Monday, December 24, 2012

Magic Wands - Get Out Of Debt Guy Site

When people get into debt, they want someone to wave a magic wand and make it go away.   This makes them vulnerable to debt reduction scams.  It also means they tend to wait until things horribly go wrong before taking action.

I get regular updates from the Get Out Of Debt Guy site, which is a horror show of a site, as it has entries from all sorts of white trash, with their sob stories of stupidity and debt.   In 99% of the cases, these people got into debt over their head through utter stupidity - buying crap on time and then taking on onerous loans as a means of "tiding themselves over" without figuring out how they could pay back a 14% to 25% interest rate loan over time, if they can't even make their paycheck last to the end of the month.

There are a few sad cases were people have medical debts.  But the advice there is pretty simple: Declare bankruptcy and start over.   Instead, they try to make payments on a debt that will never get paid off.  They tear through their pitiful savings in their IRA or 401(k) and then decide that maybe it isn't happening.  And only then, when they are utterly destitute, do they think about Bankruptcy.

And what most of these people are looking for is a magic wand, which the Get Out Of Debt Guy doesn't have.  They want their debts to "go away" without any effort or work on their part, and without declaring bankruptcy.   And of course, it goes without saying that they don't want to give up Cable TV, their Smart Phone, or the Harley.

So these folks engage in wishful thinking.  What is the harm in that?  A lot.  What usually ends up happening to them is this:
1.  They take on more debt to pay off debt - debt consolidation loans, home equity loans, and the sort.  This does not reduce debt, just makes the payments last longer and lowers the monthly payments slightly.  The consumer congratulates himself on this financial acumen and runs up more debt.  After all, with lower monthly payments, he can "afford" it - right?  Wrong.

2.  They try to make payments on loans they cannot afford, and go through their savings - which might be protected in bankruptcy - instead of cutting to the chase.

3.  They send off money to people who promise to "reduce debt - without bankruptcy!" - folks who claim to have magic wands.   Such folks, of course, are charlatans, and they just take your money and do nothing.  About half the letters to the Debt Guy are along the lines of "how can I get my money back from them?" or "How can I make them take action on my debts?"   They just don't get it.  They signed onerous loan agreements, and now they have tossed money away to a con artist - and yet they still believe that it will all work out somehow.

4.  As the debts pile up, they start going after more and more onerous and odious deals in life - payday loans, title pawn loans, whatever, as a means of "tiding themselves over".   More debt is just gasoline on the fire at this point, but they don't get it.  They are engaged in self-immolation.

5.  Rather than seek out a legitimate bankruptcy attorney (because in Redneck parlance, "Lawyers are a rip-off!") they just let things go to collection and have judgments recorded against them.  The car gets towed, the house foreclosed upon, wages are garnished, bank accounts seized. Instead of taking action early on and possibly preserving some of these assets and getting some breathing room, they wait until they are nearly homeless before they take action.

6. At this point, they don't even have the $500 to pay a real lawyer for a basic bankruptcy proceeding.  And moreover, they've made their finances so complicated that the poor lawyer who does take their case will spend months untangling it all - if he can do much of anything at that point.
So how do you "get out of debt" like the Get Out Of Debt Guy says you can do?   Well, first of all, let's address how you got in.   You have to get out of the mindset that debt is normal, desirable, and inevitable.   It is basic math.  If you make $50,000 a year, borrowing $10,000 more doesn't make you $10,000 richer, but rather $5,000 poorer, after you get done paying all that interest and other charges.  And with each debt you take on, you risk your financial future and well-being.   So debt should not be taken on for frivolous reasons like smart phones (which really are a debt instrument, as they have fixed contracts that basically pay off the cost of the phone over time) or a motorcycle, a bass boat, a pool table, or whatever.

If you take on debt, do it for smart things - your first house, or a real education.   And be smart about it.  Get the best rates and shop around.   Buy as much house as you need, not what you want.  Don't take out private student loans and ask parents to co-sign.  Go to a real school, not a for-profit college.  Major in something useful, not frivolous.  And borrow only what you need to get by, not stuff that just makes you comfortable.  Yes, it is true, many students borrow money on private student loans so they can have four years of cable-TV while in college.  That's about $5000 right there - and a distraction from your studies!

Even a car loan is a frivolous loan.  People say they need a car, but what they really want is a brand-new one, and a fancy one at that.  So they pay through the nose and pay a ton extra for collision insurance, drive it badly, drive their rates up, and end up over a barrel.   Maybe when you start out, a loan from your credit union for a short term to buy a used car is not a bad idea.  Spending big bucks on a new car at age 22?  Just dumb.

OK, you say, fine advice.  I get it.  I fucked up by not taking this seriously.  Now I am over a barrel, how is this going to help me?  I need to know how to get out, not how I got in.   But it is important to know how you got into debt, otherwise, any efforts to get out will be short-circuited by the same bad behaviors that got you into debt.  You will pay down debt and then think, "Gee, I can go spend more money, now!" and end up back where you started.  It is like congratulating yourself for losing 20 pounds by eating a whole chocolate cake.  It makes no sense.

But once you figure out how you got into this mess - and who is to blame (you, not the government or the banks).  You can take steps to get out:
1.  Cut services, sell stuff:   If you are falling behind on your bills, or "living paycheck to paycheck" or even "making all your payments" but not saving for the future, you are living beyond your means.  The only way out of this is to lower your lifestyle standards.  You are living a lifestyle you can't afford, and you need to come to grips with this.  You can't have it all, so figure out what it is that you really need and get rid of the rest.  And a lot of what you think you need is really just crap you want.   You will have to do this, no matter what you do in the next steps, otherwise you will end up where you started in a few years.  So do this and do it now. Cut Cable, get rid of cell phones, sell that hobby car, bike, boat, etc.  You can't afford it.  You only think you can.  $100 a month is $125,000 out of your 401(k) at retirement.

2.  Figure out if you can pay your debts:   Chances are, you can't.  Most people, once in debt, will never get out, without bankruptcy.  But if you can sell enough crap and cut cable TV, cell phones, get a roommate, or whatever, you might be able to whittle down the debt, over time.  I was able to do this, only because I had a lot of crap to get rid of - and was not ashamed to cut everything to the bone!  On the other hand, if you are already severely delinquent and have high interest loans, forgetabout it!  You are headed to Bankruptcy, and the sooner you go there, the better.

3.  Declare Bankruptcy:  If you have more debts than assets and not enough income to pay off your debts, you are bankrupt, by definition.  Cut to the chase and go for it.  Find a real Bankruptcy Lawyer, not some stupid online con-man, and talk to him.  Bankruptcy won't discharge all your debts, but it will preserve your 401(K) and IRA (which is a good reason to have both) and allow you to keep some things like your car and tools of the trade (in some States) and work out payments on some debts.  This surely beats watching your car be towed away and your bank account be drained.   And it puts a dead halt to collection agencies.

4.  You have a fresh start - don't blow it!   A lot of people who declare bankruptcy end up in the same trouble down the road, as they just go back to doing what they were doing before, only worse.  Within a decade, they are back at step 1, and on their way to step 3 again.  If you want to be a perpetual SLAVE in life - owing money for junk and crap and feeling put upon, that is a lifestyle choice, not a preordained condition.  Look around and think about what you really want out of life.  Is a fancy car worth not funding your retirement?  Is having a Harley worth worrying about making the payments?  And what happens to this debt bandwagon if you get sick, get in an accident, lose your job, or the economy tanks?  Why live on the knife's edge of life so you can have a fancy cell phone?   Re-think your priorities and start accumulating real wealth.
Now, of course, this advice all falls on deaf ears. People read this and whine, "But Bob!  That's haaaarrrrd!  I wanna keep all my crap and wave a magic wand and make the bad things go away!"

And I wish I could help you, but life doesn't work that way.   Life may seem harsh and difficult, but if you confront it head on, as opposed to living in denial, it is not as scary as it seems.   But this requires you to live in the real world, not some pot-smoke clouded fantasy land.

Do the hard thing.  It pays off in the long run.

A Special Note About Student Loans:  Student Loans, at the present time, are not discharged through bankruptcy, unless "extreme hardship" can be shown.   And living without a smart phone is not "extreme hardship".  Such hardship discharges (usually adjustments) have been few and far between.  But help might be on the horizon.

First, though, put your debt into perspective.  I have seen former students whining about $25,000 to $50,000 in student loan debt.  This is the price of one or two medium-priced cars in the United States.  Considering that in your lifetime, you will pay off the loans on 5-10 cars, this is hardly a staggering amount of debt to pay off.   Once you start making money, and as time and inflation devalue the dollar, you will look back and laugh at how you worried about such trivial amounts.  It may seem like a lot of money now, but in 5-10 years, you likely will be buying a house worth twice to three times that amount.  Put things in perspective!

The other thing is that in 2012, new programs have been initiated to allow for some Student Loan Debt relief.  Two programs tie the payments to a percentage (10% or 15%) of your annual income for a number of years, making it easier to make the payments when you first get out of college.  But these programs apply toward Federally guaranteed student loans only.  Private loans might not qualify.  Many people apparently don't even know about these programs, as they are not well advertised, and the application process is not easy.

There are proposals for a "Student Loan Forgiveness" act that would allow you to pay 10% of your discretionary income for ten years, and then forgive the remainder of the debt.  However, this is merely a proposal at this point, and would apply to Federal Student Loans only, not private loans.  According to some sources, this act (which is currently in committee) has a 5% chance of being voted on, and a 1% chance of passing.  Don't get your hopes up.

And if you are reading this and contemplating a Private Student Loan and/or going to a "For Profit" University - RUN AWAY as fast as possible.  Such degrees are worthless and such loans are toxic.

There are ways to go to college and even graduate school on a budget, but it requires you to think hard, work hard, and scrimp and save - all hard things.  But if you really are smart enough to go to college, you should be able to figure these things out.

There are no magic wands.  There are no Genies out there.  Sorry to be bearer of bad tidings, but that is the nature of the world and reality.   The good news is, of course, that reality is very value-neutral, and if you choose to live in it (as opposed to fantasy-land) you will do well in this world.

All you need do is act rationally in an irrational world.  Others will squander while you save, and you will come out on top!