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.

image by Brad_Chaffee

This is the second post in the series regarding the five steps to debt elimination. In the previous post I discussed how to cut expenses to minimize your outgo of money each month. Today we’re going to focus on the income side of things. Let’s talk about how to bring the income up as high as possible as quickly as possible. First, let’s recap the five steps so you can see where we’ve been and where we’re headed. The steps, in order, 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

Even though we’re talking about maximizing income, don’t go and sign up for every 12-hour shift and all the overtime you can get at your normal “day job” (killing yourself in the process of trying to work enough hours). Spend some time brainstorming ways to make some cash that don’t involve so much time or energy!

Brainstorming Activity

When you’re looking for ways to maximize income, explore your entrepreneurial side. What are things you can do that people will pay you to do? When Stacy and I were trying to kill off the last of our mortgage debt, she worked as a public speaker, guest author, advertiser (through her blog), etc. I worked as a construction laborer (self-employed), web designer, public speaker, author and business consultant. We were able to bring in an extra $1,500 or more every month just by working little side projects. What is it that people want you to do for them? A couple of thoughts on that before we continue: make sure whatever you take on is legal and that your time is worth it. If you’re going to end up in jail for taking on a project or if you’re only going to make $5 or $6 per hour on some monumental task, you may ought to see if there is something else you could do that would let you sleep at home each night and make you $50 or $60 per hour. Even if you could only do 25% as much work at those tasks, you still make a lot more overall and avoid a criminal record. ;0)

What to Do With the Cash

We’ll get into the details of how to spend this extra income in the next few posts, but for now, let’s settle on this: if extra income is going to be coming your way, please make a plan for it. The moment you get some money in your hands without a plan of what to do with it, I promise it will disappear. Instead of working a lot of extra projects or hours at work with no plan, sit down and map out some priorities. If I gave you $1,000 today, what would you do with it? Don’t just go out and start earning a bunch of extra cash without first knowing what you plan to do when you get it!

Summary

So there you have it: another simple step toward gaining financial freedom. As you can see, we’re working in logical order toward cutting expenses, maximizing income and ultimately beating our debt to a pulp. Coming up next, we’ll talk about getting current (up to date) on all your debts.

image by Brad_Chaffee

You want to be debt free, right? Excellent! This post is all about the first of the five steps I teach about how to eliminate debt. Before we get into the details of this step, I’ll go ahead and give you 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

Simple enough? I hope so. Let’s get into the details of Step 1: Cutting Expenses. Read the rest of this entry »

Overview

Though the name may sound fancy, a Deed in Lieu of Foreclosure is simply where a borrower gives the property back to the lender (voluntarily) instead of having the lender foreclose on the property. Of course, everyone who is having trouble paying the mortgage isn’t eligible for a Deed in Lieu of Foreclosure – there are some conditions. The biggest of these conditions is that the lender must be willing to agree to accept the deed to the property instead of payments. As you might guess, this means the house must be worth more than the amount owed or the bank will almost never consider it as an option. So what are the pros and cons? Read the rest of this entry »

What is a Short Sale?

In simplest terms, a short sale is when you sell your home for less than is owed on it. As you may imagine, this process must be approved by the lender and usually comes with lots of strings attached. Nonetheless, as an alternative to foreclosure or bankruptcy, a short sale may be a good option for those who can no longer afford the home in which they live and the market says they can’t sell their home at an amount to pay back the loan. If you are seeking a short sale, you are likely ready to move on and start over in a different home (probably one with lower payments). If this is the case, you need to be focused on selling! This means staging the home, offering open houses, advertising the sale in every possible place you can think of, etc. If your goal is to get out from under the burden of this house debt, focus on selling the home. Let me repeat, FOCUS ON SELLING THE HOME. If you’re lucky, you might not even need to short sell. But if the market bears out that you can’t sell it for enough to cover your loan, just be aware you’ll need to get the bank’s approval for any offer amount that is less than the amount owed and thus you’ll be pursuing a short sale.

Short Sale vs. Foreclosure

The primary difference between a short sale and a foreclosure is the party who initiates the selling process. Either way, the aim is to sell the property so as to satisfy a loan on that property. In a foreclosure, the lender forces the sale; in a short sale, the borrower contacts the lender and asks to sell the property for an amount less than is owed.

Deficiency Judgments and Recourse

If you’re considering a short sale, there is nothing more important you’ll read in this article than this section. While state law varies on this point, it is possible that a lender can sue you to collect any amount remaining on the debt after the proceeds from a short sale. In other words, if you owe $100,000 on the home and short sell it for $90,000, the lender may have the right to sue you for the $10,000 difference. This is called a deficiency judgment. How do you avoid the deficiency judgment? Two words: WITHOUT RECOURSE. Any request you make with your lender to consider a short sale need to include the provision that it is an agreement without recourse. Those two little words can save you THOUSANDS of dollars.

What are the Tax Implications of a Short Sale?

Like the implications of any debt forgiveness on your home, you should be aware that you may owe some tax money to the IRS in the event of a short sale. Currently, The Mortgage Forgiveness Debt Relief Act of 2007 provides that in the event of debt forgiveness through a short sale on your primary residence, you should not have to pay income taxes on the debt forgiveness. However, the provisions outlined in this act expire in 2012, so be aware and do a little research to avoid being surprised with a hefty tax bill.

Short Sales and Credit Ratings

As you might expect, like a foreclosure, a short sale will have a negative impact on your credit score. According to Fair Isaac (the agency behind the FICO Score), you should expect your credit score to drop by 85-160 points in the event of a short sale. This is a massive hit that will probably keep you from being able to purchase another home (using a loan) for at least a couple of years.

Avoiding a Short Sale

Don’t put yourself at risk by buying more than you can afford! If you must have a mortgage, make it one with a payment no more than 30% of your net (take-home) pay. If you find yourself falling behind, don’t wait until it is too late before taking action. Live on a budget every month that includes an emergency fund to help cover your expenses if your income takes a temporary hit. Simply put, be smart and don’t overreach your income; and if you happen to get into trouble, don’t be afraid to ask for help.