Tips And Guide For Debt And Loan Management

There are basically five situations in which refinancing seems attractive:

1. You can lower your interest rate for “no cost.” If you have a fixed rate loan and can refinance at “no cost” into a similar term loan at a lower rate, you should refinance.
2. Your adjustable rate mortgage is about to go up. If you have an ARM that is about to increase, you may want to refinance with a fixed rate loan.
3. You have an ARM, and your nerves can’t take it any more. ARMs are scary because your rate can go up at almost any time. If you want some more certainty and budget control, a fixed rate refinance is the way to go.
4. You have a balloon payment loan. A large lumpsum payment can wreak havoc on your finances. Trading it in for a more conventional loan makes sense.
5. You need cash. The fifth situation in which refinancing seems attractive is when you need some extra cash and you want to refinance the house in order to pull out some money. This proposition is inherently dangerous, and we do not recommend it. However, if you have plenty of equity in the house and are in a severe debt crisis, refinancing may be an advisable approach to solving your problem. Read on.

The first four situations make sense because you will likely be saving money, but the last option is inherently dangerous. Let’s look at each situation a bit more closely and show you why you may want to refinance.

The final part of your notebook is a running tally of what you have paid, when you paid it, and what you still owe. Again, each creditor should have its own subsection. You may even want to put your monthly bills in their proper place in the notebook.
You can even put each check as it clears your account in this section. You can monitor payments and outstanding debt in various ways:

• You can do it by hand by subtracting your payment each month from your previous month’s balance.
• You can use a spreadsheet. Spreadsheets are part of many computer systems; Microsoft Works, which is found on many PCs, has one built in.
• You can buy a computer program, such as Quicken, to help you. These programs have some cool charts and graphs that will let you see your debt shrinking in 3-D.

If you adopt this program and see it through, you should begin to see some dramatic results in a short period of time. Just as debt seems to have an almost mystical way of growing in the blink of an eye, so too does it have a way of shrinking when you begin to take action. As time goes by, and as your debts reduce, you will be able to devote even more money toward your debt-reduction plan, making it shrink all the faster. Before you know it, you will be out of debt.

At this point, you may be thinking that Dr. Bombay won’t take $9 a month. Maybe not, but maybe he will. Actually, some of your creditors might be very happy to hear your voice. Especially if you have been avoiding them and reneging on your responsibility to pay what you owe them. A phone call with a repayment plan, even a small repayment plan, can be seen as better than nothing. Explain to each creditor on your list what you are doing. Tell the creditors

• You are sorry for allowing this debt to get out of hand. If you express regret, you may find that the creditor will be far more willing to work with you.
• ? You have every intention of paying them back in full.
• Paying them back will, however, take some time. You owe a lot of people money, not just them.
• You have a plan of action to pay everyone back, and in it you will be treating each creditor equally. The creditor to whom you owe the most money will be paid the most. It is a fair plan.
• You understand that they want more money each month than you are proposing, but at this time, you are doing you best. In time, as the debts shrink, you hope to be able to pay more.
• You would like their cooperation. If they could stop adding interest, they would get paid sooner, and your job would be easier.

Sam had ignored his Gottshalk’s Department Store bill for five months and owed them $1,100 when he finally created a plan that called for him to pay them $75 a month. Once he got up the nerve to call customer service, Sam explained his situation, apologized, and proposed his plan. Gottshalk’s agreed to cut his interest rate from 11.9 percent to 7.9 percent.
This last part is the trickiest. Creditors don’t have to agree to anything, certainly not a cessation or reduction of interest. But if you are honest with them and if they see that you are endeavoring to do the right thing, they just might agree. After all, the last thing they want to see is a default.
If they tell you they will not accept $9 a month, that they will sue, or will write off the debt and sell it to a collection agency, listen politely, and send them the money anyway. The odds are that they will cash the check, however unhappily.
Credit card companies might not be so generous. They are usually very difficult to deal with and do not often negotiate. Yet, as with other creditors, an honest attempt on your part to settle your bill can go a long way. Do your best to get them to lower
interest and finance charges, pay what you can afford to pay, and begin to make some headway.
There are downsides to this sort of plan. By consistently paying less than you owe there is a possibility that your creditors may report you as paying late every month. Or they may cancel your credit altogether. If this is of concern to you, you may want to pay those creditors whose credit you still want more and the others less, at least until they are paid off.

To figure out how much each creditor gets, multiply its percentage by the amount you can afford to pay (we promise there will be no more math after this!). Because Ryan can afford $100 a month and his mom gets 22 percent, he needs to multiply her percentage, 0.22, by $100: .22 ??$100 = $22. If Ryan could afford $200 a month, Dr. Bombay would get 9 percent multiplied by $200: $18.
Ryan, like you, would then need to pay these amounts each and every month to his creditors. As it stands, Ryan will devote $100 to getting out of debt, with each creditor getting a percentage according to how much Ryan owes them. This is where your commitment comes in. You must set aside that amount, whatever it is, every month and earmark it toward these debts. Each creditor will have to share whatever it is you can afford. The only way to get out of debt is to get out of debt. It is not easy. That is why you must be committed.
For various reasons, your plan may not exactly reflect how much you owe each creditor. One debt may have such high interest that it must be paid more, or another creditor may be bothering so much that you just want to get rid of it as fast as possible. These adjustments are fine; the important thing is to create a plan that works, that you can live with, and that you are committed to.
For example, you may decide that the best course of action is to get rid of the credit card with the highest interest rate first and then worry about the others. We have no problem with that—in fact, it’s smart. The important thing is to create a plan that you believe in and that works. Pick a plan, any plan. Once you do, the important thing is that you will be getting out of debt instead of going into debt.

This list tells you how much each creditor is going to get each and every month, depending upon how much you can afford to pay. How much can you afford to pay? If you have a budget, you know. If not, you still intuitively know how much you can afford to repay every month—$25, $50, $200, whatever works.
Let’s go back to Ryan and see how this process works. His budget will allow him to dedicate only $100 each month toward these bills. (We are not saying not to pay your bills if you can afford to pay them. This tool is for those bills that you have fallen behind on and/or feel overwhelmed by.) Each creditor will get its percentage of that $100

You then need to figure out what percentage each debt is of the entire amount. It’s not that hard to do. First, add up your total debt. In Ryan’s case, it is $11,500. To figure out each creditor’s share of the whole debt, divide each creditor’s amount by the entire debt. For example, the Armata Visa bill ($5,000) divided by the entire amount ($11,500) equals .43, or 43 percent. That bill is 43 percent of Ryan’s total indebtedness. The next thing to do is to add that figure onto your list, next to each creditor’s name and the amount owed. In Ryan’s case, the list would look like this:

Again, this plan to pay off your debt will not be at the expense of the rest of your life—in fact, it cannot be done that way. If you set up a plan that involves renouncing all you enjoy, you will not stick to the plan. Because you will not have been spending any money, and when you do break your budget plan, you may well binge, putting yourself worse in debt than before you started. You will continue to eat, live, entertain, go to school, have lunch out, and so on. You will just be adding one more category to your expenses: debt repayment.

Your payments may not be that much at the beginning; whatever you can afford is what you should pay. This is going to be a plan that works, one you can live with. Although it might be a modest beginning, creating such a plan is a significant moment in your financial life. It is the moment when you stop going into debt and start getting out.

To make this repayment plan work, give it your full commitment. Commit totally to repaying everything and everyone to whom you owe money. Of course, it will take time and won’t be simple, but that is no excuse for not starting.

A 31-year-old man once asked his wise father whether he should go back and finish his college degree. The man was worried that it would take three years and that he would be 34 years old when he finally finished college. His father looked at his son and asked him, “How old will you be in three years if you don’t go?” How old will you be in three years if you don’t commit to repaying your debts? You’ll be three years older and several more dollars in the hole.

aking a commitment to pay everyone back is very significant. If you do it, you will feel better about yourself. It will give you the confidence to call up your creditors and work out a repayment plan. Fear will begin to evaporate and will be replaced by strength. A commitment to keep your word, have integrity, and live up to your responsibilities fosters self-esteem. It is good for the soul.

Commitment is a very powerful thing. Buckminster Fuller (1895–1983) is best known for inventing the geodesic dome, but he was also a prolific author, mathematician, cartographer, speaker, scientist, and inventor. At one point, he had the longest entry ever in the history of Who’s Who.

What many people don’t know about Bucky is that he was a complete failure for much of his life. He was kicked out of Harvard, twice (once for blowing his entire semester’s allowance on an evening with showgirls), had several businesses fail, and was grieving for a daughter he lost to a childhood illness. An unhappy, unknown failure at 30, Buckminster Fuller decided to kill himself.

As he walked to Lake Michigan in the dead of winter, intent on throwing himself in, Fuller realized that his mistake had been selfishness; if he fully committed himself to helping the greatest number of people he could, he could be a success. He vowed on his deceased daughter’s memory to do just that. It was only after making this commitment that he turned his life around and became a lovable genius some dubbed “the da Vinci of the twentieth century.”

W.H. Murray wrote the following in The Scottish Himalayan Expedition:
Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative and creation, there is one elementary truth the ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one’s favor all manner of unforeseen incidents, meetings and material assistance which no man could have dreamed would have come his way. Whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it. Begin it now. You don’t need to change the world; you just need to make a commitment to yourself and for yourself that you are going to repay all your debts.

Your creditors are probably not too happy with you right now. Although some people start on the path toward financial solvency still current on all of their bills, most people do not. Their utilities may be close to being turned off, and their credit cards are so maxed out that they can no longer even use the cards to continue to accrue interest, finance charges, and penalties.

Late payments like these create even more debt, which in turn may cause more fear and avoidance. Avoidance can then cause more late payments, creating even more debt. Debt begets more debt. Maybe you’ll go on a binge-shopping spree to feel better. In this hellish cycle, debts grow and grow and grow. You can put an end to this cycle by putting together a practical repayment plan.

Of course, we realize that some debt is unmanageable and that such debt is bigger than a repayment plan. If that is the case, bankruptcy is probably a better option.
We understand that and even endorse that option. After all, one of the authors of this book is a bankruptcy attorney. The repayment plan being presented here is for those of you who plan to get out of debt without declaring bankruptcy.