From Debtor to Better

I’ve heard a lot of really tough stories lately about people who have really had a hard time with their finances.  They’ve each been hit with an extraordinary burden to bear and it clearly is taking its toll on their well-being.  Unfortunately, I know this happens to thousands of people every day.  Sometimes it’s the calls from bill collectors.  Sometimes it’s the scary letters.  Sometimes it’s the arguments with your spouse.  Whatever causes it, financial burnout is a real and serious possibility when you’re under ANY financial stress.

Consider this: you were working at a great company that paid excellent wages and offered full benefits.  The horizon looked great for you so you were spending lots of money building the lifestyle expected of someone with your earnings.  Then, six months ago you were laid off from that job.  You spent a month reeling emotionally, another three months finding a new job and so now four months after it all happened you’re back at it.  You work hard at this new job and make a reasonable wage, but it isn’t as much as you were used to.  Plus, since you didn’t have any savings, you are now 3-4 months behind on all your bills and collectors are constantly calling.  Thankfully, you’ve built some discipline into your life by developing a workable budget, living on less than you make and been sacrificial by selling your car to buy something cheaper.  You’ve done all the right things but life is hard.  Now what? Read the rest of this entry »

image by Brad_Chaffee

This may be the most under-used tip of all that can literally save you thousands of dollars if you apply it.  It is easy, fast and works about 60% of the time.  Ready?  Since this is step 5 in a 5-step process, let’s go back and take a quick glance at each of the steps.  In order, they are:

1. Cut Expenses
2. Maximize Income
3. Get Current on Everything
4. Use the Dave Ramsey Debt Snowball to Arrange Your Debts
5. Make a Call Every Time You’re Ready to Pay Something Off

Congratulations if you’ve made it to step 5!  That means you’ve started living on a budget and setting your mind to beating your debt.  In other words, it means you’ve committed to becoming FREE!  So let’s look at the last step in this whole process.  As you start to pay down your debts, there will come a glorious day with each of them when you realize you have enough cash to pay one off.  Here’s where this step comes into play.  When you see you’re ready/able to pay off a debt, pull out the bill, find the contact number for the company and call them.  Ask if they’ll waive a month or two worth of interest charges or (if you’ve been past due) some late fees. If you’ve got a $1,500 balance on your credit card at a 29% interest rate, having them waive even one month of interest can amount to a $37 savings. This may not sound significant, but if I paid you $37 for every 15-minute phone call you could make in a regular workday, how long would you take for lunch?

Two warnings:

1. We’re not asking for a settlement (in most cases) – a settlement is when you’re asking for some of the debt to be written off rather than just having fees waived and this can have several negative consequences.  For example, with many debts you might have to pay the taxes on the debt forgiven.  We won’t get into that for now…just keep in mind that settlements may have negative consequences.
2. Make this call only when you’re ready to pay the debt off completely. If you have a $400 balance and $300 in hand, call and ask if they’ll waive $100 worth of interest/fees if you pay it in full. The worst they’ll say is no. If they say yes, be sure to ask for confirmation of that waived amount either via email or letter. Don’t give them your payment information by phone because that can cause all kinds of problems. But do ask – I’ve seen people save hundreds of dollars by simply asking for a discount.

So that’s it!  Five steps to getting out of debt.  Keep it simple, build momentum, be realistic in setting your expectations and KILL YOUR DEBT!  If I can be of help, be sure to contact me.

Today we’re going to tackle the fourth step in the process of overcoming your debt.  Before we get into those details, let’s take a look at the five steps.  In order, they are:

1. Cut Expenses
2. Maximize Income
3. Get Current on Everything
4. Use the Dave Ramsey Debt Snowball to Arrange Your Debts
5. Make a Call Every Time You’re Ready to Pay Something Off

Since we’ve already covered steps 1, 2 and 3 (Cutting Expenses, Maximizing Income and Getting Current on all your past due bills, respectively), today we’ll discuss step 4: the Debt Snowball.

I love Dave Ramsey.  He is awesome.  When Stacy and I paid off our mortgage (our very last debt), we drove to Nashville so we could scream “I’m Debt FREEEEEEEEEEEEEEEEEE” on the air from his studio.  It was a wonderful experience and meeting him was quite cool.  Most of my teachings line up with his and while there are many nuances where we differ, I can’t find any good reason to deviate from his plan on how to tackle your debts.  So let’s go over what the debt snowball is and how it works.

Get Everything in Order

First, you need to know what your debts actually are.  Find out ALL of your debts, what each requires as a minimum payment and the overall balance you owe.  Ignore interest rates.  Order those debts smallest to largest based on the overall balance.  Pay minimum payments on all of your debts EXCEPT the one with the smallest balance.  Put every extra penny you can scrape together toward paying off that smallest debt.  When it is paid off, you can put the required minimum payment it had on your next smallest debt, as well as every penny you can scrape together toward killing that one.  Simple, right?

The Why

Mathematically, this approach makes no sense.  But as Dave says, this isn’t about math. If you knew the math, you wouldn’t have gotten into these messes in the first place.  So we’re not worried about the interest rates or things like that.  We’re looking strictly at paying off the debts – making them go away.  When I teach, I put it this way: imagine yourself in a dark alley late at night.  Out of the shadows steps ten scary goons.  If I have the option to either make the biggest one smaller or make the smallest one go away, I’m going to choose that second option EVERY TIME.  The debt snowball helps you get rid of the goons more quickly because you’re getting rid of the smallest one first (and most quickly), then the next smallest, etc.  Eventually, you’re only battling one or two big goons.  By that time, however, you’ve built up the momentum, discipline and drive to beat him/them, so you win!

So that’s it.  Debt snowball your debts once you’ve cut your expenses, maximized your income and gotten current on all your debts.  Then you’re ready to start knocking them out.  Stay tuned for Step 5 because as you get ready to pay off a bill, we’ll talk about how to make a call and save some serious cash by investing 10 or 15 minutes of your time.  I’m looking forward to it – I hope you are!

image by Brad_Chaffee

I know, I know…you’re wondering why there would be a “five-step” system that technically has six steps.  Well, I don’t count this one because I hope you don’t have to deal with this one, even if you do have past due debt.  Nonetheless, if you find yourself on step 3 with lots of collectors hounding you, I want you to be prepared and have some tools in your arsenal to deal with them.  What qualifies me to discuss this?  How about the six years I spent working as a debt collector and training debt collections for one of the world’s largest financial institutions?  I’ve talked with literally thousands of people who are past due on their bills and heard just about every story out there causing those problems.  So how do you deal with collections?  Here are my five top tips:

1. Know your rights– Some of the most boring reading you will ever do (and the only chapter in my book that I feel I need to apologize for) is the chapter regarding debt collections and the law.  There are four major laws you need to be familiar with as someone who may be dealing with creditors.  They are:
   • Fair Debt Collection Practices Act (FDCPA)
   • Fair Credit Reporting Act (FCRA)
   • Fair and Accurate Credit Transactions Act (FACT Act or FACTA)
   • Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act of 2009)

   Please allow me to make a shameless pitch for my book if for no other reason than I’ve taken these four federal laws and broken them down into what they really mean for you.  If you know your rights then you know what is and isn’t allowed by a collector.  For example: are you getting calls late at night?  That’s a big no-no!  FDCPA says collectors may call between 8a-9p in your time zone. Are you getting calls at work?  FDCPA says that all you have to do is tell the collector you’re not allowed to receive calls at work and they have to stop calling you there.  See how handy this information might be!?

2. Be reasonable/realistic – Since you are working with a limited amount of income and must prioritize how to spend that income, you must be reasonable when choosing who gets paid and who does not.  If a collector is trying to “make an arrangement” with you and you don’t have the money, don’t set up the arrangement. Be reasonable with yourself and with the collector and be realistic in what you can/cannot do.
3. Be logical – A collector’s primary job is to get you to pay him/her before hanging up the phone.  That means good collectors will use emotion to beat you at the numbers game.  If you’ve followed my advice thus far and been reasonable and realistic in what you can pay, don’t let a collector change your plans by using emotion.  If you get emotional (mad, sad, scared), you’ll do something desperate.  Use logic, not emotion.
4. Choose your battles – If you’re emotionally spent, you are in no shape to be working with a collector.  You will not do very well.  My advice to those I counsel is to talk with a creditor once per week or when something changes.  If you are ready to make a payment or if some major change occurs in your situation, talk with them. Otherwise, only answer their calls about once per week.  Calmly advise them of what’s going on (if there’s anything new) and tell them your plan of talking with them once weekly or when something changes.  They won’t like it, but it keeps you from spending hours on the phone fighting and draining yourself emotionally.
5. Know the difference between secured/unsecured debt – Sad to say, most Americans don’t know the difference in a secured debt and an unsecured debt.  A secured debt is one that is backed by an asset (like your car or house).  If you don’t pay, you lose that asset.  Pretty much everybody knows that if you don’t pay your car payment, the car gets repossessed.  That’s because it is a secured debt.  An unsecured debt (credit cards are the best example here) is one that if you don’t pay, there’s really nothing the collector can take from you.  Learn the difference in secured/unsecured debt because if a collector tells you you’re going to lose your house if you don’t pay your credit card bill, you can be assured that collector is a moron.  Learning this difference will also help remove the fear of what happens if you aren’t able to pay for a long period of time – scary words like foreclosure, repossession, judgment, etc. become less fearful because you know what they all look like.

image by Brad_Chaffee

Today we’re going to tackle the third step in the process of overcoming your debt.  Before we get into those details, let’s take a look at the five steps.  In order, they are:

1. Cut Expenses
2. Maximize Income
3. Get Current on Everything
4. Use the Dave Ramsey Debt Snowball to Arrange Your Debts
5. Make a Call Every Time You’re Ready to Pay Something Off

Overview

Psalm 37:21 says that “The wicked borrow and do not repay, but the righteous give generously” (NIV).  I do not expect you to avoid paying your bills and I do not condone bankruptcy in 99%+ of situations.  HOWEVER, there are simply going to be times when something happens in your finances that will keep you from being able to pay a bill on time.  These situations can get expensive quickly and can create a dangerous financial whirlwind if you don’t get past due bills under control quickly.  Since we’ve already covered steps 1 and 2 (Cutting Expenses and Maximizing Income, respectively), today we’ll discuss step 3: bringing all your past due bills up to date*.  Why did I wait until step 3 for this task?  If you’ve not cut expenses and maximized income before you try to tackle this step, you may find you won’t be able to handle this step and will quickly get frustrated and give up on the whole process.  So while it may cost you a little money and aggravation to do steps 1 and 2 before this one, don’t skip them!

When you go past due on your bills, three bad things almost immediately happen: 1) late fees are charged, 2) higher interest rates can be imposed, and 3) collectors start calling.  You don’t want any of these things!  This means that before you focus on paying off any of your debts (no matter how small), you need to bring any past due bills up to date.

Warning

There is one big caveat I want to mention.  If you have a debt that is really old and you aren’t getting phone calls or letters about it, WAIT to pay it.  Work on those past due bills that are actively causing an issue first, and then get to those dormant ones.  In addition, there is the concept of time-barred debt.  Time-barred debt is debt that is so old that the law prohibits collectors from taking legal action if you do not pay.  I don’t want you to avoid paying these old debts (remember Psalm 37:21), but don’t get in a rush to bring old debts back into your situation until everything else is under control.

Summary

Last but not least, keep in mind that this step may take you some time and depending on how far you’re past due, this whole process can be a little tricky.  If you’ve only got one or two bills past due and they’re only a little late, this step won’t take very long.  If you’ve got a lot or some really old debts, this one may take you a while.  Don’t be in a rush!  Don’t do anything out of desperation; during this step you’ll likely be dealing with collectors.  If you allow emotion to come into play, you’ll lose.  Be logical, realistic and honest.  Be patient, keep your focus and tackle the debts as your budget allows.