Debt Free With A Clear Conscience |

Advice: Debt Free With A Clear Conscience

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Consumer debt is killing us these days in America, and a big chunk of that debt is totally due  to people living above their means, buying and spending to impress others, confusing their ‘wants’ with their ‘needs’ and paying for everything on credit. There’s not a whole lot of sympathy floating around out there right now for people who spent years racking up piles of debt buying stuff for the sake of looking fly, having the coolest electronics, or taking the wildest vay-cays.

But what if you tried to do most of the right things with your money? What if you spent the last few years being relatively frugal while busting your tail trying to build something of value that would benefit others, and the whole thing ended up caving in on itself and you were left standing there holding a big bag of debt? What would you do? Could you climb out from under the weight of that debt? Could you do it and keep your integrity intact?

Todd Temple was in just such a fix. He’d initially put his whole savings into a business idea that centered around traveling across America and putting on seminars for teenagers. His plan seemed to be going well from the get-go; the events were a hit and attendance was high. One problem emerged at the end of the first year though, his company failed to break even. According to Todd:

“So we scaled back the next year’s tour and borrowed money to pay for promotion and travel. We had another good tour … but expenses still outweighed income. It happened again the next year, and the year after that. I had to keep borrowing to keep us afloat. Then I ran out of lenders.

Good thing I did, because the red ink had flowed to six figures. I owed money to many friends, and a dozen increasingly unfriendly banks. With insufficient income to make even the minimum payments on all the loans, I started rationing: pay one batch this month, another batch the next. After several months of this hit-and-miss business, the creditors ran out of patience. One by one, they closed my accounts and demanded immediate repayment of everything I owed them.”

That’s a super-tough situation for anybody to be in, but it’s especially sucky if, like Todd, you’ve sunk – and lost – everything you have into a venture that not only failed, but also was your sole source of income. Says Todd:

“Even if I sold everything I owned — including the equipment I needed to make a living — I couldn’t pay off a tenth of my debt, much less the full amount they demanded.

“I couldn’t even respond to their “gracious” monthly repayment plans — my budget was already trimmed to the bone. How could I cut back on a one-meal-a-day food allowance, or cancel medical insurance I didn’t have, or forgo entertainment expenses I no longer incurred because I was too ashamed to go out with friends to whom I owed money?”

What do you do if things get to this point? This is no longer a situation where debt is a mounting problem; no sir, in this case you are now fully involved in an all-out debt crisis. Drastic times for sure, man. And drastic times call for a drastic debt management plan and immediate action. If you know for sure that you can get your hands on a decent chunk of money in the very near future, be proactive and contact your creditors. Be nice, tell them the situation and that you will be able to pay back the debt. See if you can work something out with them that will reduce some fees, penalties and maybe stave off harmful credit reporting. It may work and it may not; be cool and sell yourself and see what happens.

If there’s no cash infusion anywhere on your horizon, you are going to have to suck it up and deal with some hard decision-making. When most people get to this point, Todd Temple says:

“…they just keep rationing payments, holding out for increasingly unlikely financial relief. Meanwhile, their balances continue to rise from all the late fees, back payments, and the ever-growing interest on it all. That means more expenses, more missed payments, and sooner or later, closed accounts.

Don’t wait till that happens. If you know you’ll never make it to the end of this journey with the load you’re carrying, it’s time to jettison some cargo. Reorder your debt list, placing the most crucial accounts at the top. If you’ve got a secured loan on something you can’t afford to have repossessed, that’s a candidate for the top of the list. If you have more than one credit card account and you hope that at least one of them will still be with you when the dust settles, pick the best one and place it high on the list. Put the other credit cards at the bottom. Rank all your debts this way, then divide them into two lists — Now and Later. The Now list contains only those debts you can manage to keep current with monthly payments based on your budget. The Later list is made up of accounts that you’re going to have to ditch now and come back for later.”

This is a difficult process to go through, for sure, and in my opinion you should make darn sure that if any any money is owed to family and friends that you put their names at the VERY TOP of your Now list. Don’t give in to the temptation to pay them last because ‘”they’ll understand” or because they won’t charge you interest or penalties. Relationships are a heck of a lot harder to repair than a credit score, trust me. This list-making is tough reality for sure, but the most painful step for many people is going to be the next thing that Mr. Temple suggests:

Go down your Later list and prepare to say goodbye to the accounts on it. If the debt is secured, the creditor is probably going to take the secured item away from you. And if you owe money to the bank where you keep your savings or checking accounts, read the fine print on your agreements: You may have given them the right to seize that money to apply toward an unpaid debt. If that’s the case, consider opening an account at another bank. (This was tough to do in my case because I owed just about every bank in town.)

Whether you tell these creditors [that you’re not paying them] or not, they’ll soon figure it out. And they’ll keep tacking on interest and penalties and anything else they’ve written into the fine print. Unfortunately, there’s nothing you can do about that right now. They’ll also start calling you pretty frequently.

“If you know it’s going to be many months (or years) before you can settle the debts on your Later list, I suggest that you not take the calls. For me, they were an all-too-frequent reminder of my failure — something I didn’t need when I was working like a madman to redeem the situation. If you take the calls but have no solution to offer, the creditors will keep calling. They have you on speed-dial. They also know the odds of their collecting the debt: If the account is three months overdue, they have a 75 percent of collecting. At six months it drops to 50 percent, and after a year, their odds drop to one in four. So it pays them to pounce soon and often.

When creditors have tried to settle things frequently, via phone and mail, without result, they’ll often turn things over to a collection agency that specializes in debt recovery. These folks generally play hardball, and may bring in a law office to do the pitching. If the debt is unsecured, there are just two things they can do to you (besides make you feel awful): They can fill your credit record with bad marks (not much you can do here), and they can sue you. If your creditor thinks you have assets, they may take you to court, hoping that the judge will take these assets out of your hands and into theirs. If you have a decent job, the judge can garnishee your wages — which has nothing to do with parsley, as it turns out.

Lawsuits aren’t cheap, so despite all threats to the contrary, a creditor isn’t going to start one unless they determine that you’ve got decent assets or a good paycheck.If you’re in college or just graduated, out of work or self-employed, and have no significant assets, you’re what creditors call “judgment proof.” In layman’s terms, that means “broke, and likely to stay that way. If that describes you, you’re pretty safe from court. Isn’t it nice to know that your poverty comes with a silver lining?”

Okay, well there you go, that covers most of the negative stuff. But what about the “positive side”, the uplifting stuff? Is there any? Yep. You’ve still got that other list, remember? The Now List. You are going to keep on paying these people back, so try as hard as you can to make all your payments and make them on time. These are going to be your only ‘friendly’ creditors for a good while and you want to keep them satisfied. You want them to be consistently putting good little little bits of information on your credit history.  Says Temple:

“When you’ve paid down the Now list to the point where you can address someone on your Later list, redo both lists and get ready to deal with some old but not-too-happy creditors. You may have to do some hunting to track them down. If it’s been too long, they’ve written off the debt and sold it to someone else. Contact the original creditor and ask for the current balance, or the name of the company that now owns your debt. Be ready for the bad news: While the creditor may have given up on you, their interest-giddy computers haven’t missed a penny. Your current balance will include interest on the long-unpaid balance and interest on the interest and late fees. Welcome to compound interest.”

And as you whittle these debts down, you need to also be stockpiling money so that you can get back to your Later list and start getting right with those creditors. This is where you try to make good – where you can really pull yourself up and feel good about yourself and your sense of responsibility to those who lent you all that money in the first place. For Mr. Temple, though:

“…the only practical solution was to save up a stack of cash, then work out some settlements. Many of the creditors were already offering to settle things for less than the full balance. Their odds of collecting years-old debt from a judgment-proof debtor are pretty slim, so getting some of the money is better than receiving none at all. I accepted their offers, settling each debt when I had the cash to do so with a single payment.

I need to confess something here. This settlement thing was one of the most unsettling moments in my journey. After all, when I borrowed that money I had promised to pay back all of it. How could I agree to pay them less? I sought counsel from two mature Christians I respected: the one a defaulted-then-redeemed debtor, the other a banker who dealt with us defaulters for a living. Both agreed that if the creditors were willing to forgive a portion of the debt, I was free to take it. So I did.”

If you take this route, you need to make sure that the creditors list these debts on your record as having been satisfied. In addition, you are probably going to have to list the forgiven portion of your debts as income to the IRS and you will have to pay income taxes on that money. Sucky, I know! But “them’s the breaks”, as they say. When you get this far you need to really feel good about yourself; you’re doing the right thing. Proving that you’re the kind of person that can take a hit, get back up, dust yourself off and keep moving forward. You’ve set yourself up for future success. Seriously, I’m not giving you some bogus rah-rah crapola. You can do  it, Tom did!

“To finish my story: I did indeed pay off all my friends first. That took a year. It was a wonderful year. Then I got to work stockpiling enough cash to settle with the long-neglected banks. That took two more years, which weren’t so wonderful because some of the income had to go toward the replacement of my 10-year-old car and to pay the dentist $2000 to fix the teeth I had neglected in my poverty. But patience and diligence and 100-hour weeks prevailed. The final debt was settled last December, allowing me to start this year on level ground. I bought a gray cashmere sweater to celebrate. Life is sweet.”

Behold: A man with integrity and a clear conscience. And now, debt free! Beautiful.

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