Debt reduction is a good thing to tackle at the start of the year but sometimes we’re in denial about how much debt we actually have and how much work it will be to pay off those debts.

A reader sent me the debt quiz below; you give a yes or no answer for each question.  Each yes answer is a hint that you should take a closer look at debt in your life.

1) I carry credit card balances for a long time and often pay only the minimum
amount due.

2) My credit card balances are growing each month.

3) I am at or near my borrowing limit on one or more of my credit cards.

4) I no longer have a savings account, or I am using savings to pay bills I used to pay
from my checking account.

5) I try to manage my money to a budget, but I often come up short when I sit down
to pay bills.

6) I use cash advances from credit cards or the overdraft feature on my checking
account to pay bills and basic living expenses.

7) I borrowed from friends or family when money was tight and haven’t yet paid it
all back.

8 ) I juggle payments, paying one creditor one month and another the next so that
they are both getting something.

9) I often transfer balances from one credit card to another because I can’t afford to
pay all of my monthly credit card bills.

10) I have “consolidated” my debts into a home equity loan or a single credit card more
than once.

11) I rely on overtime pay or money from a second job to pay my regular bills.

12) I don’t have the money to pay irregular bills, like real estate taxes and insurance.

13) When I come home from shopping, I sometimes hide my purchases or lie about
how much they cost.

14) I no longer pay attention to how much I owe.

15) I sometimes get notices in the mail or phone calls telling me I’m late with
a payment.

16) My heart rate increases when my credit card is run through the machine because
I never know if it will be accepted.

Lending money to family and friends is no picnic, just ask Brandon. He’s a reader who left the comments below on the post from earlier this year about lending money to family.

“My wife’s family does not have much care when it comes to money. they don’t make very much, have horrible credit, and their kids are following suit. My brother-in-law borrowed my car to drive to Salt Lake City and fell asleep totalling the car (but walked away). I only had liability on it so I was out $1500 which he said he would pay back. 3 years later- not a dime.”

Fortunately for my wife and I, our siblings and parents are good with their finances so we’ve never had to worry about whether we should lend money to them or not.  I can see how your first instinct is to help out a family member in need, but things can get messy.  Brandon goes on in the comments to share more details.

“My mother-in-law got behind on her mortgage and asked if I could lend her the $1k for two weeks till her next payday. that time all went well- no worries. then the next month the same thing and the next month. then she’d only have some of the money to pay back or one month none at all. She owed us $2500 (which is a lot for us i’m only 28).

 

Then she never borrowed anything for a year or so. Then the same thing again, with the guilt trip saying she can’t miss another payment or they’ll forclose. So I lend her the $1k which doesn’t get repaid. It’s now Christmas time so there is no chance of her having extra money to pay me back for who knows how long.”

This next part seems to be the real kicker, the thing that would probably get under anyone’s skin. Borrowing money and then not spending it wisely.

“I feel they just think we’re an ATM for them. The biggest problem I guess I have is that they don’t change the’re lifestyle to try and pay me back. My wife and I have 2 kids and a very modest house, no internet (i’m at work =D) a small tv with the cheapest cable package. Yet my in-laws have internet, x-tra movie packages and go out to eat more than us. I’m a very quiet person who like making people happy so I don’t wan’t to drive a wedge between us (that would kill my wife- her family is everything). What in the world can I do???”

I don’t have a good answer for Brandon since I’ve never been in that situation before.  I’m hoping one of you will have some tips and advice to share with him about lending money to family. If so, please share it in the comment section below.

PayPal encouraged me to pay with my bank account rather than my credit card as I was setting up a subscription payment last night.  When I first setup the subscription in PayPal it defaulted to use my bank account as the funding source.

I wanted to switch it over to use my credit card just in case the subscription payment was due and there was no cash in the bank account.  In my case it wouldn’t be that I didn’t have the cash, it just might be in another account.  So rather than have the payment not go through, I set it up to use my credit card as a funding source.  Plus that buys me another few weeks of time I can hang onto my money before I actually have to pay for it.

When I attempted to change my funding options from bank account to credit card, PayPal prompted me with the message below:

You’re choosing not to pay with a bank account. Please note that both bank account and credit card payments are sent instantly, and account numbers are never exposed to the merchant.

 

You’ll also find that transactions paid with a bank account:

 

    * Will not accrue credit card finance charges.
    * Let you stay in control of spending and avoid credit card debt.

 

No matter how you pay, you get 100% protection against unauthorized payments sent from your account.

 

Do you want to make this payment with your bank account?

I went ahead and choose the credit card option but thought it was interesting that PayPal is discouraging the use of credit cards and encouraging paying with cash using this approach.  Perhaps it’s to avoid paying fees to the credit card company for processing?

I’ve been to plenty of brick and mortar businesses where they don’t take credit cards to avoid the fees but whatever the reason, this is the first time I’ve ever seen something like this online before.  Have you ever had a business or payment processor encourage you to use cash over credit online?

Payday loans can bleed you dry.  For example, here’s a recent comment from reader Cheryl:

“We started out with Payday Loans when we hit financial bottom when I lost my job. We had just moved with a larger mortgage, plus have 2 kids at home to feed.

 

We now have 6 Payday Loans that are killing us. I’m laying awake at night worrying. We pay one off and it seems something else comes up. Id go without food and eat cereal to pay them off, but I have 2 teenage boys who eat all the time and I even bulk cook and freeze things for them.

 

No junk food, pop etc. I home cook meals every night. It is such a hole to get in, and so frustrating when you cant get out. Our credit has hit rock bottom now.

 

We have considered bankruptcy since some of our other bills have suffered now also. Ive heard you can file against Payday loans, but where will I get the money to file?”

Cheryl, I don’t know how much your loans are for or what interest rate you’re paying on those loans but I do know that the rates on payday loans can be insanely high, higher than any credit card.  As you’ve experienced, the interest accumulates so quickly that your payments go towards the interest, making the original loan difficult to pay off.

If some of the loans are bigger than others you could use Dave Ramsey’s Debt Snowball method of paying off the lowest balance loan first, then once it’s paid off apply the payments you were making towards the next highest balance.  One possible way to raise money to pay off that first loan is to get together some of your personal belongings and sell them on eBay. 

Of course from a pure numbers perspective, it would be good if you could consolidate all of those really high interest loans into one loan at a lower interest.  However, you mention that your credit is bad so you may not be able to find a bank or credit card that will give you a line of credit.

Alternative sources of loans such as Lending Club are useful for some people but if your credit is really bad that won’t help much either.  If you have family that’s willing and able to help out, you could look into borrowing money from them through Virgin Money USA.

Since it sounds like you’re struggling with paying a bigger mortgage without your job, I’d contact the National Foundation for Credit Counseling.  The NFCC has credit counseling, home owners counseling, and bankruptcy counseling all of which may be of some assistance to your family.  Good luck!

The struggling economy has left many people facing the potential of foreclosure and has created a wave of scam artists that are taking advantage of the fears of desparate homeowners. The Federal Trade Commission is on a mission to help stop foreclosure rescue scams around the country.

Here is the FTC Chairman Jon Leibowitz’s warning about avoiding foreclosure scams:

“These con artists see the high foreclosure rates as an opportunity to prey on people in distress,” FTC Chairman Jon Leibowitz said. “They promise to rescue homeowners in troubled financial waters, but after they take their money they throw them an anchor instead of a lifeline. People facing foreclosure should avoid any company or individual that requires a fee in advance, guarantees to stop a foreclosure or modify a loan, or advises the homeowner to stop paying the mortgage company.”

It’s a sad article, it tells of people who paid companies a fee to stop foreclosure and then lost their homes because the company never had the intention or ability to help the homeowners.  As part of their campaign against the scams the FTC created the public awareness video below where they talk to homeowners who have faced foreclosure and had to deal with the decietful companies.

When money is tight, it’s tempting to turn to quick fixes but some of them can have lasting consequences for your money and your future. Obviously times are tough and many people are faced with decisions they thought they’d never have to make but here are three money traps to watch out for.

Cashing in your 401(k)

You may be tempted to claim the money in your retirement plan to pay off debts or fund a major expense. If you do, you will not only affect your future, but you may lose a big chunk of money in taxes and fees. When you cash in your 401(k) early, a substantial portion of the funds are diverted to pay for income taxes as well as penalties for early withdrawal.

Consolidating Credit Card Debt into a Home Equity Loan

Combining your high-interest loans into a single low-interest home equity loan may seem like a wise move. But unless you also cancel your credit cards and stop overspending, this consolidation of debt may simply allow you to build even more debt. And if you fall behind in the payments on a home equity loan, you will lose your home.

A better approach is to cut back on your spending and use the money you save to pay off credit card debts. If you are having trouble meeting the payments on loans, call your creditors and explain how your financial situation has changed. Set up a payment plan that you can live with.

Payday Loans

Although payday loans may be easy to come by they usually also carry outrageously high interest rates. They will only put you deeper into debt so avoid them like the plague.

Debt can ruin a marriage, so how can you beat debt before your wedding day? Although you many not be able to eliminate debt before tying the knot, there are things you can do to prepare for debt in married life.

Dating and Debt

When you get married, your two families become one and so do your personal finances–the good and the bad. It’s important to find out what your spouse-to-be’s likes and dislikes are, and it’s just as important to find out about their personal finances.

Uncover this information while you’re dating and hammer out your plans for the future during your engagement. Waiting until you’re married to discover bad financial habits and low credit scores can add financial stress to your relationship.

How to Talk About Debt

Money is one of leading causes of divorce so talking about your finances should rank as a high priority. You don’t want your marriage to end before it begins, so make time to talk about finances with your significant other.

Share the debts and expenses you have and ask what debts and expenses they have. People are often embarrased by or ashamed of the debt they’ve accumulated so if you explain your financial situation first then they’ll probably feel more comfortable sharing.

Financial Behaviors

You can also learn a lot by watching spending habits and observing certain behaviors. If they always pay with a credit card rather than cash or a debit card, this may be a red flag of credit card debt. Inquire if they pay off the balance on their card each month.

Of course he might put your mind at ease when he says he uses his credit card to earn points, but he pays off the balance in full. Or a red flag may wave if she says she only makes the minimum payment each month.

A fiancee that never seems to have money is another sign of a problem. It may be a sign of living beyond their means–spending more than they’re making. The way to get to the root of the problem is to ask the questions that give you the answers you need. Before you marry someone, you need to know everything about them including income, expenses and credit history.

Credit History & Debts

When you’re married, your credit history, credit scores and debts affect your ability to make major purchases. If your partner has a bad credit score and you’re buying a house, lenders may require a higher cash down payment or charge you a higher interest rate. It can even cause you to get denied for the mortgage.

In the current economy, credit scores and credit history play an even bigger role than ever before. It’s important that you enter into marriage with full knowledge of the debts and credit history that comes along with your spouse. It affects your ability to reach milestones in your relationship, such as buying a home, and your day-to-day finances.

Avoid Wedding Debt

Definitely avoid starting your marriage in debt because you threw a wedding you couldn’t afford. You can have a wonderful wedding and still be conscious of the amount you’re spending.

Throwing a smaller more intimate affair is back in style. This helps couples to save money on everything from the venue space and the number of invitations to the food and beverages served at the reception.

Shopping for gently used wedding dresses at high-end consignment shops or borrowing gowns from friends and family members help brides to save thousands of dollars on buying a new gown Remember you only wear it once.

Marriage & Debt

Finances are a leading cause of divorce because money problems can cause fighting and stress that trickle into the other areas of your marriage. If you go into your marriage with your eyes wide open, you can alleviate this problem in your marriage. Talk about your finances with your fiancée before you get married. Don’t dwell on the past and hold it over their head.  Instead make a plan for how you’ll handle your finances going forward together!

This post on debt and interest rates is part of a series on credit and debt in marriage.  You can also read about credit scores and interest rates, improving your credit score, and
free credit reports.

Filing for bankruptcy can eliminate or reduce your debt but there are major consequences you should be aware of before you file for bankruptcy. Unmanageable debt is a huge problem in the U.S., bankruptcies totaled over 1.1 million last year; a 31% increase from the previous year.  Here is a look at the two most common forms of personal bankruptcy, Chapter 7 vs Chapter 13, and what they mean for your finances.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common type of bankruptcy for individual filers, the epitome of what people think of when they hear the term “bankruptcy”. Chapter 7 is basically a liquidation of all your assets that aren’t protected against creditors during bankruptcy proceedings.

In some states like Florida, the judge cannot force you to liquidate your principal residence if you are in good standing with your mortgage; however that is not the case in all states. With Chapter 7 your assets are liquidated to pay off your debts.  Any remaining debt not covered by the sale of your assets is no longer your responsibility; your debt slate is “wiped clean”.

I don’t like that term, because there is nothing clean about bankruptcy. It is a long, painful process and it tarnishes your credit for many years to come. Also, keep in mind that federal student loans never go away since judges cannot dismiss federal student loan balances. 

Chapter 7 bankruptcy is like starting over with your financial life, but the consequences for starting over are that you lose your possessions and you have a big asterisk on your credit report for the next 10 years.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a reorganization of your debts supervised by a federal court; basically a way to renegotiate your debts and come up with a plan to repay them. Unlike Chapter 7, the debts are not dismissed by the court. Instead, your attorney and the judge work out a repayment plan to get you out of debt. In some cases the reorganization involves a reduction of the debt you’re required to pay but the debts are not completely eliminated.

Once your lawyer has negotiated the terms, you start paying monthly installment payments to a trustee appointed by the court and they distribute the funds to pay off creditors. In order to file for Chapter 13, you must show that you have income coming in on a regularly or fairly regular basis. How much you earn will determine the length of time over which they structure the repayment plan.

There are debt limits for Chapter 13 bankruptcy, if your debt is higher than a certain amount then the current laws won’t allow you to file for Chapter 13.

Chapter 7 vs Chapter 13

The advantage of chapter 7 is that you start over with no debt. Obviously a big disadvantage of chapter 7 is that creditors will take anything and everything they are allowed to get their hands on to pay off as much of your debt as possible before the courts wipe away the rest of it.

Of course, if you’re so deep in debt that you could never pay it all back you may be willing to sell everything you have to be free of it. A recent CNN Money article describes Chapter 7 as “often the best option for consumers saddled with insurmountable debt”.

Not having to sell all of your possessions is the upside to Chapter 13. One big advantage of chapter 13 for home owners that can work out a repayment plan with their bank is that you can keep your house.  Another benefit is that a Chapter 13 stays on your credit report for a shorter time period than a Chapter 7; although they will both ruin your credit until they fall off your history.

Filing for Bankruptcy

If you are considering filing for bankruptcy, remember it is one of the biggest financial decisions you’ll ever make. The CNN Money article cautions against filing for bankruptcy without first doing your research.

“be wary of any potential conflicts of interest from credit counseling agencies or bankruptcy lawyers that could potentially profit from your position”

Not only should you consult with an attorney, it would be smart to talk it through with close friends and family.  Another suggestion is to sit down and talk with people that have gone through a bankruptcy filing to hear their experience and what they learned from it.

Alternatives to Bankruptcy

As we’ve covered, bankruptcy is not an easy solution to getting out of debt.  There are definitely other options you should look into before considering filing for bankruptcy.

Negotiating with Creditors – Your creditors would rather recieve a portion of the money you owe them than none of it so they may be willing to work with you.  You can call the companies you owe money to, explain your situation, and try to work out a payment plan that will allow you to pay off the debt rather than simply defaulting on it.

Credit Counseling – The surge of debt problems in the U.S. has given rise to many credit counseling organizations that can work with you to help address your debt.  A lot of them have education options where they’ll show you how to better manage your money and some of them will help you negotiate with your creditors.

Not all organizations claiming to be credit counselors have your best interest in mind, beware of fraudulent debt reduction companies. The US Trustee Program can help you find credible credit counseling services.  The Trustee Program is:

“the component of the Department of Justice responsible for overseeing the administration of bankruptcy cases and private trustees under 28 U.S.C. § 586 and 11 U.S.C. § 101”

They have a portion of their website dedicated to credit counseling & debtor education information where you’ll find a list of approved credit counseling agencies.

Borrowing from Friends & Family – You can’t borrow your way out of debt but if you need some money to get through a tight spot one option is borrowing money from people you know.  It’s certainly a tricky proposal that could ultimately ruin a relationship if not handled properly.  However, if both parties are up front about what’s expected and responsible about meeting the agreed upon terms it could be a workable option.  Here’s an article about borrowing money from family.

Resources

• Approved Credit Counseling Agencies
• Credit Counseling Frequently Asked Questions
• Approved Debtor Education Counselors
• Choosing a Credit Counselor

Have you decided it’s finally time to take charge of your finances and work on a plan to get out of debt once and for all? If so, congratulations! The bad news is that it may take a while to dig out of your debt hole, the good news is there are dozens of options available to help you through the process.

Debt Consolidation

One of the options you may be considering is debt consolidation; a process that allows you to consolidate your high interest balances into a lower interest loan. This is a popular method of debt reduction due to the fact that you have only one payment to make versus multiple payments throughout the month. Additionally by consolidating into one lower interest loan more of your payment will be applied toward the principle loan amount, therefore not as much money will be wasted on interest.

Unfortunately in today’s economic climate qualifying for a loan to pay off your high interest debt may be challenging. For people who feel debt consolidation is the right answer for their debt elimination plan, social lending networks might be an option to consider.

Social Lending

Social lending networks such as Lending Club offer peer-to-peer (p2p) lending for individuals who qualify for personal loans. The concept is simple enough, borrowers can apply online for personal loans at a lower rate than offered by more traditional lenders (banks, credit cards). In turn lenders can help borrowers while seeking attractive returns.

How does Lending Club work?

If you are looking to consolidate higher interest loans you can apply online and instantly view the interest rate you qualify for. As part of the loan application you will have to provide your social security number and other identifying information in addition to meeting certain credit qualifications. Qualifying borrowers will have their loan request listed for a two week period in which lenders have the opportunity to select requests to fund. If at the end of the two week period your loan is not funded you can either re-list the loan or accept partial funding if it has been offered. You can see the full application process explained in this Lending Club review.

Lending Club Terms and Fees

The loan amount is set to fully amortize over three years with monthly payments to include principle and interest ranging from 6.69%-19.37%. Once you submit your loan request it will be assigned a Lending Club “grade” which correlates to a predetermined interest rate. As with many other types of loans a borrower can expect to have processing fees (determined by the grade assigned to your loan) as well as unsuccessful or late payment fees if your payment is not honored by your bank or paid late.

Social lending vs Traditional loans

The main difference with peer-to-peer (p2p) lending seems to be the loss of the middle man. When you remove the middle man- traditionally a bank- less money is lost in the transaction to cover the profit for the financial institution. While there are some processing fees involved both the borrower and lender can benefit financially by using this system.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

Growing up as part of the MTV generation, I always thought of MTV as a source of entertainment that had an anti-establishment edge.  The videos they showed always seemed to push the envelope and were, in my mind, a good commentary on some of the latest trends in the youth culture. 

Now MTV is using their clout with the younger crowd to help start a discussion about fiscal responsibility.  Not very racy or controversial but definitely an important topic for college students. 

With a tagline of “We’re broke, let’s fix it”; they’ve launched a website for college students called Indebted. The partnership with the Peter G. Peterson Foundation has a goal to:

“raise awareness about the dangers of excessive personal and government debt, and to promote action to help stop the fiscal crisis in the U.S.”

How will they get college student’s attention?  Here are some of the dire facts they list on the home page:

• College students today have to spend more than double what the previous generation spent on tuition – and tuition costs keep going up.
• 15 years ago, half of college students graduated with student loans – now two-thirds of them do, with the average student loan debt being around $20,000.
• On top of individual debts, every American is carrying a burden of about $184,000 in government debt and unfunded obligations.
• Tax rates will have to more than double in our lifetimes for our country to get by.
• With increasing government and personal debt, young people today are set to be the first generation that won’t enjoy the same growth in standard of living as their parents.

I’m glad MTV is trying help to educate college students about debt and financial responsibility.  It may not be much help for the college senior who’s 50K in debt, but it could certainly help the incoming freshmen.