I talked to a credit counseling agency and they told me to find an attorney about bankruptcy. What should I look for in an attorney and what questions should I ask? I am self-employed, have my own at home business and have gotten in serious credit card debt. I have been paying my mortgage and all cards, except for one. I called them but they will not work with me. I had one card go to collection and just got a collection agency letter in the mail. I would be willing to sell my house and pay the debt, but prefer not to do that. The lawyer I called said he need $2,000 up front and I do not have that. I do I deal with talking to the collection agency?
Hi Kathy, I’m sorry you’re in this situation. What kind of credit counselor did you go to? Did they tell you that you were ineligible for a debt management plan? Typically a not-for-profit credit counselor will work with you and your creditors. They’ll put you on a plan — called a debt management plan — that will allow you to pay off your credit card debt in less than five years, and negotiate with your creditors to lower your interest rates. Is that a process you went through? Sometimes, if the counselor thinks that the debt is too high to pay off within that time frame or if you don’t have enough income to support the debt, they will suggest bankruptcy. But I want to make sure you went to a reputed counselor and considered all of your options before going this route. Be sure that the counselor you are working with is an accredited non-profit agency that is a member of the National Foundation for Credit Counseling. You can do a search on their website here.
Once you’ve done that, I’ll direct you to the American Bankruptcy Institute. That organization has a consumer information website that is really helpful. Whether or not you can keep your home and your car will depend on the type of bankruptcy you file, the value, and your state’s exemption rules. Chapter 13 bankruptcy allows you to keep your property and puts you on a repayment plan to pay off your debt.
ABI’s website also has a pro bono resource locator that can help you find pro bono legal help near you if you qualify – it’s certainly worth a look. If you don’t qualify, and you can’t afford an attorney, you may be able to pay off the attorney’s fees through your repayment plan if you file Chapter 13. Be sure to ask about that upfront. You’ll also want to ask the attorney how long the process will take, how much time he or she will devote to your case and how much access you will have to ask questions, and whether he or she will be handling your case exclusively or if it will be passed off to someone else in the office. He should also be able to clearly explain the bankruptcy process in a way you understand – if it sounds like another language, search out other attorneys until you find the right fit.
Recently, Anderson Cooper invited me on his show, Anderson Live, to talk to one family about how they can scale back their spending and get out of debt. While the examples come directly from their budget, my tips apply to anyone with the same goals — so check it out!
As graduating college seniors no doubt know, early May is the time for the checking off a long list of to-dos. Pick up cap and gown? Check. Submit senior thesis? Check. Take stock of student loans?
While a six-month grace period means that organizing a pile of loans doesn’t seem as pressing as say, turning in that final Classics paper before graduation, it’s something that should happen sooner rather than later. That’s the advice of Brendon McQueen, creator of a new student loan organizing site called Tuition.IO.
“I would have everyone out there immediately figure out who you owe and if you’re able to pay for it,” McQueen said.
He’s speaking from experience: after graduating from Columbia in 2009, he knew he had student loans — about $120,000 worth — but had know idea who he owed, if he had any power to negotiate the interest rates or the ability consolidate the individual loan amounts.
“We’re talking about incredibly fundamental questions,” he said. “I thought, ‘If I’m having this problem, there must be a ton of other people out there having a similar problem.’”
It was the effort to fix that problem that led to the creation of Tuition.IO. The site (which is a pun: “Tuition I Owe”) is free to use, and works like this: after signing up, you’re taken to an “organize your loans” page. To figure out how many federal loans you have, you’ll need to enter your social security number (the site uses VeriSign, the same type of encryption that banks use for online transactions), and your National Student Loan Data System PIN. (You or a parent received the pin when completing the FAFSA, so check your records or request a duplicate pin through the Federal Student Aid website.)
Once you add any private loan information, Tuition.IO takes you to an account overview, which, using a graph, shows you how much you owe, when the balance will be paid off, and, through a slider, how much faster you could pay off the balance if you added an extra $50, $100, or even $500 per month. There are also tabs where you can learn the pros and cons involved with consolidation, deferment, forbearance, and even loan forgiveness for public service.
McQueen says that it’s that last subject — loan forgiveness for public service — that has piqued the interest of many users. Many teachers and soldiers with student loans don’t seem to realize they can take advantage of some of these forgiveness programs, he says. “The crazy part is people aren’t even [getting] enough information to ask the important questions.”
If the numbers are any indication, people are, at the very least, learning that Tuition.IO can help manage their debt load. In September of last year, when Tuition.IO did a demo at the technology conference Finovate, they had roughly $60 million in aggregate user debt; now, they have $500 million in aggregate user debt. “We get a ton of emails from people just saying, ‘Thank you thank you thank you for creating this!’” he said. “And of course, that always feels pretty good.”
As for McQueen’s own hefty loan balance — is it down to zero?
“I have not paid off my loans, but I just consolidated, and I’m about to jump into income-based repayment. So I’m improving my situation,” he said. “Slowly.”
My husband is an entrepreneur and we were living for years within a budget that turns out not to be real (our savings and investments were used as salary). I have discovered all our savings (including 401k) are gone. We have $0 to our name. I also discovered that we are in debt up to $494,000, which includes a home equity loan on my in-laws home, a car loan, money borrowed from friends and his parents, and credit cards. Our health insurance has just been cancelled. We are unable to pay our rent of $5,200 and our car loan is in default. I don’t know the first thing about taking a step forward with this mountain of debt on top of me. I negotiated with all the credit card companies to reduce interest rates and drop late fees and I make double payments on the cards.
Suzanne, this sounds like a scary situation — but it also sounds like you’re getting a handle on things. It was smart to call your creditors and negotiate a better rate. The next thing I think you are going to need to do is downsize. You’re lucky in that you rent, so you have the flexibility to move to a less expensive property. I highly encourage you to do that immediately – you simply cannot afford this home. Cutting that chunk of your budget will free up more money that you can use to save and chisel away at those cards and other loans.
Then I want you to consider where else you might be able to make cuts. Can you drop down to one car? A less expensive car? Cut the cable or any other extra services? Go over your budget with your husband and see what can be cut back. I guarantee you will find some savings. And it sounds like both your and your husband’s income is somewhat sporadic, so I want you to get on a system in which you deposit your income into a savings account, then pay yourself a set paycheck each month. If you earn more one month, you still get the same amount – because it accommodates for the months during which you’ll earn less. This is a wake-up call that you needed to get more involved in your finances – it’s never too late.
If that doesn’t work, and you feel like you’re facing bankruptcy, I wanted to address how that might work with all of these loans from friends and family members. When you file bankruptcy, every loan must be listed, even loans that are undocumented among friends. If they are unsecured, and they get discharged, you won’t have to pay. That doesn’t mean you can’t – or shouldn’t – pay these people back, but they won’t be able to do anything to collect the debt. For the home equity loan, if no one pays it, the lender can foreclose. If your in-laws continue to pay it and you do not, they will likely be able to keep their home, even if you are on the loan and you file for bankruptcy. Your obligation to pay your in-laws for that loan may be eliminated, but again, you could continue to pay.
This week we welcome Travis Pizel, the blogger behind Enemy of Debt. We receive a lot of questions about the process of credit counseling, so I asked Travis to share his experience paying off over $100,000 worth of debt through a debt management plan with a credit counselor. First-hand accounts are always helpful!
Driving through the treated road sludge of Minnesota winter roads had left our van extremely dirty, so I took my place in the car wash line late on a Sunday afternoon. Once I entered the car wash, little nozzles shot detergent, and then water at our vehicle. Finally, the dryers kicked in, blowing hot air at the van. But the van didn’t move an inch. We allowed the work to be done around us while we sat still. I couldn’t help but think to myself how nice it would be if getting out of debt was like that. I could just close my eyes and wait as someone else did all the work.
But it’s not like that at all. Let me tell you my story.
During the first 13 years of our marriage my wife and I accumulated $109,000 of credit card debt. Due to a minimum payment policy change with a major creditor with which we had multiple accounts, we found ourselves in a situation where we could no longer meet our monthly financial commitments. It was then that we enrolled in a debt management plan. They negotiated a lower interest rate and monthly payment with each of our thirteen creditors that would allow us to eliminate our debt in just under 5 years. Our overall payment was not significantly lower, but because of the drastic interest rate reduction, we were finally able to make progress on the principal of our accounts instead of just throwing all our money away each month on interest. We are approaching the end of our fourth year in the program, and have paid off $84,000 of that debt.
But there’s so much more to our story.
Getting out of debt is not like the drive through car wash described earlier. We couldn’t just enroll in a debt management program and expect all the work to be done for us. It’s more like parking the car in your driveway, filling a bucket with water, grabbing a sponge and a towel, and getting to work. We have to be active in our program to make sure we’re headed in the right direction. Each and every month we check our creditor statements to ensure the lowered interest rate is being applied, and that our payments are being received on time. As creditors are paid off, we need to contact our debt relief company and tell them where we want those extra funds applied for future payments.
There’s also the matter of how we got into debt in the first place.
Eliminating our mountain of debt wouldn’t do us any good if we didn’t address the lack of communication and bad spending habits that got us there in the first place. My wife and I have made significant lifestyle changes in order to live within our means for the first time in our lives. To be honest it didn’t happen all at once. It took us over a year of constantly re-evaluating our monthly expenses and cutting out unnecessary expenditures to fully understand how deep those cuts, and how big those changes had to be.
We have also worked tirelessly to improve our communication skills. For the first thirteen years of our marriage we hardly talked about money at all. Changing that by forcing ourselves to talk almost daily about the state of our finances and coming up with a budget system that works for us has been extremely hard.
Our hard work is paying off and we are finally able to see the the finish line.
In twelve months, with the help of our debt management program, we will have eliminated our mountain of credit card debt. We will also have learned and practiced the tools needed to handle our finances the right way for the rest of our lives. After that last payment is made, we will then in a way start over, leaving the mistakes of our past behind us and focusing on bettering our future.
I think our future looks pretty bright.
About Travis: Travis writes about personal finance at Enemy of Debt, where he candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband, he provides a unique perspective on balancing debt, finances, and family. Follow him on Twitter.
My husband and I have recently paid off our credit card debt. So exciting! We set a goal and stuck to it over 24 months and it feels great to be debt free! I went back to work part-time to help with this and really like my job and plan to stay.
My question is about prioritizing our spending. Now that we have an extra $1,200 a month we no longer need to put toward debt, I’d like your advice about how to prioritize. A few considerations:
- We have about $5,000 in home improvements we would like to make.
- We are planning a big trip for our family in the spring. It’s really a trip of a lifetime and have already saved about half what we think we need. Probably need another $4000 to be conservative.
- My husband was transferred to our current city four years ago. We were told we would be here three to five years. We bought a home but financed it with an interest-only loan. Our down payment was 30% of the home’s value. We now think we may be here at least another five years, maybe longer. This is not our “forever” home but we aren’t ready to buy the next step yet. Should we be making principal payments to this loan even though we don’t plan to stay in this house more than 24 more months?
- My husband’s car has over 125,000 miles on it. He needs a new car this year or 2014 at the latest.
- We put 18% of my husband’s salary in a 401K each month. We have used my part-time salary to pay off debt and for extras. Should I be putting part of my income in a Roth IRA?
- We have two children and contribute monthly to their 529 accounts. They are young but I feel good about the balances.
Could you help us? The mortgage concerns me, but I want to use my salary to its potential!
Laura, congratulations to your family for paying off that credit card debt — that’s a big accomplishment. Isn’t it great that you now have this extra money to play with? The first thing I always want to note — so you may have heard this from me before — is that I want to see you with an emergency cushion, so you don’t end up back in debt when an unexpected expense pops up. So let’s put three to six months’ worth of expenses aside in a liquid account, if you don’t have an emergency fund already.
Next is retirement, and it sounds like you’re doing really well there. Even so, I’d run your numbers using my retirement calculator to see where you stand — the calculator will tell you how much you should be saving each month to reach your goals. If it tells you you’re behind, then yes, stashing some money in a Roth IRA is a good idea.
I also think it’s okay, at this point, to put some of that cash toward your vacation, so you can pay for that outright instead of using credit cards (though it may be a good idea to use credit cards when traveling to earn rewards, as long as you trust yourselves to pay off the balance in full when you get back). I’d also start saving for that car — in fact, if your emergency fund is set, I would split the difference between those two goals: $600 toward vacation, $600 toward the car. If you are still working on that emergency cushion, you can still put a little toward these goals, putting $600 into the emergency fund and $300 each toward the car and vacation, so you feel you’re making progress on all fronts.
Then let’s talk about that mortgage loan and the home improvements you want to do. Based on the information you’ve given, Whit Douglas, a mortgage lender with Corridor Mortgage Group, says paying toward principal is probably not a priority at this point. “I wouldn’t recommend making extra principal payments with how low interest rates are right now — and even more so in this scenario, when you will only be in the home for two more years.” If it makes you feel better, consider that under a traditional mortgage, payments during the early years primarily go toward interest, anyway. It often makes sense to pre-pay principal under an interest-only loan if you’re planning to stay in the house for a long time — your payments will jump after the initial interest-only period, and this can soften the blow — but in your case, your money could work harder for you elsewhere.
Finally, to address the home improvements: unless these are going to add a great deal of value to your home (in other words, you’ll get a large return on your investment when you sell), you’re likely better off living with your home as is and looking for the qualities you desire in your next home. Remodeling magazine publishes a yearly cost versus value report on common projects, which can help guide you in determining how much of the cost of the project you might recoup when you sell. You’ll note that none of the projects listed are able to recoup 100% of the initial outlay.
As March winds to a close, high school seniors across the country will receive letters from colleges that will decide their next four years. Shortly thereafter, a second letter will come — and it’s even more important than the one saying “accepted” or “rejected.” This letter is the one from the financial aid office, the one that determines the expected family contribution. And according to new research out of the University of California, Merced, it can also play a role in determining the student’s GPA.
In “More Is More or More Is Less? Parent Financial Investments During College,” sociology professor Laura Hamilton found that financial help from parents is linked to lower GPAs. In studying a group of roughly 12,000 students, Hamilton found that the students whose parents give the most money wind up with an average GPA of 2.95 — a number that will not help post-graduation job prospects or admission into graduate programs.
“Employers throw out anything below a 3.0,” Hamilton said.
Lest parents take this as a sign they can put away their checkbooks and start applying for loans, Hamilton clarified that she’s not just talking about parents who can afford to bankroll the full cost of tuition — “parental financial aid” can mean Parent Plus loans and even loans taken out with the student as a cosigner.
It’s an interesting take – particularly with the words “student loans” and “crisis” appearing in more headlines on what seems like a weekly basis. Are parents to take from this that they’re actually better off not trying to save as much for college as they possibly can?
Not quite. But what they do need to do is talk to their kids about what it means to be paying this tuition, and what it means if loans are part of that payment package.
“A lot of times, students don’t worry about [paying back loans] until after college,” Hamilton said. “As tuition rises, parents either have to pay, or they have to pull out loans. Neither of these things are helpful for grades… you can kind of put them off.” In other words: if a student doesn’t understand the cost of attending college, he or she won’t try as hard to justify that cost with a stellar academic performance.
In an interesting twist, Hamilton’s study also found a positive correlation between parental financial aid and graduation rates — that is, money or loans coming from a parent makes a student more likely to complete their degree.
The connection: Social life. “A lot of the money parents give end up getting sliced into the social experience,” Hamilton said. In other words, pizza and beer — not to mention extracurriculars that can take up more hours than all classes combined. And the more fun your child is having, the more he or she is going to want to stay. “No student wants to drop out of college. College is really fun, right? If you invest the money in your kids, they’re going to be motivated to stay.”
So what’s a confused parent to do? Hamilton suggests modeling funding off of scholarships or merit-based grants. “If you say, ‘this is your job, I expect you to get a 3.0; if you don’t I’m withholding your money,’ you would probably get a positive effect on students’ grades, and they stay in school,” Hamilton said. “I saw this in my other study. Parents that gave a lot of money but set standards, their kids did really well. Parents that didn’t hold them accountable, their kids got in trouble.”
According to new research from the Urban Institute, people in their 30′s and 40′s are falling behind when it comes to building wealth. The other morning, I went on Morning Joe to talk about this troubling trend as well as the specific things — like housing — that are tripping people up. To see our full discussion, check out the video clip below.
I had to co-sign for my son to secure student loans for going to college. Now he is two years out of college and has a full time job and meeting his payments completely on his own. My question is: Will I always have to be listed as a co-signer on these loans?
Hi James, thanks for writing. The answer is not necessarily, and that’s because it largely depends on the lender. Many, like Sallie Mae, offer a cosigner release after the borrower has met certain obligations – under Sallie Mae’s program, the borrower must have completed school, made 12 to 24 consecutive on-time payments, and met underwriting requirements. Wells Fargo allows a cosigner release if the borrower meets credit requirements and has made all of the first 24 payments on time. Contact your lender for specifics about your loan – with two years of payments under his belt, you may qualify to be removed. If you don’t yet, you can at least find out the qualifications and then have your son work to meet them. Once he does, you should get off that loan.
In an attempt to avoid another mortgage crisis, the government recently passed a set of new rules that might affect your ability to get a mortgage. Over the weekend, I went on the TODAY show to speak with Lester Holt about what these new rules mean for you. To see our discussion, check out the video clip below.