March 29, 2024

Wading in a sea of debt

Jan. 27, 2008
How did this ever happen?
That’s what Bob wondered every night for months, his stomach knotted with worry. He and his wife were earning $50,000 per year, and that seemed like a lot. They worked hard and played hard. They took vacations each year, sent their two boys to the Catholic school, bought a new plasma television, went skiing on weekends, and attended sports events in Detroit.
But in reality, Bob (not his real name) and his wife were routinely using credit cards when they came up short each month. Bob’s wife handled all the bills, so he was shocked when Kohl’s and JC Penney began calling the house, wanting to know why payments were late.
As it turns out, Bob and his wife, who live in the Traverse City area, had wracked up $64,000 in credit card debt. With no equity left on their home, they could no longer consolidate debt to pay the cards off.
After a few late payments, the credit card companies hiked up their interest rate to as high as 34%. Bob and his wife were told that the only way to get it down to 16 percent was to make consistent payments for six months. But the whole thing was futile, the couple thought. They couldn’t make minimum payments, and what they could pay wouldn’t even cover the interest, Bob said.

DIGGING OUT
Bob and his wife had dug themselves in so deep, that they called an 800 number they saw on a commercial for debt relief services. The Texas company promised big things, but did next to nothing and charged the couple $2,800.
So then they turned to Michigan Debt Settlement in Suttons Bay—a small company that “settles” with credit card companies. That means it negotiates a pay-off amount with the credit company that might be anywhere from 30 percent to 70 percent of the total balance owed.
The couple’s credit cards are nearly all settled. Bob and his wife had to empty their retirement account to do it, but they now have an extra $2,000 per month to begin saving for the future. It cost Bob and his wife $4,000 to “settle” on their credit cards ($400 per card), but they expect to save $23,000 in credit card debt when all is said and done.
Bob and his wife are obviously not alone. News reports of foreclosures, a glutted housing market, and falling stock market mirror the very personal struggles of people trying to pay their bills.
Fortunately, there are local resources that people can use to help them through.
Settling accounts with credit card companies is an option for people who don’t want to file for bankruptcy or wouldn’t qualify. There is no public record and the credit score is negatively affected only for about 18 months versus seven to 10 years, said Jackie Freeman, owner of Michigan Debt Settlement.
Besides taking a hit on your credit score, there is one other drawback to settling accounts, and that is that the “settled” amount is treated as taxable income.

WIPING OUT DEBT
Bob and his wife were only able to get about 35% of their principal amount settled because their accounts had already gone into litigation. Typically, Freeman said she is able to get at least half the balance wiped out, an assertion that was confirmed by her clients who did not want their names used in this article.
“Jackie went far beyond what she was paid to do,” said one of her clients. “I am a 72-year-old woman and I have never not been able to pay my bills, but then I came up against circumstances beyond my control. It was just life.”
Freeman was able to wipe out $24,000 from her $50,000 credit card bill, she said.
For her $400 per credit card fee, Freeman will take all the creditors’ calls and advocate for debtor clients even when they get served with a lawsuit (in those cases, Freeman works with bankruptcy attorney Paul Bare).
She adds that settling an account is an option for people who have a pot of money they can draw on, such as drawing on retirement savings, borrowing money from a family member, or selling a collectible car.
People can choose to settle accounts themselves without going to a professional, but must ensure they document everything, get everything in writing, and meet every single requirement set out by the credit card company, Freeman said.
Freeman said that none of her clients had spent irresponsibly with the intention of backing out of their debts.
“A lot of our clients are old and sick, and they were using their credit cards to purchase their medications or were buying their groceries on credit cards. This kind of debt generally happens after an unavoidable catastrophe. People had control until a divorce happened or someone was injured in a car accident or got laid off from their work; that happens a lot up here.
“I see retailers who came to the end of the summer season, they’ve bought all this inventory on credit cards, and they’re stuck. That’s the profile of so many of our clients.”

REASSESSING YOURSELF
It’s vital, she said, that once a person is rid of their credit card debt, that they responsibly rebuild their credit and make a spending plan that allows them to save enough for emergencies and times of hardship.
And that requires a good deal of
serious introspection, said Paul Sutherland, author of Zenvesting, president of the Financial Investment Group in Traverse City, and chief investment officer of the Utopia mutual fund.
“The core of all this is taking a look at who you are. What do you want your life to be?” said Sutherland, who also writes a financial column for Spirituality and Health magazine.
“Let’s say that you look at why you shop so much and discover that it’s a kind of entertainment for you. So would your entertainment money be better spent on $8 for a two-hour movie at the State Theatre rather than spending $40 for a sweater? Or could you take a book to a coffee shop and spend a quiet two hours there, seeing friends? Once you examine who you are and what makes you happy, it’s easy to get past your expensive addictions.”

FINANCIAL PEACE
The story of Bob and his wife is telling; neither had really sat down and talked together about money before hitting bottom.
That’s not unusual, said Jim Christians, who teaches a 13-week class called “Financial Peace University” at Faith Reformed Church in Traverse City. The class is based on financial self-help books written by Dave Ramsey.
“This is more a class about communication than anything,” Christians said. “Besides learning how to manage our money, we learn to communicate. Most people don’t talk about money. A lot of families struggle with debt, making payments, and money becomes a subject they learn not to talk about.
“This class requires the husband and wife to work together to get out of debt, to put together a plan on how they want to spend their money. The whole goal is to get out of debt, none, not even a mortgage, while beginning to save for the future. People find it’s very gratifying to work through it and define their priorities. ”
Christians concedes that figuring out a budget can be challenging. One of the tools used in the program is to put a set amount of money in an envelope to cover a particular expense. “When most people find out what they’re spending on groceries, for example, they go crazy. They had no idea what it adds up to
each week.
“It causes you to communicate and there are always rough edges. But if the spouses are committed to the program, they find they’re feeling more in control within a few months. They go from trepidation to anxiety to ‘we can do this.’ They learn to commit to a plan to save their way out of debt. It starts out kind of touchy, but they end up feeling really victorious and empowered by the end of it.”

‘TELL YOUR MONEY’
So how does the plan work? The key to a spending plan is to “tell your money” where you want it to go. It’s key to pay off debt while beginning to save. Ramsey advises first paying off the credit card with the smallest payment and once that’s paid off, to “snowball” that former payment into the next smallest credit card. Pretty soon, you’ll be making significant payments on your largest card, Christians said.
Participants are also told to immediately set aside $1,000 for emergencies. That way, they won’t need to resort to a credit card. Another principal: Don’t dig a hole (i.e., borrow money) to fill a hole.
Christians said that the program is life-changing.
“I know that some people don’t get it. They will leave unchanged. But a lot do get it. And when you see people change from bondage to debt, browbeaten, to bumping into them and hearing, ‘Hey, we don’t have any more debt, we’ve paid it all off, we’re down to a house payment, and we have money in the bank.’ That’s how serious it is.”
Do you have to share your personal details?
“No,” said Christians. “You just need to show me a budget and that it balances to zero. I don’t look at your numbers, but I’m looking for your zero.
“If you’ve done your income and all your expenses and show you have $500 left, wrong. If you have $500 left, you need to allocate it to savings, retirement, college or the purchase of your next car for cash.”
Dave Ramsey’s books do have a religious angle. So is this class religious?
“There is some, but very little — maybe we share proverbs and scriptures about money and debt. You won’t be offended unless you’re super easily offended.”
Jim Christians said the class has been “dramatically life changing” even for himself. He’s become more thoughtful about money, and it’s made all the difference.
“I don’t want people to think they have to count every nickel and dime. In fact, Dave Ramsey says to give yourself a personal allowance or what he calls ‘blow money.’
“I originally gave myself $100 a week, which was significantly less than what I was spending. And after getting used to living more frugally, I found I don’t even spend that much.
“I used to drop $20 for a baseball cap and not even think about. Now I think about it because it comes out of my spending money, and I’d rather use it for something I really need.”
EDITOR’S NOTE: To sign up for the Financial Peace University classes in Traverse City, call Faith Reformed Church at 947-7082. For a course in your town, google the name of your town plus Financial Peace University.
To reach Jackie Freeman at Michigan Debt Settlement, call
231-271-6617 or 231-668-9000.

NEXT WEEK: Top Tips on Unemployment Benefits


Missing Your Mortgage Payment? Pick up the Phone...
Al Zalinski has been in the banking business for 20 plus years and has never quite seen the number of foreclosures of the last few months.
His advice: If you’re having trouble paying your mortgage or know you’re going to have trouble, pick up the phone and call your mortgage company or bank immediately, said Zalinski, executive vice president of Traverse City State Bank and CEO of Traverse Mortgage, which is wholly owned by the bank.
“Three months is way too late. The first late payment is the time to call. If you know you have a cash flow problem, you’d better immediately start talking to your lender.”
Many people don’t realize that banks don’t want to foreclose on a loan and are willing to refinance the loan with a payment that a client can afford. It can mean extending the term of the loan or finding a lower fixed interest rate, he said.
Zalinski said that it’s important to call the bank that originally issued the loan, but it’s also wise to shop around to see if you can get a better deal.
Part of the problem, of course, is that people bought into low teaser rates on adjustable rate mortgages. Those payments didn’t even cover the cost of monthly interest and the consumers ended up owing more than the original loan amount—sometimes even more than the house was actually worth, he said.
Traverse City State Bank did not offer adjustable rate mortgages, nor the “teaser rates”. Zalinski said he watches with amusement the “800 number commercials” that are now offering to bail out the same people they drove into financial desperation in the first place.





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