How to Get Out of Debt With the Get Out of Debt Guy » financial hardship

Chloe Ruins Credit of Daughter With American Express

Steve Rhode — Tue, 11 May 2010 18:16:19 +0000

Chloe

“Dear Steve,

My daughter opened an AMEX card for me since my credit is fair. She got me a card in my name off of her account to be used for emergencies For the first 8 months of the card I was able to pay the bill however in mid July I came upon financial hardship and wasn’t able to pay.

I was using the card for everyday use and not emergencies and my daughter wasn’t aware of it since I was the account manager on the card and my bank account was connected to the card and paying all of the bills.

My daughter used the card maybe once or twice.

To make a long story short I can’t pay the bill and it’s now over 120 days in arrears. This bill is $38,000 now with all the interest it’s accrued. AMEX will not deal with me at all. I’ve asked them for a payment plan to get this paid off however all they offered was a plan that I have to pay $2930 per month for 12 months and I can’t afford that! I asked them to allow me to pay $700 – $1000 per month with a balloon payment in August (when I expect to get a bonus from my job) but they wouldn’t do that either.

They said if we don’t pay the first payment by next Friday that it will be turned over to a collection agency.

I have ruined my daughters good credit. She’s only 25 and was going to buy a house in the next few months and now she won’t be able to. I’ve also asked AMEX to put the liability in my name and make me responsible for the bill since my daughter didn’t know anything about this but they won’t do that either.

Any suggestions?? I’ve looked into debt companies but I’m afraid they may be scams.

Help please!!

Chloe”

The Answer:

Dear Chloe,

The damage is now done and hopefully you’ve learned some very valuable lessons. No sense wasting a perfectly good failure, I always say.

Sadly, this is not the first time I’ve seen a situation like this, and I’m sure it won’t be the last either.

When you daughter agreed to let you be an authorized user of her account she gave you the opportunity to ruin or damage her credit. And for everyone that may have allowed someone to be an authorized user on a credit account, check the balance and/or check your credit report to see what the current status of the account is. You don’t need a surprise like Chloe’s daughter got.

Before you leap to anything like credit counseling or debt management, which your daughter would have to enroll in since this is her card, not yours, I’d suggest waiting and letting the card go to collections.

Once it gets to the collection company they may accept your offer to repay $1,000 a month. But even $1,000 isn’t going to clear this balance in less than four or five years. This might be a good account to consider doing a debt settlement on. If you work with a reputable debt settlement company there is a chance that you could get 30% knocked off the balance and get this resolved in just a couple of years. Try contacting this debt settlement company and see what they feel is possible.

For my regular readers you may notice that while I am sometimes critical of debt settlement companies, this is a good example when a debt settlement approach might be a good option. The only unfortunate situation here is that it is an AMEX account. Never an easy creditor.

Big Hug!

@GetOutOfDebtGuy

The Answer:

“I Have Three Degrees But I’m Broke And Miserable”

Steve Rhode — Mon, 22 Feb 2010 22:32:18 +0000

From How to Get Out of Debt

Theresa

“Dear Steve,

I have $75,000 in school loans and I have one job bringing in $360 per week after taxes and another job where I make $150 per week after taxes. My car payment is $251, rent is $600, utilities are $130, Food is $80, and water is $45.

I have a 401(k) with $6,000.

Help me. I feel borderline and broke. I relocated ten months ago from New Jersey.

After acquiring three degrees I still can’t find a job to match my qualifications. I feel broke and miserable.

Help!

Theresa”

The Answer:

Dearest Theresa,

I certainly feel the pain and frustration that is coming through your electronic correspondence. Working hard to get three degrees and achieving great things in education always seems like it should pay off, but sadly it doesn’t always.

I recently wrote about this in “Is Going to College Really A Smart Financial Move?“.

I don’t know what your degrees are in and the student loans are not my first worry here since they are probably government backed student loans and you’ll have to pay them come hell or high water.

Let’s Look At Student Loan Options First

You did not mention what your student loan payments are and if your loans are on hold or in forbearance. If they are then they are just sitting there, ticking away, with the balances getting bigger due to growing interest being added to the amount of your loan.

The Department of Education offers a little known program called ICR (Income Contingent Repayment) that is worth investigating.

This plan gives you the flexibility to meet your Direct Loan obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your Adjusted Gross Income (AGI), family size, and the total amount of your Direct Loans. To participate in the ICR Plan, you must sign a form that permits the Internal Revenue Service to provide information about your income to the U.S. Department of Education.

This information will be used to recalculate your monthly payment, adjusted annually based on the updated information.

This plan gives you the flexibility to meet your Direct Loan obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse’s income if you’re married), family size, and the total amount of your Direct Loans. Under the ICR plan you will pay each month the lesser of:

the amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or
your monthly discretionary income* multiplied by 20%.

If your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized.

The maximum repayment period is 25 years. If you make payments under the standard or 12-year extended plan and then switch to the ICR plan, time under the former plan counts toward your 25-year repayment period.

Time spent in other plans or in deferment or forbearance does not count toward the 25 years. If you haven’t fully repaid your loans after 25 years under this plan, the unpaid portion will be discharged. You will, however, have to pay taxes on the amount that is discharged.

Let’s Look At Your Debt

The figures you gave me indicate that your problem isn’t the typical too much credit card debt. Your monthly obligations and payment amounts seem reasonable, except for your monthly food budget. Really, only $80 a month for food? There isn’t much to trim or cut in the expense category.

The Real Issue – Under Employment

Theresa, the critical issue of your “broke and miserable” situation is that you are underemployed rather than unemployed.

Now it is very easy for me to tell you to go out and get a better paying job, saying that does not make it happen automatically and there could certainly be some underlying issues that are holding you back from doing that.

Once case in particular stands out as an example. I once had a client that was working the night shift at Walmart for years. She was just barely getting by. As we talked about why she had not tried to look for a better job she finally let it slip, “I am ashamed of my feet”.

She felt her feet were too big and she did not want to go on an interview where she felt someone might make a comment or judge her by the size of her feet.

Once we talked through that issue she developed the confidence to at least go try an interview. She got the new job making 50% more and it solved her money troubles.

I’m wondering Theresa if you have an issue that is holding you back from looking for a new job?

Getting a new job is not fun or easy. It often involves a lot of rejection and when you are already feeling borderline, broke and miserable the last thing you want to pursue is rejection. But if you can face the process mentally prepared for rejection then it makes it a bit easier. In fact, I would adopt the approach that each ‘no’ that you get is a good thing because it means you are one rejection closer to getting to the ‘yes’.

To help I’ve put together this job bank page with links to help.

I have always found that the secret is to make a job of getting a job. What I mean is that you have to approach it like a project. You need to use your educational skills, project management abilities and communication skills to diligently hunt for more income.

Another issue that comes out in your email is one of self-worth or self-esteem. It sounds like you’ve been down for so long that up is impossible to set your aim on.

In your search for more income I don’t want you to find a third job, I want you to find a higher paying primary job. Even if you don’t think you deserve more than what you have right now, trust me, you do.

And I could tell you all sorts of mumbo jumbo that I believe in but let me distill it to say that as long as you feel you are not worthy to have a higher paying job, you’re not.

Theresa, bankruptcy, credit counseling, debt settlement and all the rest of the tools to use in problem debt situations will not help you, only increasing your income will.

And I did not forget about your $6,000 in 401(k) money. It’s just that unless we tackle those underlying issues that are holding you back, if you tap that cash, it will just be gone and the problem won’t be any more resolved than it is today. Don’t touch that 401(k).

Big Hug!

@GetOutOfDebtGuy

The Answer:

Anne is Struggling With Her Student Loans and Sallie Mae

Steve Rhode — Tue, 09 Dec 2008 20:39:25 +0000

From How to Get Out of Debt

“Dear Steve,

I am currently in debt management and I have used up all of my forberance. I cannot make the payments. Half of my take home pay goes to debt management.

Is there any way I can postpone payments rather than forberance or financial hardship? Sallie Mae will not give me financial hardship–they say I make too much gross income to qualify. But, paying half my salary to dept management only leaves the other half for mortgage, etc. I am struggling every month.

Anne”

The Answer:

Dear Anne,

While you used the term debt management, which typically refers to a credit counseling program or approach, i think what you are struggling with are your student loans. For detailed information about how you can work with your lender on this see “Tiffany is Behind in Student Loans, Late On Other Payments, And Looking For Hope.”

I am becoming more and more concerned about student loans. They are often terminal debts, unable to be discharged in bankruptcy and unable to be afforded. The cost of college has accelerated way beyond the cost of living and a college education today costs a substantial amount of a families income, to the point where it is not affordable.

What was once considered good debt by many, is getting hard to justify in uncertain economic times.

Big Hug!

@GetOutOfDebtGuy

The Answer:

John Wants to Know “If I Consolidate My Debt On One Account Will It Hurt My Credit Score?”

Steve Rhode — Mon, 10 Nov 2008 14:32:58 +0000

From How to Get Out of Debt

“Dear Steve,

I opened up too many credit card accounts in the past two years i recently joinend a credit union bank which offered me a chance to put all my credit cards under one account. I owe about 3,000. I also only make about 1,400 a month so at times I’m only able to make minimum payments

Will putting all my credit card accounts under one credit effect my credit score

John”

The Answer:

Dear John,

It only makes mathematical sense to consolidate your debt from those credit card accounts to a single card if the interest rate the credit union if offering you is significantly better. Essentially what you would be doing is an unsecured debt consolidation loan from two cards to one. But you need to be aware that if you maintain your checking account at the same credit union as your new debt consolidation credit card and you fall behind on your credit card payments, the credit union may reach into your checking account and take what you owe them. This could create real financial hardship when you can least afford it.

Consolidating your debt could have some negative consequences if you have been making payments on-time on those cards. By closing the two year old cards and consolidating the debt you are essentially closing the door on two good years of positive credit history that helps to improve your credit score.

Consolidating the debt from two cards to one, without a significant interest rate reduction, will not do a whole lot to actually reducing your monthly obligations. For example, let’s say that you owe $1,000 of card A and $2,000 on card B. Your monthly minimum payments on card A would be about $20 and on card B, about $40. If you consolidate the debts into one card with a balance now of $3,000 then the minimum payment on that one card, using the 2% of balance rule would be about $60.

So, bottom line, I think that unless the spread in the interest rate on your current cards to the credit union card is more than 5%, that you may be better off keeping your good credit history and sticking with your current cards.

ALERT: If the credit union is offering you a better interest rate, you should call your current credit card companies and let them know that and ask for them to match the rate. It does not hurt to ask and about 75% of people that ask do get a much lower rate.

Big Hug!

@GetOutOfDebtGuy

The Answer:

New Concerns About 40% Credit Card Debt Reduction Proposal

Steve Rhode — Mon, 03 Nov 2008 20:38:07 +0000

From How to Get Out of Debt

Last week I wrote an article Banks Agree to Wipe Out Up to 40 Percent of Credit Card Debt But Watch Out but more information has come to light since then.

While consumer advocates are happy about the possibility of getting banks to write off as much as 40% of the debt in order to help consumers avoid bankruptcy, this is a well intentioned plan that is still half baked.

Proponents of this initiative have not clearly thought out all the issues and appear to not be spending time learning from what has and has not worked from outside the United States fence. On first glance, an effort that would wipe out a large portion of debt seems like a blessing but from personal experience in helping people in the U.S. and the UK. These are the important areas we need to focus on.

Creditor Voting – I have not read or heard any discussion about the 40% plan becoming binding on all unsecured creditors if the majority of creditors, by debt, agree to the plan. Unless all creditors are bound to the plan all it takes is one creditor to not participate and the entire solution blows up. The reality of getting all to agree is unreasonable so a 51% acceptance of the plan should be sufficient.
Fast Track Individual Voluntary Arrangement (FTIVA) – In April, 2009 a new process will come into effect in the UK. The FTIVA is designed to allow 90% of insolvent debtors who would normally seek bankruptcy protection, to enter into a payment plan upon a 51% acceptance by creditors. The extensive research and framework of this plan is something that we should closely study and consider emulating before the U.S. goes off and learns the mistake lessons like the UK already has from the more formal IVA already in place since 1986. UK Fast Track IVA Review Document – PDF
Make Life Allowances – Not only does this repayment plan need to be binding on all creditors upon a majority vote but it needs to have allowances and processes built-in to handle an unexpected financial hardship for a consumer enrolled in the plan. Already, consumers are seeking bankruptcy protection secondary to unexpected life events which create hardship. If a consumer is enrolled in the 40% plan and three years into the plan they have an unexpected financial emergency, we don’t want the plan failed and creditors to go back after the entire debt and all the fees and interest they can heap on. We need to create some fail safe mechanism that does not leave, the consumer that has made their best effort, stranded after so much effort. Otherwise, why not just go bankrupt to begin with and avoid the possibility of wasting three or four years of repayment only to fail due to an accident, illness, downsizing, etc.
Provide Incentives For Hard Work and Extra Effort – A lesson to be learned from the UK system would be that we need to provide consumers with an incentive to end their 40% plan early if they work hard, increase their income and can pay the plan off early. Accelerated repayments benefit the creditors and the consumer since it gives them motivation to improve their financial standing during the time in the plan. In the UK it is far too common for a consumer to get a raise or increase income only to have it taken from them as a windfall and poured into the plan. We need to fix the total amount due under the plan at the start so that the consumer clearly knows the total debt to be repaid and let them be hungry to pay it off early through grit and determination.

United States consumers have been long abandoned and left without new and more progressive ways to repay their debt outside of bankruptcy. This is our opportunity to remedy this situation and give good people with bad debt a way to effectively repay their debt with more protections than a credit counseling plan can give and without the big gun of bankruptcy.

How to Get Out of Debt With the Get Out of Debt Guy » financial hardship

Chloe Ruins Credit of Daughter With American Express

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