Money Problems: Day 10 – Debt Insurance

Mortgage debt

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Today, I am continuing the  series, Money Problems: 30 Days to Perfect Finances.   The series will consist of 30 things you can do in one setting to perfect your finances.  It’s not a system to magically make your debt disappear.  Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days.  That’s not my schedule.  Also, I think that talking about the same thing for 30 days straight will bore both of us.   Instead, it will run roughly once a week.  To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, Day 10, we’re going to talk about debt insurance.

Debt insurance is insurance you pay for that will pay your lender in the event of your death, dismemberment, disfigurement, disembowelment, or unemployment.  Exactly what is covered varies by insurer, type of debt, and what you are willing to pay for.

Private Mortgage Insurance(PMI) is a common form of debt insurance.   Generally, if you take out a mortgage with a down payment under 20%, you’ll be expected to pay for PMI.    According to the Homeowners Protection Act of 1998, you have the right to request your PMI be cancelled after reducing your loan amount to 78% of the appraised value of the property.  That ensures that the lender will be able to recoup their money by seizing the mortgaged property if you should happen to fall under a bus or get hit by a meteorite.

Another common form of debt insurance is for your credit cards.  Card companies love it when you buy their insurance.   If you buy their life insurance, your card is paid off when you die.   Disability insurance pays it if your get hurt.  Unemployment insurance…you get the idea.

Here’s the deal:  Get life insurance and disability insurance separately.  It’s cheaper than getting it through your credit card company and let’s you get enough to actually live on if something tragic happens.   Unless, of course, you die.  Then it will leave enough for your heirs to live on.

As far as unemployment insurance, build up your emergency fund instead.  That’s money that gives you options.   Credit card insurance is money flushed down the toilet.  Many of these policies cost 1% of your balance.   If you’ve got a $5,000 balance, that will mean you are paying $50 per month.  By comparison, if you’ve got a 9.9% interest rate, you’ll be paying about $40 per month in interest.

Debt insurance is a bad idea, if you can possibly avoid it.  A combination of life insurance, disability insurance, and an emergency fund provide better protection with more flexibility.

Your task for today is to review your credit card statements and mortgage agreement and see if you are paying debt insurance on any of it.  If you are, cancel and set up the proper insurance policies to protect yourself and your family.

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Filing Bankruptcy: Pride or Shame?

Schoolchildren line up for free issue of soup ...

Image by State Library of New South Wales collection via Flickr

I’m a big fan of personal responsibility.  If you’ve promised to do something, you should do it. With that said, it seems odd to some people that I don’t have an ethical problem with bankruptcy.  For some people, it is the only option after a long series of problems.

Don’t get me wrong, it should be a shameful decision. Reneging on your word should never be a source of pride.  It should be a difficult decision to make.   A couple of years ago, I came very close to making that decision myself.

It should not be a reason to celebrate and it should absolutely not be a reason to behave irresponsibly.  Some people don’t see a need to take care of their responsibilities because, when it gets bad, they’ll be able to file bankruptcy and make the creditors go away.  They are abusing a safety net.  That abuse hurts everyone.   Credit card companies have to charge higher interest rates so the paying customers can cover the risk of those who default or file bankruptcy.

There is one prominent local bankruptcy attorney who files every 10 years, and has filed consistently for decades.   He runs a thriving practice, so it’s not a matter of poor choices, it’s a matter of deliberately living beyond his means and screwing his creditors.  He’s one of the slime-balls that give lawyers a bad name. He is one of the many who abuse a lifeline designed to save people from a life of destitution they didn’t ask for, and he does it to finance his extravagant lifestyle.

If you have found yourself buried in a debt you didn’t plan for, if life threw you a curve-ball that you are entirely unable to deal with, if you have to file bankruptcy, it’s okay.   Really.   When you go in front of the judge, have the decency not to enjoy it, and try to learn from the experience.

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How to Deal with Debt While You’re Out of a Job

This is a guest post from Marc Chase of My Credit Group.

Dealing with a lot of unpaid debt can be a hassle on its own.  Having to pay those debts when you don’t even have a job to provide you with the money to do so can be a nightmare.  While you’re hunting for a job to help make ends meet, your debts continue to pile up, leaving you scrambling to find a way to take care of them before they cause you to slip further into the poor house, and leave your finances needing credit repair services.

Since you’re likely more concerned about finding a job than anything else, we put together this handy checklist of what you should do to avoid your unpaid bills and debts getting the best of you while you search for a new job.

•     Apply for unemployment benefits. This should be your first order of business after you’ve lost your job, especially if you’re one of the many Americans currently living paycheck to paycheck.  Unemployment benefits go a long way towards helping consumers stay on top of their bills and credit accounts.  Don’t make the mistake of thinking another job is just around the corner – there’s a good chance you can’t afford to wait.

•    Keep paying the minimum balance. If you’re on the verge of drowning completely in unpaid debt, you may be tempted to stop paying your bills completely, at least until you get some additional funds in your account.  Do this, and you’ll find yourself in need of credit score repair before you even get that call back for a follow-up interview.

Instead, do everything you can to at least pay the minimum balance on all of your credit accounts and bills.  This will ensure that your credit history doesn’t take too much of a beating, and saves you from paying even more in interest fees down the line.

•     Stop spending money like you have it. Because the sad truth is, while you’re still unemployed, you likely don’t have a lot of money to spare.  If you’re still living your life as though you can afford to pay for everything – eating lunch and/or dinner out more than twice a week, generally buying things you don’t NEED – now’s the time to stop.

Stop charging every purchase you make to your credit card – break them out only in an emergency.  This will help keep you from sinking further into debt while you’re out looking for a way to pay for your purchases.

•     Eliminate and prioritize your bills. Now’s a great time to take a long look at some of the bills you’re paying, and deciding if they’re even worth the service.  That doesn’t mean you should stop paying bills you consider “less important” than others; it means looking at some of the things that might have once been necessities (a land phone line if you primarily use a cell phone, a full package TV cable bill, etc.) and re-evaluating your stance on how important they are now that you can’t afford them all.  In many cases, you can get in contact with your service provider(s) and talk about ways to reduce your bill (say, cancel cable but keep internet).

This is a guest post from Marc Chase, President of Product Development for My Credit Group, a website dedicated to helping consumers with managing their credit.

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Mistakes Made

St. Thomas Beach
Image by K. Sawyer via Flickr

My wife and I started dating when we were 19. We married shortly thereafter, and–at 31–we have 3 kids.

Now, most of a decade into my career, with a dozen years of experience as both a husband and an adult, I think we make decent decisions.

When we were younger, though, we were dumb. We didn’t think much past the “year” in “0% for a year”. Our long-term financial planning was non-existent. Heck, most of the time, our short-term financial planning usually consisted of a call to the bank to see if we had enough money to buy whatever we wanted at the moment or rushing to the bank to deposit the change we found in the couch, hoping to beat the last check we wrote.

We were never able to judge ourselves based on how happy we were. It was always a matter of how we were doing in relation to someone else. A relative–a close relative–is 10 years older than we are. That means, naturally, that she had a 10-year headstart on us. We saw the nice house, the nice cars, and the nice furniture and couldn’t help but compare it to our situation. Their stuff was always shiny and new, while we were making repairs and ignoring rust.

That comparison always made responsible spending difficult. We watched one friend upgrade her house twice in 2-3 years, while driving nice cars. Why couldn’t we do that, too?

Bad logic.

In one year, we put an addition on our house, got married, bought a brand-new pickup, and spent 10 days on a ship in the Caribbean. We did that with a gross household income of about $40,000. Before that summer, we didn’t have a mortgage. Since that summer, we have had a car payment, a credit card payment, and a mortgage payment.

I can still smell the scorched plastic peeling off the sides of our well-used credit cards. That year was when we figured out how everyone else affords all of the nice stuff: they bury themselves in debt.

The debt was never a big deal to us. Yes, money was tight. We always had more month than money, but we also had $50,000 in available credit on the cards and a $5000 credit line serving as our overdraft protection. Since we never missed a payment, we thought we were doing well. After all, you don’t have to be able to afford the debt, as long as you can afford the payment, right?

After that, we started putting the nice truck to work hauling home new furniture. Who can go wrong with 0% for a year? Surely, I’d have a raise by the time that comes due.

The same time we paid off the truck, I got a raise. It was a good raise. There we were, a wallet full full of balance-laden credit cards, a mortgage that we could have done without, furniture we were still paying for years later, a freshly paid-for truck, and a small stack of new money. That meant, of course, that we could “afford” a new car that came with a payment that was–coincidentally–equal to the raise. No problem.

Six weeks later, I got laid off.

Two weeks into the layoff, we found out that we were no longer “trying” to have another baby, we were just waiting for 9 months.

I wish(wish!) that would have been a wake-up call, but that moment of clarity was still 18 months away. The driving obsession to get out of debt was another 18 months away. Unemployed and expecting brat #2, I still wasn’t ready to take a rational look at my finances. That, however is a story for another day. Today, is my day to share my biggest financial blunders, not my successes.

What financial mistakes have you made?

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