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The A-B-Cs Of Debt Management

If you feel as if you’re drowning in a pool of debt you’re not alone. The average American family now carries $80,000 in debt of which $5232 is in credit card debt. And the average debt per credit card for people that usually carry a balance is $7,494.

The harsh truth is that if you’re carrying $20,000 or more in debt there’s no easy way out. It will take you a fair amount of self-discipline and anywhere from 2 to 3 years to become debt free. One of the best ways to achieve this is through debt management. And here are the A-B-Cs you need to know to get started.

A is always track your spending

There are reasons why you’ve fallen so far into debt and you need to know what they are. To do this you will need to track your spending for at least 30 days. This means writing down every little thing you spent money on up to and including that drive-through latte you got yesterday morning and that magazine you bought on impulse today.

Once you’ve done this you will need to organize your spending into categories. This could include groceries, eating out, clothing, entertainment, those drive-through lattes, transportation, your cell phone bill, student loan payments and so forth.

Now, sit down, take a deep breath and look carefully at those categories. Somewhere in there are the reasons why you’re struggling with debt. It could be that you’re eating out too often, buying too many clothes or spending too much on entertainment. The important thing is to isolate those hotspots or areas that are causing you to pile up debt.

B is for budget

Okay, so now you know those areas where you’re spending too much money. Next, you need to create a budget designed to trim your expenses. Making a budget is not all that complicated. You could do it with a piece of paper and a pencil. Draw a horizontal line across the top of the paper and then a vertical line in the middle down to the bottom. On the left side of that line write down your fixed expenses or those things where you have no leeway, which typically would include insurance, rent or mortgage payment, student loan debt and your auto payment – if applicable. Then on the right side of that line write down all of your discretionary spending using those categories that you’ve created. Review each of those categories with an eye towards where you can make cuts. Your objective is to get your spending down to below your earnings so that you’ll have more money available to begin paying down your debt. For starters, you should try to whittle your spending down by 20%. If you find you can’t do this go for at least 10%.

C is for create a plan

If you’ve gotten this far, good for you. You obviously want to do debt management and get your debts paid off. But wishing won’t make this happen. You need to have a plan. Open a spreadsheet and write down all of your debt – how much you owe each lender, the minimum payment, its due date and interest rate. Now you have a choice to make because there are two popular ways to pay down debt. The first is called snowballing your debt, the second is stacking it. To snowball your debt you would arrange it in order with the debt that has the lowest balance down to the one with the biggest To snowball your debt, you would arrange it in order with the debt that has the lowest balance down to the one with the biggest and then focus all your efforts on paying off the debt with the lowest balance. Paying that off should go fairly quickly and will free up money you can use to begin paying down the debt with the second lowest balance and so on. Of course, you will want to continue making at least the minimum payments on your other debts.

Stacking debt is basically the opposite of snowballing debt because it means organizing your debts with the one that has the highest interest rate down to the one with the lowest and then doing everything you can to pay of the debt with the highest interest rate. The simplest way to think of these two methods is that snowballing will get you out of debt the quickest while stacking will save you the most money

C is also for conscientiousness

Remember how we said it may take you 2 to 3 years to get debt free? This is a period during which you must be conscientious. You need to keep your spending under control, make all of your payments on time every month and heavy up on those payments as much as you can. Here’s an example of what this can mean. Let’s say you owe $10,000 on a credit card at 15% APR and make payments of $300 a month. In this case, it would take you 44 months to pay off the debt and would cost you $3,017.04 in interest. If you were to up that payment by $100 to $400 a month, you would pay it off in 31 months and it would cost you only $2065.31 in interest – a savings of more than $900.

There it is – the A-B-Cs of debt management. Follow them and it’s guaranteed you’ll be debt free some day and just think how good that will feel.

< H2> C is also for conscientiousness

Remember how we set it may take you 2 to 3 years to get debt free. This is a period during which you must be conscientious. You need to keep your spending under control, make all of your payments on time every month and heavy up on those payments as much as you can. Here’s an example of what this can mean. Let’s suppose you owe $10,000 on a credit card at 15% APR and make payments of $300 a month. In this case, it would take you 44 months to pay off the debt and would cost you $3,017.04 in interest. If you were to up that payment by $100-$400 a month, you have it paid off in 31 months and it would cost you only $2065.31 in interest – a savings of more than $900.

This Week’s Free Debt Management Tip: Eliminate Those “Gray” Charges On Your Credit Card Bills

Do you remember that trial subscription you signed up for two years ago? Probably not. Or what about that free gaming membership or magazine subscription that you signed up for because it was “free?” Drawing a blank here? Well, you may not remember them but trust us those companies haven’t forgotten you. As a result just last year there were 233 million of these charges. In fact, they’re hoping you never remember them so they can continue to charge your credit card – this month, next month and in perpetuity.

Gray charges

The industry name for these them is “gray charges.” And in 2013 (the last year this was reported) they added up to $14.3 billion.

Mick Weinstein vice president of the software company BillGuard has said that, “Nine out of 10 people don’t check their credit cards carefully. And even if they do it’s too time-consuming to dispute those charges. So most people simply let them go.”

Not illegal

While you might think these gray charges are illegal they are not. However, what they do are designed to do is keep you paying, which is why there were 233 million of them a year ago. If you do the division that’s an average charge of $61 on every credit card bill.

The most common

The most usual of the gray charges are what’s called “free to paid,” where you’re offered a free introductory period but then when it expires you’re stuck with a paid subscription. These account for more than 115 million transactions a year at a total of more than $6 billion. There are some other interesting names for gray charges. As an example of this, there are “phantoms,” where other services or products are tacked on to another transaction. Another type of these is “zombies.” These are memberships or subscriptions that keep charging you even after you’ve canceled them.

Hunt them down

If you think you may be the victim of gray charges – as many people are – you will need to sit down with your credit card statement(s) and go over it with a
magnifying glass every month. You need to look at every single charge especially any that are on auto pay. Most people simply scan their statements looking for big charges they don’t remember or maybe just look at the total amount due. But be sure to also scrutinize the small charges as they can really add up.

Kill them

If you find a charge that looks sketchy you need to contact either the credit card issuer or the merchant. Don’t expect to get reimbursed for past charges but at least you should be able to kill them in the future. It’s worth the time and trouble because while those gray charges may seem like a minor issue they do add up over time. As an example of this if you’re paying just five dollars a month in gray charges that’s $60 a year or $300 over five years.

Use PayPal?

If you use PayPal and signed up for some kind of a subscription – for something you no longer need – you’re probably still paying for it. It can be even harder to find gray charges on PayPal because you might not even notice that your balance is going down a bit every month or your checking account is taking some small hits. And with PayPal it’s not very easy to hunt those down those gray charges but it could very well be worth the time and effort.

There’s an app for that

BillGuard offers a smart phone app where you can use its people dispute grey charges on your behalf. One of its users had once bought a one-day Boing pass and then began getting hit for $9.99 a month. But when its customer pressed just a few buttons BillGuard disputed those charges and eventually got him a refund for three months of payments. As you can see from this example the payoff for weeding out those gray charges can be substantial.

The problem is that it’s just very easy to put your finances on autopilot and then just sort of zone out. But when you do this any gray charges on your credit card will come back to haunt you.

This week’s Free Debt Managment Tip: How To Handle Debt Collectors

Debt collectors are trained to not take “no” for an answer. The reason they’re so obnoxious is because most of them work on a commission basis. If they collect nothing from you, they earn nothing.

It can be unnerving to be called by a debt collector. This is especially true if he tries to pressure you into paying more than you think you can afford. The way debt collectors do this is by calling you constantly, making awful threats and using other obnoxious tactics. There are debt collectors that are so difficult to deal with that you might end up promising to pay them just about anything in order to make them go away.

You do have some power

When you do deal with a debt collector you do have some power. There is an act called the federal Fair Debt Collection Practices Act (FDCPA) that spells out what debt collectors can and cannot do. Understanding this act puts you in a much better position when confronted by a debt collector. For example, the FDCPA gives you the right to ask him for written proof that you owe the debt. And when you do this he is obligated to comply with your request.

You have the right to dispute the debt

If you don’t think you owe the debt or you disagree with the amount the collector says you owe, you can dispute the debt. You must do this in writing and you must send it in the form of a letter to the debt collection agency within 30 days of having been contacted by the debt collector for the first time.

Send a cease and desist letter

After a debt collector has contacted you for the first time you can write a cease-and-desist letter telling him not to contact you again about that particular debt. When the collector receives the letter he cannot communicate with you again except to let you know that he won’t be contacting again or to tell you about some specific action he’s about to take in order to collect the money such as filing suit. (Click here to see a sample cease and desist letter.)

Other things debt collectors cannot do

There are other things the FDCPA says that collectors cannot do. Among these are that he cannot call you before 8 AM or after 9 PM unless you tell him that it’s okay. He cannot contact you at work if you tell hum that your employer doesn’t want you to be called there. He cannot use profane or insulting language and cannot call you constantly during a single day or day after day – that’s harassment. Finally, the collector cannot threaten you with consequences that are illegal or that he has no intention of actually acting on.

You have another weapon

Smart debt collectors have learned that if they push the legal envelope and harass and threaten people long enough a lot of customers will pay them at least part of what they owe. But here’s where you have yet another weapon. Debt collectors don’t want to have to sue you as this means he would need to invest more time and money in order to collect from you. Debts that go to debt collectors are unsecured debts such as credit card debts and unpaid medical bills where you were not required to give the creditor a lien on any of your assets. This means there is nothing the debt collector could seize if you don’t pay the debt. If he sues you and wins he could garnish your wages, seize one of your assets or place a lien on one of them so that you couldn’t sell or borrow against it without first paying off the debt. All of these things cost the debt collector more money and time. If your debt is small he may conclude it’s just not worth the effort. He may decide he could better use his time going against other consumers with debts that he believes would be easier to collect.

You can always settle the debt

Regardless of what the debt collector might want you to believe you can always settle a debt. Let’s say that for the sake of the example the debt is $950. You could offer to settle it for, say, $200. Why would the debt collector accept this? It’s because debt collection agencies typically buy debts for pennies on the dollar. In fact, he might have paid less than $20 for that $950 debt. When you know this it gives you a lot of room to negotiate. While the collector might not accept your first $200 offer, you might be able to settle it for $250 or $300.

Get everything in writing

If you are able to successfully settle a debt make sure you get the agreement in writing. This should spell out what you agreed to pay, the date the settlement was made, the name of the debt collector and any other information pertinent to the agreement. If the debt collector refuses to provide this information in writing you will need to write it up in the form of a letter and then mail it to the debt collector as certified or return receipt requested. You will, of course, want to keep a copy for yourself. If you never receive the return receipt because the collector refused to sign for your letter you will only have one option – to not pay anything and then wait to see what he does next.
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This Week’s Free Debt Management Tip: Stop Shopping

We read recently of a 30-year-old woman who decided it was time to face reality. She was $19,800 in debt and most of it was money she had just frittered away. The fact is that she was trying to live a lifestyle she just couldn’t afford.

Her first step – a budget

The first thing that she did to deal with her debt was to set up a budget. She skimped a lot and after two years was debt-free. In doing this he discovered a double benefit. First, it increased the amount of money she had each month to put into savings plus it lowered the amount of money she needed to save for retirement.

What she next discovered

The next thing she discovered was that her closets and cabinets were overflowing with junk. She found she was spending $5 here and $10 there – nothing crazy – an extra lotion or shower gel. She figured out that what she needed to do was just stop buying and use the stuff she already had.

A year-long ban

She then embarked upon a yearlong ban on shopping. Over the course of those 12 months she got rid of 75% of her stuff, managed to live on just 51% of her income and was able to travel – two trips to New York and others to New Orleans, Denver, Portland and Toronto.

In addition to using up the stuff she already had she found two things she just had to stop buying. The first was takeout coffee. The second was books. She found she had 50 books she had never read and yet was always buying more. She stopped shopping for notebooks, magazines, candles, or electronics. She did not allow herself to buy clothes except for a couple of things she realized she needed before she began the ban. This is because she had done a massive de-clutter and found there was a lot of stuff she had never even worn.

The lessons to be learned

This young woman began freelancing and between this and her regular job earned a little over $57,000 last year and took home $43,700 after taxes. She now lives off of 50% of her income or about $1600 a month and yet has a very full and rich life.

There are several important lessons to be learned if you’re struggling with debt and want a better life. For example, the first thing you should do is set a goal. We can’t tell you what it should be but it should be large enough to help you get out of debt within, say, a year. This might mean cutting your spending by 30%, 40% or even 50%.

Look for places where you can make cuts

Next, pull out all of your receipts and credit card statements and review them to see if maybe you need a shopping ban. Look for extraneous stuff – or stuff you didn’t really need but bought on a whim – and things like drive-through lattes and take-out meals. Also look for things that you really could live without. Then add up all those expenditures. If you find all those little things add up to a lot, you may need a shopping ban of your own. Many people have found the best answer is to simply put away the credit cards and pay cash for everything. There’s just something that makes it harder to pay cash for stuff then to use those little plastic cards.

Go through your closets and your storage areas

You may have accumulated a lot of stuff you don’t need or don’t really use. The lesson to be learned here is to go through your closets and storage areas looking for stuff you could use up. If you can’t use it, get rid of it. Donate it to a charity and take the tax write off or sell it on eBay or Craigslist.

Stay the course

The woman in our story found it very difficult to give up some of the things she really loved like drive-through lattes and books but she ultimately did. You may also find it tough to give up some of those things that are causing you to run up debt. But if you stay the course you’ll soon have your debts managed or even paid off. And just think how much better your life would be. You would be able to live comfortably, save money for retirement and maybe, like this young woman, take some really neat trips.

Is Bankruptcy A Form Of Debt Management?

There are a number of different ways to achieve debt management. Some of the more common of these are making a plan to pay off your debts, getting a debt consolidation loan and consumer credit counseling. It’s also possible to get your debts under control – or managed – by transferring all of your balances to a new credit card with a lower interest rate or through the option of debt settlement.

If you’re so far down you can’t see up

While all of the debt management solutions described above will work they are all based on the idea that you have some money and decent credit. What are your options if you have no money and poor credit?

In a word, bankruptcy.

You could file either a Chapter 7 or Chapter 13 bankruptcy.

A chapter 7 bankruptcy

This type of bankruptcy is generally called a liquidation bankruptcy. The idea behind it is that a court appointed trustee liquidates your assets in order to pay your creditors. However, you’re allowed to keep part of your assets such as your car, your house and your personal belongings. This means that in most cases there won’t be any assets left to liquidate.

Once you file a chapter 7 bankruptcy an order will be issued called a stop action notification. It will be sent to all your creditors. This will stop most of them from demanding any more payments from you or taking any legal action against you.

A chapter 7 will discharge your unsecured debts with certain exceptions. It won’t discharge alimony, child support, spousal support and certain tax debts. It can’t also discharge secured debts such as your auto loan or mortgage. But if your 800-pound gorilla of debt is credit card or medical debts, a chapter 7 bankruptcy can be your ticket out of trouble.

A chapter 13 bankruptcy

This is usually called a reorganization bankruptcy because it’s designed for people to set up repayment plans where their incomes are used to gradually repay their debts. People whose income exceeds the limits of a chapter 7 bankruptcy often choose a chapter 13. This type of bankruptcy usually takes three to five years to complete but won’t exceed five years. It can be considered a form of debt consolidation.

The pluses and minuses

There are eally only two positives to filing for a chapter 7 bankruptcy. One, of course, is getting out from under your unsecured debts. The second is getting rid of those angry creditors or debt collectors that have been making your life miserable.

Bankruptcy is actually guaranteed in our Constitution, which I bet you didn’t know. It’s because our founding fathers in their wisdom believed that everyone should be able to get a fresh start. And that fresh start is bankruptcy.

However, a chapter 7 bankruptcy does have its cons or downsides. The largest of these is the negative effect it will have on your credit score as it may reduce it by as many as 200 points. In turn, this will make it very difficult for you to get new loans – including credit cards — for two to three years after your bankruptcy. If you are able to get a loan it will be high-interest, low-dollar credit. It’s likely that the cost of your auto and homeowner’s insurance will go up as a result of your bankruptcy. You may have a problem getting a job because many employers now run credit checks as well as background checks on prospective employees and could rule you out when they see your bankruptcy.

A bankruptcy will stay on your credit reports for 10 years. This could make it difficult for you to buy a home, say, eight years from now. It will also stay in your public record for the rest of your life. You could fail to get that dream job because your employer saw that you’d had a bankruptcy and ruled you out as a result.

Explore the other options

As you have read filing for a chapter 7 bankruptcy can have very serious effects on your life. No matter how bleak your finances might look, it’s wise to check out your other options before filing. Consumer credit counseling could be a good choice. There is probably a consumer credit counseling agency in your town or city and if not it’s easy to find one online. In either case, when you go to one of these agencies you will be assigned a debt counselor that will review all of your finances including your debts, your spending and your assets. He or she will help you develop a budget designed to get you out of debt without going through the trauma of a bankruptcy. If your debt counselor can’t help you develop such a budget you could then file for bankruptcy.

Bankruptcy is a form of debt management but …

A chapter 7 bankruptcy is definitely a form of debt management as it would certainly get your unsecured debt under  control by eliminating it. But as you have read, bankruptcy can have a drastically negative effect on your life making it important that you check out all your other options before choosing it.

How do you want to spend the next 30 or 40 years?

You’ll probably going live another 30 or 40 years. Given this, how do you want to spend them? Do you want to be constantly hassled by lenders and collection agencies? Do you want the stress of struggling with all that debt give you a heart attack or ulcers?

Do you want your finances to be a continual struggle? Or would you rather get your debt managed and ultimately paid off so that you will have money for vacations, to buy new cars, to save for retirement and to live a more peaceful life? The choice is yours. But the only way you’ll be able to manage your debts and get them under control is to make a plan and take action beginning today or at least tomorrow.