Debt doesn’t just affect the people actually in debt, it often affects the ones around them, near and dear to them. I know this from first hand experience as someone who has loved and lived with someone so deep in debt they could not see a way out. Not only is the emotional toll hard on the debtor but also on those close to them, those trying to help and support the debtor through their hard time as best they know how. But the hardest thing is when the debtor doesn’t have the motivation to take a hold of the situation themselves and they just let it carry on as is. It’s hard to try and help and support when you feel like your efforts are being wasted.
The biggest mistake I ever made when trying to help someone in debt was helping them with payments when money got tight. I thought that if I could just help them get through that things would turn around for them and everything would be alright. Until I reached the point where I was not only trying to help emotionally but financially as well. I was an enabler. All I wanted to do was help but the way I was “helping” was actually causing more damage than good because the debtor never fully understood the severity of their situation with me forking over money. I eventually had to step back and let them conquer their debt on their own.
This is for everyone who has ever loved and supported a person in debt and for those who are in debt that are not taking action or don’t know what action to take.
The first step when you feel like things are getting out of control is to take control of the situation yourself, don’t let it spiral out of hand, and seek help. You’re already looking and seeking for help if you’ve found this website, GetOutOfDebt.org, a great place for information and resources to get out of debt. You can even submit a question with your personal situation through this website. If you don’t ask for help you cannot expect to receive it.
It is important to remember that those in debt often experience the typical emotional stages of debt, similar to grief, being: denial, anger, bargaining, depression, and acceptance.
Let me tell you about my friend, Michael. Michael is a near and dear friend to me but is in over his head in debt and can’t seem to find a way out. I full heartedly believe that the restriction of the quality of life that Michael feels from his debt has sent him into a depression and he is stuck in a situation he’s not quite sure how to get out of. Debt can do that to people. It’s important to remember that it’s a normal emotion during stressful times and to seek help both financially and emotionally.
Michael’s mother had him start building his credit the moment he turned 18 but unfortunately Michael was never properly taught just how to use credit which has lead him into this tight spot he is faced with now.
As a rule of thumb, when using credit you should try to never go over 1/3 of the credit limit. Once this amount is crossed it may begin to hurt your credit report. Unfortunately for Michael, the majority of his credit cards are close to their limit if not maxed out already.
Michael’s total debt that he currently owes is $25,000. Breaking that down, the majority of his debt is secured debt of roughly $17,000 and unsecured debt of around $8,000.
Michael works retail which means he works his fingers to the bone, never has a certain schedule and doesn’t get paid much. After taxes Michael brings home on average $1,000 a month.
His secured debt is his car originally purchased for $24,540 which is a joint account with his mother. The interest rate is somewhere around 11.5% and he has agreed to a 74 month term, ending in 2013, with payments of $465 a month.
His unsecured debts are around $8,000, not a relatively high amount of unsecured debt in the debt world but he has minimum payments due each month just a few dollars shy of $300.
All of this being said, with the $1,000 Michael brings home each month he is liable for $765 in payments towards his total debt, leaving just $235 at the end of each month for other expenses (car insurance, gas, food, living expenses, etc). Needless to say, Michael is in a tight spot and does not have enough money to pay his debts and still make necessary payments towards living expenses.
Other people, like I myself once did, are helping to support Michael financially and he is not paying all of his debt himself. This puts others in a tight spot who are tight with their budgets and may not have the extra money to put forth towards his debts themselves but are people that care for him and don’t want to see him suffer. This is only hurting Michael because without him facing his entire amount of debt he will not have the motivation to fix it.
Earlier I mentioned the five stages of debt.
The first being denial. That’s right, it’s not just a river in Egypt. Michael used to have the mentality that everything was fine and that adding on another credit card wouldn’t hurt him; after all with a monthly minimum payment only being an extra $15 to $20 a month for a $400 credit limit it was easy to tack on cards. It was like there was nothing wrong and adding more credit was alright as long as he could afford the minimum payments each month. Or when he would make a monthly payment on a card and bring the total down from the credit limit by $20 or so he would then think it was alright to use the card since there was now $20 on it; this was often used on groceries or household items. This is actually quite common for people unable to support themselves without credit. If you cannot survive each month’s bare necessities without the use of credit you should seek help immediately.
Not too long ago I saw the first sign of anger in Michael. After I had stopped contributing to his finances and he was shorted on his paycheck he started to panic. He got real angry that he didn’t have the money to live on or to pay all of his debts.
Recently, Michael has entered into the stage of bargaining. He’s trying to find the easiest solution for his debt, but doesn’t want to take it as far as bankruptcy. He’s started to look into solutions that he is not entirely educated on and wanting to jump on board. He had mentioned borrowing from his 401(k), which I will discuss more in detail further down, but given that he only has $1,500 in his account he would only be able to borrow $750 to put towards his debts. He was ready to jump on board without knowing or understanding the risks at hand to pay off just 9% of his total debt.
I strongly believe that Michael has always experienced depression with his debt but lately it has gotten worse. I can hear it and feel it in Michael’s voice when we talk. He wants to pay back his debt but just can’t afford to do so. He is still young and has many hopes and dreams for his life but feels restricted by his debt. He has had to move back home with his parents for the time being because the debt is so high he cannot afford to be on his own. He wants a way out but is not sure which way to turn.
Acceptance is the last and final stage I am waiting for Michael to reach. I hope that once he understands the full extent of his debt and all of his options he will be able to choose a path and embark on a route to becoming debt free. For anyone who is trying to support a person in debt emotionally it is only when they reach this stage that they will truly make a commitment to change their way of life, to realize the mess they’re in and to start to change it.
Being that 68% of Michael’s debt is secured it will be tricky for him to find options that will help with “only” $8,000 unsecured debt. I put only in quotations because in the debt world this is seen as a relatively low amount of debt, but for Michael, it is a real burden on his shoulders.
There are a lot of people out there with under $10,000 in debt that may feel like their drowning and not sure which route to take because a lot of companies have a $10,000 minimum before they help you. It doesn’t matter if you have $100,000 or $4,000 worth of debt, the stress of debt can take it’s toll and leave you with feelings of despair and loneliness.
Michael like many other debtors is optimistic. Michael thinks if his luck could just turn everything will be alright. He is convinced that if he could just get a raise at work, receive generous holiday cash gifts from friends and family or use his tax return money each year to pay back the debt that everything would be alright. Unfortunately none of those things are certainties and Michael is banking on hope and as anyone in debt knows, hope does not pay the bills.
Michael, like others is not looking at reality – debt happens – often when you least expect it. If something medically happens, a car accident or the loss of a job, Michael would be in a very tight spot given that he has nothing to pay towards anything with his current situation. He is one illness away from being delinquent on accounts and not being able to catch up.
For those, like Michael that may not have over $10,000 in unsecured debt, do not own a house or have equity and just cannot not seem to make ends meet. Here are some options at hand….
I learned in the very early days of working in finance that doing nothing with your debt is always an option. You can choose to ignore and hide from your debt however this option will usually end in more stress and heartache. Hiding from your debt does not make it disappear and usually over time it will catch up with you. This is not recommended, but it is a choice you’d have to make.
2. Current Route of Minimum Payments
With the example of Michael, if he continues at his current rate of living, paying $765 in payments each month and somehow finding a way to live off of $235 a month without the use of credit it will take him roughly 15 years to pay off his unsecured debt. With an average interest rate of 20% and only paying about 3.7% of the debt each month he will end up paying a total of $14,365 towards the original $8,000 debt borrowed. Yep, $6,400 will be paid strictly in interest.
For Get Out of Debt Calculators click here.
As for the car, he still has 3 years left on his term, after then “only” leaving 12 more years until he’s free of his entire debt based on only making minimum payments.
The biggest problem with this is that Michael does not have the money to meet all of his expenses as it is, living this way for the next 15 years will not be easy and will most likely lead to worsened depression.
3. 401(k) Loan
There are a lot of risks when taking a 401(k) loan. It may sound fantastic at first, being that you owe yourself and not a financial institution, there are usually no taxes and best of all for those with bad credit, no credit check! What a lot of people do not think about though are to cons to this route. Usually you can only borrow up to half of the amount in your 401(k) plan. If this amount is less than your total debt you are really only engaging in a short term solution to lower minimum monthly payments than actually fixing your debt. You should also know that while in a 401(k) loan you have to continue to work for the company you are currently with when you take out the loan. Should you be fired or decide to leave the entire amount of the loan will be due immediately. Most people think that they do not plan on leaving the company and do not foresee anything happening to result in them being fired so they enter into a loan like this. But life happens and the future is uncertain. It is not advised to enter into a plan where there are such uncertainties that you have no control over.
If a catastrophic event occurs, like an unforeseen accident or injury on the job, and you cannot work or make payments the loan is treated by the IRS as a withdrawal and appropriate taxes and penalties will be due. If you are offered a bigger and better opportunity outside of your company and you want to quit, you will have to turn down the opportunity or owe the entire amount of the loan immediately.
While 401(k)s can transfer between jobs, the loans you take out on them CAN NOT.
You should only take out a loan on your 401(k) if you are certain that you will not leave or be fired from your job (something you cannot entirely be certain about), you live in a bubble and have no risk of being injured in life or if you have the amount to pay back the debt in full readily available, in which case you wouldn’t need the loan.
4. Unsecured Debt Consolidation Loan
The number one thing to realize with a consolidation loan is that they are for people in good credit standing and you have to have a good to excellent credit score to qualify. Anything under a score of 660 and you will most likely not qualify. Even with a score of 660 it will still be difficult to find companies to help you. In Michael’s case his credit score is 642; the chances of him qualifying with any company are slim to none.
For argument’s sake, if he could qualify for one of these loans, based on a scenario of 11% interest on the loan and a term of 60 months (5 years) he would only be paying $174 a month towards the unsecured debts. Which sounds great in comparison with the $300 he’s paying now but based on his salary he would still only have $361 at the end of the month after all of his payments, still not an amount for someone to live on.
If you feel you can qualify for a consolidation loan and are interested in this route a great company and website to visit is LendingClub.com.
5. Debt Management Plan
A company that offers a Debt Management Plan (DMP) typically likes for the amount of unsecured debt to be above $10,000. I’m not saying that there are not companies out there that won’t take a plan for a debt under $10,000 but you would need to do some research and make sure it’s a reputable company, like this credit counseling group. The one thing that a lot of people don’t know about DMPs are that most of them are run based on the creditors terms and conditions. In a lot of instances the companies offering the plans are paid by the creditors. Being that DMP companies usually work on behalf of the creditors you will most likely see a drop in your interest rate but you will still need to make monthly minimum payments at around the same amount you are paying now, if not a little higher.
While it is enticing for a lower interest rate it is important to remember that if you have an insufficient income to cover your monthly payments already it will not be easier in a DMP. Also, all of your credit cards would need to be closed and with no new credit being shown on your credit report you score will likely suffer because of this, leaving you with a lower credit score and the need to rebuild your credit in the future.
Don’t get me started on debt settlement. It’s such a bad idea. You HAVE to go deliquent in your accounts with this route, and you either have to offer a lot of money up front or still make those monthly payments you can’t afford to live and pay on, you will most likely go to collections and there is a strong possibility you will be sued.
I took the liberty of composing a little video about the truths of debt settlement that many companies will not tell you up front.
Bankruptcy is always an option but is not something to be taken lightly. Bankruptcy is serious. However, bankruptcy should also be considered when you’re in over your head and cannot afford the payments on your debt as well as money to be able to live on.
Bankruptcy is seen as a fresh start because it will eliminate secured and unsecured debt, wiping the slate clean and giving you a new, fresh start.
Granted, your credit will be hit with bankruptcy and like any other negative mark, like deliquent accounts, and it will take 7 – 10 years to fall off depending on which chapter of bankruptcy you file. With cases like Michael and his income bracket he can file for Chapter 7 bankruptcy and start rebuilding his credit usually after 3 months of filing and the mark will fall off of his credit in 10 years. For those filing for Chapter 13 the bankruptcy will fall off after 7 years.
Just like anyone without credit it will not be easy to just apply for unsecured credit and receive a credit card once out of bankruptcy, you will most likely need to start with a secured credit card and show that you can make purchases and pay off the balances appropriately.
For those that file or have filed for bankruptcy, if in the future you are asked at any point (even after the 7 – 10 year fall off point on your credit report) if you have filed for bankruptcy in your life when applying for a loan, mortgage, credit card, etc you will have to declare that you have. However, after getting first hand knowledge from someone that has filed for bankruptcy it is not a huge problem if you have to declare it as long as you rebuild your credit into good standing at the time of application.
With bankruptcy it is the quickest and easiest way you can start living life without debt constraints and not have a good portion of your life lost to paying debt you cannot afford.
In Michael’s case, the car is his biggest concern. Since it is joint with his mother if he files for bankruptcy she will still be liable for the payments on the car. Unfortunately this is a risk that people take when they co-sign for a vehicle and something they should keep in mind when doing so. You should never co-sign for anything unless you are prepared to make the payments if the other co-signer cannot. Given that the car is in both his mother’s and his name he can include the car in the bankruptcy to relinquish his ownership and obligations to the car. He has the option to either hand the keys back and voluntarily repossess the car or let his mother take over the payments and keep the car. If he hands the keys back to the finance company and they auction the car off his mother will still be liable for the large remaining balance still owed on the loan after the car is sold at an auction. Looking back to three years ago when his mother transferred the car to him and co-signed on his car loan he should not have agreed to take the car with payments that high based on his income. However, hindsight is always 20/20.
Once you commit to the decision of bankruptcy you can stop making your payments towards your debts and start saving for bankruptcy. Granted, you face the risk of repossession of your car if you have one and plan to include it in your bankruptcy but that is a risk you might have to take in order to start to fix your future. If you can save what you’ve been paying each month towards your debt for a couple of months you can probably save up enough to buy a little beater car to get you to and from places. It may not be the flashiest car but flashiness if usually not affordable at this time. Also, it is important to remember that you will need a bankruptcy attorney and bankruptcy attorney’s have fees that are usually around $1,500 for Chapter 7 and $2,500 for Chapter 13. You can either save up for this amount before filing when you stop paying your creditors or some attorneys have the option to set up a monthly payment schedule to pay them back for their services. Granted, these months may not be easy and you will most likely be contacted by creditors looking for payments but it is important to remember that this pain is only temporary. Compared to the pain of debt still owed that you cannot afford to pay or have a life with for years to come if you choose to do nothing is far less than the agony felt in this short period of time. When you can start fresh with your life in a relatively short amount of time I think the pain might start to wear off once you can get back on track.
Usually you can schedule an appointment for a free consultation with a bankruptcy attorney to discuss your options.
It’s important to remember that time in life is precious. We are not given an infinite amount of time in this life and I truly believe that more people would enjoy their lives living the way they want to than being constrained by their debt. If you’ve made a mistake of getting in over your head with debt it’s important to remember that this happens, you are not alone, you can fix this and learn from your mistake. As always, there’s no use wasting a perfectly good mistake.
While the numbers are an important factor, a lot of people forget about the emotional stress and strain brought on by many years of owing debt and the restraint on life.
I do not believe that bankruptcy is an easy out or should be taken lightly. But I do believe that when a person is strapped to make ends meet, like Michael, and does not have anything more than $235 a month to live on, something needs to be done and quick. The emotional toll I’ve seen this take on Michael breaks my heart. I feel that he is so concerned with fixing the past that he’s forgetting about fixing his future. Right now he cannot afford to live on his own without his parent’s help, he cannot afford a vacation and often cannot afford to go out with friends without the financial help of other people. If Michael ever wanted to start a family, he would not be able to – he could not support one with this debt still around. It is not the life he imagined and I can say for certain it is not the life he desires.
Michael, like so many others out there, has his head in the sand and needs to face his debt head on to start to make a better and brighter future by finding an option that works for him to become debt free.
Many write bankruptcy off because they are worried about hurting their credit. But you have to remember, if you’re already in over your head in debt and cannot afford your payments not to mention if most of your cards are almost to their limit, your credit is most likely already not good and you cannot start to rebuild it until you tackle the debt at hand.
If you feel your situation is similar to the likes of Michael, seek help. For yourself and for those around you trying to help and support you as best they can. As I’ve learned, for those desperate to help a loved one in debt it is important to not enable their debt habit by financing their payments for them, this only demoralizes how the debtor views the debt if someone is taking care of it for them. The one thing I learned and the one piece of advice I can pass on from first hand experience is to not be an enabler, like I was. It is difficult because a loved one’s debt will not only cause them stress but you stress as well since no one likes to see a loved one in pain. It is important to remember that the best support you can give is emotional support; realize you cannot control the situation or fix it yourself, only the debtor can do this and the best thing to do is to be there for them if they need to talk. That being said, the best thing a debtor can do is to get educated about their options and take control of the situation.
Ask yourself this, how much stress, lost ooprptunities and lessened quality of life are you will to endure with debt still lurking around? Is it really worth it to live this way for years to come and give up your time, quality of life and opportunities? Is it more important to you to fix your past or fix your future?
You are in control of your own destiny. You should always choose whichever option and route in life you are comfortable with and that you desire.
And as always to those in debt: Stay educated. Stay strong. Seek help.