problem.
1. Look at ALL of your options, including options you don’t think you would like. Try
to see where you are going to be 3 to 5 years down the road with each option, then
pick the option for you.
2. When evaluating each option, you have to “rise above the tree-line” to see where
each road or option will take you. If you see that you cannot make it all the way
down a certain road, then why take one step in that direction?
3. Realize that most debt problems are solved with cash flow, which is simply
regular monthly income. Not cash, cash savings, or a lump of cash from someone
else, because the person with the debt problem typically cannot get their hands on
enough cash to pay off all of their debt.
4. Realize that using these tips can be viewed as a way of eliminating the worst
alternatives for handling a debt problem. Also realize that when payments are being
missed on your debts, the choices you face in solving the debt problem are usually
not between good and bad, but between bad and worse.
Here’s a simple example with an elderly widow: I had an elderly lady in my
office this past week for a debt consultation. Her sole income is a small Social
Security benefit, and she had about $21,000 in credit card debt and $7,000 in a
401(k) retirement account, which is protected from creditors. She asked me if
would be advisable to cash-out her retirement to pay her credit cards.
After we went over the three practical tips mentioned above, I pointed out that she
could certainly withdraw all of her retirement money to pay credit cards, but that
she would have $14,000 in credit card debt and an uncertain amount of income tax
due for the cash-out of her retirement. If you can’t go all the way down a certain
road, then why take one step in that direction?
We looked at debt management, but that requires a regular monthly payment that
she can’t afford. We looked at debt settlement, which is simply a cash discount, but
she doesn’t have enough cash to do that, and she needs her cash as an emergency
buffer. We looked at the option of doing nothing, and it seems workable for her
situation, because she is on Social Security and she has nothing that creditors can
reach. We also looked at the option of bankruptcy. After reviewing all of the
options, she is going to start with the option of doing nothing. If the creditors cause
her too much stress, then she’s coming back to file a Chapter 7 bankruptcy.
Here’s an example with a young family: A young couple with 2 kids came into my
office this past week. The mom stayed home with the young kids, and the dad was
recently laid off. They were current on all of their bills at the time the dad was laid
off. He recently received about $10,000 in a severance package, and they started
receiving about $1,800 per month in unemployment benefits. He already started
applying for jobs – something in or around the Toyota plant, and as a backup he is
applying for jobs in the Eagle Ford shale area, but the decline in oil prices has caused
a reduction in hours and jobs in that area.
Their total debt is about $30,000, so this is another example of where the cash
savings is not enough to handle his debt. If you can’t go all the way down a certain
road, then why take one step in that direction?
We looked at the option of debt management, where you make a monthly payment
to pay your bills in full, but they need to use the severance package cash savings to
cover the gap between their unemployment benefits and their living expenses. Also,
they don’t know if they will run out of cash savings before the dad gets a new job. If
you can’t go all the way down a certain road, then why take one step in that
direction?
We looked at debt settlement, but if they use the cash savings for debt settlement,
then there is no cash savings to cover the rest of the living expenses that the
unemployment benefits do not cover. If you can’t go all the way down a certain
road, then why take one step in that direction?
They don’t feel comfortable doing nothing, because if they get sued and the creditor
gets a judgment against them, then they could lose all of their cash if the creditor
gets a writ of garnishment. (Although there is no wage garnishment in Texas, there
is what I call “bank account garnishment.”) They opted to file a Chapter 7
bankruptcy, and they will be able to keep all of the severance package cash.