestyle and Budget - As ironic as this might sound, the easiest thing to do is often the most difficult for people to execute, futzing with the budget. If we just look at your situation from a mathematical point of view, it can be repaired by reducing expenses, increasing income or a combination of both. Every dollar you do not spend remains in your pocket and can be used for debt reduction and paying bills. If you want to some help to adjust your budget, take a look at the Mvelopes website.
Scott, the bottom line is that none of these are perfect solutions, but they are possible paths to follow to get your financial life under control so you can live within your income again.
Please let us all know how things turn out for you. We care and want to know.
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.
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