Call each creditor up and get on a repayment program.  Get them to freeze all the late charges and interest.  If they refuse then you can get backup by calling a legitimate debt settlement company.  You don’t have to go into great detail with them but you should at least make the effort to repay.  If you just don’t want to deal with them then you have options like Consumer Credit Counseling or Debt Settlement.  I wouldn’t make either of those options my first choice before trying to negotiate myself, both have their drawbacks.  Try it on your own first and then if you’re just frustrated beyond belief then get hold of a company you can trust.  I hesitate to make recommendations as to who you can trust.  I’ve had some good experience in recommendations and some bad.  If you read this post and see an advertiser on this site then rest assured they are at least screened by me although I make no representation as to the quality their service, it doesn’t constitute a warranty, don’t sue me, etc.  (how’s that for legal mumbo jumbo?)

Oh, by the way…I’ll be putting together some more posts soon so bookmark me and check back every so often.  I know it’s been a while but Summer’s over and I’m back at my desk for large chunks of the day.

Take care,

David

PS – Don’t stress over debt.  Life is too short.  Manage your debt, learn to budget, live happier.

Nope, not even a little bit.  I never thought of debt until it was too late. The fact is that none of did and most of us weren’t taught how to manage our credit and debt.

Most of us are up to our necks in credit card debt.  We gladly go along unabashed because it is, simply stated, “socially acceptable” to owe money to a giant corporation with whom we have absolutely no personal connection.

What is socially acceptable today would give our grandparents sleepless nights.  My grandfather once told me that I shouldn’t buy it if I can’t afford it.  Well, that apparently does not apply when I can afford it on a credit card.  I am fairly certain that at the time I missed what he was telling me.

Possibly something to take away from all this is that regardless of the credit card, we are using somebody else’s money and we should try not to do that.

In addition, until we face real financial adversity we might not find the strength to change.  Unfortunately by the time you get to this point debt has become uncontrollable and ultimately unjustified.

Ok, so now we’re up the waterway without mean to row the boat, (something about a creek and a paddle).  What do we do?

1. We take a deep breath or several.
2. We figure out how much our monthly shortfall is.
3. We figure out a way to increase our income or decrease our monthly expenditures.

If we can be successful in those three steps then we’re good.  Problem solving in progress and lesson learned.

But, if we still have a shortfall after that then we’ve got issues; and here’s how we fix them:

1. Prioritize your debt.
2. Contact the creditors that are not going to get paid and work out a plan.  Let them know what to expect and when.

Ok, so step number 2 is the hardest but you can’t cave in.  They are going to demand payment and if you’re already late they’re going to get crazy about it.  You can’t give into the impulse to pay them right away.  Remember, you are in a bind and XYZ company is not going to get their money if I have to choose between my rent or my credit card.

I just want you to be prepared.  It’s not going to be pretty in most cases.  Stick to your guns and you’ll get through this.

Next is to follow the Debt Snowball Method explained in another post.

If you have any questions, please post a comment and I’ll get back to you as soon as possible.

Wishing you peace of mind,

David

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

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.

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

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