Get Out of Debt, the Unconventional Way
Getting out of debt the conventional way involves cutting up all of your credit cards, consolidating as much of the debt as you can, and living on a budget. That’s the way they usually tell you to get out of debt, and I absolutely agree that those are some good steps to take. However, If you have really done it up right, and you don’t want to declare bankruptcy because doing so will either totally denigrate your sense of self, or declaring bankruptcy will result in losing some things that are too important to you to lose, then I suggest that you pay attention. It’s messy, but it will get you out of debt and back on top.
Firstly, whatever you do, do NOT consolidate your debt. While having your phone ring ten times per day may not be pleasant, you can generally string out smaller debts longer than larger ones, and smaller debts are less likely ever to hit a courtroom. Furthermore, as you will soon see, the smaller debts that do hit courtrooms will usually make it possible for you to settle them before it gets that far.
Secondly, always take the collector’s calls. You have nothing to hide from, and let’s face it; you DO owe the money. I don’t care about the sob story of how your kid’s friend stole your credit card and maxed it out and never paid you back, or how you trusted someone who didn’t come through. The debt is in your name. You owe it. Unhitch the diaper and pull up the big people pants.
Thirdly, never yell at the collectors or threaten them. As unpleasant as they are when you are trying to get out of debt, they are just doing their jobs, and trying to keep from going in debt themselves. If the collector is someone who works for the original debtor, he’s getting paid regardless of whether the multi-billion dollar company that was foolish enough to extend you credit ever sees a dime from you. Don’t worry about “Carl”, or whatever his name is. He’ll be fine. He gets paid to sound agitated. Yelling at him isn’t going to make anyone’s day any better, and it’s sure as hell not going to end in a way that resolves the problem.
If the matter of your debt has moved beyond the original creditor, to a collection agency, despite the fact that the caller turns up the volume and starts using words like “court room” and “wage garnishment” and other scary terms designed to make you feel helpless, you are actually in a better position than you were before it went to collections. So, let “Mr.” Hoolihan, or whatever he is calling himself as a way of asserting authority over you know that you will be glad to call him “Mr.” if he will extend the same courtesy to you. Otherwise, find out his or her first name and use it. Personally, I refuse to do business with anyone with whom I am not on a first name basis. It’s just a personal preference.
In any case, the reason you are in a better position with Mr. Hoolihan than you were with Carl is that while Carl earns $8.50 per hour and is happy to get the work, Mr. Hoolihan works strictly on commission. In fact, his agency typically pulls in 30% of however much you pay and Mr. Hoolihan generally ends up with close to 2/3 of that. Do you know who else works on commission? Yes. That’s right: Sales people. Mr. Hoolihan’s job is to sell you on the idea that he is in control and that since you didn’t pay your bill that he is holding all of the cards. In reality, he’s not. His only real recourse against you is to send the deal to court, in which case, he loses his commission, and you go to court to waste the judge’s time when he tells you what you already know: You owe the money. Mr. Hoolihan doesn’t want to take you to court. He wants to scare you. If he does a convincing enough sell job on it, you will pay your debt to his client and he will be able to pay the orthodontist bill for his kid before the ortho calls looking for his payment.
Don’t buy what Mr. Hoolihan is selling. Instead, turn it around and throw him off of his game. He expects you to be mad. Be nice. He expects you to respond to his threats. Don’t. He will try to put words in your mouth. Re-iterate your position. Always make sure he hears the words from you. “I won’t make you any promises today, as badly as you want them, because I don’t want to break any more promises. I have lots of people calling me, and I am committed to paying every last dime to every last one of you, but at the moment, I am simply unable to offer you more than that. I’m not sure when it will be, but I promise you that the matter is more important to me than it is to you. Do me a favor and call me back in a couple of weeks so that I don’t forget about you in the midst of all of the collectors who are less considerate of my time than you.” Give Mr. Hoolihan an invitation to call you back. He doesn’t expect that. Give him a reason to act more becomingly than the other collectors act. He doesn’t expect that. Give him a tone of honesty and understanding, with a sense of dignity and a lack of shame. He doesn’t expect that.
If he persists, make sure he hears the words “I am absolutely committed to paying this debt, and frankly, since I am in control of who gets paid when, I have determined that the first people getting paid back are the ones who are kindest and most patient with me. I really appreciate that you gave me a reminder call. I hope I have better news for you next time.” In short, if you give Mr. Hoolihan a reason to show you how tough he is, he will forget about his commission and you will have to face the situation sooner than you are able.
Understand, that you are in a better position than the collector, because he needs your signature on the check. He wouldn’t call you to bug you for money if you were not the gatekeeper. That means you, not he is in power. It’s of utmost importance to grasp that nobody is in control of your paycheck but you. That means, that regardless of threats from creditors, that in the end, it’s you that makes the decision if and when to pay them and how much. With that said, let’s move on to how you should be spending your paycheck if you truly do want to get out of debt.
Step number one if you truly want to get out of debt, is to decide which elements of your life are essential. These will include things like housing, transportation, food, electric, and some sort of telephonic device. By the way, I have a phone at home and at work, but I still refuse to carry a cell phone. Each to their own, but if your bill exceeds your package, either change your plan or ditch your phone. Step number two is to, at least for a short time, STOP paying EVERYBODY who is not on the “essentials list”. Put the rest, whether it’s $10 or $1000 into savings. It sounds crazy. I know. But you desperately need to ruin your credit if you have any left. Why? You have proven yourself to be a credit addict. The best way to dry up your supply of credit is to ruin your credit. Don’t worry. At some point after you have learned to live without it, someone will offer you credit again. With any luck, this credit detox program will teach you to use it responsibly, or not at all in the future. For now though, get rid of it. The money you put in savings for a few months while you refuse to pay can act as your emergency money. After you have about 1 month of income saved in your savings account, then and only then is it time to start paying off debts.
That doesn’t mean, however that you should stop adding to savings. The formula you need to be mindful of is the 70/20/10 rule. That is. You have to figure out some way, I don’t care how, to lower your monthly essentials to 70% of your total income. DO whatever that takes, even if part of that means taking a second job. The second part of the 70/20/10 rule is that you use 20% and ONLY 20% of your income to pay off debt. The third rule is that 10% of the money you earn is yours to keep for savings. There is nothing more heartening than knowing that your nest egg is building. (By the way. If you don’t have it, read and apply a book called “The Richest Man in Babylon” by George Clayson. It will change the way you see money for the rest of your life). Once you have established the 70/20/10 rule and learned how to live it as if your life depends on it, then you can start using the 20% to pay off your debt. Here’s how to do it.
1) Pay off ONE, and ONLY ONE of the debts at a time, starting with any debts owed to friends and family. They will tell you to get your other debts taken care of first. Don’t listen to them. When all the debt is cleared, they are the ones who you need relationship with long term. They are the most likely to leave you alone, but they are also the most likely to harbor resentment. They come first.
2) After you have paid friends and family debts off, then, pay off one debt at a time starting with the smallest of your debts, BUT do NOT PAY FULL PRICE. Almost every creditor, by the time you sufficiently ruin your credit will settle for 70% of the bill. Otherwise, they would never send it to collections. SOMETIMES when a debt is in collections you have to refuse to deal with the collection agency in order to get the deal. Be firm. Your right as a consumer is to deal with only the original creditor when paying off debt. If a creditor absolutely will not budge, then put their name at the back of the list and move on to the next debt in line. By the way, don’t accept payment plans. When you negotiate for 70%, offer them 50% and barter to 70%. Now and again you will get lucky. Don’t call them until you have 70% of the money owed. That way, if you work out the deal, you can pay them the same day.
3) Sometimes a creditor that you moved to the back of the line will call you back a week later and offer you the same deal that you left off with. In that case, tell them that you have already moved down your list of debtors, but that you appreciate the offer and that you will move them back to the front of the list and that as soon as you have amassed the amount that they are offering to settle for, that you will call them back. The collector will try to make you think this is a one time offer. He will even tell you that you can never have that deal again. He’s lying. He will try to get your to commit to a payment plan. Don’t accept it. Simply re-iterate your position and tell him that you will call him/her back when you are able to pay the amount offered and that he or she will have to decide then how to handle the offer. For now, though, they should know that you no longer have the money, so the whole thing is moot. This creditor should be your next phone call when you have amassed the amount offered. Often he will tell you on the return call that you missed the boat. If so, put that debt on the back of the list and repeat. DO that as often as necessary to get your rate.
By the way, in most cases he will try to tell you that you have accrued interest. He will try to give you a logical reason why you should pay more. Refuse to do so. If you negotiate a deal with the creditor for a reduced payment, then get a notice from that creditor stipulating that acceptance of the payment is considered the end of business dealings and that the remainder of the debt is to be forgiven. If the creditor refuses to send such a promissory note, then make up one yourself and send it with your check. In the memo portion of your check, write the words “Final payment if accepted”. Include a note that states something to the affect that if the check is cashed, that the creditor is accepting the payment as the fulfillment of the total debt. Send it certified mail. It doesn’t happen very often, but now and again a creditor will try to go back on his word. A copy of your note, plus a copy of the check will suffice to aid you if that matter ever goes to court. NEVER pay a creditor more than the deal that you were offered, regardless of what games they may play. It’s your money.
4) Once you are out of debt, a few things will be true. Firstly, you will be debt free. Secondly your credit report will read like a rap sheet. Secondly, you will have learned to live without credit. Thirdly, you will have amassed a considerable amount of savings that you can use for investment. The interesting thing about credit is that cash down tends to fix EVERYTHING. Before you use that cash down to re-establish credit though, you will want to get a copy of your credit report. Once you have it, you will want to go through the process of challenging every negative mark on your credit. In most cases, the creditors can’t be bothered to send back the form that is required in order to keep the blotch on your credit, especially if the debt is considered to be fully paid.
Wait one year after challenging your credit report and get another copy. You will be amazed at how much cleaner it is. Then, and ONLY then, take some of the money from your savings account and purchase what is known as a “secure” credit card. This is a card on which you are borrowing money from yourself, and in so doing, establishing credit. Use that card to pay as many of your living expenses as possible and then pay it off monthly. This will be good practice for the future when someone offers you real credit again. Continue to put the 10% in savings that you have been socking away, and use the 20% to live a little. You earned it.
I told you this would be unconventional, and it is, but it might just change your life. I hope it helps.
