DebtReductionBlog.com

This question comes from T.H.:

HI DAVID
I WOULD LIKE TO KNOW HOW TO REALLY GET STARTED WITH THE SNOWBALL METHOD? MY HUSBAND AND I BOTH HAVE FAIRLY GOOD INCOMES AND WE SHOULD NOT BE STRUGGLING LIKE WE ARE. THE PROBLEM IS THAT WE ARE BEHIND ON BILLS, AND EACH MONTH, WE PAY THE MOST IMPORTANT ONES FIRST, BUT WE ARE NEVER CAUGHT UP, AND CONTINUE TO BE A MONTH BEHIND ON EVERYTHING. HOW CAN WE GET CAUGHT UP AND START WORKING THE SNOWBALL METHOD? PLEASE HELP.

T.H., sorry for the late reply.  Here’s where I would start…having been in that situation I can tell you what I did.

Here was my situation:

Income: $3400 a month
Rent: $1325 a month
Student loans: $234 a month
Car loan: $388 a month
Visa: $63 a month
Master Card: $109 a month
Department store card: $34 a month
Department store card: $42 a month
eBay: $100 +/-
Groceries: $150 a month (wait for it)
Netflix: $20 a month
Cable: $84 a month
Internet: $50 a month
Cell phone: $100 a month
Home phone: $35 a month
Auto insurance: $55 a month
Del Taco (and other restaurants): $475 a month +/- (wasn’t that worth the wait?)
Gas and Entertainment: $Whatever was left and then some.

So, I was spending everything I had and then some.  My credit card balances seemed to increase every month even though I was paying everything they asked for, (the minimum), and I wasn’t charging nearly as much as I use to…so I thought.  Embarrassed to say, but I even had a few bank charges from NSF’s about every other month.

When I finally woke up out of my crazy consumer spending when my car needed more fuel than I could afford.  When I say afford, I mean I was broke and all my credit cards were maxed out.  I stretched so thin that I couldn’t see a way out.  When I say I couldn’t see a way out I mean that I didn’t see the waste as waste.  I needed my high-speed Internet and cable to keep up with the world.  I needed to spend money at restaurants because I couldn’t cook.  I ate crappy food because it was really easy to eat crappy food.

So, where did I start?  You guessed it.  My student loans.  Even though I was spending about $600 a month on food, I still wanted to maintain my unhealthy lifestyle and let my creditors foot the bill.

The student loan forbearance was easy…I just lied.  I’m not suggesting you lie to any of your creditors ever; it’s just what I did.  I called my lender and explained to them that I had just been laid off and would like a 6 month forbearance on my loan.  I didn’t tell them I knew it was coming so I got another job lined up.  That came on a need to know basis, in my opinion.  They gave me the six month forbearance.

Now I had an extra $234 a month right off the bat.  Whew!  I could afford gas again.  Problem solved, right?  Nope.  Six months went by…then seven…then eight…then in the ninth month I started getting some peculiar calls and letters from my student loan lender.  They were concerned that I had ignored the new payment book.  I lied again.  I told them that I got sick and couldn’t find another job and asked that they give me more time.  They gave me another six months.  That was easy.  Ok, not easy, because now everything was about the same except that I started wanting more stuff that I couldn’t afford.  Stuff like health insurance and necessary medication.

Funny thing when you eat crappy food for a long period of time you start to not be well physically.  If I could afford a gym membership I would get one…it just works out to about $300 a visit to the gym, (meaning I would go about once a year right after the start of a new year).

I started to think about what life would be like without all these bills and took a long, hard look at my life-style.

What was next?  That’s right, I called my car loan people and asked them if I could skip a payment.  No problem, they would just tack it on at the end of the loan.  Ok, not a great long-term solution but at least I was starting something.  I had about $600 extra that month paid off one of the department store cards.

Miracle of miracles, I discovered the snowball method.  I discovered something that already existed but I didn’t know it.  Now I learned how to cook.  Since I had to start making car payments again, I did something I never thought I would do…I went to the garage and pulled out a couple pots and pans to make dinner.  I told myself that I am going to cook for one week and not spend any money at a restaurant.

I’m not suggesting at all that I ate well that week; it was pretty awful.  But, I discovered that tuna, ramen, spinach, and hot sauce do make a balanced meal for about $2 a meal even if it tastes like warm garbage and smells about the same.  The good news is that I saved about $150 that week.  I needed to do that a couple more weeks and I could make my car payment and have money left over to pay a nice chunk on my next card.

Unfortunately, I was only able to muster another week of restaurant sobriety and was only able to save another $150.  Still, not bad.

That month I paid the full minimum plus another $200 on one of my high interest department store cards.

I got really excited and decided I should kill the cable and netflix if I’m really going to do this thing.  The process was repeated and I paid off the aforementioned department store card.

I kept that up and just kept paying off the cards, then the car, then the loans.  I wasn’t always perfect.  Sometimes I justified charging something I didn’t need.  Other times I was stronger than I thought I ever could be.

The bottom line is that it came down to my lifestyle choices.  If you make a decent income and you just can’t figure out where it all goes, just put it in a spreadsheet.  Put down everything you’ve been spending lately and see if it’s stuff you really need.

If it takes you 6 months, a year, 2 years or more…just keep at it; you’re going to get debt free.  Sacrifice now so you can be large and in charge when you’re done.  Your credit should be in amazing shape after all that.

My grandfather told me that “Nothing is free and only the good stuff is hard to get.”  Financial freedom is hard to get so it must be the good stuff.

You can do this!  Cut those expenses and pay something off to get started.

I hope it helps and please post another comment if you have some more specifics to analyze.

Thank you,

David

It’s been a little bit since the last post. I had to go to Denver for a couple of days. Anyway, while I was on my trip, somebody asked me one of those questions that is asked so infrequently that you slap yourself in the head because you know it would be a great blog post…well, at least it could be informative if not out and out “great”.

Keep in mind that I’m not a tax professional and you should seek out a CPA.  This blog post is opinion only and should not be considered tax advice in any way shape or form.  I am not a professional tax adviser and you should never take my advice on anything ever. How’s that for a disclaimer?  I think if I had a legal department they would be proud.

The question I had from Dan S. is this: “Will I get hammered by the IRS for settling my debt?”

No, you won’t get hammered…BUT, (and it’s a big but), the creditor has to 1099 you for the debt you settled if it’s over $600.  If you owe $50,000 and you settle half then the creditor will report it to the IRS that you were basically paid the right to write that off the difference and make you responsible for the tax on the $25,000 in settled debt…which you must then claim on your taxes.

Are there ways around paying taxes on that amount?

Yes.

- If you are insolvent when you reached a settlement.
- Your non-business debt was settled as a result of Hurricane Katrina.
- You actually have a job in the field that you claimed you would work in when you got your student loan in the first place.
- You declared bankruptcy and that particular debt was in the discharge.

That’s the quick and dirty take on settled debt and taxes.  Again, ask a tax professional instead of taking my advice.  I’m not an accountant, CPA, or IRS agent.  When it comes to taxes I pull my pants down around my ankles like anybody else; one leg at a time…or something like that.

Debt reduction experts grown on trees; just pick one. If you want free debt help, I am here for the asking. The only thing I ask is that you let me spill your guts for you, (anonymously of course). I’m going to tell your story creatively and discuss how I would handle the situation if I were in your shoes. Nothing is taboo here…but nothing is sacred either. The best way to learn is to teach, (believe me, it’s true!). Since I have so much to learn I have decided to teach everyone in the world financial literacy.

Do you want to learn about how debt in the US really works? Ask the question.

The fastest way for you to get out of debt? Ask the question.

Do you want to know which bankruptcy alternative is right for you? Ask.

This is a forum for learning and the best way to learn is by experience. Since most people don’t get into life-choking debt just to see what it feels like; we will hopefully spare the rod and teach others how to learn from our mistakes OR how to get out of the bad place before you feel like you want to find a people size mouse-trap.

Humor will always be a part of what we do here because humor helps us take that bitter pill a bit easier…or you can do what I do and just hide it in a slice of pizza.

Ask a question in the comment section and I will post back. Make sure you leave an email so I can contact you if I need to.

Until next time,

David

So, have you heard about the debt snowball?  It’s not a bad thing, it’s a good thing.  Let’s say you are just about as buried as you can be in debt but you have just enough breathing room that you can squeeze in an extra $100 a month.

Now, let’s say you have 7 payments a month listed here (we’re going to use some numbers that are somewhat in line with what I have seen lately. (Lately happens to be around April or May of 2008)):

1. Mortgage - $2,188 a month carrying a balance of $328,234 (6.75% interest)
2. Home Equity Line of Credit (HELOC) - $796 a month with a balance of 77,303 (12% interest)
3. Car loan - $422 a month with a balance of $16,883 (10% interest)
4. Student loans - $275 a month with balance of $9,930 (8% interest)
5. Wells Fargo VISA - $51 a month with a balance of $2,654 (18% interest)
6. Discover - $37 a month with a balance of $1,823 (19% interest)
7. Capital One - $11 a month with balance of $377 (22% interest)
   

So, you’re now obligated to pay $3,780 a month just to your debt.  Since you’re a two income family, you bring in $4,944 a month after taxes, (good job).  You have a baby so after food, diapers, formula, insurance, doctors visits and cable you have about a hundred bucks left over to do whatever you want to do.  That hundred dollars use to not be enough so you would go out and buy a on credit, right?  tisk tisk…I’m kidding; I’ve done the same thing which is partly why I know all this stuff now…but I digress.

The good news is that you have finally decided o buckle down and get yourself out of debt regardless of how long it takes!  Since you work nights and your spouse works days, you don’t need to pay for babysitting or other forms of baby watching.  That’s good.  (is the picture clear?  I want it to be clear…pictures are worth a lot of words but since I don’t have any pictures I guess I’ll just have to keep describing)

Anyway, so…you’ve got the extra hundred bucks so you decide it’s going toward bills.  (very nice)  But which bills do you pay?  Do you spread it out evenly?  Do you pay down the highest interest first?  Just how do you decide to distribute that extra money?

Well, in this situation, I highly recommend the Snowball Method.  I don’t know who invented the Snowball Method of Debt Reduction but they were smart.  I guess I can only assume was named after the creator of the method, James Edward Snowball of Rockville, Maryland.  (ok, maybe not)  It doesn’t really matter.  Here’s what you’ve decided to do, (funny how I know these things, huh?).

You’re going to take the smallest debt on your list…

7.  Capital One - $11 a month with balance of $377

…and pay the minimum of $11 plus the extra $100.

Ok, so now you’re paying $123 on the Capital One card the first month of your program and all the others remain the same.  You’ll keep paying $123 towards the Capital One card until it’s finally paid off.  Here comes a tricky part…After your 3rd payment, you will only owe about $60 on the card.  So, you take the $111 and split it amongst two payments.  First is the Capitol One which is $60.05 and the balance of $50.95 extra goes to the second card, (the Discover).

So, after month 4 your lowest balance debt is paid off and you’re working on your second highest balance.

To recap, you paid off your lowest balance card in 4 months as opposed to the 55 months it would have taken you if you just paid the minimum every month.

Now, you take that $111 you were paying on the Capital One and put it all towards paying off your Discover Card.  So now you’re paying $111 + $37 = $148 per month towards your Discover Card.

Ok, get comfortable because it’s going to take you an additional 14 months to pay off the Discover.  Of course, that’s a far cry better than the 97 months it would have taken you if you only paid the minimum of $37 each month.

Next we want to take out the Wells Fargo VISA.  If we played by the banks rules, our debt to them would take 102 months to pay off.  But, since we’re reducing debt at a much faster pace than ever before, our Wells Fargo VISA gets taken out just 31 months into the program, (just 13 months after we finished the Discover).

Wow!  Things are starting to speed up; I’d better buckle my seat belt…

Student Loans are next and they don’t give up much of a fight.  We pay off that debt just 6 months later.  Guess what?  You have NO MORE UNSECURED DEBT!  Oh, happy day!  Go out and splurge.  Buy yourself something nice…like a bag of chips, (you still have a lot of work to do).

At this point our snowball has been rolling along and picking up extra money each and every time we pay off another debt, and another, and another…

So now our snowball is $474 PLUS our car payment now of $422 for a total of $896.  So now we’re going to pay $896 a month on the car until it’s paid off which only takes about 7 months after we paid off the Student Loans.

We can unbuckle the seatbelt and relax a bit now because it’s a little longer to our next destination, (which is the HELOC payoff).

Let’s recap…
So far we have paid off $31,667 in just 43 months.  It seems like a long time; but when you consider you would have been paying on those credit cards for more than 100 months, it’s less than half, (I figured that out without a calculator, by the way). 

So moving on…

If we played their game the way they want us too, we wouldn’t pay off that HELOC for 357 months.  BUT, since we have a snowball, we’re going to apply it just after we finish with the Car loan and we are going to get rid of that Equity Line of Credit in just 60 months after we finish paying off the car.  That’s 103 months into the program and we’ve already paid off the second on the house and we have NO UNSECURED DEBT!  That’s a great feeling.

Our snowball is now $1,692.  We are going to add that to our monthly mortgage payment and send the bank $3880 for the next 93 months.   Congratulations, now you are completely out of debt AND you have an extra $3,880 in your pocket every month.

1. Mortgage - $0 a month carrying a balance of $0
   
2. Home Equity Line of Credit (HELOC) - $0 a month with a balance of $0
   
3. Car loan - $0 a month with a balance of $0
   
4. Student loans - $0 a month with balance of $0
   
5. Wells Fargo VISA - $0 a month with a balance of $0
   
6. Discover - $0 a month with a balance of $0
   
7. Capital One - $0 a month with balance of $0

Feel free to buy a new car now since your old rust-bucket is over 17 years old now. 

Ok, the above example is just an idea of what is possible.  Obviously life circumstances change and hopefully for the better.  You are not always going to make $5,000 a month on two incomes.  If I had to hazard a guess, I would say 10 years from now $5,000 a month will be pretty low for a 2 income family.  BUT, you control your debt every step of the way.  You never have to increase your debt if you don’t want to.  Remember, it is your choice to be debt free or you can stay in debt and hope everything works out for the best.

Let me know if I can help!

Best regards,

Dave B

After reading the blog posted here: AC360, I started to suffer vertigo and loss of balance.  After going to the doctor to determine the cause of the symptoms, I found it was due to slanted reporting of the facts.  I didn’t know this at the time but the blog poster wrote with an intent beyond simple fact reporting.  I really didn’t expect that because at the top of the blog, (under the part that says AndersonCooper360Blog), it reads, “Be honest about what you see, get out of the way and let the story reveal itself.  - Anderson Cooper”

So, of course the blog will be opinionated, right?

Well, let’s break this down a little bit.  First, the story mentions that residents will, (combined), have to pay up to 2 million dollars, “Yes - you read that right. TWO million dollars!”  Then the blogger posts that as many as 5,000 residents may be affected.  Then she says homeowners could be asked to pay up to 1.75 million.  Hmmm…which is it, tard girl?  2 million or 1.75?  See, because after receiving the calculation back from NASA I discovered that there’s a 250,000 dollar difference. Yes - you read that right. TWO hundred and fifty thousand dollars!  Or, one eighth less than you mentioned twice.  TWICE!

Besides, if you split that 5,000 ways, (as you suggest), it’s only $350 each homeowner, (I’m guessing you were rounding up a couple thousand homeowners, eh?).

Here’s the deal…life is not like Monopoly.  If there’s a bank error in your favor you don’t get to keep the moeny…except in this case probably because it would be “insensitive” for us to ask for the money back that was overpaid.  Gas is $4 a gallon but no…you go ahead and buy a new plasma theater system for your living room because you were smart enough to buy a  house below sea level right next to the ocean.

At least some of the homeowners used the extra money to get out of debt.

I want to hear from some real life New Orleans home-owners affected by this; what is your opinion?

The news today is not good if you take time to read the story that wrote the story.  The story is simple enough: “Visa profit jumps 28%“.  Well, that’s going to happen when consumers just like you and I start using our credit cards to make purchases best left to cash.  I paid $60 to fill my tank today; that’s $30 more than it would have cost just a couple years before. .  Fortunately I’m able to pay cash for fuel and food purchases, (for now).  But, for many Americans maybe that’s not the case?  Just thinking out loud…(or at least writing silently in my office).  It seems to me that a sharp increase in anything has outside contributing factors such as, oh, I don’t know…basic living expenses; food and fuel come to mind.  I think fuel especially since that is easier for me to measure than how much I’m paying for a burrito at Chipotle Grill.

Watch what happens in a couple quarters when things get really bad.  Housing inventory will skyrocket as default on other credit rides the wave.  Banks will go under from the weight of crushing debt turned bad.

You need to protect yourself and your family.  Reduce your debt now while you still can.  Pay down the higher interest debt to start and then work on the other stuff.  It may seem hard but it’s not as hard as being saddled with debt and trying to fight off inflation too.  You have to really want debt relief before any plan comes together.  Drop me a quick message if you want me to answer any question or questions about debt settlement, debt consolidation, or just debt reduction in general.  I’m here to help.

Ok, talk with you soon!

Davd B

I just read this story on MSNBC The new economics of hunger which told of massive food shortages in several counties. As I was reading it, I had to check the date…nope, not April 1st anymore so it’s not an April fools joke. Ok, here’s a hint: I don’t watch TV. I occasionally stream news and entertainment online, (thanks Hulu); but never do I plop down on the sofa and turn on the news, (or anything). My TV is good for watching DVD’s and collecting the random dust that I see floating about in the sunlight. I guess my point…or my excuse, really, is that I haven’t really been keeping up on world events.

I knew things were going sideways a while ago. I predicted oil to climb steadily and then drive up food prices but I thought all that would be in sort of a “false inflation”, if you will. I called it false inflation but it seems like oil prices never really stabilized and continue to surge. And, now that we’re coming into the summer months expect prices to go even higher! So much for false inflation. I’m not sure what the Federal Reserve calls it but apparently they tried to throw together a pie chart that show inflation hasn’t been a concern because if you take away food and energy, prices are pretty much the same. Hmmm…ok; I guess I was kind of thinking that same thing with my “false inflation” theory…but it only exists falsely if prices stabilize and eventually drop again, (oh, how I long for the days of $2 gas).

Wake up call, prices are going higher. Seriously, this is not going to get easier; it’s going to get harder. And, with an “economic slowdown”, (according to the prez), we are a far sight worse off and the future looks bleak. So, what’s my point? I’m not sure because I’m just kind of rambling so I lost my point…wait…there it is again.

Commit yourself to getting out of debt as soon as possible. With all the uncertainty…scratch that. With all the CERTAINTY that the economy is going to get worse for reasons we discussed here and some we haven’t yet, (housing meltdown, credit crisis, and more…), the certainty is that we are not riding high like we were in the late 90’s and early part of this century. Life is not going to get easier, people; it’s getting harder. The stress on the economy is palpable, (that means you can feel it as though it were tangible). Sorry, I had to look up that word a couple years ago and I thought I would share, :). My point there is that I feel the stress on the economy like I haven’t ever felt it before.

Remember the movie The Perfect Storm? In the movie, (it was probably a book first and a true story before that), two major category 123, (or whatever), storms came together and created one big superstorm…the perfect storm.  Well, that’s kind of what we have here now with the economy.  First, you have a housing crisis caused by years of stupidity in the mortgage industry, (remember buying a house with no money down and no way to pay back the loan), coupled with dwindling oil supplies, (supposedly), and a falling dollar all creating a domino effect.  I guess it’s not really a domino effect so much as the cat finally kicking over the first domino that we’ve been setting up for years.  So, that’s it.  You’ve got a few choices at your disposal if you have enough gold to keep you alive the next couple of years and only a couple if you don’t.

Either way, I recommend you reduce your debt somehow.  Start off by paying off the high interest credit cards first.  Then tackle your car loans.  Auto loans typically aren’t high interest but they usually have a heavy footprint on your monthly cashflow.  After the cars are paid off try paying off your student loans and then your mortgage.  Some people tell me that you have a lot of tax benefits by keeping a mortgage.  Fine, pay it off then remortgage and do something investy with the money.  Scratch that advise if you’re paying less than 6% interest now.

If you are considering bankruptcy, (it happens every day), then try settling your debt first.  Many companies would rather you pay as much as you can and then drop the debt from the books than get nothing at all.  It’s simple.  Save up enough money to pay off half of a credit card.  Call the credit card company and offer them half of what you owe to settle the debt.  If they go for it, great; if not, I suppose they’ll have a counter-offer.  If they refuse to work with you then  you can just go into hiding with your lump sum, (or settle the next debt in line).  Credit card companies typically come around eventually and there are many factors that will contribute to their level of desperation…but we’ll cover that another time because I am about ready for bed.

Sorry to blog your eyes off but the story I ready just hit me in the face with an anvil sized dose of reality and I didn’t like it much at all.

Talk with you soon,

Dave B

Hi all. So a little bit about yours truly. I have been in debt settlement and debt negotiation for quite a few years. I’ve seen it all, (hopefully). I started this blog because I am tired of people telling me I should start a blog. so many people just don’t have a clue about what debt settlement is or how it works. I’m here to clarify. So, if you have a question, just post it in comments and I will reply with an answer…or you can just email me.