Lazy Man and Money

6 Debt Management Tips for Avoiding Personal Insolvency and Bankruptcy

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[Editor’s Note: The following article was written by Ian Chase on behalf of Solve My Debt. They pride themselves on being the go-to-experts for high quality debt management. They also suggest that you take positive action today against your debt problems and get in touch with the team for expert help.]

When debt is piling up and bankruptcy seems inevitable many people give in to the stress and ignore their problems until a creditor forces bankruptcy upon them. The feeling that you’ll never get out of debt can be overwhelming, but with a long-term debt management plan and the right techniques it is possible to slowly and gradually reverse the downward debt spiral and avoid personal insolvency and bankruptcy:

1. Compare Total Monthly Income to Current Financial Obligations

First you’ll need to get a picture of just how bad your debt situation is by calculating how much income you’re reliably bringing in every month and comparing it to the amount of money you’re spending on recurring financial obligations (i.e. – debt repayments, rent/mortgage, insurance, electricity, transportation costs, food, etc.). You’ll probably find the need to do some restructuring and budgeting just to make recovery a feasible possibility.

2. Track and Allocate Expenditure with a Comprehensive Budget 

Your budget should be a constant work in progress, changing along with the dynamics of your life. To make next month’s planned budget more accurate and effective it is best to track every cent of income and expenditure this month, so you’ll have something to reference. At the end of the month create categories for miscellaneous expenses that you normally wouldn’t add to your budget, as it is these unexpected and unrecorded purchases that usually push people over the spending limits of their budget. After a few months of budgeting you should no longer feel a sense of financial uncertainty because all of your wants and needs will be adequately planned for.

3. Create a Debt Calendar and Reschedule Problematic Payment Due Dates

Making payments is only half the battle in getting out of debt; if you want to avoid late fees and potential damage to your credit score you need to make payments on time. Unfortunately, sometimes your pay periods don’t mesh with payment due dates, especially if you get paid monthly or every two weeks, which is why creating a debt calender will help you get sorted out. Look for the payment due dates that fall on days during “income droughts” when you won’t be expecting any payments. In most cases you’ll be able to reschedule payment due dates so that they fall near pay periods by simply calling the creditor and asking.

4. Consolidate Debts Wherever Possible

Debt consolidation is the process of signing over some or all of your debts to a single lender who would then charge you a centralized monthly payment on one date for all of your monthly repayments. This not only reduces the stress of dealing with multiple creditors it also puts your repayment obligations together at one time of the month and helps you minimize the possibility of having several offenses on your credit report.

5. Devote A Bank Account To Your Debt Payments

Open a checking or savings account that will be designated to hold all of the money used for your debt repayments. Your primary concern every month second only to living provisions should be to ensure that the account is loaded with enough funds to cover your upcoming payment obligations. This not only helps with discipline it also makes accounting easier.

6. Examine Financing Options

If repaying all of your debts with your current income doesn’t seem practical you may want to consider financing options that could give you the assistance needed to repay secured or otherwise urgent debts. Although this practice would be causing you to create a new debt, and you would probably be stuck with higher interest rates, it would get the current creditors off of your back and allow you to postpone or avoid personal insolvency and bankruptcy.

Debt Free For Life: David Bach on Bankruptcy

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A publicist for David Bach reached out to me last month to ask if I would be interested in reviewing his new book: Debt Free For Life. Usually, I pass. Reading a book and writing a quality review takes a dozens of hours for me. This request was different for a couple of reasons. One, it’s David Bach, one of the best known personal finance authors. The other was the request itself. It wasn’t to review the whole book – just one chapter.

The publicist clinched the deal when she mentioned that the chapter would be about bankruptcy. That’s one area of personal finance that I never write about here on Lazy Man and Money. The idea is keep yourself out of situations where the b-word is mentioned. Still, for the purposes of being complete, it is something that should be covered. At the risk of angering PETA, this kills two birds with one stone, metaphorically one of my favorite things to do.

The chapter on bankruptcy was a little dry – which is to be expected. A chapter on bankruptcy isn’t going to compete with Dancing With the Stars (unless you are dork like me). I don’t know about you, but if I was facing bankruptcy, I’d put a high value on the information being valuable, not the entertainment value of the information. Here are a few of the points that David Bach covers:

  • The best advice he has to those who may be considering bankruptcy – Here’s a hint, seek professional advice early – do not wait. (He couldn’t emphasize the importance of this more.)
  • The two chapters of bankruptcy applicable to individuals – Chapter 7 and Chapter 13 – Most people identify bankruptcy with Chapter 7, a total declaration of being unable to repay. Fewer people know about Chapter 13, which allows for a more flexible repayment schedule.
  • The factors to look at before applying for bankruptcy protection – Such factors include: how much you owe, your income, the types of debt, the assets you own, and what your future plans are for the next 5 years.

Much of the chapter focuses on the final point. However, I learned some really interesting things about bankruptcy such as how you can keep your multi-million dollar home in Florida and Texas. Just make sure you live there 3.5 years before you declare and make sure you talk to a lawyer. Perhaps a more relevant tip is that retirement accounts can be protected. This is no only yet another reason to max out your retirement contributions, but also a warning not to tap that money to pay down credit cards.

Finally, the chapter ends with Bach making some very important points. Briefly paraphrased, filing for bankruptcy doesn’t make you a bad person. It can cause depression and it may be wise to seek council beyond a financial and legal. He makes a great point that bankruptcy is temporary and that it too will pass.

Frugalism vs. Capitalism III

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Rich Slick over at Get Rich Slick has a rebuttal to my post yesterday. To continue the debate, here’s a rebuttal to his rebuttal…
1) By “that dollar will be taxed”, I mean that a dollar saved is dollar in your net worth. A dollar earned could be only 72 cents in your net worth. Trust me, I want to pay a ton of taxes. I’d like to pay 1M or more in taxes a year.

2) Yes there are risks to everything, but saving a dollar is not a risk. So the capitalist takes a risk, while the frugalist typically doesn’t. Yes, risk is a fact of life, but there are degrees of risk.

3) It’s the “without too much concern for the price or cost of an item” that leads to over-extending oneself. Yes, it’s not a guarantee, but it’s a risk of not concerning oneself with the costs of things. The frugalist doesn’t run this risk.

4) The “wasteful nature” that I was talking about was related to buying new cars with the idea of helping the economy. Meanwhile perfectly good cars go into landfills.

5) Yes we agree that a car isn’t an investment. I realize the phrase “depreciating investment” is an oxymoron, but it’s common vernacular to say, “I invested in new shoes today.” If this missed you then… (sigh and shrugs shoulders). Would you have preferred, “A frugualist doesn’t waste money on new cars and uses it to make more money?”

6) Do you want to teach me? Ben Franklin said a penny saved is a penny earned. Perhaps this could be a post in and of itself. I would really like to understand the math behind it.

7) For each Bill Gates how many people have filed for bankruptcy? Millions and millions? What if you just took $100 and played roulette hoping for black (or red) to come up 15 times in a row. I’m guessing you’d throw away a lot of $100 chips, but if you get it right you’ll have over $3M. Or you could just invest your life savings in some penny stocks. Do it wisely and you’ll join those names Rich Slick mentioned.

In the end, Rich Slick makes the perfect argument I was intending to make from the outset. Warren Buffet and Sam Walton were frugalists AND capitalists. Of course they didn’t make their billions by being frugal, but they are examples of how it is possible to be both.
Did I make a lot of assumptions about capitalists? Indeed. Did Rich Slick make a lot of assumptions about frugalists? Indeed.