7 Ways to Avoid Personal Bankruptcy

Posted on August 22, 2005 by jesse

I recognize that this can be a very, very emotionally-charged issue at times. My writing style is direct (read: blunt). I will be blunt here. But I want all readers to know this:

If you are having financial difficulty, and are possibly contemplating personal bankruptcy, that does not mean in any way you are a bad person. It happens to the very finest of people. It is not a reflection of your character. You are still of immeasurable worth.

I’ve outlined below 7 ways to avoid personal bankruptcy. These are most likely the same suggestions I would give anyone having financial difficulties. If you are considering filing for personal bankruptcy then you certainly should read on. It just may be that you can avoid filing bankruptcy all together.

Get on a Written Budget
One way to avoid personal bankruptcy is to immediately get on a written budget. You will need to get absolutely intense about your money. Money that is told what to do prior to it landing in your wallet will work harder, last longer, and keep your finances stronger than any other financial move you can make.

The simplest budget may work best for you: pencil & paper. Others enjoy the use of excel spreadsheets or fancy software packages. The key is not in what you use, but that you use it. You can take a look at this article on setting up a personal budget. We won’t go into the details here.

Just know that the #1 way you can avoid personal bankruptcy is to get on a written budget.

Sell, Sell, Sell Your Ball and Chain
items causing need to file personal bankruptcy What is causing this extreme financial pressure? Have you purchased too much home? Is your house payment representing 40% of your take-home pay (that’s too much)? Do you owe money on any vehicles? Many times personal bankruptcy can be avoided by people just taking a good, hard look at what they owe and why they owe it. While it’s true that most bankruptcies have been caused by health-related costs, we still need to analyze why a medical bill caused the ultimate pressure that led someone to want or need to file personal bankruptcy.

Not only do you need to assess what types of ball-and-chains you have lying around, you also need to see what type of junk you can sell quickly to cover any month-to-month cash shortages you may be experiencing. Do you have a ton of books or CDs that you could sell? Any hobby items you no longer use or need? Freeing up this cash can go a long way in giving you a clear head about your finances. It will give you breathing room – which will allow you to think clearer about other ways to avoid personal bankruptcy.

Cut Up Your Credit Cards
In no way – under any circumstances – should you be using a credit card. Destroy them. Cut them up. Even the one for “emergencies”. We’re talking about ways to avoid personal bankruptcy, not walk right into it.

But Jesse, I don’t have the cash right now to be able to handle any emergencies. And life is surely going to happen! I’ll just use it for emergencies.

That may be true. You might just use it for emergencies. But I guarantee that your definition of an emergency will become much stricter if you don’t have the ability to charge anything in the first place. All of a sudden having the air conditioner going out in the car isn’t an emergency. Why? Because you can’t afford (right now) to repair it.

Please don’t fall for that line of thinking. Until your finances are completely under control, you shouldn’t be using credit cards.

Negotiate or Surf to Lower Interest Rates
That’s right. After telling you to cut up your credit cards, I’m now telling you to surf high-interest-rate balances to new cards. But that doesn’t mean you actually keep the card – it’s cut up. You do want to take advantage of any low-interest offers you receive (take a look at the 50 you get each week for starters).

Your object in doing this is to create some short-term positive cash flow. Getting down to a lower interest-rate will bring you that much closer to avoiding personal bankruptcy. True, you won’t be getting out of debt any faster, but you will be freeing up some cash you might need to get by month to month. Not only will the extra cash help out there, but you’ll feel better, a little calmer, knowing you’ve got a bit of wriggle room.

Increase Your Income
While this might seem a bit obvious, it’s overlooked very often. You shouldn’t just look at cutting expenses. What can you do to increase the other end of the equation? The income side? Can you work overtime, get a second job delivering pizzas? Work for UPS? Can you mow lawns, trim hedges, paint houses, wash windows, flip burgers, etc.? A part-time job that brings in just $500 extra per month will do wonders for your monthly budget.

This is not a time to be prideful. You need money. You’ll need to work for it. You might even need to do less-than-glamorous things (I listed some above), but you’re doing this for a short amount of time so you can avoid a long-lasting curse: personal bankruptcy. Avoiding this financial pitfall by gutting it out for the short-term will bring you long-term benefit.

Avoid CONsolidation
Nine times out of ten this leads you to personal bankprutcy – it doesn’t help you avoid it. Do not fall prey to predatory companies that hunt the weak, desperate, and vulnerable for customers. CONsolidation will free up your monthly cash flow (which is a good thing) but it does this by extending the length of time you will be in debt (this is not a good thing) and hurts your credit badly (this is also not a good thing). Please, avoid the illusion of debt consolidation. Focus on increasing your income, cutting your expenses, lowering your rates, selling your junk, getting rid of any ball-and-chains (new car?) and getting on a written budget.

Maintain Your Perspecive
Times are most likely very emotional for you right now. Your marriage is probably stressed to the max, and you think about your money problems constantly. This is not a time to jump into any crazy ideas. You need to gain the advantage of many minds and consult with trusted friends and family. Consult before you decide to make any financial moves. Above all, remember that your worth is not tied to your net worth. You are not a bad person for being in this situation. While I do not completely write-off your contribution to this predicament (we’d have to talk one-on-one for that) I do recognize that life happens – sometimes in a very harsh way.

I admire your desire to look for ways to avoid personal bankpruptcy, instead of just filing and not taking responsibilty for your financial life. If you need free personal counseling or advice, please don’t hesitate to contact me directly.

Help Get Me Out of Credit Card Debt: 3 Steps

Posted on June 30, 2005 by jesse

No doubt, if you’re here, you’ve probably made some mistakes financially. That’s okay, there’s no adult walking the earth that hasn’t. You can certainly be sure of that.

I truly enjoy helping people get their finances under control. It really does bring me a lot of satisfaction. One thing I do to make sure I stay abreast of new financail crises is to watch message boards. Many times people will join a message board and post something along these lines:

Help me get out of credit card debt!
I really need someone’s help. My spouse and I have made some mistakes financially and now we’re really in a bind. We’re barely making ends meet. I’ve even taken on a part-time job. It just seems there isn’t enough money at the end of the month. No matter how hard we try, it seems there’s always something that comes up that keeps us from saving anything! Please, help us get out of credit card debt. We’re drowning!

Small details in these situations change, but the answer is almost always the same. If you find yourself in a similar situation, think long and hard about what you are about to read, then commit yourself to doing it.

Three steps to help you get out of credit card debt:
1: Cut up your credit cards and close your accounts. I don’t care about your FICO. I don’t care about “emergencies”. You need to stop borrowing money. You can’t dig yourself out of a hole – you need to climb out. Cut up your credit cards and close your accounts. This step might take a lot of faith on your part. It maybe sent an uneasy feeling to the bottom of your stomach. That’s okay though – that’s just because you have gotten so used to that comforting plastic that you’re going through a bit of withdrawal. Take a deep breath and destroy your credit cards.

2: Get on a written budget. What does this mean? You write down everything you spend and you sit down at the beginning of the month and budget your money. Experience (mine and thousands of others) has shown that when you begin budgeting your money by having a plan and sticking to that plan, you experience a raise. And usually it isn’t the 3-4% raise you’re used to. We’re talking 10-20% – even 30% at times. When you plan and budget your money you are not constricting yourself, you are telling your money what you want it to do. Once you do that, get out of its way and let it do what you told it to! Once you’re on a written budget you’ll see where you can easily cut back on unnecessary expenses while not even experiencing a change in your lifestyle (which wouldn’t be the end of your world, if you’re having credit card debt issues). Once you have a budget in place, you’ll see where the extra money can come from – enter step three.

3: Snowball your debt. This final step will be the final blow to your credit cards. Do you want to know what will really help you get out of credit card debt? Big, fat payments on the principal that you owe the credit card companies. That’s right, you will not be shifting the debt around, pretending to actually be doing something. You will be paying down your credit card debt one step at a time.

Let’s do a quick recap on what will help you get out of credit card debt: (1) Cut up your credit cards and close the accounts. Never use them again. (2) Get on a written budget. You tell your money what to do – not the other way around. (3) Snowball your debts into absolute oblivion.

College Student Budget – It’s “In”

Posted on May 24, 2005 by jesse

In parousing BankRate.com, I found this article about college students, debt, and bankruptcy. It’s pretty alarming:

Gen Xers yearn to carve a new direction for society. Unfortunately, the direction appears to be straight into debt. Americans between the ages of 25 and 34 now boast the second-highest rate of bankruptcy, just behind the 35-44 group. The average credit card debt for this group increased by 55 percent between 1992 and 2001, with the average young adult household now spending approximately 24 percent of its income on debt payments.

Let me warn you right now that I might come across a bit harsh in this article. I want to arouse some strong feelings in you about the absolute disaster that is taking place with my generation (at the time of writing this, I’m a wise 24 – there goes my credibility).

Let’s talk about why college students go into debt. Remember this: I live on student family housing at a private university. I have been going to Brigham Young University since April of 2002. Virtually all of my friends are college students. Because we are all broke, we can talk about personal finances with little inhibition. What I mean by all of this is that I am privy to very real information from real college students.

At times, we hear an initially sad story from a college student. Their car breaks down and all of a sudden they’re in need of some cash. So they charge the repairs to the credit card. If you aren’t careful, your first instinct might be: Well, that poor college student. How could they have known their car would break down? It’s unfortunate.

Yes, it’s unfortunate the student’s car broke down. And no, of course they couldn’t know the car was going to need some major repairs any time soon. But this is the crucial issue:

What transactions took place before the unfortunate event?

In my experience, usually you can find the following transactions: a ski pass they just had to have, multiple transactions that took place at any number of fast-food chains, a gym membership that’s a “necessity”, wireless internet, new software/games for a computer, and a few new DVDs for the apartment’s collection. This is just an example and I am not exaggerating. I’m speaking from direct experience here.

Is it bad to purchase these things? Of course not. I merely want to make a point. The college student is strapped for cash come car-repair time not because they do not have any money, it is because they already spent their money. That is a critical difference.

With undergraduates holding average credit card balances above $3,000, we really shouldn’t look at what they purchased with the credit card, because often-times we’ll see that those purchases, at first pass, appear legitimate. You’ll see a charge for textbooks, tuition, car repairs, etc. And you think, well, these things can’t be helped. But look at the previous purchases. Where did the money go before these credit card transactions “needed” to happen? That is the key.

I can think of no demographic that is in more need of a budget than the college student demographic. Budgeting certainly does not sound cool. You don’t talk about it on your way up to the slopes. If you really do budget, you probably keep it to yourself. You’re a nerd, and you don’t want people to know about it.

But the college student population, with all of their supposed wisdom and street smarts, apparently doesn’t know how to live within their means. Those car repairs did not necessitate use of a credit card – your overspending prior to that unfortunate event is what necessitated the use of that card. Your lack of planning is what gave that credit card transaction its supposed blessing.

College students: budgeting is hip. It’s cool. I’m one of you, but I budget. I don’t owe anybody anything. I’m a graduate student with money socked away come time to drop my several thousand dollars each semester to pay for some (hopefully) great wisdom. Where did the money come from? I earned it, and didn’t subsequently spend it. Has my car broken down? Yes. Did I charge it? No. Where did the money come from? I earned it, and didn’t subsequently spend it.

Please don’t see this as a bragging session, but allow me to be even more open. I am married with a little boy and my part-time income is the sole source of cash for our family. I do not make a lot of money. How do I make each dollar work so hard? I tell it where to go, and it does what I say, because at the beginning of the month, I sit down with my wife and we plan.

Budgeting is in.

Should I Pay Off My Mortgage Early?

Posted on May 9, 2005 by jesse

Let me warn you right from the get-go. You’re hearing this from a guy that is pretty darn close to totally anti-debt. Now that I’ve disclaimed my bias, let’s discuss briefly an early mortgage pay off. Should you do it? Maybe.

I discussed a lot of the issues with mortgages, interest, saving that interest, tax-deductible interest, etc. in a discussion on the 15 vs 30 year mortgage question and the tax advantage of owning your home.

We’ll just breeze over the issues once again here, then you’ll be armed with the information you need to answer that immortal question: Should I pay off my mortgage early?

Alright. Everyone needs a roof over their head. There’s a cost involved there, whether you own your home outright or are still trying to pay off the mortgage. You need shelter. That’s a fact of life.

It is relatively easy to get quite a bit of money from the bank and be pretty well leveraged with your mortgage. I mean, you can get a loan-to-value of 5% ($5,000 down on a $100,000 home) pretty easily these days. I would say an LTV below 10% is pretty highly leveraged. This can be very advantageous with a mortgage.

Mortgage rates are extremely low right now (May 2005). This is cheap money! That is another advantage to a mortgage.

Your interest is tax-deductible. This makes an already cheap interest rate even cheaper!

The disadvantages of a mortgage? The interest cost is huge. For a $120,000 home, you could easily be looking at $170,000 total interest on a 30-year mortgage! Another disadvantage is the fact that you lose that monthly cash flow. If your home were paid off you could put those monthly “payments” to good use in an investment. Also, there is a lot of peace of mind that comes from not owing anybody anything. And you wouldn’t.

Consider the following scenario before you decide if you should pay off your mortgage early. Let’s take Ron, who is just crazy about owning his own home. He has an emergency fund in place with 3-6 months’ expenses. So he just goes to town paying off his 30 year mortgage in 13 years by paying an extra $300 per month. The result? In 13 years his mortgage is paid off.

But what could he have done with that $300 over the last 13 years? Invested it in the S&P 500. What would it have grown to? Without calculating all of the numbers, we can be reasonably assured that it would have amounted to a lot more than the interest he saved when he decided to pay off his mortgage early (alright, alright, his investment would be worth just above $95,000 invested at 10% for 13 years).

The general rule is this: if you have to decide between the early mortgage pay off or investing that surplus cash into something else, you would financially choose the one with the highest return (your after-tax interest rate is your rate of return because every dollar you spend paying it down is a dollar you don’t have to pay interest on). So if you can invest that $300 at 10% in a tax-conservative (low turnover) S&P 500, or save 6% after-tax, you would always choose to invest the money.

Is that 10% guaranteed? Heavens no! But over the long-term you’d be hard pressed to make an argument otherwise. Is that 6% return guaranteed? Heavens yes! That must be included in your decision to pay off your mortgage early.

I think Dave Ramsey has a pretty good plan. You need to make sure your foundation is well-laid before you consider paying off your house early. And this is coming from a guy that is about as anti-debt as you can get. He counsels his listeners and fans to follow his baby steps 1-5 before paying off the house. Why? Because steps 1-5 include getting together an emergency fund, getting rid of all debt excep the house, investing 15% in retirement, contributing to college funds for kids and then finally paying off the house early.

What this amounts to is that if you are already sitting on 3-6 months’ expenses in cash (money market, savings account, i.e. liquid), you don’t have any debt except for your house, you’re contributing 15% towards retirement (taking advantage of those possible 10% returns from the stock market and the great tax benefits that come along with investing for retirement), you’re even planning on helping your kids out with college, and you still have excess cash left over to pay off your mortgage faster? Man – go for it!

Forget about the possible 10% return of the S&P – you’re already making a killing contributing consistently 15% of your income – make a guaranteed return of 6% on that excess cash. And when you’ve paid off the house, take that payment you were making and go on a cruise. When you get back from the cruise, start socking it away for retirement.

Advantages & Disadvantages of Credit Cards: Are You Even Ready?

Posted on May 4, 2005 by jesse

The debate rages on across America. What are the advantages to certain credit cards, what are the disadvantages? Shouldn’t I be using at least a card that gives 5% cash back on gas and groceries? A gallon of gas, normally costing $2.25, would now only cost $2.14. A gallon of milk costing $3, would now only cost $2.85…

And then there’s the advantage of free(?) airplane tickets. One family member I know used their free tickets to take all the kids to California – something they otherwise wouldn’t have been able to afford.

I personally am somewhere in the middle.

One huge disadvantage to credit cards isn’t from the credit card itself. It’s from the people that use them. Now, I know of the studies that have shown that you spend somewhere around 18% more when you spend with plastic instead of cash. Dave Ramsey touts that statistic at least every day. I did hear him mention a caveat the other day. Basically he said that if you are operating on a written budget, then you probably only overspend by about 10% – totally just estimating. The point he was trying to make was that if you have a plan going in to the grocery store, or wherever, you will probably not spend too much more if you use plastic or cash.

And then there’s the advantage of convenience. I personally don’t like to carry around cash (except for a $20 bill). Everything else I run through with plastic. I’ve also spoken with people who say that if they have cash in their wallet/purse, they burn through it quicker than anything. Psychologically – they explained – if they have the cash in their hand instead of in the checking account, it’s as if they’ve already “spent” the money. So they do.

However, back to that disadvantage. I just can’t take the extreme approach: ABSOLUTELY NO CREDIT CARDS! I feel it’s a bit simplistic. I don’t believe personal finance is really that complicated, but to throw out that absolutely NOBODY should ever use a credit card, that it will destroy them, that it will drive them to bankruptcy, that it will cause them to not live within their means, is just a bit too much.

Especially when we see how much companies are now looking at the FICO score to evaluate whether you can get auto insurance, property insurance, etc. Statistics drive these choices, and statistically you’re likely to make more claims, with a higher dollar amount per claim, if you have bad credit than good. Why is that? I have some guesses, but that’s for another time.

So you need good credit. Should you go out and borrow money to build your credit? No. That’s pretty silly. Should you get a credit card in spite of the disadvantages, or because of the advantages? That’s your choice.

Let me make this totally unsupported statement: 95% of all credit card holders would be better off financially without ever having their credit cards in the first place.

Just take a look at how many people want to get out of credit card debt so badly. I think 95% is a safe shot in the dark.

So, I have established my own set of rules to evaluate whether you are worthy of the advantages of a credit card – and protected from the potential disadvantages. If you follow these rules, I think you’ll be alright.

You must be:

1. Operating under a written budget.
2. Debt free except your home (owing on a car or student loans is debt).
3. Protected against emergencies: 3-6 months’ expenses in a good savings account.
4. Paying the credit card balance in full each month.
5. Writing down exactly how much you spend.
6. Contributing at least 10% of your income towards retirement.

If you cannot say “YES” to all six of these rules, then you are not yet ready for the advantages of credit cards. You are still to exposed to their disadvantages. Work on getting these six rules down, then evaluate whether you think a credit card would further you along on your road to financial success. Be aware of the fact that spending 3 hours finding the “perfect” card, could have been spent working, and earning the equivalent of probably six months’ worth of rewards! Keep all things in perspective.

Debt Payoff Calculator: What Really Matters

Posted on April 28, 2005 by jesse

So many times I hear people talking about this special order they should be using to payoff their debts. Some of these debt-ridden individuals are now just dead-set on paying down their debts according to the highest interest rate first. This makes mathematical sense. Or does it?

Other people, Dave Ramsey included are proponents of a payoff scheme where you payoff the smallest balance first – attacking it with intensity.

Both of these methods assume you are using a snowball approach. The question really is the order of the payoff.

Well, I used my Debt Payoff Calculator to get to the bottom of this never-ending debate once and for all. (The calculator comes as a bonus with the YNAB System purchase.)

The debt calculator’s results are pretty interesting.

My first test involved several fake debts in a payoff order with the highest interest rate debt first. An initial snowball amount of $100 was used. The setup looked like this:

The resulting calculator screenshot shows the (many) months it will take to payoff this debt:

Alright, with an initial snowball amount of $100, a debt load as seen above, and a payoff strategy using the highest interest rate debts first, it would take you 31 months to pay off your debt. This is all according to the calculator.

So, let’s take the same debts, and simply re-order them from smallest balance to largest. We’re still using the $100 initial debt snowball amount. This is the second calculator setup:

And once again, I took a screenshot of the debt payoff calculator’s result using the smallest-balance-to-largest scheme:

Yeah, this is the same screenshot. I didn’t want to make the server load up two different screenshots when the calculator’s results were the exact same. I was expecting a difference, at least minimally, but from this result we know that the debt payoff times are within a month of each other (the debt calculator rounds).

I was getting ready to talk about how the important part of a debt payoff scheme is to go at it with intensity and not worry so much about your initial order (once you do set it up, commit to it). I was going to even go as far as to say that a few months difference didn’t really matter that much – as long as you’re attacking it with intensity.

The calculator’s results, however, make my job a whole lot easier. The difference is virtually null! Think about this for a second. Instead of worrying, analyzing (over-analyzing), and stressing about what order you should use to payoff your debt, simply start doing it! That’s the key. Sending extra money to your creditors will get rid of your debt. Selling things you don’t need, getting rid of a car that was too expensive (even if you’re upside down), managing your money – all these things will bring you closer and closer to your debt payoff date.

Don’t stress the order. Stress the intensity. When your intensity level is high, your debt will be gone in no time.

Control Debt? Nah, Get Out of Debt NOW!

Posted on April 26, 2005 by jesse

Lately I’ve been on a little kick with CNN Money that’s had me reading their site virtually every day.

Today I landed on an article about controlling debt and thought I should make a few comments. I’ll put all of CNNMoney’s comments in bold or italics throughout this commentary.

First off, the title is interesting: Controlling Debt. I would name the article “Abhorring Debt” – there’s no reason why you should simply control it. Get out of debt now! As fast as possible! Once you manage to stop paying creditors, and begin paying yourself, you’ll be on the road towards wealth, fianancial peace, and security.

Alright, let’s get into the article.

Americans are loaded with credit card debt
The article states that the average American household with at least one credit card has nearly $9,200 in credit card debt. Ouch! This debt is sucking away the wealth-building power of all of these Americans. Imagine the wealth you could build if you no longer had to make a credit card payment? It would be in the several hundred thousand, if not millions of dollars, when invested wisely.

Some debt is good.
Borrowing for a home or college usually makes good sense. Umm, I can’t quite agree with that one. I would maybe say some debt is permissible, but I would never say debt is good. Imagine this scenario. You take out a 30 year mortgage to purchase your first home. However, instead of taking 30 years to pay it off, you make several extra payments per year and pay it off in 15 years. Now, once the home is paid off, you just don’t feel something is quite right. I mean, here you sit with this money eacy month that used to pay the bank. So, because having house debt is good, you decide to take out another mortgage.

While that may seem like a silly example, a mortgage is permissible, but having no mortgage at all is oh so much better.

I don’t really want to get into borrowing to get through college, but I do want to say this: I am a graduate student who is debt free. I live among other college students who are not debt free. I am not debt free because I make more money. I am debt free because I manage what I make, which results in far less spending. This is not to say I’m in any way better. I’m only making an observation based on several years of this college experience. College students live like their parents before they should, and this causes them to think they need to borrow money (we won’t go into how the parents are living).

Some debt is bad.
Don’t use a credit card to pay for things you consume quickly, such as meals and vacations, if you can’t afford to pay off your monthly bill in full in a month or two. If the credit card company is making even a penny of interest off of you, you should immediately cease using your card(s), and pay off all balances immediately. Get out of debt NOW.

I would rather hear them say: “Debt is bad. And some is even worse than that.”

Get a handle on your spending.
Here they hit it on the money. Write down everything you spend for a month. Bingo. I discuss this principle here and here. When you start writing down what you spend, your spending will drop.

Pay off your highest-rate debts first.
To be honest, if you’re really attacking your debts with intensity, if you really want to get out of debt NOW, it honestly doesn’t matter a whole lot which order you use to pay off your debt. Dave Ramsey suggests paying them off from the smallest balance to the largest for the motivational factor. He likens it to trying to lose weight and deriving a lot of motivation from seeing those initial pounds (small debts) drop rather quickly.

I tend to agree with him, but if you’re set on paying off high-interest debts first because it makes “mathematical” sense – go ahead. The important thing is extreme intensity and the desire to get out of debt NOW.

Don’t fall into the minimum trap.
We really don’t even need to talk about this since we addressed it above. If you’re carrying a balance, you’re not making a wise financial choice. And if you’re just paying the minimum? You’re committing financial suicide.

Watch where you borrow.
If you don’t go into debt you will never have this problem. NEVER EVER take out a home-equity loan. You’re digressing financially if you do this. NEVER EVER take out a loan against retirement. You’re playing with fire when you mess with your retirement. Be patient. Save money for whatever it is you need. Be patient. Save money. Be patient. Remember, the objective is to get out of debt NOW – not to prolong your slavery to debt.

Get help as soon as you need it.
If you have more debt than you can manage, get help before your debt breaks your back. There are reputable debt counseling agencies that may be able to consolidate your debt and assist you in better managing your finances.

No! To consolidate your debt is to not admit that you have a serious problem. For the sake of not repeating myself again and again, I’ll go ahead and do it again: Get out of debt NOW. You got in. You can get out. You will survive. I discuss the Illusion of Debt Consolidation and debt consolidation companies in other places.

The article did offer a few tidbits of good advice, but they lack the guts to tell America that they have a problem. Get out of debt NOW. Keep your money. You work and sweat for it. It should be yours to build wealth. Stop lining the pockets of the credit card companies and get intense about getting out of debt NOW. You will not regret it.

Debt Management Option: Do It Yourself!

Posted on April 22, 2005 by jesse

There’s a great article on CNNMoney that sparked a bit of desire in me to write. Society is getting further and further into debt, and once people realize what they’ve done, they go about it all wrong when trying to get out. The internet is full of debt management programs that give you the option of getting on a payment plan. The company negotiates your debts down, negotiates a lower interest rate, and gives you “peace of mind” – as long as you pay them.

What actually can happen is pretty scary, and that’s where this article comes in. It discusses different red flags that should come up when you’re weighing your debt management option.

The article gives the following seven red flags when evaluating a company as your possible debt management option:

1. Have an ‘unsatisfactory’ record with the local BBB.
2. Don’t spend more than 30 minutes conferring with you.
3. Don’t let you review your contract before signing.
4. Automatically enroll you in a debt-repayment plan.
5. Expect an upfront fee equal to one month’s debt payment.
6. Require ‘voluntary’ contributions.
7. Pay your creditors late, despite your making on-time payments.

Now you’re probably saying to yourself: “Oh man, you’d have to really be naive to still sign up if you saw stuff like this.” I couldn’t disagree more. These salespeople are very skilled at what they do. They recognize that you are in a very tight situation, your emotions are probably running on high, you’ve already really had an internal battle just making a step towards resolving your debt issue, and you want so bad to see some change in your financial picture. It doesn’t surprise me at all that people get sucked into these schemes in this kind of emotional state. It’s actually pretty understandable.

The article continues with 8 tips on how you can evaluate and work with a debt management company:

1. Check with the Better Business Bureau.
2. Mind the fees.
3. Look for easy-to-understand contracts.
4. Choose a company that can help with all your accounts.
5. Check out the agency’s credentials.
6. If a counselor uses a stopwatch, run.
7. Make sure they pay when they say.
8. Do the math.

The only problem with these 8 tips is that it means you’ll actually be using a debt management company as your option. I have a completely different notion for you:

YOU GOT INTO THE DEBT – YOU CAN GET OUT

After all the math is done, remember that it’s your behavior that caused this problem in the first place. If you had not been living paycheck to paycheck, but instead had been living within your means, and possibly even had an emergency fund, you would most likely not be in the mess you’re in now.

Debt management is not an option. 99% of the time you will be better off just hacking away at the debt the same way you got into it. One bite at a time.

Debt CONsolidation Equity Loan: Watch Your Step

Posted on April 21, 2005 by jesse

A debt consolidation equity loan is one of the most touted financial products on the internet (not just on the internet, but it’s pretty rampant here). Why is this so? Because so many people are up to their eyeballs in debt. They get paid, and creditors take the majority of their paycheck.

The most common reason people have too much debt is because they are not living within their means. It’s a recipe for disaster. If your credit card balances are ever-growing, you are spending more than you make – period.

So after a few years of this obnoxious behavior, you take a look at all your different credit card statements, car payments, house payment, etc. and you realize that you’re a bit tight on cash flow – to put it nicely. Why? You might have even experienced a raise or two. Why is money so tight? Because your debt’s aggregate required minimum payment is now so high (along with nasty interest rates), that it’s sucking away your money before you ever even get to see it.

You’re in deep, deep debt.

So you head out onto the internet to find out how you can handle your debt problem. You probably run into a site like this that teaches you all about credit, refinancing, getting loans – all from professionals – and everything to do with debt.

Quite artfully, you’re talked into one of the biggest CONS of our age: debt CONsolidation, usually in the form of an equity loan. I love this line in the “Debt Consolidatioin” forum description: “Is Debt Consolidation good for you? It is however the most popular method to get debt free.” I’m not sure exactly what they mean by “however” but I loved the second sentence:

Debt consolidation is the most popular method to get debt free.

As a rebuttal, please allow me to quote one of my favorite debt crusaders, Dave Ramsey:

“Debt CONsolidation-it’s nothing more than a con because you think you’ve done something about the debt problem. The debt is still there, as are the habits that caused it; you just moved it! You can’t borrow your way out of debt. You can’t get out of a hole by digging out the bottom…I feel debt is the symptom of overspending and undersaving.” (emphasis added)

- The Total Money Makeover

It gets worse though. As Ramsey suggests a bit further on page 48, the debt CONsolidation is “appealing because there is a lower interest rate on some of the debt and a lower payment.” What you discover however, is that it’s not because the rate was negotiated down, it’s because the length of the debt was extended. In short, this means you’ll be in debt longer, most of the time paying even more interest.

I also discussed the illusion of debt CONsolidation here.

The only time debt CONsolidation would possibly be an option is if you have totally changed your habits. If you haven’t used credit cards for at least one year, you’ve been attacking your debts with intensity, and you have a good handle on how you manage your money. Only then could I maybe say it would be okay for you to go ahead and get a lower interest rate. This is, of course, under the presumption that you would continue to pay the same amount toward your debt that you had before. This little maneuver, remember, has not gotten you out of debt. It has only saved some interest.

The most important thing to do when faced with the option of debt CONsolidation equity loans, is to walk away and mull over it for a while. Have you really changed your habits? Are you getting out of debt already? Are your balances already on the decline? Are you budgeting?. Lest I repeat myself a third time, I won’t say it again.

But just one more little hint: 99% of the time, debt CONsolidation equity loans are just that CONS. Avoid them. Whittle away at your debt the old-fashioned way: blood, sweat, and tears.

Free Credit Repair Advice: Do It Yourself

Posted on April 18, 2005 by jesse

Here’s a bit of free advice on credit repair. Do it yourself.

Of course, some people say free advice is worth what you pay for it – nothing.

Before I get into your credit report and possible credit repair, I thought I might disclose why I’m writing this article. The other day I did a search for credit repair (did you know that (according to Overture) the term “credit repair” is searched more than 200,000 times each month?) and saw tons and tons of results from companies wanting to repair your credit – for a fee of course.

So I did a bit of research on credit repair and came up with some great information.

One of my intents in writing this article is to try and appear in the search results so people will become educated about credit repair before committing to some contract where their hard-earned dollars are taken away from them.

So I hope some people see this article, think about it, and decide not to participate in any type of credit repair program. Here’s why:

First off, why do you want to repair your credit? There are two possible reasons:

1. There is an error on your credit report.
2. You’ve made some fiscal mistakes and have some bad marks on your credit.

If you fall under category #1, then you have a valid reason to want to fix your credit report. There is an error, made by either the credit bureau or a creditor, and it needs to be repaired.

If you fall under category #2, then you do not have a valid reason to repair your credit. There is nothing to repair. The credit report is true and accurate. All you really can do is wait the 7 years to have the bad marks removed naturally (or 10 years if we’re talking about a bankruptcy).

So, category #1 people, here are some steps you can take towards repairing your credit. These were taken from this article at BankRate.com:

1. Order your credit reports.
2. Examine your reports carefully.
3. Double-D strategy — dispute and document.
4. Solve and dissolve debt.
5. ~~Add stability to your credit file.~~

Steps 1-4 are great. Follow them as outlined in the article. As you can see, I do not agree with step five.

You need to remember that if you want a good credit score then you’re going to have to borrow money. BankRate mentions in the article to “remember [that] a bad report costs you money.” A bad report will cost you a bit more on your car insurance, and homeowner’s insurance premiums. This is a fact of life. The issuing companies use credit reports to determine your insurability. It’s all statistics.

The only other significant way it will cost you money is if you borrow again, because you’ll have to borrow at a higher rate (you’re a riskier investment for the creditor). Why don’t you just consider not borrowing money anymore? Credit repair then becomes null. That’s the free advice.

Don’t worry so much about your score. As Dave Ramsey says, “I refuse to worship at the altar of the FICO score.” This is just his way of saying, “hey, I’m not going to get hung up on my stupid credit report because I’m not going to borrow money.”

If you’re worried about applying for a mortgage, but you have really bad credit, then maybe you aren’t ready for a mortgage? Just a thought. However, if you have come around fiscally, you can always get certain mortgage lenders to do manual underwriting. This means they actually think about you and your personal situation before dropping the gavel on their decision. It’s a much more intelligent way to lend money, and it allows people who really have cleaned up their act to get a mortgage they can afford without having to wait such a long time to have the dings fall of their credit report.

To recap: if there are legitimate errors on your credit report, credit repair should be done. But take this free advice: do it yourself! The only entities that can make changes to a credit report are the credit bureau and the creditor. Consider that before you sign a check to some company promising ‘miracle removals’ from your report. It ain’t gonna happen.

If your report is legitimately tainted because you screwed up in the past, then just focus on getting your finances in order through budgeting, getting out of debt, saving an emergency fund, and mastering your money. With a mastery of money, you’ll be more concerned about where you should invest your money so it works for you. You couldn’t care less about what some company thinks about your financial situation. You’ll know the truth.

I hope this free advice on credit repair was worth more than you paid for it.

YNAB

You haven't budgeted like this.

Category Archives: Debt