Fall From Grace

When you accumulate a certain level of debt, it feels like you’re wading through an eyeball-deep pool of poo, dancing on your tiptoes just to keep breathing.   Ask me how I really feel.Tip Toe

It shouldn’t be a surprise that I’m in debt.  We have gone over this before.   The story isn’t one of my proudest, so I’ve never talked much about how it happened.

Our debt was entirely our fault.  We messed up and dug our own poo-pool.   There were no major medical bills, no extended unemployment, just a strong consumer urge and an apparent need for instant gratification.  Delayed gratification wasn’t a skill I’d considered learning.  The idea of it was a thoroughly foreign concept.   Why wait when every store we visited offered no payments/no interest for a year?   We didn’t give much thought to what would happen when the year was up.

We got married young.   We bought our house young.  We started our family young.   We did all of that over the course of two years, well before we were financially ready.   Twenty years old, we had excellent credit and gave our credit reports a workout.   Credit was so easy to get.    By the time I was 22, we had a total credit limit more than twice our annual income.  We fought so hard to keep up with the Joneses.   A new pickup, a remodel on our house.   Within a month of paying off the truck, I got a significant raise and rushed out to buy a new car.

Every penny that hit the table was caught in a net of lifestyle expansion.   I was bouncing on my tiptoes.

Four months into my new car payment, I was laid off.  There’s me, hoping for a snorkel.  A week later, we found out our son was going to be a big brother.   Our pool had developed a tide.

We killed the cable and cut back on everything else and…managed.   Money was tight, but we got by.  I got a new job, but had we learned any lessons?  Of course not.   We got a satellite dish, started shopping the way we always had.  Times were good, and could never be bad.  We had such short memories.

Fast forward a couple of years.   Baby #3 is on the way while baby #2 is still in diapers.   Daycare was about to double.  Daddy started to panic.   I built a rudimentary budget and realized there was no way to make ends meet.   There just wasn’t enough cash coming in to cover expenses.   That’s when I made my first frugal decision:  I quit smoking.  That cut the expenses right to the level of our income.  It was tight, but doable.

There was still one serious problem.    Neither one of us could control our impulse shopping.   For a time, I was getting packages delivered almost every day.  It was never anything expensive, but it was always something.  Little things add up quickly.

Last spring, I realized we couldn’t keep going like that.   I started looking into bankruptcy.   Somehow, we managed to toss ourselves into the deep end of the pool.  We had near-perfect credit and no way to maintain it.

While researching bankruptcy, I found our life preserver.   We put together a budget.   We cut and…it hurt.     It’s taken a year, but every bill we have is finally being tracked.   We have an emergency fund and we are working towards our savings goals.    It hasn’t been an easy year, but we are making progress.    We’ve eliminated 15% of our debt and opened out budget to include some “blow money” and an occasional date night.   We are always looking for ways to decrease our bottom line and increase the top line.   Most important, we are actually working together to keep all of our expenses under control, with no hurt feelings when we remind ourselves to stay on track.

We are finally standing flat-footed, head and shoulders above the poo.

Update:  This post has been included in the Carnival of Personal Finance.

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Debt Scams

When you are up to your eyeballs in debt, praying for a step-stool, sometimes life–more accurately, con-artists–try to trip you when you are vulnerable and look for a solution.  They aren’t muggers on the street.  They come at you wearing ties, invite you to a real office, with real furniture and a real nameplate on a real desk.   They are a real company, but that doesn’t mean they aren’t trying to scam you out of the little money you have left to put towards your debt.

Yes, I am talking about debt management scams.  These scams come in 4 main varieties.

Debt Settlement companies instruct you to stop paying your bills completely and send them the money instead to be placed in a settlement fund.  When your creditors get desperate enough, they will be willing to settle for pennies on the dollar.

In theory, this can be a good strategy for some debtors.  Unfortunately, it has some drawbacks, even if the company is legitimate.   They tend to charge high fees as a percentage of your deposits.  Some take another fee when a settlement is accepted.   The entire time you are building your settlement fund, your credit rating is sinking, leaving you open to being sued or garnished.  The bad companies take the fund and run, while even the good companies can’t guarantee your creditors will play ball.

Ultimately, they aren’t doing anything you can’t easily do yourself.    If you want to go the settlement route, stop making your payments and funnel the money into a savings account that you will use to offer settlements from.  It takes discipline, but there is no upside to paying someone else for the same function.

Debt Management plans are used when you owe more than you can afford to pay. These companies work with your creditors to adjust interest rates and minimum payments and they try to get some fees waived for you.

A good company will work with you and your creditors to make sure everyone is working together towards the goal of eliminating the debt.   A bad company will tell you they are working with your creditors while ignoring any contact from the creditor.  They’ll tell you the creditor isn’t willing to negotiate while never stepping up to the negotiation table.   Another trick is to offer the creditor a set payment, with a “take it or leave it” clause.  Any input from the creditor is interpreted as a refusal to participate.   This, coupled with high fees paid by the debtor, make debt management firms a risky proposition.  Most states require the firms to be licensed.  Check to make sure they are before giving them any information.

Debt/Credit Counseling companies work with you to establish a budget and eliminate expenses; in effect, they are training you to be in control of your finances.  They are often organized as a nonprofit, but not always.

Some–the sleazy ones–lie about what they are doing, or attempt to misconstrue what you are agreeing too.   Be careful not to use your home as collateral to consolidate unsecured debt and don’t walk into a Chapter 13 bankruptcy without that being your intention.  Both of those are common debt counseling scams.  If the company isn’t able to provide all of the details of a transaction–company name, address, licensing information–or they aren’t willing to spend as much time as necessary explaining the details of the transaction, walk away.   This is your life, you are in charge of it.  Don’t let anyone bully or prod you into signing something you aren’t comfortable with.

Credit Repair is almost always a scam. There are ways to get correct bad information removed from your credit report.  If the information is correct, those methods are illegal.   There are two legal methods to repair your credit.  First, stop generating bad credit.  Make your payments on time and eventually, the bad items will fall off.   Second, write letters disputing the actual incorrect items on your credit report.  There are no quick fixes, and anybody telling you different is flirting with a jail sentence, possibly yours.

How do you avoid the scammers?

  • Be skeptical. If it looks to good to be true, it probably is.  There is no such thing as a magic wand to fix your credit and make your debt disappear.  Bankruptcy + 10 years of your life is the closest thing to magic credit repair in this world.
  • Only use a legitimate credit counselor. Verify them through the Better Business Bureau and the National Foundation for Credit Counseling (1-800-388-2227 or www.nfcc.org)
  • Check the license. Most states require credit and debt counselors to be licensed.  If they’re not, run away and report them.
  • Read the find print.   Don’t sign anything you don’t understand.  Like every other piece of your financial life, own the transaction. Know what your are doing, or don’t do it.
  • Are they willing to work with you? If they’ve got a generic plan that doesn’t account for your specific situation, they are probably a con.  At the very least, they are a worthless company and a waste of both time and money.
  • Are they willing to work with your creditors? If not, they won’t be accomplishing anything for you.
  • How much do they cost? Higher fees may not be an indicator of a scam, but call around and find out if they are in the right ballpark.  Triple or quadruple the going rate is a sign of someone who will disappear late one night, with your hopes, dreams and savings in tow.
  • Above all else, trust your gut. If it doesn’t feel right, it probably isn’t.  There is nothing a counselor can do that can’t wait a few days while you check them out.

There is no magic bullet to kill debt.   You’re not fighting a werewolf, you’re fighting a lifetime of bad or unfortunate choices and circumstances.  It’s important to keep a realistic outcome in mind.

Update:  This post has been included in the Carnival of Debt Reduction.

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Balance Your Borked Budget

You’ve got a budget worked out to the penny.  You know every dollar that comes in and every dime that you spend.    All of your bills are getting paid on time.  Then, one day, it all comes crashing down. Your budget is no longer even a reasonable approximation of your cash flow.  You’ve got no idea what’s coming in or going out.   Bills are piling up and fees are digging you deeper in debt.

What happened?  More importantly, how do you get back on track?

The first thing you need to do is identify the problem. What, exactly, went wrong?  Did you lose your job or need a surprise botox injection?  Your car died or your kid developed a hockey habit?  Sports car or shoe sale?  Whatever the cause, if you can’t identify it, you can’t deal with it.  Some of the possible problems may be things that can get clubbed and buried in the backyard, while other things may be expenses that won’t be going away.    If it’s a one-time expense, you can simply refocus your debt repayment to take it into account.  If it’s an ongoing expense, you will need to adjust your other expenses, possibly in a drastic manner, to make ends meet.  You can’t know which way to go without knowing what caused the problem.

Next, commit to to making it right. Don’t leave it at a mere commitment.  Actually commit and actually do it right. Future-you is counting on you to fix the problem before he gets screwed.   This is important.  Without firm–and real–commitment, nothing else will matter.  At best, you will be treading water.  At worst, you will drown yourself in unanticipated bills.

Cut everything extra.   Every expense–whether it’s your mortgage or your maid–is a rock in your pocket, one hundred miles from shore.  How much can you carry and stay afloat?  This isn’t the time to keep paying something because you enjoy it.  If it isn’t absolutely necessary, it’s got to go.  Cut your internet, cancel Netflix, learn to shut off the lights when you aren’t using them.   Is the early termination fee less than 6 months of your cable bill, your satellite bill?  Cancel it.    You can always sign up again later.  This is the time to be ruthless.

Is there a way to bring in some extra cash?  Can you pick up a second job, or land a freelancing gig?  If you’ve suddenly found yourself unemployed, can you spend some time on being a Mechanical Turk?  Sell all of the things you don’t use anymore, or, more likely, never should have bought in the first place?  Do you have a spare kidney?

Remember, this is a drastic situation calling for drastic measures.  Your future is depending on you.  Don’t make him come back and kick your butt.

Update:  This post has been included in the Carnival of Personal Finance.

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Clearing Up Social Debt in 3 Steps

Debt can be thought of as a disease–probably social.  Most of the time, it was acquired through poor decision making, possibly while competing with your friends, occasionally after having a few too many, often as an ego boost.  Unfortunately, you can’t make it go away with a simple shot of penicillin.   It takes work, commitment and dedication.  Here are three steps to treating this particular affliction.

1.  Burn it, bash it, torch it, toss it, disinfect. Get rid of the things that enable you to accumulate debt.   If you keep using debt as debt, you will never have it all paid off.   That’s like only taking 3 days of a 10 day antibiotic.   Do you really want that itchy rash bloodsucking debt rearing its ugly head when you’ve got an important destination for your money?   Take steps to protect yourself. Wrap that debt up and keep it away.

2.  Quit buying stuff. Chances are, you have enough stuff.  Do you really need that Tusken Raider bobble-head or the brushed titanium spork?  They may make you feel better in the short term, but after breakfast, what have you gained?  A fleeting memory, a bit of cleanup, and an odd ache that you can’t quite explain to your friends.   Only buy the stuff you need, and make it things you will keep forever.  If you do need to indulge, hold off for 30 days to see if it’s really worthwhile.   If it’s really worth having, you can scratch that itch in a month with far fewer regrets.

3.  Spend less. This is the obvious one.  The simple one.  The one that makes breaking a heroin addiction look like a cake-walk(My apologies to recovering heroin addicts.  If you’re to the point that personal finance is important to you, you’ve come a long way.  Congratulations!).  Cut your bills, increase your income.  Do whatever it takes to lower your bottom line and raise your top line. Call your utilities.  If they are going to take your money, make them work for it.   If they can’t buy you drinks or lower your payments, get them out of your life.   There’s almost always an alternative.   Don’t be afraid to banish your toxic payments. Eliminate your debt payments.  This page has a useful guide to debt and how to clear it off.

Update:  This post has been included in the Festival of Frugality.

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