Nicholas
“Dear Steve,
So far, my wife and I are current every month on all of our bills, but we’ve been living with steadily deepening debt since we got married 8 years ago. We were students then, living on student loans. We went into debt for our wedding and haven’t had a positive net worth since. I studied hard, ignoring money mostly, because I figured my time was better spent working hard to get an education than working for $8/hour while studying. But was I ever wrong! As the story continues, we had one child. I went to medical school. We continued to get student loans even while using credit cards to make up for what we couldn’t borrow from student loans. Then we had another child. Six months into medical school I realized I could either have a happy, healthy family or a career in medicine, but not both. I chose family.
Since my original plan for gaining a livelihood was suddenly a non-reality, I had to scramble to make something of myself. I got a low-paying job researching at the local university, and made plans to start a business helping people.
Well, it took many months (actually three years) of hard effort while working full time to learn heads from tails in the business world and build a business plan I am confident in and excited to implement. But now I am looking at my finances and want some guidance. I am happy with my decision to quit medical school, but obviously not happy with the resulting debt! Here’s the breakdown:
Student Loans: $69,151 (in deferment until June 2010)
Loans from family: $27,690
Credit Card debt: $30,211
I make $40,500 a year at my job, minus business expenses which have averaged about $6,000 a year.
We got a loan for a house two years ago, mortgaged through a state program.
Our monthly living expenses have been $3,143 per month, but I am hopeful of budgeting down to $2,500 per month (this doesn’t count debt payments).
But in addition to living expenses, we have business expenses (which are variable), payments on credit cards and other debt payments (which are $1,010 per month minimum). So bottom line is I make $3,042 per month and spend $4,153. And my student loans haven’t even come into repayment yet! (they’ll be ~$400-$500 per month next June)
We’ve been charging expenses in order to have cash to pay credit card bills. All told, the result is an average of $1,111 deeper in debt every month. This is not a good situation. As I mentioned before, we haven’t missed a payment yet because we have been juggling money around.
I feel like a failure. I thought I could pull my jumbo jet out of its downward plunge but it looks like I’m about to crash and burn big time.
What plan of action would you suggest?
Should I ask for early inheritance from family? ($100,000 & no guarantee on this one!)
What can I do with student loan debt? Any way out of it?
How does bankruptcy affect my ability to start up a business?
We’d rather not lose our house. Will I necessarily lose my house if we go bankrupt?
Nicholas”
Dear Nicholas,
In one way you are a lucky man. It is said, and oh so true that we learn more from our failures than our successes. In your case, once you reach the other side of this financial tragedy you will be wise beyond your years. That’s what happened to me, my bankruptcy and financial failure became my greatest strength and gave me the experience and wisdom to help other people facing similar circumstances. Maybe that is what you might do as well?
I know you feel like a failure. It sucks. I felt the exact same way. But what I learned was that my feelings of failure were my feelings. Nobody else judged me as much as I judged myself. In essence, I created my own pain and that left me depressed and paralyzed.
Since you had an interest in medicine at one time, let me use a medical analogy. Let’s say you have a patient that presents with what turns out to be a terminal disease. No matter how hard you try, you are unable to save the patient and know they will die. Do you simply focus on your inability to have the tools and resources to make unreasonable miracles happen or do you continue to provide compassionate care to the end and know that you did the best you could? The right answer is that you put the needs of the patient before your own self-serving needs.
Your financial life right now has a terminal cancer. This cancer was exacerbated through a series of events that began with student loans and ended with using credit to get by. The cash advances and bill shifting are not a solution, they are a medication that masks the true underlying problem, the cancer and it’s spreading.
As a man and a father what I need for you to be most is to stand up, acknowledge the situation for what it is, be strong and take responsibility to address the issue in a way that provides the most care for your family to end this and move on.
Your family has leant you money because they care about you and want to help. But the reality is that all they did was enable your financial cancer and allow it to grow. Borrowing more from them or from an inheritance is not the solution here. The solution is bankruptcy.
At times like this you need to either increase your income, reduce your expenses, or a combination of both. From what you describe, increasing your income does not sound like a reasonable expectation. So that leaves us with legally reducing expenses, through bankruptcy.
This is going to be a two stage approach. Much like a two phase chemo to kill the cancer. The first phase is going to be addressing the debt. This is going to require bankruptcy. The second phase is going to be to address the student loans. Hopefully these are government backed loans and you might be eligible for the IBR, Income Based Repayment program to create a payment you can afford.
So here is your immediate treatment plan:
- Find a local bankruptcy attorney you like. Call a bunch of offices and find one that seems communicative and nice.
- Make an appointment for you are your wife to go in and meet the bankruptcy attorney. Don’t go with the intention of filing bankruptcy that day, go to ask questions and learn.
- Talk to bankruptcy attorney about a game plan to address the debt.
- Once you know what Chapter of bankruptcy you might file under then you can contact the student loan lender.
- Go bankrupt and once it is discharged we can begin credit report therapy to make it better and get you in shape to get credit again.
Bankruptcy does not impact your ability to start a business except that if you have to personally guarantee debt for the business that might be a problem. But a successful business is not built on debt. Credit for a new business is an anchor around the neck. Build your business on a cash basis. That’s what I’ve always done. As you make money, plow it back into the business and grow it. If you do that you’ll be much more likely to be successful.
Please come back and update about your progress in the
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