Debt Control Is Debt Free

Debt Control Is Debt Free

by Stephen Lau

To get out of debt and to stay debt free all your life, you need to take the following steps:

Step One

How serious is your current financial situation?

Total up all your monthly bills against your gross income, and you will get an overall picture of the situation.

Get receipts of all your spending in the first two months. Compare total expenses with your total income, and you will get a better and more detailed picture of your current financial situation.

Is it serious? If it is serious, is it a financial emergency?

A financial emergency means the imminence of one or more of the following:

· Homelessness due to pending or imminent foreclosure

· Eviction due to non-payment of rent

· Utility cut off due to non-payment of bills.

Step Two

Take appropriate actions.

Don't just sit there and worry yourself sick. Do something about it!

· Immediately contact your creditors or utility companies to obtain a temporary solution.

· Get an attorney to negotiate a solution to your financial emergency.

· File for bankruptcy to buy more time.

Step Three

Make some temporary contingency plans.

· If you have little income or property, do nothing because a court judgment against you might not work in the creditors’ best interest.

· Borrow from your friends and relatives, if this is an option.

· Raise money to alleviate your dire financial situation by borrowing. However, be careful: do not jump from the frying pan into the fire, and get yourself into deeper debt. Avoid borrowing from a finance company: debt consolidation loans, payday loans, or tax refund anticipation loans.

· Sell your salable assets, such as jewelry, a car or a house.

· Cut your daily expenses:

   e.g. Brew your own coffee instead of going to Starbucks.
   e.g. Rent a DVD instead of going to a movie.
   e.g. Mow your lawn instead of using a landscaper.
   e.g. Wash your car instead of going to a carwash.
   e.g. Make fewer grocery trips.
   e.g. Use food coupons.
   e.g. Conserve your water, gas, and electricity.

· Borrow or withdraw from a tax-deferred account, if you have an IRA, 401(k) retirement plan.

· Apply for a home equity loan or credit line.

   Advantages: Interest may be deductible on your income tax return; you can borrow as you need the money.

   Disadvantages: Predatory lenders may charge exorbitant interest rates; you may have to pay an upfront fee; and you increase your already-over-stressed monthly payments.

· If you are a senior, apply for a reverse mortgage, which is a loan against the equity in your home. This is an option only if there is a lot of equity in your home. The disadvantageous factors are your age, the costs and fees. and your daily expenses.

   For more information, go the FHA's Home Equity Conversion Mortgage Program and the Fannie Mae's Home Keeper Mortgage Program.

· File for bankruptcy, which may not only wipe out all your consumer debt, such as credit cards and medical bills, but also stop all creditors from further harassment.

   Debts that cannot be wiped out include alimony, child support, federal and local income taxes, and student loans, among others.


Step Four

Reduce spending

Use computer software such as Quicken to help you keep track of your daily spending.

Always remember the maxims:

The borrower is a slave to the lender.

Never buy the things you don't need with the money you don't have.

Total up your income, and create a realistic budget based on what you have, and spend according to your spending plan.

Avoid spending pitfalls:

· Purchase based on future income: Buy now and pay later.

· Impulse buying: Just this once! It’s once in a blue moon!

· Sales: It’s on sale! You’re saving real dollars!

The principle of saving

Most people concentrate ONLY on how much money they can make and ignore how much money they can save!

You must start saving for the future. The money you save today, however small the amount, will start working for you - slowly but eventually.

Saving is a choice. Don't give yourself more excuses. You can always find some money to save under any stringent circumstance. Always pay yourself FIRST! Put aside a fixed sum of money every month, however small the amount. The best way is to have money automatically placed into a savings account.

Saving makes you feel having a handle on life. You feel responsible and able to cope. You feel you are in control of your life, instead of being controlled by others.

The practical application

Apply the principle of saving to you daily life.

You can save a lot of big money by not eating meals cooked by others such as

· Convenience meals
· Drive-through dinners
· Take-out foods.

The Americans are spending over $400 billion dollars each year on meals prepared by others. Cut your spending by cooking your own meals. (Go to my website Healthy Eating.)

Find out how much you have spent on food today.

Keep track of all groceries and food items, keeping all your receipts: you may be surprised to find how much you have spent on food!

Shop smart for groceries

· Use coupons when you shop.

· Prepare a grocery list.

· Go shopping on a regular basis, but no more than once a week.

· Don’t go for last-minute buys.

· Don’t shop when you are hungry.

· Don’t always buy small: buying in bulk may save a lot.

· Read unit price (on the left side of the sales price) to see if it is really a bargain.

· Look for bargain items often at bottom shelves.

· Buy “store name” items, which are always cheaper.

· Avoid convenience foods: they cost much more.

· Always buy seasonal items.

· Eat more vegetables (meats cost more than vegetables).

If you think your spending is out of control, maybe it is time to make the cut on your spending.

· Learn to become a patient shopper, that is, wait a couple of days to see if your impulsive buying will subside or not.

· Always carry cash with you - not a credit card!

· Go to discount stores outlet malls (e.g. T.J. Max for teenagers' clothing; Loehmans for suits and dresses; Army/Navy stores for low-priced pants, outdoor and rain gear), or clothing catalogs.

Step Five

Deal with current debt

Smart debt consolidation

Consolidate all your debts so that you will have one payment. However, be cautious.

· Shop around and look for:

   - Low interest rate

   - Reasonable repayment terms.

· Avoid getting the wrong consolidation loan that ends up

   - Paying more

   - Having long repayment terms.

· Always compare the Annual Percentage Rate (APR) and the total payback time.

· Focus on the total cost of the consolidation loan, not the monthly repayment. (Go to the BanxQuote Website to get a list of loans available.)

· Commit to changing spending habits and lifestyle, such as

   - Understanding why and how you got into debt in the first
     place

   - Resolution not to repeat the same past mistakes

   - Taking control of your financial future by turning over a
     new leaf.

· Develop a plan to repay your debts.

· Learn the principle of saving (see above).

· Negotiate for a lower interest rate or fee.

· Be realistic of your goals.

Smart credit counseling

Go to the National Foundation for Credit Counseling (NFCC) to get more information on debt-reduction:

· Developing a practical and individualized debt-paying plan

· Getting budget counseling and seminars

A knowledgeable and reputable credit counselor should be able to help you with the following:

· Developing a personalized plan to solve your immediate money and credit problems

· Teaching you how to avoid similar problems in the future.

Smart strategies for getting the right credit counselor

· Check with the Federal Trade Commission (FTC).

· Check if the credit counselor is licensed or not.

· Check if the credit counseling service offers FREE information on savings and debt management.

· Check with the Better Business Bureau to see if the credit counseling is reputable or not.

· Check all the fees involved e.g. start-up charges, monthly fees, or other charges.

· Check the disclosure of the compensation of credit counselor from creditors. Non-disclosure of compensation means the credit counseling service may not be trustworthy.

· Check the accessibility of the confidential personal and financial information you provide to the counseling service.

· Check if there are potential signs of scams.

   - The credit counseling service guarantees the erase of
     unsecured debt from your credit report.

   - The credit counseling service promises the payoff of
     unsecured debt with pennies on the dollar.

   - The credit counseling service requires a start-up fee and
     substantial monthly service fees (the service should be
     compensated by creditors).

   - The credit counseling service informs you not to pay your
     creditors or to communicate directly with them.

   - The credit counseling service demands a percentage of
     savings as payment.

Deal with current financial crisis

A financial crisis, such as debt collection, may have occurred. If you do not pay your bills, your debt will be referred to a collection agency, which will find you through the following

· Credit bureaus

· Original application for credit

· Post office

· State department of motor vehicles.

The Federal Fair Debt Collection Practices Act was passed by Congress in 1978.

Always know your rights:

· No harassment

· No phone calls at odd hours (before 8 a.m. and after 9 p.m.), or calling at work

· Use of false statements e.g. misrepresenting the involvement of an attorney in collecting a debt, or stating that a lawsuit will be taken against you

· Unfair practices e.g. depositing post-dated check prematurely

· Keeping the debt private and confidential.

If the collection agency breaks the law, file a complaint to the Federal Trade Commission and the creditor.

Smart dealing with debt collection agencies

· Offer to settle for less: Collecting agencies authorized to accept less than 100 percent of the debt may agree to a smaller amount if it could be paid in one lump sum.

· Offer to make monthly payments.

· Don't let collection agencies take legal action. Creditors can take legal action to seize your assets, attach your wages, possess your car, or foreclosure. Simply ignoring the debt won't make the problem go away.

File bankruptcy

Bankruptcy could be the right option under these circumstances:

· Using new debt to pay off old debt

· Monthly expenses being covered by cash advances or overdraft account

· Having too many overdue bills

· Being unable to meet credit card minimum payments.

Bankruptcy may not be the best and final option when you have not attempted the following:

· Credit counseling

· Curbing excessive spending

· Debt consolidation

· Debt resolution with creditors

· Extension on payments.

Bankruptcy is often the last resort is get out of a seemingly hopeless financial predicament.

Disadvantages

· Bankruptcy stays on your credit record for seven to ten years.

· Bankruptcy may impair your ability to obtain a credit in the future.

· Bankruptcy may have adverse impact on your potential employer and landlords.

Advantage

The only advantage is that it may wipe out most of your debts.

Dischargeable debts (can be forgiven) include accounting fines, back rent, court judgments, personal loans, and utility bills, among others.

Non-dischargeable debts (cannot be forgiven) include alimony, child support, credit card charges, medical bills, student loans, and tax obligations, among others.

Exempt assets include the main car, tools of trade, food and clothes, among others.

Non-exempt assets include cash, investments, personal property, luxury items.

Creditors with secured loans are first to be repaid upon the sale of property.

Types of bankruptcy filing

Chapter 13 bankruptcies filing enables the debtor to formulate a plan to pay off both secured and unsecured debts under the guidance of the bankruptcy court. The borrower may discharge a large part of the debt, and the remaining debt is to be paid over a period of up to five years. The debtor may be allowed to keep some of the assets.

Chapter 13 bankruptcies filing requires a filing fee.

The judge appoints a bankruptcy trustee to oversee the budget and spending, assets and debts of the debtor.

The debtor is required to submit a petition that includes a repayment plan, income, assets, and debts, and budget and spending, all creditors with names and addresses.

Upon creditors' acceptance of the repayment plan, the trustee will send monthly payments to creditors.

To be eligible for Chapter 13 bankruptcy filing, the debtor must have a stable and regular income from regular wages, pension payments, welfare payments, social security benefits, child support or alimony, among others; and the total amount of secured debt and unsecured debt must not exceed a certain amount.

There is no limit on filing for chapter 13.

Chapter 7 bankruptcy filing

The debtor must turn over nearly all the assets to the bankruptcy court, which disburses cash to creditors after selling the assets in auctions, and when that happens, the debtor is free of any financial obligation to creditors.

To be eligible for Chapter 7 bankruptcy filing, the debtor must demonstrate that he or she could not possibly pay the debt within three to five years; the debtor has not intentionally defrauded the creditors or the bankruptcy court.

Chapter 7 can be filed only once every six years.

Step Six

Plan for the future - your life after debt

Plan for your life after debt. Get professional credit report repair to turn over a new leaf.

· Set your specific financial goals: college financing, estate    planning, insurance, and investment. Set and review your short-term and long-term goals.

· Motivate yourself with the mental visualization of a future balanced budget.

· Seek professional financial help if need be. Get a qualified    and certified financial planner to help you with smart money management.

   Familiarize yourself with financial planning strategies and terminology. Research the Internet with regard to personal   finance.

   Discuss your specific financial goals: college education    financing, estate planning, insurance, and investment advice.

Interview more than one financial planner; get referrals.

Copyright© by Stephen Lau

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