Monday, July 11, 2011

Get Out of Debt

The Question:

I’m buried in student loan debt, and my flying job only pays $22,000 a year. What do I do to pay all the bills, especially the late credit card bills? Calls from collection agencies are driving me nuts!

My Thoughts:

The following thoughts do not substitute for legal, financial, or tax advice from a competent lawyer, minister, accountant, tax preparer, witch doctor, CPA, spouse, or other internet resources. Regulations may have changed. I would highly encourage seeking professional help, even if it does cost some.

Further, I don't know what these new rules of money are. If you pay down your debt, the bank rewards you by reducing your credit line. If you keep a revolving debt, you get charged. If you invest, you lose, period. If you save, you lose. If you spend, you get the benefit of whatever you purchased, for a short period of time. If you recycle, you get charged. If you reuse, you get charged. If you earn a dollar, the gov't takes 40-60% of it. If you win a dollar, even more gets taken. There seems to be no reason or rationality to it anymore.

On to the thoughts. First, CEASE any collection agency from calling you. Tell them "Under the Fair Credit and Collection Act, do not call me again regarding this matter." Then send 'em a letter stating such. If the collection agency has really been driving you nuts, or calls after you’ve told them not to, send them a certified letter to their physical mailing address, a PO Box does NOT count. Need a trick to getting their physical address? During the “don’t call” conversation, ask them which address you should use to Fedex a payment. For computerized calls, use a phone that is not your own (the FBO’s would do, or a pay phone), speak to the secretary and ask for the mailing address. Don’t give them account info or anything else.

Now that you only don’t have to worry about calls from collection agencies so you have the silence needed to figure out your situation.

Write down all of your debts. All of them. Credit cards. Student loans. Parents. Friends. Relatives. Alimony. Child support. Taxes. Medical bills. etc. Put down the monthly payment due, interest rate, billing address, customer service contact number, and payment due date. Getting them in one place is the first step.

Next, figure out your monthly income. That's per diem, wages, extra work, and so on, after taxes. Ticking off Uncle Sam will not improve your situation.

You can fun around with a budget or not, some folks can live with them, some can't. I can't, so I make it easy.

Take 10% of your monthly income off the top and pay it to yourself. These are your investments. A U.S. Supreme Court ruled in April 2005 that retirement accounts such as IRAs and 401Ks can not be touched by collection agencies. Exceptions might be by the IRS, child support, and alimony- a bankruptcy lawyer could tell you more. What this means is you can save for your future despite being in a debtor's hell. With a Roth IRA, you can always take out your contributions without tax penalty, so if really desperate you have something that can allow you to still eat. You can build your six month emergency fund into your Roth IRA and the collection agencies can't touch it. Treat this money as a last resort, it is why you are working, for yourself.

Figure out your monthly expenses: Rent, mortgage, insurance, phone, utilities, and so on. Write 'em down. Put down their billing address and the contact number. If the due dates are scattered through the month, call 'em and see if you can get them closer together. Then you only have to pay bills once per month. BTW, the car insurance payment and the medical are recurring expenses that you know you will have, they are monthly expenses. Take the amount and divide by 12 to get the monthly amount.

Take 20% of your monthly income and pay it to your debts. Total up all of your debts, divide by the number of debts. This tells you how much you can pay to your creditors. One of the biggest steps you can do to resolve your debts is pay your creditors the same amount each month, every month, no matter how small nor how much you owe. If the minimum monthly payment is within a few dollars of this amount, make the adjustment to meet those mins. A few dollars over the 20% won’t hurt. However, 30% or more can really hurt.

What if the minimum payments are exceptionally higher than the 20%? You’ll have to make some decisions. Can you call the creditor and have the minimum payment reduced for a year? Many banks are willing to do this, some will have specific criteria. Balance the amount of information you give them with withholding information from your creditors. Collections agencies, no way, don’t bother to call and apply for “programs.” The only thing collection agencies understand is money, thus simply send them money each month.

Take your monthly income, subtract the 10% for your investments, monthly expenses, and 20% for the debts. What's left goes to your weekly and special expenses. Start with a 50/50 split, adjust as needed. Special expenses are things like a new TV, replacing the refrigerator, or the new toy for your car you've been eyeing. Weekly expenses are things like food, eating out, a car wash, a pair of jeans, and so on. Perhaps with this job, eating out is a monthly expense. For me, it works better as a weekly expense.

With the 50% for the weekly expenses, divide it by 4.33. That's your weekly allowance. You can take it out in cash at the beginning of the week, or transfer it to your checking account, whatever works for you. When you're out of cash, you're done spending for the week.

Need to build up a cash cushion in the checking account? First, get an account not attachable by creditors (more later). Second, use a monthly income amount BELOW your actual income. Third, don't cheat yourself thinking the slowly building money there is for your use. When you've built the cushion beyond a sufficient amount, give yourself a paycheck, distributing 10% to yourself, 20% to the debts, and the rest to the monthly, weekly, and special expenses.

Now, for the creditors. . . Man, they are a nasty bunch aren't they? Many willfully violate the regulations, saying anything they can to get ignorant debtors to pay them. They get bonuses based on how much they collect. They can't stand inconsistency, lies, false promises, and so on. They only understand money. So, use the following three rules:

1. Cease any creditor that harasses you.
2. Withhold as much information as possible from the creditors.
3. "Make regular payments you can afford, no matter how small, to every creditor you have."

How do creditors find out about your banking accounts? You tell them. So, withhold as much information as possible from the creditors (nope, no bank account, nope, no job, nope, no mattress, nope, no credit card, etc.). With them not calling every blasted day, it's a lot easier to do.

Whoa, this could kill your credit, but it’s probably already shot if collection agencies are calling. Being late with payments, not making payments, and being insolvent kills your credit worse. BTW, you can get apartments, jobs, girlfriends, and so on, even with poor credit. In today's financial world, credit doesn't mean jack anymore. There is no debtor's prison, except from the IRS. The IRS, though, is far more reasonable than most collection agencies. The IRS knows the rules and plays by them. You can negotiate payments with the IRS and with the income level of a first year regional pilot, the IRS is typically willing to negotiate.

If a collection agency repeatedly violates the Fair Credit and Collection Act, you can sue them, and they can end up paying your debt and paying you damages. for more details.

If you walk away from the unsecured debt, it will stay on your credit history for seven years. You could still get the occasional collection call after the seven years, but if you don't pay or negotiate anything, it won't reset the seven year clock. Many credit cards have gone to binding arbitration agreements, so don't be surprised if a collection agency pulls the arbitration judgment racket on you. I suspect there will be a class action lawsuit against the binding arbitration racket some day. In any event, it's hard to attach a lien on accounts they don't know about, and you are not required to give up your account information in the current racket binding arbitration. If in court, that's a different story, and spend money for a competent lawyer's advice. Once the account is written off, it no longer collects interest.

If you go the “write-off” route, be prepared for a 1099 form at the end of the year, the debt write-off now being shown as income for the IRS. There are exceptions for this for mortgages and other debts, see for more details.

There are two choices with the monthly payment money you are no longer paying towards the debt you’re choosing to write-off: 1. Save some of it for a settlement payment, knowing that when you make the settlement payment, it will restart the seven year clock on your credit history unless you negotiate otherwise. 2. Never pay the debt, period. Remember, this is a business deal, not a calculation of your worth as a human. Just ask the CEO of the airline that has gone bankrupt for the umpteenth time, pushing wages artificially low, while the CEOs and others take golden parachutes.

BTW, no matter how bad your credit stinks, in two years of timely payments, and other steps, you can have good credit once again.

Student loans: If you have a Federal Direct Student Loan, you can consolidate all of your student loans with the Federal Student Loan Agency. CALL THEM!!!!! Nelnet, Sallie, Nellie, and a whole host of others will be so disappointed that they can't run you over with high interest rates. Consolidate the loans into an income contingent repayment schedule. A first year FO typically qualifies to have a zero dollar payment. There's also forbearances and deferrals, as long as you communicate with them. Furloughs, first year FO pay elsewhere, new job, no job, disability, sick kids, the government, in a rare form of bureaucratic foresight, understands and can adjust the payments accordingly. But, you gotta tell 'em!

So the guidelines:

1. Pay no less than 10% of what you earn to yourself.
2. Pay monthly expenses using one list, in one location, all at one time.
3. Pay daily expenses using a weekly cash allowance.
4. Pay special expenses using separate accounts (or socks).
5. Pay no more than 20% of what you earn to your debts.

With creditors:
1. Cease any creditor that harasses you.
2. Withhold as much information as possible from the creditors.
3. "Make regular payments you can afford, no matter how small, to every creditor you have."

(Portions excerpted from Guy Picard's "Turning it Around: A Book for People in Debt")