Debt Free or Bust

Comment Answers and a Total Money Makeover Epiphany

I got a lot of great questions in the comments of the last post and I’ll answer them in this post in case some readers haven’t sifted through the comments. Maybe I should rant more often…

Confusion

I know a lot of things I write in a single post don’t make sense and may even be contradictory.

The comments from the last post have really helped me to step back, take some deep breathes, stop panicking and start thinking more clearly.

Unfortunately, confusion is what happens when you panic. Panic leads to desperation and that leads to stupid. I’m not thinking straight a lot of the time and it shows in my lack of progress. I’m scared and depressed, and things get confused. I’m not getting any traction because I can’t seem to focus on two things at once: get spending down & get income up. I seem to be able to focus on one, but it’s at the expense of the other.

This isn’t an excuse, but I suffer from depression and it became severe in the aftermath of Hurricanes Katrina and Rita. I was too depressed to even notice I wasn’t paying enough attention to my finances or looking at the big picture and seeing something needed to be done. I was having trouble just getting out of bed. Clinical depression can really knock you down and make it hard to get back up. I tend to dwell on the negative and not take action. Even on medication I fight this daily.

I haven’t done a good job of implementing many of my ideas. That’s very true. But I’m doing better than I was 2 years ago. I know none of you sees it because I haven’t been blogging that long. Just blogging and letting out some frustration is getting me moving faster than I have moved in quite awhile. That’s still at a snail’s pace, but I’m getting up to turtle since I’ve been tutoring. Being around teenagers and doing something I rock at (math and science and school) really helps me to have a little more positive outlook. That little bit of positive outlook doesn’t last very long, especially when I look at the big picture.

I go from very depressed to angry. Believe me, ranting and being angry are a lot better than depressed. Ranting and anger get you up and moving. There are still days when I look at the money situation and cry or start thinking about whether my life insurance policy would take care of my son. Then I put that out of my head because no matter what, my son needs me and bankruptcy isn’t worth dying over.

I feel like I’ve already failed, and failure has more inertia to overcome before action starts happening. It’s another reason I’m pretty sensitive when anyone says something negative in a comment. I dwell on the negative and I’ve already kicked myself a bunch, so when someone even touches me it hurts.

Having y’all dish out a bunch of tough love has cut through some of the pain and even though I feel lower than an ant, I’m making more progress as I describe further down in this post. One big thing is another job to go along with tutoring. It will replace tutoring while school is out. Getting my income up fast is critical. Even if my online business took off this second, I wouldn’t get paid for 6-10 weeks. More income now is what I need and that means work that pays daily or weekly, like delivering pizzas.

The Epiphany

I assume anyone reading this blog has at least read Dave Ramsey’s book, The Total Money Makeover. Maybe I shouldn’t assume that. If you haven’t, I hope you’ll pick up a copy at the library and read it. I’m not asking you to buy it, just read it so you’ll know where some of my plans of action are coming from and why I’m changing some of what I’m doing.

In TMMO, you’re supposed to get current with all your creditors before you start your $1000 baby emergency fund. The debt snowball comes in baby step 2. I can’t get current on all my debts so I can’t get to baby step one. Thus, I am not ready to do a total money makeover.

Prioritized spending: I follow the plan in Financial Peace by Dave Ramsey. Essentials of food, clothing, shelter, transportation, utilities and medical care come first in th budget. It’s basically the same in The Total Money Makeover. Then I start paying for the few other things we spend on and debts. 95% of the rest of the money pays debts.

Debt Payments

I can’t get my debts current because I’ve defaulted on all but one unsecured debt. I didn’t pay most of them for over a year, and when I started paying them I was paying them on a pro rata basis, except the smallest debt. That’s how I was able to pay off 6 small debts totaling nearly $5000 over the last 12 months. I allocated $450 a month to pro rata payments and anything left after that went to pay off the smallest debt in line. That’s how I ended up paying $12,000 to pay off only $5000.

It also demonstrates how fast compound interest can work against you when you’re on the paying end of it.

I haven’t used credit for 2 years now to pay for anything because I couldn’t and can’t pay the bills. That at least stopped the source of the madness.

I’ve rethought pulling money out of my IRA to use for debt payments and I’m not going to do it.

I worked very hard to get our necessary expenses down to $2500/mo. They were down to $2300 until oil prices skyrocketed again this spring. We had all kinds of leaks in the budget that I found as I made it tighter and tighter over the last 2 years. When I was making $3000, we still had some lifestyle to cut back. In 2007, my tutoring income went to necessities when we were short (when something went wrong), and the rest went to pay on debts. With tutoring and the business, I was bringing in $3500 a month on average. This year I’m making at least double what I did last year tutoring. But, without the business that’s not enough, so I’m getting another job to fill in for the business income.

Answers to questions from the last post

Some have asked why I didn’t shut the business down sooner.

My income bottomed out when I closed my FP business as of February 1, 2008. I went from some income and getting nowhere to no income from that source. I closed it because I would have to take money from my IRA to pay all the upcoming memberships, subscriptions, licenses and taxes that would have been due in May and June 2008. These bills would cost about $7,000, so it’s not trivial. I took the money out of my IRA last year to pay those expenses, which was stupid. I feel I had to cut that loss, and I believe that was the right thing to do. I also didn’t make any money in January, so I decided to close in February.

During the first 1.5 years of my FP business I was able to cover our necessities and then some. Prior to Hurricanes Katrina and Rita, I brought home $4200/mo and I was able to make the minimum payments or a little more on the debts, both business and personal. Katrina hit on August 29, 2005 and Rita hit just 3 weeks and 6 days later. Between the two hurricanes, 41% of my potential client base was thrown into chaos. Business dropped off extremely.

In Oct. 2005, the bankruptcy law changed, and the minimum payments on all the credit accounts went up, too. Minimum payments used to be 0.5% of the balance or lower. Payments went up to 2%-4% of the balance. Some of my payments tripled or quadrupled or worse. Interest rates started rising then, also. The hurricanes caused a huge business interruption and I didn’t have the money to pay debts when the payments went up so much. Instead of continuing to pay something, even though it wouldn’t have been enough, I quit paying completely. Not a smart move.

If you were in a hurricane zone from the 2005 storms you could withdraw from your retirement savings without penalty in 2006, so that’s how we survived most of 2006, but I only took out enough to meet our essential expenses plus the business’s annual lump sum expenses. Any payments I made were from the business making some income or other work. I also had a roommate most 2006 who was paying $375/month. A lot of people needed a place to live after the hurricanes.

In 2007, the business made more money and really seemed to ramp up during the first 6 months of the year. I thought we were out of the woods between the business income and tutoring income. I met clients in the morning or early afternoon and on Friday and Saturday. I tutored as much as I could Sunday through Thursday evenings.

By July 2007, I was cleaning houses while my tutoring income was low. I’m not cleaning houses again because my asthma and allergies got much worse. I was moving slowly that month because I was sick with allergy symptoms most of the time, though not sick enough to not work. I decided I wouldn’t clean houses again. I would have to find something else that didn’t aggravate my allergies. I can mow grass, deliver pizzas or anything else as long as it doesn’t involve indoor dust and allergens, especially cat dander.

Then the business picked back up again in August and September 2007, but bottomed out in October through the end of the year. I had 3 clients who didn’t need much help during the 4th quarter of 2007. When the business didn’t make anything in January 2008, I closed it.

My roommate also moved out in the spring of 2007, and I haven’t been able to find another suitable roommate. There is a lot more housing available now for reasonable prices, so moving in with someone else isn’t a necessity like it was in 2006.

Everyone thought the business interruption was a temporary slump because of the storms. We all thought things would stabilize and growth would resume. Many small business owners, including me, attended several meetings and workshops held by FEMA and our local, state, and federal representatives to help guide us through the disaster recovery process and get whatever help we could. Help was in the form of counseling, marketing and opportunities to network. We didn’t get checks from the federal government. We’re not in New Orleans, we’re where many people evacuated to. Business didn’t pick back up in some sectors, mine being one of them.

I would have shut the business down a year earlier if it hadn’t been for the hurricanes. Instead of taking the money out of my IRA last year to pay for the annual fees and expenses, I should have shut it down. If I didn’t have to cash to cover those expenses, I shouldn’t have kept the business open. It might also have taken off if it hadn’t been for Katrina and Rita. I’ll never know because that isn’t what happened. I’m where I am now and that’s where I have to work from.

What will be different this time about getting my income up?

I’m looking for more of my own students to tutor. I’m starting a pizza delivery job I hope this Friday evening. When tutoring is over for this semester in May, I’ll be delivering pizzas 5-6 afternoons and evenings a week. Then I’ll reduce those hours again when school starts back up in August. But I’ll keep the pizza delivery job until something higher-paying comes along or my internet business starts making double what I’m making delivering pizzas.

If the internet business makes money and doesn’t take any more time than it does now, I may keep the pizza delivery job until all the debts are paid off. The more money I can throw at the debt the faster it will go away.

Some have asked why I don’t teach full-time.

I don’t have a teacher’s license and classroom teaching isn’t something I really want to do. My degree isn’t in education, it’s in chemistry. To get my teacher’s license I have to get accepted into Teach for America in my parish (county) and if they take me, I have to pass two tests, attend a 6-week summer workshop (full-time, only $1200 pay) and some classes over an 18-month period. Until I get the license, I’d only make about $22,000/year. That’s $1833/mo gross, or about $1550 net. That comes to $11.46 an hour. I would have to cut my tutoring hours down to no more than 8/week, and I’d have to study for the required classes. I wouldn’t have the energy to get a third job. I’m 47, not 27, and I physically don’t have what it takes to work 16 hours a day anymore. I can and have managed 12 hours a day, but that’s my physical limit. I’ll make more tutoring 25 or more hours a week and delivering pizzas.

Tutoring, pizza delivery and any other odd jobs I can find also leave a little room to work on my online business. I have more niches in the works and I’ll be working on each project until it’s finished before I continue work on another. I’ve worked on my projects in a scattered fashion and I’m not finishing any of them. If I can get work finished on the things I’ve already started I will start to bring in more money from online sources.

Being scatter-brained is part of the depression. I often lack focus when some distraction comes up, like placing a new plug-in or adding a widget to a site or blog. I spend too much time on theme work instead of on content production. I’m making that change by not allowing myself to do anything until I’ve produced solid content for at least an hour each day. I’m not even reading email before I work on whatever project is at the top of the list.

What’s the point of paying $1-$2 to each collector?

The point of only paying a collector $1-$2 is it keeps the debt in limbo. I’ll pay that amount to all my unsecured creditors except the one with the lowest balance. That debt will get as much as I can dump on it, and hopefully, it will be paid off quickly. Then the next lowest debt will start getting the lion’s share of what I have to pay.

All the debts I defaulted on are unsecured. If I pay nothing, there are specific procedures in place to sue me and, at worst, get a writ of garnishment. If I pay something, even if it’s only a dollar, it effectively keeps the collector from moving forward. There is no procedure for accounts that stay active and in contact but don’t pay in full or work out a settlement. The collectors continue to throw a fit and foam at the mouth, but don’t’ do anything substantive. They just keep sending more letters demanding payment in full or some other amount, and continue calling non-stop. The debts sometimes get sold to other collectors after a certain period of time. There doesn’t seem to be a set period of time before a debt is sold.

This method of dealing with collectors is what will keep me from having to declare bankruptcy. All the debts I’m doing this on are unsecured. You can’t use this on secured debts because they’ll come and take the thing you borrowed to buy, including your house. It will also allow me to stay in better control of my finances and get the debts paid off or settled more quickly than if I continue to pay any amount on a pro rata basis. All that did over the last 12 months is cost me $7000 to make $5000 of progress. I’m not doing that this year. Most of the money I put towards the debt has to make an impact on the debt or my money isn’t working as hard for me as it should.

At one point I calculated that I would need to bring in about $2800/month over our basic expenses just for debt payments to pay everything off in 5 years. That number is way too low. At a current balance of $200,000 and the average interest rate at about 15% (roughly) it would take $4,760/month for 5 years to pay off the debt in full. The longer it’s dragged out, the more I’ll pay in interest.

I don’t have $4,760/month just to pay on debts. I’ll eventually have to stash some cash to settle some of them. The older the debts get the less the collectors will take to settle the accounts. Since about $50,000 has been tacked on in interest and fees since I quit using credit 2 years ago, I’m negotiating settlements, when the time comes, based on the balances I had before the debts went to collections. I’ll have to pay more than that, but if I start at the low end and they start at the high end, I think we’ll be able to reach a compromise. The creditors that don’t get paid in full will also get more out of those settlements than if I declared bankruptcy.

I don’t care how trashed my credit gets as long as I can avoid bankruptcy. I plan to have a zero credit score some day because I’m done worshiping at the debt alter of FICO. After this mess is cleaned up, no matter how long it takes, I will never borrow another penny in my life, so help me God. A credit score will no longer be necessary if I no longer wish to borrow money. If I can’t pay cash, I’m not buying it, whatever “it” happens to be.

Why do I want to have an emergency fund of 3 months of expenses?

My hurricane deductible went up to $7500 (5% of replacement value) and will go up each time the replacement value of my house is adjusted upwards. I’m pulling $6500 out of my IRA to build an emergency fund with $7500 in it. That’s about 3 months of expenses.

The only reason I’m pulling the money out of my IRA now is because the tax hit will be a lot less than if I wait until I’m making substantially more money. Also, the deductible expenses from my failed business will offset the withdrawal, even with the penalty. The government let us withdraw from retirement savings without penalty during 2006 for hurricane recovery. But there is no guarantee they would allow that again if another major hurricane devastates South Louisiana.

We live along the Gulf Coast. Hurricanes happen. $7500 is a lot of money to me just about anytime, but now especially since it would take me quite awhile to earn that much and live. I have $1000 saved already. I only have to take out $6500 to bring the fund up to the hurricane deductible.

I’m not putting any of my earnings into savings until all basic expenses are met and my debts are paid off or settled. I was going to put a small amount away from each source of income, but that wouldn’t really help me. The amount I would save would only be around $30/month. I just need to put everything I can toward the debt. That’s where it will make the biggest impact.

I also have no credit, and I wouldn’t borrow anyway. I can’t pay back what I owe now. It would be stealing, or at least borrowing knowing I would violate the terms of agreement even though I would eventually pay the money back.

If something goes wrong with the house I can fix it. If I have to replace my 11 year old Honda with another one 11 years old or older that still runs, I could pay cash for it. Any salvage value from my current vehicle would go immediately back into the savings account, and any money earned would be socked away into savings until I have at least $7500.

It will take me much longer than 24 - 36 months to pay off all my debts. An emergency fund of at least 3 months of expenses is insurance against borrowing when something happens that costs money. And we all know Murphy happens. A baby emergency fund of $1000 for longer than several months is too risky. I get a knot in my gut every time I think about not having it and I know that’s my own personal risk meter going off like a siren.

I hope this clears up some of the confusion from previous posts and comments. I hope I’m beginning to have a clearer picture of what I need to do and how I’m going to do it, and that what I’m writing isn’t contradicting itself. Please let me know in the comments if I’m still not being consistent. Maybe if I can get my head on straight I’ll be able to earn more, use my time more efficiently and tackle the debt faster.

Thank you all for getting me to wake up. I’ll probably keep getting mad, but I’ll do my best to use that energy to make more money.

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