Even if you decide not to share the details of your debt problem with your friends and family (and I would seriously suggest that you ought to do so with your close family) you still need to have an outlet for all your concerns and emotions. This should help you to keep your problems in perspective and makes it more likely that you will be able to find a solution to your problems.

In my case the two people that I discussed my problems with most were my sister and my doctor (as I was depressed at the time). My sister provided non-judgemental support and I really looked forward to our weekly conversations. The experience of discussing my problems with my doctor was similar, but he was totally detached from my situation so in some ways it was easier to talk to him. Both were invaluable as I battled to solve my debt problem.

So who should you choose to help you through your debt problem? It could be a family member (ideally one not directly affected by your problems), a minister, a close friend, a doctor or even a debt support group. You need to make sure that whoever you choose is able to listen to your problems and offer advice if requested without being judgemental. They also need to be available and willing to help you. My experience of asking my sister for help was that she was pleased to be asked (although of course a little sad at the state I had got myself into).

Once you have started discussing your problems with someone you must keep on assessing whether this is helping you or not. If it isn’t working for you then never be afraid to stop the conversations (politely of course).

photo credit: kamshots

A piece of advice from an old man (well not quite THAT old, but getting there!)

A while ago I read a post on a money blog about how it was possible to negotiate a substantial increase in ones income if one knew how to go about it.  It contrasted this with the more limited benefits to be gained by concentrating on cost savings.  This got me thinking, as I had always been slightly wary of the type of advice that gets you spend a lot of time switching utility providers to save a limited amount each year.  Perhaps my time would be better spent trying to increase my income by a larger amount?  Widening this thought process a bit I decided to write a post about what my priorities for life would be if I was starting out again. This is to try and put the whole personal finance “thing” in perspective!

1 – Live Your Life and Make it Full of People

It is a bit of an over-used saying, but money doesn’t make you happy.  It is people and satisfying relationships that make you happy.  Of course money is important and having sufficient can make being happy a lot easier.  However I find it possible to imagine a situation where I was poor at the end of my life but surrounded by loving friends and family.  I would be happy!  Contrast this with a situation where I had spent my life pursuing material wealth and alienated my family.  I could die alone and be very miserable.  Of course the ideal is to have both, but this extreme example makes it clear to me where my priorities would need to be.

So how to achieve this?  Make time for your friends and family.  Do fun things with them.  Keep up with your network of friends from each stage in your life (school, college, different jobs).  be involved in the community through charities, clubs, or religious organizations.  Have financial aims that are not only about enriching yourself, but also giving to others.

“I would rather die a pauper with friends than be like Mr Burns in The Simpsons – rich but reviled by all.”

2. Be Brilliant at What You Do

In your career, find something that you enjoy and/or are good at.  Strive to be the very best that you can be at this and you will reap the rewards of job satisfaction and (very probably) financial advancement.  If you think about it, the rewards from excelling at your profession are more or less unlimited.  If your current job does not offer any prospect of excelling or rewards for doing so then consider something different. Get some training or consider starting a part-time business.

“I would rather be a doctor with a debt problem than a janitor with a high credit score!”

I will cover priorities 3 and 4, and how I measure up in my next post……

photo credit: Photos8.com

Being Good With Money Can be Boring!

We all know that we need to budget, watch what we spend, and not put things on credit.  Sometimes this can just seem a little bit dull and depressing!  You start the month feeling sure that there will be some money left at the end for a nice meal out/some new clothes etc. but gradually the money goes on other things.  The car needs to be repaired, the children need new shoes etc. etc.

Temptation is Always There….

This is when the temptation to put things on credit can be very great.  The card that you haven’t used since you got it has 2000 available to spend with zero interest.  The feeling of being freed from your monthly budget is brilliant.  Yes you can afford that meal in an expensive restaurant, the latest techno gadget, or a trip to the theater.

But the Punishment For Taking on Debt is Swift

Take this path and the feeling of freedom won’t last for long.  You will hit the limit on your card, the introductory interest rate will end landing you with a hefty monthly bill.  Suddenly you are back to funding your spending out of your monthly budget, only now you have even less money to spend each month.

Is There Ever a Right Time to Take on Debt?

So when should you be funding purchases from debt?  I think that you should only use your card if you know you can pay the balance off in full when the bill comes.  On very rare occasions it might be worth making a big purchase (e.g. a vacation) on a card if you know that you can clear the balance over a couple of months.  To use your card in any other way is to make yourself permanently poorer.

photo credit: Nexeus Fatale

What is a debt spiral?

This is when the interest/repayments on loans reduce your available income so that you have to borrow more and more each month to keep up.  It is a downward path that leads to serious financial problems and even bankruptcy.

Example

A family has a monthly income of 2000.  Their monthly essential outgoings total 1500 so they have 500 each month to spend on non-essentials or to save.

They decide that they just must have a new car, the monthly cost is 300.  They now have 200 each month to spend/save.

As they are working really hard, they feel that they deserve a holiday and put the 4,000 cost on a credit card.  Monthly repayments are 200.  They now have nothing left to spend each month.

But people can’t live without their little luxuries so they eat out and go to theme parks with their children and increase their credit card debt to 8,000 over the next year.  New credit card repayment is 400 and they are now running a monthly deficit of 200.

If nothing is done about this situation the debt will grow more and more quickly as it compounds up/is added to.  This process will only stop if the family realize that they need to take action or they are refused further credit.  In the latter case the door to bankruptcy is open!

Be on Your Guard

The point of this post is to realize that the start of the debt spiral won’t seem like a problem at all.  In fact it could seem like a really great day.  You’ve rewarded yourself for all your hard work with a new car.  That foreign holiday you’ve always dreamt of is now a reality.

If you are tempted to put luxuries/treats on credit then consider this thought:

“If you can’t afford the lifestyle you want now then how are you going to be able to afford it when you have extra credit bills to pay”?

Taking on credit when you don’t need to is stealing from your future.  Consider the following rule:

“The only way to become wealthy is to spend less than you earn and invest the difference”

You should be able to clearly see that doing the opposite (spending more than you earn and borrowing the difference) is a certain way to being poorer in the future.  Always ask yourself if you really need something before you buy it.  Never buy large purchases on an impulse especially if they are going to be bought on credit.

3 years on and I have resolved my debt crisis.  I am looking forward to the future and am remarkably still married.  The process of working through my debt crisis  wasn’t easy, but the tough decisions I took then are starting to pay off now.

What is your debt story?  Write a reply here, you might find that just writing it down helps you to come to terms with it/see what needs to be done to fix it.

Good luck!

Cost of Bankruptcy - Filing Costs

The filing costs for bankruptcy are actually quite small and are as follows:

Chapter 7 – $299

Chapter 13 – $274

Cost of Bankruptcy – Legal and Counseling Costs

You will probably need to assistance of a attorney to file for bankruptcy.  There are also new regulations that require you to attend credit counseling before declaring bankruptcy.  Typical costs for these are going to be in the region of $700-$2000

Getting Credit and Insurance After Bankruptcy

Your bankruptcy will stay on your records for 10 years (or 7 years for chapter 13).  During this period you will find it much more expensive to get credit, including mortgages (for chapter 7 bankruptcy you will probably be unable to get a mortgage at all for 2 years).  In the current climate you might find it hard to get a mortgage at all.  Insurance companies will use credit records, and consider people that have been bankrupt a higher risk.  This will increase your premiums.

The Emotional Cost

There is much less stigma attached to bankruptcy than there used to be, but it’s still there.  The effect on your family and relationships might be significant, you are certainly going to find out how strong your relationship is.  If you have been hiding debts from your family then the double shock of also declaring bankruptcy will push a lot of marriages to breaking point.

Debt Control – The Basics

You cannot control your debts if you don’t know what they are.  Record all of your debts in one place with amount outstanding, repayment amount, interest rate, and time to repay.  You can use this information to help you to decide which of your debts to pay off first.

You cannot plan to pay off your debt if you don’t understand how much you earn and how much you spend each month.  Use your bank statement to write down a complete list of everything you earn and spend in a month.  This will help you to see if you are able to pay off your debt on your current income.

If you feel that your debt situation is getting out of control then seek the advice of a reputable debt organization, preferably a charity or a company that gives initial consultations free.  One thing that you must not do if you are in this situation is nothing (and another is taking on more debt).  Delay can make things much worse and make the job of resolving your debt situation far worse when you eventually have to face it (which you inevitably will).

Bankruptcy Types – Chapter 7

This is full bankruptcy for the most serious debt situations where the debtor has no or little income. Recent legislation restricted access to this form of bankruptcy as it was felt that too many people were taking advantage of it to avoid their debts.  Some of the new requirements include attending credit counseling and the need for additional legal advice.  This type of bankruptcy stays on your credit file for 10 years and usually you will not be able to get a mortgage for 2 years.

Bankruptcy Types – Chapter 13

This bankruptcy type is for people that have a serious debt problem but have earnings and can afford to pay something towards paying off their debt.  In this case the debtor will pay an agreed amount into their bankruptcy over a period of years.  At the end of this period all of their debts will be written off.  This form of bankruptcy stays on your credit file for 7 years. If you are a UK rather than a US resident, this type of bankruptcy is similar to an individual voluntary arrangement.

Common Features

Mortgages are not included in a bankruptcy and whether the debtor gets to keep their home or not will depend on state-by-state regulations regarding exemption of the family home from the bankruptcy estate,

Debt to Pay – Pay off the Most Expensive First

This method makes logical sense.  You sort your debts into order of the interest rate that they charge and use any additional income that you have to pay off the most expensive debt first.  In this way the money that you pay off your debt saves you the most interest.

Debt to Pay – Pay off the Smallest First

One criticism of the above method is that you might spend a long time paying off an expensive debt and not see very much progress.  This alternative method sorts your debts into order of their size.  You then use as much income as you can to pay off the smallest first.  In this way you will reduce the number of outstanding credit balances that you have at the fastest rate.

Debt to Pay – Calculate it Once and Forget it!

The problem with both of the above methods is that they require a level of self discipline and organization that most people that get into debt just don’t have (I know I didn’t).  My alternative suggestion is to try and work out why you have got into debt and address that issue. Once you have done that, then as long as your debt repayments are reducing your debt and you can afford them – just forget about them and concentrate on enjoying your life and not taking on any more debt!  Your credit balances will be cleared eventually as long as you keep up the payments and don’t take on anything new.

Debt Insurance – What is it?

The debt insurance (or repayment cover) that is sold to you when you take out a loan will pay your repayments for a specific period of time (often only 12 months) if you are ill or (for some policies) if you are made redundant.

Debt Insurance – Should You Use It?

Credit companies should not make taking on the debt insurance a condition of offering you credit.  You will frequently find that it is a better idea to buy insurance against sickness (permanent health insurance) separately.  Prices are far more competitive and you will also be able to insure yourself for an amount that will help you to live – not just to pay your credit bills!  The other advantage with permanent health insurance is that it normally insures you for as long as you are unable to work, whereas debt insurance will often only pay you for a set period – typically 12 months.

Be aware that you may be subjected to high-pressure sales tactics on these sorts of insurance policies as staff at loan companies may be targeted to sell a certain number of policies.

The other problem with debt insurance premiums is that they are frequently added as a one-off charge at the start of the loan that you then pay interest on for the duration of the loan.