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I’ve received several questions lately from young adults, just out of school, who are finding it difficult to make ends meet. Here’s one from Ryan, who is feeling overwhelmed by debt:
I’m 21 years old, working a full-time job and a part-time job, and going to school part-time on weekends and evenings.
After high school graduation, I immediatley fell into credit card debt, which I’m still drowning in. I had barely any financial guidance from my parents, and now have started some pretty terrible money spending habits. I think I’ve finally crossed the threshold that my expenses have overgrown my monthly income.
I’ve already called my credit card companies and negotiated a lower interest rate, and canceled them both. Right now I am making all the minimum payments (some on time), but I feel like I’ve finally hit a wall. I’ve tried the debt snowball, but it seems as soon as something is paid off, something unexpected comes out of nowhere.
I’ve been thinking about programs like Novadebt to consolidate everything and start again, but I’m worried about my credit score. I know that when you get involved with programs like this, you can’t be able to be approved for a car loan or mortgage for a few years in the future. I thought that if Novadebt can pay off my debts, it would be better to just pay one bill a month and I might just have the opportunity to start saving some money.
Can you give me some advice?
First, Ryan should stop taking on new debt. He needs to make sure not to sabotage himself. It sounds like he’s taking steps in the right direction. If he can stop spending and begin flexing his frugality muscles, he’ll be able to attack his debts without losing ground.
Next, Ryan needs to establish an emergency fund. He’s had trouble with the debt snowball because unexpected expenses keep cropping up. By saving $500 (or $1,000) as insurance against the unexpected, he’ll be able to follow his plan without being sidetracked.
Speaking of which, while digging out of my own debt nightmare, I’ve found it valuable to make a spending plan. This isn’t a budget, but a rough estimate of upcoming income and expenses. When I draft a spending plan, I write down all the money I expect to receive between now and the end of the year. I also list known expenses: every debt, every monthly bill, every special occasion (such as Christmas). After examining my cash flow, I create a list of financial priorities. This can be intimidating at first, but if you are patient and persevere, your cash flow will improve in time, and your debt will diminish.
After Ryan does these things, he can concentrate on the debt snowball. Or, if he decides it’s best, he can seek the help of Novadebt or some other consumer credit counselor.
What advice do you have for Ryan? What has helped you pay off your debts? What can you tell him about credit counseling and its effects?
This article is about Ask the Readers, Debt Friday, 24th August 2007 (by J.D. Roth)
August 24th, 2007 at 5:35 am
It’s hard to say without knowing more, but I’ve found that people who are in this hole of debt and can’t get out suffer from one primary problem - they won’t stop digging.
If you are in a hole and want out, the first thing you must do is STOP digging.
Maybe Ryan has already stopped. If so, great, no need to read the rest of my comment.
Here are the questions that came to my mind when reading. Where do you live (and is moving back in with your parents an option while you get out of debt)? Do you have a cell phone (ditch it for a prepay - $10 at att/cingular recently)? Do you have cable TV, satellite TV, Land line phone with caller id, call waiting, and all the other useless crap, high speed internet? Do you drive when walking/cycling is less expensive? Could you trim your food spending (and still be healthy)?
I certainly hope this isn’t coming across as judgmental. It’s not intended as a judgment. I’m just trying to help you see that extreme circumstances require extreme measures. When it comes to simplifying, going big is often easier than going in one toe at a time.
August 24th, 2007 at 5:35 am
I don’t think he needs to be concerned about his credit score if he is only sometimes making payments on time and is fully extended on his revolving accounts. I also don’t think he should be thinking about buying a house or car in the next couple of years, you need to be in a better position financially before you can purchase something that big.
Save some cash for emergencies and start paying off his debts is his only choice.
August 24th, 2007 at 5:42 am
I agree that Ryan needs to make a good spending plan, especially as whether credit counseling is a good idea depends a lot on how easy it is for him to make the minimum repayments.
One of the things that can be difficult to get your head around, is that you are going to have to start spending a lot less than you are used to. It doesn’t matter which method you choose, you will have to change your lifestyle a bit. I have second-hand experience that this realisation is pretty important.
August 24th, 2007 at 5:42 am
It’s good advice, but if he can’t consistently make the minimum payments, how is he going to save an emergency fund? Without knowing more about where his monthly income is going and making suggestions on what he can cut or reduce it’s tough to say what he should do.
August 24th, 2007 at 5:58 am
I agree with the Other Ryan. Cut expenses as much as you can as a first step, even if it means living uncomfortably. Just for a few months. That will give him the extra cash needed for an emergency fund.
Aside from that, I’d say Ryan needs to turn to his family for some help if that’s possible. He sounds extremely busy already — two jobs plus school. That’s a hard load. Maybe his family can help him consolidate his debt with a loan. I’d rather pay interest to my parents than the credit card companies OR Novadebt.
August 24th, 2007 at 6:04 am
JD, I’m reminded of that friend of yours who asked for help with “finding money” and wouldn’t cancel the cable, cell phones, or downsize vehicles. Making some payments on time is absolutely unacceptable. And turning to a debt consolidation org. is a band-aid for a problem that requires an amputation. He’s just going to have to suck it up and make some big changes–primarily mentally–before anything is going to happen. There’s nothing that debt consolidation orgs. do, in my opinion, that an individual can’t commit to do themselves–it’s a pretense at a solution, and not an actual solution.
August 24th, 2007 at 6:08 am
Is there anyway to get more details like incomes and expenses? It’s hard to make a response without those details. In the meantime, here you go, this is my personal formula;
1.) spend less than you earn
2.) track all spending for at least two months (shoe box, notebook, debit card register, it doesn’t matter just do it)
3.) create a budget (here is where you cut expenses)
4.) create a spending plan (here is where you allocate money to meet your cash flow throughout the month)
5.) calculate net worth
6.) review steps one through five twice a month (to get started you may want to do this weekly)
7.) at the very least, if you cannot perform any of the other steps, number one is the most important
8.) and oh yeah, get used to being young, on your own, and in over your head
August 24th, 2007 at 6:19 am
The biggest thing that helped me is tougher to do that to say…it’s “make more money”. I had a huge fear of success as JD’s written about before that kept me from interviewing with other companies. Once I did get out of my old job, multiple opportunities opened up.
I understand Ryan’s still in school, but is it possible for him to get an entry-level position in whatever major he’s declared? Perhaps that would pay a bit more.
As a sidenote, if Ryan’s current car is one of his unexpected expenses, perhaps a mechanic’s book could help? He could perform some of the regular maintenance himself and save a bit.
August 24th, 2007 at 6:22 am
Do not use a debt consolidator!!! About a year ago I was in similar straights, and I heard one of those debt consolidation radio adds and I called them to find out the details. I’m not going to call them scams, but lets just say that they need to make money too. They do so by undercutting the debt you currently owe and dragging it out all the longer. In some cases they barely reduce the payments they just give you one address to send the check to.
August 24th, 2007 at 6:38 am
Wow, thank you all for your opinions and suggestions. I agree with all of you. Number one is definitely a mentallity switch. After a while of living on my own with friends, maxing out credit cards and being real stupid with money.. I did move back into my house.. I’ve been slowly chipping away at school loans and credit card bills, but have emliminated all utility bills, food bills (for the most part) ect.. I do have a car loan that I pay, and car insurance, a small rent to my parents to help with bills, ect.. The major thing is my entertainment budget. A few times I would blow a paycheck over the weekend after turning 21 and whatever money is leftover went to paying monthly bills. This has all stopped, I assure you. I’ve basically just stopped returning my friends phone calls.
I did call NovaDebt just to see what their program was like, and it doesn’t seem like a bad deal.. For my amount of debt they would only charge me $5 a month, and that would be included in my monthly payment to them.. They negotiated my interest rates down (For example: 20.9% down to 6%.. and 10.9%, which is what I got after I negotiated with them, down to 9.9%) So now instead of a bunch of CC bills with a $50 minimum charge.. I pay one bill a month with a $75 minimum charge.. Now I can round up all of the minimum charges spread across all the bills and throw them right onto one… This, I’m thinking, will make paying everything off alot quicker. Thats the road I plan on going down..
August 24th, 2007 at 6:59 am
When I was 21 I was prone to the following activities:
* Going to the bar
* Eating out
* Renting / buying movies / going to movies
* Renting / buying games and game systems
* Spending money on my dates / significant other
* Cable / dish television
* Car electronics / ipods / stereos
* THE latest tricked out wireless phone and pager
* Expensive brand name clothing, accessories and shoes
I’m going to make a big assumption that he is doing some if not all of these things. They led me to terrible debt that took me years to pull out of. All of these habits MUST stop for him to get to the next level. At 21 years old, this is going to be painful, but he’ll be in bigger pain if he doesn’t.
Drastic things to do to move out of debt:
1. Find cheaper rent (I lived in an efficiency for a while to save money - it sucked but worked).
2. Sell the games, movies, and systems online or through craigs list. These items may have value and do two things. a. make you spend more money for more games. b. keep you from being productive in other aspects of life.
3. If you have brand name clothing, accessories, “cull” your clothing and keep whats necessary to make sure you don’t look like a homeless person and sell them to a consignment shop or again on craigslist.
I think you can follow the theme here. Its about changing your perspective on whats important to you in life.
August 24th, 2007 at 7:20 am
It always amazes me when single people say they can’t get out of debt. Their income and expenses are completely controllable. Try digging out of debt when you are a single parent and the kids need glasses, medicines, and school supplies - not to mention food. I’m afraid I have no sympathy for his plight at this point. Maybe he should count himself lucky that he doesn’t have another mouth to feed and put it into some perspective. He does have control of his life, no one else is there taking the money from him or forcing him to stay at a job that doesn’t pay enough.
August 24th, 2007 at 7:26 am
Assuming you aren’t a total spendthrift, take a look at your biggest expenses first. That is: housing, car (and groceries/food.) If your housing is costing more than 30% of your net income, get a roommate, move in with your relatives, or find a cheaper place. Even if it’s only temporary until you get your debt taken care of. If you’re making large payments on a car (more than 15% of your net income including all transportation costs like gas and insurance), sell it and buy a junker, or move somewhere you can use public tranportation. Cook for yourself; think “refried beans and tortillas with rice” and other simple but filling foods. Don’t go out to eat ever.
And do the debt snowball: first get up to date on your credit cards (no late bills), then attack them one at a time while making minimum payments on the rest (smallest to largest interest rate or vice versa, it’s your call).
August 24th, 2007 at 7:27 am
Join the military. Immediatly take your rent to zero. Drive an old beater or none at all. Food and medical are provided and the pay is not bad. I was exactly where he is and the Navy was the best thing I ever did. I would go back in a second if my age and health permitted.
August 24th, 2007 at 7:31 am
I agree with the other commenters. If he is that overwhelmed, and it sounds like he is, then drastic changes need to be made.
Get your expenses and income down on paper, so you can see them in black and white. Where is all the money going? After stopping any new debt, this is key to getting control. If basic expenses exceed your income then you need to prepare for making big hairy tough choices. Selling cars, moving home, quitting school for a short time so that he can get control back in his life. Right now, he is controlled by his debt and stuff.
August 24th, 2007 at 7:34 am
I think what gets me about the debt consolidation thing is that you’re talking about minimum payments, as if you’re going to get anywhere with paying the minimum. Lower interest rates are great, but you should figure in everything–monthly finance charges, etc. to see if switching to a lower rate is worth it. For example, when we were paying off the last bit of CC debt, my husband said, “why don’t we roll such-and-such over to this 3.9% offer?” And the answer was that the fee to do so, plus finance charges, was more than what we would pay in interest and finance charges on the 9% card in the amount of time we were planning on taking to pay it off.
The key, I guess, is long-range planning: “I will pay off X card by month/year.”…and sticking like glue to it.
August 24th, 2007 at 7:51 am
Ryan,
I’m glad you’ve made the mentality switch and are living at home to save on rent. I don’t think you need the credit counseling agency– you can negotiate those lower rates on your own. Just tell them that you’re planning to consolidate on a lower rate credit card.
I would sell the car. If you live in an area with good public transit, stick with that for a year or so. You’d be amazed how much money you save when you don’t have a car payment or insurance. Also, if going out takes more planning, you’ll be less likely just to go out and spend money on a whim (like a fast food or beer run). If you can’t survive without a car, get a very basic 10 year old Toyota or Honda. You can buy one for approximately $3000 and if you have a mechanic check it out ahead of time, it will run forever with very little maintenance.
Finally, you said that you’ve stopped returning your friend’s phone calls. I wouldn’t take that approach because at some point, you’re going to get lonely and bored and agree to go out with them one more time and blow a whole bunch of money all over again. I would invite them to do things that cost less money– like going to a dive bar with activities like pool, darts, fooseball, playing basketball at a park, working out together at the school gym or watching a video at someone’s house (you bring the popcorn). If your friends are totally entrenched in the credit card lifestyle then you will probably want to find new friends who don’t put pressure on you to spend more than you’re comfortable with. But you definately don’t want to make yourself completely miserable and deprive yourself of a social life, because you’ll never be able to stick with it longterm.
August 24th, 2007 at 7:53 am
Ryan,
Your first concern is not hitting those payments on time. Why not? Do you forget when they’re due? Not have stamps? Don’t deposit your checks? Too tired to remember what day it is?
You’re working hard and just out in the world; it’s understandable. What’s done is done, and it’s admirable that you’re working on getting yourself on track so early - it’ll serve you well in the future!
1. Invest in a wall calendar and put it by your front door. (many Funeral Homes have them for free, if you’re cool with that - otherwise, it’s worth the expense!) Put the dates your bills are due on it for the next few months, at least. Make a little note a week/week and a half before (if by mail) that you are to send them out that day.
Also, write upcoming expenses on the calendar. (change of semester - purchasing books/supplies, car insurance/registration, birthdays you purchase gifts for, oil changes, etc.)
2. Set aside a drawer, box, or equivalent for bills only. Put envelopes, stamps, a pen or two, and all incoming bills in it. When bills are paid, write paid and the date on the envelope and file/put them all together in a different box.
3. Make a list. How much do you owe on each card? What rate is the loan at? Put it in the box with the bills. You’ll want it later, but not until your emergency fund is established, and I’m not there yet.
4. If you aren’t making your minimums easily, it’s time to take drastic measures. It’s not something anyone wants to hear, but I think you know deep down. Here are some things to consider:
- Is there somewhere cheaper I can crash? Can you be a roommate? This is often the same quality living space at a much cheaper cost. Be aware of fees to break your lease or if you need to find someone to sublease if you go this route.
- What can I get rid of and get some money for? Can you sell your old video games/systems/CDs to a friend or to a resale game shop? Sell it! Do you *really* need cable or internet at home? Is there anywhere nearby where you can still catch your favorite show or use wireless/computers? Get rid of it! Can you stay home instead of going out? DO IT!
- What can I “trade down”? Can you trade a friend for a slower computer + cash? Can you sell your computer desk and use the kitchen table instead? Can you trade a newer car in on an older, less expensive model? Can you shop a warehouse store for food (Aldi, Shopco, Save-A-Lot…) - at least for cans? If you have duplicate service (phone at home and cell phone) decide which you want most.
- What is really drastic? How much do you really *need* a car? Can you take the bus? Can you walk or bike? If you don’t have a car, you not only don’t have a car payment, you don’t have maintenance or insurance fees. That is a nice chunk of change to go toward your debt, and franky, the big blow to ours. We’ll have to get another car eventually, but we have a nice bus route and will buy used next time.
5. With *whatever* money you find or save, start that emergency fund! At least $500-$1000 is best, because everyone has unexpected expenses. We just don’t know when something in our vehicles might break, or when we might get sick and miss work, etc.
6. Now take out that little list of what you owe. Can you get a better rate? (probably not, since you’ve been missing payments and made calls in this case) Make a decision which you are paying down and put *all* the extra money you’ve found toward it.
7. When you make a purchase, ask yourself:
- Do I need this?
- Do I want this?
- What am I going to use it for?
- Do I have something that will do the same thing?
- Is this a purchase I have to make *right* now?
- Do I *really* need this?
- Will I regret buying this in the future?
Because, you know, we’re paying off all that stuff we bought in the past. I can name a few things that I would have purchased again (new energy efficient windows in a very old house) but most of it was just… junk that I could have done without or food I could have saved money on by eating at home. Remember: Tomorrow we’ll pay off the stuff we’re buying today, as long as we’re in debt. So only buy important stuff. That may include something others would consider a little frivolous, but may save you money in going out.
8. Stay upbeat. You *will* get out of this. It’s hard, and it’s no fun. It may take a few years. But you are smart and with a little determination you’ll find yourself ahead of the game! Good luck!
August 24th, 2007 at 8:54 am
These are all such great tips. I really appriciate all of your feedback, and JD. Thank you so much for posting this.
@ Another Ryan,
I completely Agree.. I’ve been digging for a long long time, and this article is my motivation to stop digging, grow up, and start to get myself out of this mess I’m in.
@ Wesley
I did just get a nice cozy corporate america entry level job with a big financial institution. It was one of my steps towards getting out of debt since they have an amazing tuition reimbursement program.. I only have to pay 10% of my tuition now plus books.. So my mounting student load debt has ceased growing and is starting to come down as I pay them off. I’m working hard at advancing in my classes at school and as I’m doing so my responsibilites (and paycheck) are increasing as my knowledge increases.
@ Kelly
Turning 21, as you obviously know, did not help my situation with money. Luckily I do live with my parents once again, and am only paying 20% monthly what I was paying for my apartment out of highschool…
I’ve limited myself to only going out once a week (at the most) and I only buy new clothes when I need to replace something that has gotten too old or worn out.. As I do have a corp job, my clothes do need to be somewhat dressy and expensive, but def not name brand.
@Anon
I know exactly what your talking about, and I wouldn’t wish that situation on anyone else. My main concern is that I don’t ever want to be in a situation like that. I enjoyed for a long time spending and having fun with the money that I worked hard to make. When the time comes for me to start a family of my own, I want to be able to provide everything that my family needs plus luxuries. It wouldn’t be fair for me to bring a child or a wife into my life while I’m buried in debt from college days. I count myself lucky everyday that I have everything that I need to survive and that I haven’t brought anyone else down with me.
@Randy
I have a father who has been in the military for 24 years. I hear this everyday and i’ve been sitting on this idea for a long long time. I’m one of the lucky young men of this country to be in great shape and health, I’ve got both eyes and all of my fingers and toes. But I honestly think that there are much better ways to get out of debt.. I’ll stop there because this discussion wouldn’t be great for a personal finance blog. I appriciate the suggestion though, and it’s still not something that’s out of the question.
@Sakoro
I completly agree.. I would honestly love to sell this car.. but with the job/parent’s house/tuition reimbursement situation that I’m in.. I think the costs of all that outweigh the cost of my car.. Without a car, I would either have to lose this job (and tuition reimbursement along with it) or lose my parents house and find a new school… My parents live about 20 minutes away from work by car, and I don’t live in a very pedestrian friendly city. Everything is extremly spread out, and if you don’t have a car around here, your not really getting anywhere. Public transportation in this city is a hair over non existant. (I live in Scranton, for anyone who is familiar with what I’m talking about)
@ Leia
Those are all great suggestions and I’m doing my best (and getting really excited with all this support) to try to implement ALL of them. I know I will get out of this, and I want to ASAP so I can start my life out without a black cloud over my head. I’m looking for the horizon and I know I’ll get out of it!! Thank You!!!
August 24th, 2007 at 9:21 am
To THE Ryan,
You may want to look at Mvelopes (Mvelopes.com). It’s an online budgeting program that has really helped me get a hold of my spending. It does have a small monthly fee (like $8 or something), but it’s definitely worth it.
To Anon:
Get over your self-righteous self.
August 24th, 2007 at 9:24 am
The book, Your Money or Your Life, by Joe Dominguez and Vicki Robin was written for folks like Ryan.
August 24th, 2007 at 9:32 am
Been there done that bought the t-shirt and burnt it.
yes it sucks being in debt, but a few simple things you can do. One start writing down everything you spend, this will help you latter when you set up a budget.
2. Spend time here and over at the simpledollar.com for tips and tricks on frugal living.
3. Realize that you will backslide on your spending and budget from time to time. It takes time to learn new habits.
4. You’re a bit young for this but when we went recently through a cash flow crisis (death in the family meant an expensive trip home - 3 weeks before we were scheduled to fly home for holidays ouch). I looked back at previous crisis and looked at what I did right and what I did wrong in order to avoid repeating mistakes.
Lastly it’s better to learn this now than when you in your 40’s with kids house mortgage etc and when it’s much tougher to crawl out.
good luck
August 24th, 2007 at 9:35 am
The one thing I would suggest is to sell stuff. I am sure Ryan has accumulated some “STUFF” that is nice to have but not necessary (ipod, cell phone, etc.) or that he purchased at a younger age that could be resold (comics, baseball cards, etc.) This cash should be used to either (help) establish an emergency fund or pay down debt.
August 24th, 2007 at 9:36 am
I agree with the other posts, mostly. One problem that I see only lightly addressed is where this person shops. Yes, when a person is in debt, he/she needs to take inventory of what he/she has and get rid of excess. But, at the same time, he/she does not need to cut so deep that they are left without things that keep them occupied at home. For instance, the video games that you have, look at each one, and ask yourself if you really enjoy playing this game anymore. If not, it is time to sell it. The same goes for dvds and clothing. With that said, if you chose to buy another dvd, game, or piece of clothing, ask yourself the same question and ask yourself is this the best price I can get it at. I am a huge dvd, book and clothes fanatic, but if it is overpriced, I will not by it. I will often buy my dvds and books from ebay and overstock.com because they have the cheapest prices. My clothes, I always look at the clearance rack, especially when there are deals like 50% off with an additional 25%. If you stop the impulse shopping and shop responsibly, you can have what you need and a little bit of what you want.
August 24th, 2007 at 9:41 am
“but I’m worried about my credit score” oh pleeease!
This alone is what make people go crazy, forget about the score and focus on how can you pay YOURSELF first.
As Eric said in comment #2, he should not have a desire to buy a car or house soon, no need to worry about a score
August 24th, 2007 at 10:03 am
What really helped me with the ‘mindset’ part is a website called debtproofliving.com. It’s run by the author of a book by the same name, Mary Hunt. I subscribe to the website to get the full impact, but the free areas are extremely helpful, too. The Rapid Debt Repayment Calculator would help you get a better idea of the actual payoff amounts and times. I consider the $24/year fee for full access to the website part of my debt repayment plan. The discussion area is full of people who’ve done what you’re trying to do.
For free, you can also read her books. They are probably available at your local library. Which brings me to my next suggestion: Utilize your library! I lived in a small midwestern town for years, and the library was amazing! Besides the books, there are cds and movies to borrow, newspapers, magazines, internet access, lectures, workshops, and lots more–all FREE. The movie selection usually depends on what has been donated, but even my small library had a shelf full of dvds. The bulletin boards will give you tons of information about community events, like basketball tournaments or movie screenings, that you and your friends could do for free or little money.
Good luck with your debt-free future!
August 24th, 2007 at 10:04 am
Ryan, When I was your age I heard a saying that could have changed my life, but it didn’t because I didn’t get it. I thought I did, but fell into the same trap you did.
The saying: Interest is a matter of understanding - those who understand it earn it, those who don’t pay it.
If you are really committed to getting out of debt some extreme measures are possible. A year and a half ago I had a run-in with the IRS and as a result they garnished my checks leaving less than 400.00 a month to live on. The condo I was renting was 850. I had to move and quick. I had a bit of savings, but it went pretty fast. I also had about 25,000 in other debt from a divorce several years ago (down from 87,000 immediately after the divorce). so, I borrowed a pop-up tent trailer from my parents and lived in it next to a friends shop. It worked out that he had some added security and I had a place to crash that had electricity. I was already in a contract at the gym so I showered daily there. I cut every possible extra beyond that and moved my stuff into a storage unit. I bought a bigger trailer for 3000.00 last fall (the winters here are nasty - reaching lows in the -10 to -20’s) to get me through the winter. Earlier this year I got on a payment plan with the IRS and continud hammering away at my debt. I’m 4 months from being completely debt free! If you don’t have kids or a spouse “homeless” isn’t really too bad. Some of the best nights sleep I’ve had were slipping into dreams of what my life will be like when I’m debt free. My plan for the future:
1. I’m getting married in Oct. and thanks to the money I saved we’ll be able to have a very nice (not extravegant) wedding.
2. When I’m out of debt - I hammer at her debt -Including the town home she owns.
3. At the current rate we’re going we’ll be completely Debt free in 7 Years.
4. SAVE - INVEST - SAVE - INVEST - SAVE - INVEST
5. RETIRE WITH ENOUGH TO DO ANYTHING I WANT.
August 24th, 2007 at 10:13 am
Ryan: please, please, PLEASE, do not try a debt consolidation service. PK mentioned that she found them to be as close to a scam as possible without crossing the line. I’ve had friends who used a service and had their situations worsened: some bills were not paid, others were underpaid even though no payment plan had been negotiated with the creditor. Needless to say, this worsened their credit scores rather than improving them.
While Novadebt may be a reputable provider (I cannot say) you should remember: they aren’t doing this for free or because you’re a good person. They do it to make money, and that money comes from you: a person who already knows he cannot afford more expenses. They say they get the money by leverage, but as my story above indicates sometimes your finances are what is being leveraged (either through negligence or willful misconduct).
The bottom line is this: consolidation services encourage you to believe they can solve your problems. This is a lie, or at best an exageration. You are the only one that can solve your financial problems, and no one (not even a professional) is going to care more or work harder for your financial success than you. Once the consolidators get at your debts, the whole thing becomes a black box and you don’t know if something’s gone wrong until it is too late.
Remember, there are three keys to financial stability: earn more, spend less, save the difference. Good luck with your financial rehabilitation, Ryan.
August 24th, 2007 at 10:16 am
Sounds like you’re on track. I finally paid off all the credit-card debt I accumulated in college (I’m 26, but once I buckled down it only took about 2 years), and it’s a great feeling.
Whenever I got tempted to buy something I couldn’t afford, something that wasn’t in the budget, I’d just repeat my mantra: “I’d rather be out of debt.” And I would realize that it’s true.
Stay tough, you can do it.
August 24th, 2007 at 10:40 am
Here’s something I’d add, Ryan: When I was your age, I was started down the road to debt. You’re smart enough to see where you’re headed, and you’re doing the right thing by asking for help changing course. I wasn’t that smart.
Now here I am at 38, and I still have ~$13,000 in debt. It’s true that it looks as if I’ll have that all paid off in the next six months or so, but so what? That’s eighteen years of my life wasted on debt. I wish that I had been smarter back then, and had actually taken the time to look at a map, which is essentially what people are providing you here. Use the map, follow the right path, and you will get out of debt. It won’t happen over night, but it will happen.
August 24th, 2007 at 10:43 am
Having worked in collections for a large credit card company, I can tell you that any credit consolidation or counseling service that charges you is a rip off. Consumer Credit Counseling Services is non-profit; they are funded by “fair-share” contributions made by the creditors, who are willing to kick in for legit CCCS groups as otherwise many of their clients would stop paying altogether or remain in delinquency. Avoid any group that tells you they can cut your debt in half or repair your credit; many of them intentionally allow your accounts to go at least 6 months past due or into chargeoff, as at this point you can get a settlement, but your credit has been totally ruined.
As a stay at home mom and thrifty type person, the best black-belt book I can recommend for someone in your position is The Tightwad Gazette, by Amy Dacyzyn. It will cost you at most $20 for all three books collected, and you’ll recoup that MANY times over using her strategies. Check it out at the library first and see if it works for you.
Clothes for work - you’d be amazed at that you can find at Goodwill or thrift stores in affluent areas. Might save you a little, and if you shop well, you’ll impress your co-workers.
Best of luck to you!
August 24th, 2007 at 11:00 am
Kudos to you for helping out the young in need of financial help!
August 24th, 2007 at 11:10 am
Borrow “The Richest Man in Babylon” from the library. Read it. Then read it again. It’s short so it should only take a couple hours.
Figure out a way to live on 70% of your gross income. Put 10% of your gross income into a savings account which is not easily accessible. 20% goes to debt.
Keep it simple. 10% to you, 20% to debt and the rest you live on.
I’ll be blunt here. If you come back with excuses of how you can’t live on 70% of your income such as how you need your car or expensive clothes for work, then really you’re not that serious about getting out of debt.
One more point. You wrote “I had barely any financial guidance from my parents, and now have started some pretty terrible money spending habits.”
This is not your parents fault. This is completely your own doing. You need to take responsibility and not blame this problem on anyone else. It will help you a lot.
Best of luck
August 24th, 2007 at 11:10 am
When I was in college, my best friend and I would state that we were going into “broke mode”. This meant that we lived as if we were broke and would back each other up to remind the other not to spend money. We’d plan out our meals, grocery costs, and possibly scrape some money to split a movie rental.
Some people would call this deep savings mode but the important part is to have another person understand your stance in a positive manner and encourage you to stick to it. Try buddying up with a friend who never seems to buy anything or spend much money. Learn their tricks and have them help you say no.
August 24th, 2007 at 11:17 am
You mention student loans. Are you still in school? You may be able to defer repayment on these while you work on the other debt. Once you have the other debt under control or paid off, you can shift to paying the student loan debt, even if you are still in deferment (better check that it doesn’t pop you out of deferment…). This is not a solution so that you can continue to squander your hard earned money, but simply an immediate step you can take to at least make sure that you can make the payments that are required each month on your other debts.
August 24th, 2007 at 11:47 am
@Matt
I appriciate the book suggestion. I’ll have to stop by the library this weekend as it looks like there are a few recommended books I’ll be spending time on this weekend. As for the parents comment. You are absolutely right that all of the spending that has occured has my signature on the reciept. I did not mean to suggest that this is my parent’s fault, just giving you some background. My father might be one of the worst money handlers I have ever met having his house go into foreclosure twice in not too wide of a timespan. Looking upon this sitation he’s in is mostly what is driving me to hit the breaks and turn it around. I really appriciate your honesty!
@freecia
that sounds like a great tactic! I’ve been thinking about something similiar. Actually this week most of my paycheck is already gone to bills and I’ve left enough in my checking account for groceries sunday to make lunches for the week, and gas to get me to work and back everyday until payday next friday. It’s been absolute torture, but I’ve learned pretty quickly that it’s still possible to survive without spending money on something every single day. The key is to get one of my close friends in on this so we can find other things to do to occupy our time without having to go out and spend money.
@MITBeta
That was something that I was considering. Unfortunatley I looked into it and my mom and step-dad make too much money annually for me to defer anything. I’m still too young to be considered independent in the land of student financial aid, and monetary help from my parents is out of the question.. (Long story) I’ve already looked into this, but appriciate the suggestion, in any other case it would be a great step toward my goal.
August 24th, 2007 at 12:38 pm
1. Read ALL the Get Rich Slowly posts on debt (including readers comments).
2. Read How to Get Out of Debt, Stay Out of Debt and Live Prosperously by Jerrold Mundis.
I guarantee when you’re finished reading you will be an authority on debt. And then you can write your own book!
Good Luck!
August 24th, 2007 at 12:39 pm
Reguarding the NovaDebt solution. I did call the company to verify some information.. the representative told me that by reducing the interest rate on my credit cards and combining all of the minimum payments into one payment to NovaDebt, my total would be only 10 dollars more than the lowest minimum payment of one of my credit cards. Their fee is included in this monthly payment, and it’s based on how much money you owe.. for me it would only be $5/month. I asked about any negative marks on my credit report, and the rep told me that the only negative would be I would be unable to use my credit cards that were being paid off (which i saw as a positive) and I would be unable to apply for any new credit cards until my debt with Nova is clean. My credit report would show that I was working with a third party to pay off my bills, but my actual credit score would increase as I was making payments on time with Nova. This sounded like a great deal to me. Is there something that the rep is not telling me that would have a negative effect? Anyone have any additional input? I would love to avoid this path, but it seems to me to be the best way to get through this. Jen, it seems like you might have some insight on this.. Any comments?
August 24th, 2007 at 2:09 pm
Come up with your budget & show it to us.
Your first budget will be inaccurate… probably way off. Start tracking ALL of your expenses for a few months in quicken or a spreadsheet. This will help you get a feel for where all of your expenses are going & help you create an accurate budget.
August 24th, 2007 at 2:38 pm
Talk to Credit Counseling Services. Talk to them about Nova and see what they say. I bet you that anything you can do with Nova you can do better without them (and their fee). Put your credit cards in a drawer, or cut them up. Get a lower interest loan and pay off the credit cards (Credit Counseling Services can probably help with that).
I would be very leary of companies who make their money off people with debt problems. Odds are they’re not benevolent, and are instead exploiting people who have shown themselves to be bad with money.
August 24th, 2007 at 2:40 pm
Great article, and this situation is a common one. Most of these comments give good advice as well.
Canceling the credit cards was the smartest move you have made. Now attack your debt with as much as you can afford to pay those bills off because interest will kill you.
Although your credit may stop you from getting a new credit card, look into putting all the debt on one card with zero interest. This may be the alternative to consolidating your debt, without hurting your credit score.
Good Luck Ryan, with persistence and patience you will be able to pay off your debt do not panic.
August 24th, 2007 at 2:41 pm
I have many friends that took the easy way out and got wealthy girlfriends who paid for everything. Maybe Ryan should try that out. It worked for me.
August 24th, 2007 at 3:31 pm
Get a second Job. It is the easiest way to get out of debt fast. I’m 21 Work 2 full time jobs and go to school. (and still have time for friends!) Granted, my classes are done online or nights.
The reason I do this? because I made the same mistakes you did, got out of high school and then used my credit cards. I also live in a place with one of the highest costs of living (1225/mo for a small 1 bedroom) and have a car payment (450/mo) so I work hard now and have been able to clear out most of the debt I accumulated (all debt will be gone by the end of this year and car will be paid off) In addition to this, I still manage to contribute to my 401k, and am building a good sized emergency fund and savings. At the end of this year, once every thing is paid off I will move all of the money that have been using to pay off debt and car and put it directly into a high yield savings to start saving for a house (a 2 bedroom apartment here in a decent are goes for about 300k, houses go for over 500k… it sucks)
so yes, limited free time sucks, but no debt is good.
August 24th, 2007 at 3:34 pm
Good man Ryan. Apply the principles you learn from the books and you’ll go far.
August 24th, 2007 at 4:12 pm
If you want to continue to be one of the young men who has all his fingers and toes, now is not a good time to join the military.
You should revisit your spending on your wardrobe. Many of us with high income jobs still keep our annual clothing budgets down to a few hundred dollars, including shoes. It is possible to find bargains. Shop only when you actually need something, as opposed to when you are bored and looking to liven things up.
August 24th, 2007 at 4:19 pm
Im 19, in my second semester of community college (which is cheap). I live at home, and work one full time night job that pays around 11.00/hr+ benefits and bonuses. AND I live in California, very expensive. But I can definitely afford to move out, should I have to. I do not have a credit card, in fact (though I am completely inexperienced, and all the comments above and below are more useful) I have a debit linked directly to my credit account, and a hefty savings. This works perfectly for me. I am using real money, not funny money. And I can save as much as I want, also it really helps to automatically transfer funds monthly to savings.
So, I hope Ryan finds his way out of debt and learns a good lesson.
The best advice I can give though is a little saying my Grampa taught me:
“It is fondness for notes of exchange, that constitutes the tuberous structure of all satanically inspired principles.”
By the way, J.D. you are awesome and I read your site everyday! And I really love reading everyone’s advice and tips.
August 24th, 2007 at 4:30 pm
Although I have no practical advice, may I say how splendid it is that Ryan is learning this tough lesson so early in life. I am even happy for him that it’s happening in his twenties, rather than his thirties or forties. Please take a longer view of your life, it will all work out just fine. Go, Ryan!
J.D. has mentioned in a previous comment that he “wasted” so many years of his life on debt, but IMO no experience is wasted (only money!). If he had not had that experience, he would never have set up such a site to help other people learn financial responsibility. Go, J.D.!
August 24th, 2007 at 4:40 pm
“I had barely any financial guidance from my parents, and now…”
And now, you are a big boy. Big boys take responsibility for their actions. Suck it up. Make it right. And stop blaming others.
“Right now I am making all the minimum payments (some on time).”
Do you know where you are? Are you remotely aware of your surroundings?
“…but it seems as soon as something is paid off, something unexpected comes out of nowhere.”
The next time something “comes out of nowhere” ask yourself this, “If I was on top of my game, could I have foreseen this and prepared for it ahead of time?” Then get on top of your game, because it seems we have a way to go.
“…but I’m worried about my credit score”
per post 25 and others, forget that for now. You have bigger fish to fry.
Finally, an echo of post 14. Have you considered military service? With any luck, you’ll get shipped to a place where good people really have it bad. Might help put some perspective on things for you.
August 24th, 2007 at 5:02 pm
Are you a member of a credit union?
Most credit unions have financial specialists who will sit down with you and help you get a handle on your finances.
August 24th, 2007 at 5:12 pm
I believe in paying off the lowest balances first, as it will relieve some monthly pressure, improve your credit scores, and help you get out of debt. 35% of your credit scores is based on payment history. However, 30% of your score is based on your balance-to-limit ratio. If you get this down, for each account, then you will help your scores out. You have to weigh who has the highest rate, balance-to-limit ratio, and how old that account is.
Also, credit counseling IS NOT THE WAY TO GO!!!!! Credit Counseling companies ARE NOT non-profit, if they say they are, because they are paid and sponsored by the credit card companies. Sure they consolidate your payments into one and lower your interest rates. But, your payments stay the same. They have an 85% drop out rate, because people that are struggling and looking for help can’t afford to make those payments. Also, it shows up as a Chapter 13 Bankruptcy on your credit report. This is because you are paying a 3rd party company to pay your creditors each month. So lenders, especially mortgage lenders look at credit counseling worse than a bankruptcy because of the fact that you’re using a 3rd party to pay off your debt.
I am a Senior Debt Consultant with Clear Debt Solution, and I hear a lot of people worried about their credit scores and their “good credit” when they call in about debt settlement. What good is your credit if you can’t use it??? People in $10K, $20K, and up all worry about their credit for the future, when they are so deep in debt, they don’t know what to do. I do! Settle the debt and get rid of it in less than three years, and “start from scratch.” You’ll pay back about half of what you owe and be able to relieve yourself of the monthly pressure to pay your minimum payments on time. Some people are worried about refinancing their mortgage in a year or tow. With the way interest rates are, inflation, and property values, there is no alternative. Settle the debt and then focus on buying a house or refinancing your mortgage or car payments.
I repeat, settle the debt and then focus on buying new things. If you are interested in debt settlement, checkout http://www.cleardebtsolution or email me at “dave@cdsteam.com”
August 24th, 2007 at 5:51 pm
Ryan, my best suggestion is to talk to a nonprofit CCCS. My experience is that people on CCCS have a notation placed on their credit report stating either “Slow pay” or “Paid via credit counseling”. Neither of these is as good as paid in full and on time, but both are better than past due or charge off. It will impact your credit rating, but if the alternative is that the accounts are past due, slow pay is the far better option. I would echo those who say not to worry about your credit rating now. Take the hit, as small a hit as you can, get it paid, learn the skills to avoid debt in the future, and you’ve got the rest of your life to enjoy a good credit score.
If you’re worried about a car loan in the next few years, maybe the best strategy there is once you’ve got the debt squared away, sock some of that newly excess money in a “car account” in a high yield savings account. Even if you have to pay a little more for the money you have to borrow, if you can pay part or all of the cost of the car when you buy it, you can take a shorter term loan which will alleviate a lot of the pain of the highter interest. Then, when you’ve paid the car off on time, that will further help your credit score, and you’ll have a paid for car! Yay!
August 24th, 2007 at 9:06 pm
Ryan, I would suggest Consumer Credit Counseling Services as well. I turned to them when one of my low-interested credit cards was purchased by another bank who jacked the rate up to 26% and refused to lower it for me. CCCS got the rate lowered to 6% and what you pay them is low. It’s not an ideal solution perhaps but it was better than 26% interest, which at the time was burying me.
I also agree that you need to draw up a budget and write down every penny that you spend. I find that so helpful, not only because you see where your money is going and can better keep your spending down, but it gives you real peace of mind. I certainly slept a lot better once I started doing this! Good luck!
August 24th, 2007 at 9:11 pm
Addressing several points:
For what it is worth, I was in my mid-30s before I ever heard the phrase “consolidation loan” without the suffix “trap”.
Cars: In the US, not having a car is not really an option if you want flexibility in employment. You can live in areas with public transit, but then without a car you are limited in job options to what you can walk to or can get close to with the local transit. I will get hate comments, but people saying ditch the car are generally not thinking it through. Remember that you need a certain population density for public transit to be possibility, and most of the land area in the US has nothing like that density. If you are not in or near a medium-to-large city, you need a car, period. If you have a job outside the normal work day, (7AM to 8PM or so maximum range), you can only do the mass transit thing in insanely dense cities such as New York. I live near Detroit, and in under 20 minutes, I can drive to places where the local parody of mass transit does not go. A cheap car should be considered, no car at all is unrealistic in most places.
On a related note: Something I have been doing for therabouts of 30 years, drive path planning. All those years ago, the price of gas drove me to plan out my driving to minimize distance and trip count the the maximum degree feasible on any given day. This means thinking about what you need to do and working out what your options are. My shopping trips are usually done on the way home from work. I plan out the stops as best as I can, but a fair percentage of the time, I have to trade off distance and time to allow for refrigerated stuff that cannot safely be left out for any length of time and has to go straight home from the purchase point. If I need to go somewhere after work, I don’t go home first. I have other strategies. Hmmm, I sense another article possibility.
August 24th, 2007 at 10:13 pm
re: comment 50
CCCS is not sponsored by the credit card companies. CCCS does not show on your credit as a Chapter 13 bankruptcy. These statements are both complete falsehoods. Clear Debt Solutions is EXACTLY what I was referring to when I talked about companies who allow your debts to charge off to negotiate settlements. I saw people all the time who went with these clowns when I worked for the credit card company (note: I do not work for them any longer, nor do I have any attachment or interest in them). They sent us letters forbidding us to contact their clients, and had their clients send all their money directly to them. They take a cut off the top, and when your accounts have charged off and been sent to 3rd party agencies, they negotiate a 50% settlement and pay them out of what is left of the client’s money. In the meantime, the client has a charge off on their credit from the original creditor, a collection agency account showing as a settlement (NOT paid in full), and if the unpaid amount of the debt after the settlement exceeded $600, you have to pay the IRS taxes on it as it is considered income.
Please, please, please stay far away from any of these debt settlement companies. They are truly bad news.
August 24th, 2007 at 11:41 pm
Just a few suggestions on the entertainment front:
My husband goes once a week to a friend’s place. They play card games (no gambling), watch sports on TV, or play video games. It’s fun, and it doesn’t cost much - about once every 6 weeks, it’s his turn to bring beer.
When I go out with my friends, it’s for lunch or just coffee. Still nice, but doesn’t cost as much. Around here, there’s also hiking and beach volleyball.
Don’t avoid all of your friends. Good friends are important.
Oh, and I would echo those who suggest CCCS.
There are a couple of disadvantages that I’ve heard of, but these are usually said by the same person who says that they’d go with them again if they did it over.
August 25th, 2007 at 12:24 am
Awesome thread!! I have little to offer for advise as I am in a similar boat, but much to take away. I just want to thank you all for your non-judgmental advise to people who have the guts to suck it up, expose their personal dilemmas, and be humble enough to ask for help in the form of guidance and information….So that goes without saying that Raul can F*&K off with his self-righteous BS that is no doubt rooted in an extreme untreated inferiority complex due to an underlying personality disorder…they do make drugs that can make you feel better so that you don’t have to be an ass to other people in order to feel like you are better Raul…Perhaps you clicked in the wrong forum?… well, let me help re-direct you… http://ehealthforum.com/health/bipolar_disorder.html There ya go buddy. Get well!
August 25th, 2007 at 1:27 am
Listen Ryan,
All is not lost. First what is your highest debt interest rate? Which bill charges you the highest interest rate? That is the debt you want to concentrate on, pay that debt off first. Second, do you have any assets, namely a house? If you do you can consolidate your debt using the equity (if any) to get a lower interest rate and avoid shady debt consolidation services. Third, stop spending money dude, I mean, if you don’t need it to sleep, eat or transportate to your work, get rid of it. You are on what we call a “debt treadmill” and if you don’t take affirmative action, you’re going to find that you feel like you are “working all the time and getting no-where”. Any money you “invest” should be to increase your earning potential. Which means, you need a better job and the education necessarey to obtain said job. Ask your employer how to get a raise and what the company needs, then think of a way to fill that need. If they don’t have an answer, then you need a new job and a new resume I might add. In short Ryan you need to be a “cash and carry” type of person until you learn a little more about debt and earning and “how the system works”. Start off though by paying off your high interest debt and that should start you off in the right direction.
August 25th, 2007 at 10:47 pm
An idea that might help with the student loan/school costs is to join AmeriCorps. They have positions where you get a very low living allowence for serving for 4 months and then you get about $1,000 for school. Most of the organizations are very flexible with the times you can work so you can work around your other obligations. There are positions with more hours for up to a year of service as well, but as a minimum time of 1/4 time member you could slightly boost your monthly take home (last year it was about $400 a month for minimum time). The experience looks good on a resume and they will ussually work with you to provide more job skills and sometimes some of yourclass time can count to if it is approved with what you are doing in your service.
August 26th, 2007 at 5:26 am
It looks like Ryan’s on the right track. Definitely track expenses on a spreadsheet. It can be an eye-opener.
August 26th, 2007 at 6:44 am
hi ryan.
what everybody else said.
I have a friend who was in the same boat as you. she was crying and working two jobs. at the same time there was a fresh ’starbucks” in her hand morning, noon, and night. so watch where those dollars go! good luck!
ditto on the jerrold mundis book. mary hunt and dave ramsey books also.
August 26th, 2007 at 6:46 am
oh! and also pack a lunch and plan your meals.
August 27th, 2007 at 10:06 am
I joined American Consumer Credit Counseling 3 years ago when I had too much credit card debt. The CC companies refused to give me lower rates when I called, though I had always paid on time, because my balances were all near the limit and I had too many cards. ACCC reduced my interest rates to below 10%, some even at 0%. I didn’t include all of my cc’s on the plan, as those certain companies didn’t reduce my interest rate with the plan and the advisor recommended that I pay those off myself and leave them open (without using). As these were lower balances, I worked hard on paying them off. Now I only use my credit union credit card, which I pay off when I use it. I will be completely out of debt within the next 2 years on the plan, including my (low) car payment. I wouldn’t have been able to do it this fast without ACCC, as my interest rates were really what was hurting me. I’ve also learned to live more frugally (though there is still room for improvement) and will soon be increasing the amount I pay each month to get everything paid off even more quickly. I am also working hard on building a decent savings (check into the on-line savings accounts (HSBC or ING), as the interest rates are excellent), and contribute anything that you can, just to give yourself a cushion. Sell things on craigslist (you’d be surprised about what people will buy) that you no longer need. Even if you only make enough to fill your car with gas, that’s still more than you had before, especially if the item isn’t something you need. Sell your old textbooks if you haven’t already. I believe there are several websites for which to do this.
You caught some flack about the statement about not learning better from your parents. I don’t believe you were implying that it was their fault. I know exactly what you mean because I wasn’t taught anything financial either and it’s a fact that people learn from example. The good news is, we can change what we have learned. There is no need to leave nasty comments to someone who is reaching out for help. Good luck–I hope that you figure out what will work best for you soon!
August 27th, 2007 at 2:39 pm
Common misconceptions in the credit and debt industry are everywhere, Jen. Having been in the banking, collections, lending, and debt settlement industries, I have seen the good and bad of all programs. I don’t mean to sound like a know-it-all, or come off as being rude, but I believe that your views of CCCS and debt settlement are misinformed. Here are my views about credit counseling and debt settlement.
Regarding CCCS, Credit Counseling Companies typically lure you in by saying they’re non-profit, but they’re actually paid for and sponsored by the credit card companies. Having done much research on this fact, they use crafting wording to say that they are separate from credit card companies, even though they are not. Here’s how it works, you pay them a one-time initiation fee of around $50.00 and they charge a small service fee for each credit card you put into their program. Then they have you pay them one payment and they disperse it to the creditors for you each month. They also try to lower your interest rates for you and the amount of time to get out of debt usually between 4 to 7 years, which means your monthly payments, will be the same if not higher.
Here are the challenges with that program:
1. Most people have a cash flow problem more than they do an interest rate problem. Since they don’t reduce your monthly payments, they have about an 85% drop out rate because most people that are struggling and looking for help can’t afford to make those payments.
2. The other challenge with those programs is that it will look like a Chapter 13 Bankruptcy on your credit report because you’re using a 3rd party to pay your bills. That’s similar to what they do in a Chapter 13, where you pay a trustee of the court and then they pay the creditors for you each month. So, lenders, especially Mortgage Companies look at credit counseling programs worse than a bankruptcy because of the fact you’re using a 3rd party to pay off your debt.
Here’s some accurate information about debt settlement and Clear Debt Solution:
The debt settlement program we have you do you have to qualify for, but it’s not based on good credit or home equity. If you do qualify:
1. We’re going to contact your creditors within the first 90 days, through a Limited Power of Attorney document, that you sign, to inform them that you are in the program with us.
2. We’ll negotiate your debt down 40-60% of what you currently owe. So essentially you’ll end up paying a fraction of the total debt that you owe. The reason for that range, is because some creditors are more aggressive than others, namely CITI and Discover.
3. Then, we will set you up with one monthly payment that’s affordable to you, and that money goes directly into your own settlement account that we use to settle your debts.
For your settlement account, we recommend Global Client Solutions, a third party trust account through Rocky Mountain Bank & Trust. Global is FDIC approved and will be set up in your name only which means you’re not sending us money each month but instead you’re sending yourself money in a secured account you control. Only you have access to your account. We don’t have any control of your money. Also you will be able to view your funds online 24 hours a day.
So how the program works is real simple. You will no longer be making minimum payments to the creditors and neither will we, instead you will be paying you’re your settlement account on a monthly basis.
Once you have accumulated enough funds in your settlement account to pay off one of your creditors at around 40 cents on the dollar, you will make a one lump-sum payment to the creditor, pay them off in full, and you’ll be free and clear of that debt forever.
We will repeat that process with your remaining creditors settling one at a time until each creditor has been paid out of the program within 36 months or less.
For Example:
Let’s say you owe Chase Bank $10,000. We would typically settle with them for $4,000 dollars, which is 40 cents on the dollar.
And let’s say for easy math your monthly payments are around $400 dollars, per month. After 10 months, you would now have $4,000 dollars in your settlement account to settle with Chase and pay them off in one, lump sum payment.
Your account would go back to zero and we would start this process over with the next creditor until all the debt has been settled.
Now, while you will get late reporting on your credit report, but once that debt is settled, then it gets updated. You see, once you have settled the debt, we have a provision in the settlement agreement requiring the creditor to remove and replace all the derogatory information (late reporting and charge off’s) with “Paid”, “Paid in Full” or “Settled in Full” with a “Zero Balance.”
Under the Fair Credit Reporting Act, the creditor has 30 days by law to report this to the credit bureaus.
Towards the end of the program the credit will begin to repair itself because you’re eliminating 30% of what your score is based on and that’s how much debt you owe.
Your credit score can go up after the first account has been paid off, as long as you’re current with all your other obligations because the credit bureaus are very slow in their reporting.
Lastly, everyone keeps talking about credit and protecting what is left of your credit score. What good is your “good credit,” if you can’t use it? You can’t refinance your interest rates with your credit cards, without them altering your account with them. If you do credit counseling, then they will lower your interest rates by switching it from a revolving account to an installment account, thus you wont be able to use the lines of credit, or credit cards, again. So, you have to ask yourself, when your debt is out of control, what’s more important to you “getting out of debt” or “your credit?”
Bottom Once you take care of the debt, the credit will take car of itself.
August 27th, 2007 at 2:53 pm
In regards to the taxes, Jen, you are partially right. Banks are supposed to report canceled debts exceeding $600 to the IRS and you are supposed to report the same as income on your annual tax return. However, the IRS permits you to write off any “income” from canceled debts up to the amount by which you were “insolvent” at the time. Insolvent means you have more money going out in expenses each month than coming in.
So, unless you have a positive net worth, which is highly unlikely if you’re deep in debt, then you won’t have to pay taxes on the forgiven amounts.
I’ve been a certified tax preparer and use to help out family who own and operate over nine H&R Block branches throughout Northern California. I currently use them and my experience to advise clients, but also recommend that they consult their own tax advisor specific to their own situation.
September 25th, 2007 at 7:21 pm
I sympathize with Ryan. He is trying to get out but they keep dragging him back in (paraphrasing Godfather). I think part of the reason he wants to turn to a debt consolidator is he needs someone to talk to, a group, someone on his side.
Before he goes into consolidation, check and see if there a free debtors anonymous support group. Just like there are weight loss groups, I think debtors should get together in groups because there’s more power with a group, and you don’t feel alone. They help motivate and are nearby.
He needs to sit down and do a budget/debt assessment by himself (or with a friend/family member) so he can really see if he is past the tipping point of debts/fixed expenses greater than income. He needs to know just how bad (or not so bad) it is.
This may sound controversial, but my younger sis is going through what Ryan is. I saw the writing on the wall years ago and tried to offer advice, but she never revealed how bad it was until it got to the point where she’s almost maxxed out. I sat down with her and helped her budget. She was about $100-200 over in debt/expenses than what she earned each month with no savings. Because he is 21, he might also be able to do this, but I contacted other family members and each “lends” her $50 a month for a certain number of months. She promises to repay but we know we might never get it back. There were concessions she had to make (like no credit cards!) but giving her that bit of breathing room allows her to actually be able to dig herself out of the pit. Yes, we helped her and some may see it as an out, but sometimes, that is what family is for. She still has to pay off her debts herself (my dad offered to loan her the entire amount she owes and I had to convince him not to–she doesn’t know that btw) but I think good will come out of all the bad. She went from someone with the attitude she would be in debt the rest of her life to realize she could get out of debt in 4 years. It gave her hope and I think someone like Ryan needs that.