Common Sense Advice for When You Can't Pay Your Bills

I liked this very practical article from the University of Florida about what to do when it all starts to fall apart.

First, prioritize your bills. Pay for food, shelter, and utilities.

Then, talk to your creditors. You might be able to work something out.

Third, keep talking to your creditors.

Fourth, negotate with the collectors.

Fifth, talk to your creditors again. (I'm sensing a theme here.)

The article also talks about the Wage Earner Plan which is an alternative to bankruptcy, and then bankruptcy itself. Let's see if we can keep it from getting to that point, shall we?

Greed on Main Street

An editorial in the New York times by author Bethany McLean sums up the attitude that many have towards the debtors of the financial crises. Wall Street may be to blame, in part, she says, but let's not overlook Main Street.

...Who made the decision to take on that mortgage she couldn’t really afford? Who lied about her income or assets in order to qualify for a mortgage? Who used the proceeds of a home equity line to pay for an elaborate vacation? Who used credit cards to live a lifestyle that was well beyond her means? Well, you and I did. (Or at least, our neighbors did.)

Undoubtedly, there are people who fit this description. And many say, and I agree, that in our consumerist society we spend too much and borrow too much and live beyond our means. But articles like this overlook the very hard-working people who just get into trouble because of factors beyond their control.

I do believe in personal responsibility. I know that I made the mess I'm in now. But believe me, I haven't been buying gold watches or taking fancy vacations. Ever.

Photo by Jeff Turner

Prioritizing Debt: From Lowest Interest Rate to Highest? Say What?

Image by hankoss via FlickrYou and I know that the rational thing to do is to pay off your high-rate, non-deductible (i.e. non-mortgage) debt first. (Except you need to prioritize your mortgage payment before anything else so you can keep your house--but any EXTRA payments need to go to non-mortgage debt.)

Isn't it ironic that that's exactly the opposite of how credit card companies apply your payments? I was smart enough to avoid this particular trap, but it's easy to get snared in it.

Let's say you take a low-rate balance transfer offer, intending to pay off a higher rate card. Cool. Just don't ever use your new card to charge anything. Ever. Because if you do, they'll charge you a higher rate for purchases than for balance transfers. OK, that's fair, you think. But then they apply your payments to the lowest interest debt. So you are gaily wracking up new debt at a higher rate, and retiring the cheap debt. This policy is fairly universal among credit card issuers.

Good plan for the credit card company. Not a good plan for you. What tangled webs they weave when they practice to deceive. Can you say "Bait and Switch"?

Amazon Chase--Thanks for Nothing

Image via WikipediaThe story is the same--a couple of years ago, I got what looked like a great balance transfer offer from Amazon Chase. Plus I would earn points for Amazon purchases--a readaholic's dream.

Except, you guessed it, the Amazon Chase card has one of those deadly universal default clauses. The good news is that I haven't had a late payment on this card since before January--probably long before that. I have called them every month asking them to lower my interest rate. It has been as high as 29% and has been hovering at a usurious 27% for months now.

Last week, like every month, I called them. They always start the call, "How may I help you today, Ms. Poorhouse?" I always reply, "You can lower my interest rate, please." Every month they say there is nothing they can do. Last week, I said I was in trouble and I couldn't afford to pay this rate. The excessively cheerful representative said she would transfer me to another department to work out a payment plan. Oh, but sorry, says the automated attendant, that department is closed. I must call back during business hours....from cubeville.

From my experience with Bank of America, I'm guessing a payment plan means another black mark on my credit report and closing the account. I don't charge anything on this account, but closing it will change my debt to credit limit ratio, which will further damage my credit rating.

But, (and this assumes that they will offer me a reduced rate for a payment plan), it's either that or continue to pay 27 percent. Twenty seven. Sigh.

So I call back today. "How may I help you today, Ms. Poorhouse?" "You can lower my interest rate, please." The slightly less chirpy representative tells me they cannot review my rate until November.

Actually, since writing the above, I looked at this again. I have a little credit left on some lower rate cards, so I could transfer about half of my balance to them. At my current accelerated payment rate, I could pay off the balance in three months. So maybe I'll do that instead of setting up a payment plan.

And I'll call back in November. "How may I help you Ms. Poorhouse?" "Lower my rate please.."

You know I'm really trying to pay what I owe. But sometimes it ain't easy.

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Bailout for the Little People?

I don't normally agree with conservative Ben Stein, but in a conversation on NPR's On Point last week, he was making a lot of sense. Like the bailout plan should be directed at the people who can't afford their mortgages rather than at the "masters of the universe" at the top who made the mess in the first place.

Charles Calomiris, professor of financial institutions at the Columbia University Graduate School of Business, pretty much felt the same way

CitiBank Wants Me to Pay Off My Debt

Image via WikipediaCiti sent me a letter yesterday offering me to participate in their Payment Partner plan. Here's the deal: agree to stop spending on your card for 4 months, and at the end of 4 months they give you 10% of any payments you make over the minimum balance due up to $550. At the end of the period, they also reduce your credit limit by the amount of the payments over the minimum balance.

Not a good deal for me, because I have very low "for life" interest rates of 2.99, 3.99, and 4.99 on this card, and I have too much other high rate debt that I'd rather pay off first for this to make sense. The spending freeze is no big deal because I've never charged anything to this card--I just used it for balance transfers from higher cards. And this is one card at least where I haven't missed payments or any other such nonsense.

According to some quick Googling, this offer from Citibank has been around for a couple of years. Some speculate that it is only extended to those with damaged credit as a way to get folks to voluntarily reduce their credit line, reducing Citi's risk. See the article below on the recent trend of credit card issuers of reducing credit limits.

I have to say, that in all of my credit mess, Citi has been the best to deal with. They don't have the dreaded universal default clause that jacks up your rate if you are late with payments to other creditors. They have had reasonable balance transfer rates. Yes, you pay lower rate balances off before higher rate balances, but some of these low rates are for the life of the balance. You just have to be careful not to incur any higher rate charges that would negate the advantage.

Further Reading:
Consumer Credit Limit Crackdown by Jessica Dickler, CNNmoney.com

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Did Fannie and Freddie's Demise Help Me?

Welcome Carnival Goers.

This post has been included in The Carnival of Debt Reduction and in Political Calculations On the Moneyed Midways, best posts from the past week's business and money-related blog carnivals.

I find myself wondering if my loan is owned by Fannie Mae or Freddie Mac. Apparently there's a 50-50 chance that it is. It is notoriously difficult to discover who owns your loan, according to ABC News's Betsy Stark, due in part to the complex mortgage-backed securities that have brought the economy crashing down around us.

I find the timing curious. After months of relentless collection calls (like a couple a day) from our mortgage company, and their inability to acknowledge our third-party request for a loan modification , all of a sudden, with no warning, we got a loan mod out of the blue. And it was after the federal goverment took over the mortgage giants. The company didn't ask us to verify our income or anything. Curiouser and curiouser.

Mortgage News Daily speculated after the takeover that since the government doesn't want to own thousands of homes, homeowners already in danger of foreclosure may actually fare better under the bailout. It's probably too soon to tell.

This thing is huge, isn't it? And I have to say that it actually makes me feel better to know that we are not alone in this, that we aren't just irresponsible, that there's something larger at work here. Or so I tell myself. Sometimes.

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Prioritizing the Bills--Pay Your Mortgage First

I wish I had come across this list of Top Tips to forestall foreclosure from Laura T. Coffey at MSNBC a few months ago.

Here's her list, with my comments.

1. Face the problem head-on.
No more piling up the bills and refusing to read them.

2. Contact your lender and explain your situation.
The best outcome is that you'll get a loan modification, like we did. The trick is that your mortgage servicer is unlikely to grant a loan modification if you can't show sufficient income to carry the new terms of the loan. So it may not work if you request it, say, if you're still unemployed. But, hey, it couldn't hoit. And if you're talking to them, they know you haven't abandoned the property for a South American hideout.

3. Understand your mortgage rights.
In other words, read your loan.

4. Consider selling your home.

5. Explore the “short sale” or “deed in lieu of foreclosure” options.

These last too are horrible to contemplate, but if you can't afford the house and have no prospects of being able to afford it, they may be your only choices. (I know. I KNOW. This is where it gets tough.) Read the article for how these sales work.

(By the way, this is EVERYWHERE. My daughter's teacher is buying a house closer to the school from a buyer through short sale.)

6. Don’t give your money away to the wrong people.
No matter how little money you have, there are always unscruplous low-lifes willing to help you part with it.

7. Seek out legitimate help.
Find a legitimate debt counselor, perhaps one affiliated with the National Association of Credit Counselors.

8. Set financial priorities that fit your current circumstances.
In other words, pay your mortgage first. The other bills can wait.

9. Consider filing for personal bankruptcy protection.
This is not something we considered. I mean, we borrowed the money, didn't we? We bought the stuff, or paid the taxes, or whatever with the money, right? For some people it may be the only way out, and you may be able to keep your home to boot.

10. Maintain your self-esteem.
Now that's easier said than done, isn't it?

Another suggestion is to pay mortgage payments sporadically, even if you can't afford them monthly. It's when you go 60, 90, 120, or 150 days with no payment or communication that the mortgage company starts to get a little antsy.

Further Reading:
Forestalling Foreclosure by Gerry Willis at CNNmoney.com
suggests trying all the tactics above before raiding the retirement account.

Breaking the Silence

I had a long talk with my sister on the phone today. She's a single mom. She makes do on less income than Mr. Poorhouse and I make. She' s frugal, and she's not in debt. Her ex-partner has a compulsive spending problem.

I told her everything that's been going on. She didn't say this was all our fault. She didn't say I told you so. She just listened. She said she was sorry. She said it sounded awful. She said she was glad I told her.

What a great sister.

Photo by magerleagues/Andrew Mager

Polly's Pointer

No need for shame or silence. People who love you love you regardless.

To Do List: Mortgage Loan Modification

Check!