Getting out of debt is on the hotlist of New Year's resolutions for so many people, yet there always seems to be something standing in the way of truly eliminating mounting debt. The car needs repairs and so does your home. Your kids always need school supplies and new clothes constantly as they grow. Don't forget retirement savings and pet food for the dog; insurance bills, medical bills and the like. Where does all the money go every month? If you're like most people, getting out of debt seems endless and daunting. Debt can sometimes be so overwhelming that we get stuck in indecision, which, by the way, is also a decision. Don't give up. There's hope and help, but it's up to you to find the right direction that will save the most time and money.
If you want to achieve a goal; if you really want it, you will get there. However, you also have choices on how you arrive at your destination. You can pay your debt off like a "gazelle;" you can negotiate and settle most past due debts directly with the creditor; refinance or consolidate all debts into one giant loan; or consider a bankruptcy option to help get there. Each of these options for eliminating debt has its pros and cons. The benefits are all the same, meaning that debt will be eliminated. However, there are landmines and pitfalls everywhere.
For example, paying off debt like a "gazelle" takes longer and costs more money, but there are bragging rights and pride in avoiding debt. Are you so proud to have avoided bankruptcy that you would spend tens of thousands of dollars and your future to get there?
Another example is that of debt settlement. Many good folks believe that settling past due debts is also another great way to avoid bankruptcy and get out of debt, but they are shocked when they receive a IRS Form 1099 for the cancelled debt. They work so hard to negotiate their debts, only to get a tax bill. Plus, the irony here too, is that the credit report may not be properly updated and debt settlement does not really help improve credit scores.
We know that life is a never ending cycle of your money seemingly running through your fingers. Isn't it time you put an end to the misery? My latest book, 5 Steps to Freedom From Debt is available on Amazon.com, but here are the steps outlined below:
1. Know the type and total amount of debt you owe
2. Set your financial goals
3. Explore all of your options for getting out of debt (including Bankruptcy)
4. Consult with your professionals
5. Make a well informed decision
These steps are important because so many people think that borrowing or cashing out retirement is an option for financial freedom, but they don't talk to their tax professional about the consequences of making such a choice to eliminate debt. Spending retirement savings to pay off debt is like stealing from grandma! Combining Debt into one giant loan seems to be another popular way that folks want to help them manage, and eliminate debt. The problem with rolling debt into a single loan is that it's more DEBT. So many honest folks will spend their future, or roll over the debt before tackling it with the bankruptcy option because they are emotionally attached to their credit score. However, when we look at all of the options for eliminating debt, we must ask ourselves, "Is this helping me get out of debt, or am I simply playing a "shell game" by shuffling the debt?"
My advice is consistent and simple, if it will take you longer than 5 years to get out of debt, you're wasting valuable time and money and it will take you longer to retire. To put it another way, every little thing you do financially, ends up having a compound effect on your financial future. If you're spending more than 5 years to get out of debt, you lose 5 years you could have been saving for that car, house, and retirement. You would never advise your friends to do that, so why should you?
Recently, Sally came in to my office for a consultation about her credit card debt. She was working hard to pay off her credit cards, but it seemed as if the balances never went down. For the past two (2) years Sally had struggled to keep up with minimum credit card payments and all her other bills, rent and food. I showed Sally how she could save $48,000.00 and eliminate her debt without making another single payment on it. Here's how:
Let's look at this from a numbers perspective:
- $30,000.00 in unsecured debt at 18% interest with $500.00/mo. payments will take 13 years to pay off; paying a total amount of $78,000.00!
- $30,000.00 can be FULLY paid in FIVE (5) years under a court ordered repayment plan in Chapter 13 Bankruptcy with a $500.00/mo. payments at 0% interest.
- That same $30,000.00 can be discharged in Chapter 7 Bankruptcy with NO Payments. (Bankruptcy costs and Attorney fees vary)
Let's just focus on the difference between repaying all the debt using the "snowball" method and a bankruptcy repayment plan. The real difference here is the Eight (8) years of payments of $500.00/mo., which totals $48,000.00! So, the secret trick of facing shame and embarrassment will save both time and money.
Now imagine if you took the $48,000.00 savings and invested it in a mutual fund that earned 6% interest. After Eight (8) years, that amount would grow to be $63,744.82! The person that filed bankruptcy and fully repaid their debt in Five (5) years, who then took the $500.00 monthly payment, invested in a mutual fund that earned a 6% interest over the next eight years, not only paid off all their debt, but also made $15,744.82. Who does that? Those that take a different perspective to eliminating their debts; that's who!