Friend in financial trouble

[pocomom]

A dear friend of mine just revealed her family is in financial trouble. Our conversation was quick but we were going to talk later and I was hoping for some resources.
What I know is her minimum monthly credit card payments are $3000 a month. I have no idea what her total debt is but I'm guessing that's in the mid to high tens of thousands. She and her husband both work though her hours were just reduced. She has been making minimum payments while making a larger payments on her highest interest rate card. But since her hours were cut back she is putting more on the card and it is reaching it's limit.
Clearly they have to make lifestyle changes, but I know they aren't taking lavish vacations or anything like that. It is debt built up over time from stuff like medical bills, moving, house repairs , and then little things like dinner out, clothing and kids activities.
They do make a very good income, but spending much more than they make, though I couldn't really tell you on what.
Normal house, normal cars, and what appears to me to be normal habits etc.

The two things I suggested were to try to negotiate a lower rate, and see about transferring balances - but she told me her debt to income ratio is too high for new cards.
Thoughts, ideas?

 

[Albort]

i dont think debt to income ratio affects getting your credit card... Should look into like Slate card for 0% interest.

They would need to start budgeting like crazy, maybe pickup a 2nd job?

 

[Lisa F]

The first thing they need to do is sit down and budget. It doesn't sound like they have a handle on their expenses and while she may have been making larger payments on her highest interest rate card, may have been racking up additional debt to do that. They need to get a handle on their expenses and stop the dinner out, new clothes and cut back on kid activities if necessary. I know my food budget can nearly double if I eat out too much and I have to really watch it because I don't have enough disposable income to be doing that. With that much credit card debt they really do not have any disposable income so they need to get serious about essentials vs. non essentials.

I would guess their cc debt is higher than you think it is based on those payments. Here is an article that I found that gives some tips on how to get out of 6 figures of debt. It sounds like they could be there

http://money.usnews.com/money/perso...tips-for-paying-off-more-than-100-000-in-debt

 

[piccolopat]

Wow! That amount of debt is daunting. She'll first have to take a look at everything they spend on and see how much they can save if they cut anything that isn't absolutely needed. It's amazing how much all of the little things can add up to. It's like going grocery shopping and putting a lot of $.69 cent items into your cart and ending up with a $150 bill. Then they'll need to discuss if one of them getting a second job is an option and how much extra income that might bring in. If they have good equity in their house, is selling it now an option to generate cash? Anyway, I suggest they put everything down on paper first and see if they can reasonably tackle this themselves. If not, they may need to find a good bankruptcy lawyer.

 

[nkereina]

Have they considered bankruptcy? Chapter 7 which will eradicate the revolving debt or chapter 13 which will appoint a trustee to oversee their payments to their creditors, and the courts will decide how much they pay on a payment plan to pay it off. Chapter 13 takes less of a toll on your credit.

A long time ago, DH did not have health insurance and accrued six figures in medical bills. His only option at the time was to file chapter 7 bankruptcy. After about 4 years, he was able to open a high interest credit card and after about 7 years, his credit was back to normal - he was able to open other cards, get loans, have decent interest rates, etc. I believe the BK filing fell off his credit report around the 7 year mark too. The only thing I would caution is if they have a mortgage loan - with chapter 7, I'm not sure what happens with a mortgage loan and keeping their house.

 

[mrsheppo]

I recently quit my job and have had to budget more now that we have less income coming in. We do not eat out. I cook all our meals at home and have become pretty good at watching sales and stocking up when the sales are great. It sounds like this couple needs to either get a second job, file bankruptcy or eliminate all unnecessary spending. I buy my DD clothing at thrift stores now because she grows out of them so quickly. $20 recently got 10 items of clothing. I would also try re-negotiate cell phone and cable and internet service and see if they could save money there. Eliminate kid activities if possible. No morning coffees or lunches out. Make coffee at home and pack their own lunches for work. Car pool or use public transit if possible.

 

[nkereina]

There's a web site called Bill Fixers who will call your utility companies, cell phone company, cable company, etc. and try to negotiate lower prices for you. I don't think they do credit card interest rate, but it may help with their other monthly bills. If they are unsuccessful at lowering the rate, there is no charge. But if they do lower it, you pay them 50% of the savings. For example, if your cable bill is $100 and they lower it to $50, you pay them $25 (one time fee). Seems like there isn't much to lose with trying it out.

 

[davper]

They would need to start budgeting like crazy, maybe pickup a 2nd job?

And a 3rd & 4th job each. Put the kids to work collecting cans and bottles from the neighborhood or find a good sweatshop for them. This will help them save on childcare.

Just kidding, of course, about the kids. I just want to make a point of the intensity that they have to attack this with.

What I know is her minimum monthly credit card payments are $3000 a month. I have no idea what her total debt is but I'm guessing that's in the mid to high tens of thousands.

Her CC debt has to be a minimum of $100k. I imagine they have car and house payments along with some adult toys they have financed. (get your mind out of the gutter)

I am willing to bet they are looking at a bankruptcy in their future.

 

[davper]

There's a web site called Bill Fixers who will call your utility companies, cell phone company, cable company, etc. and try to negotiate lower prices for you. I don't think they do credit card interest rate, but it may help with their other monthly bills. If they are unsuccessful at lowering the rate, there is no charge. But if they do lower it, you pay them 50% of the savings. For example, if your cable bill is $100 and they lower it to $50, you pay them $25 (one time fee). Seems like there isn't much to lose with trying it out.

I would read the fine print on this. They may negotiate paying $100 less a month now only to find out later that you have to pay $125 more down the road. NOt only does this cost you more in the long run, you pay for that priveledge up front.

 

[nkereina]

I would read the fine print on this. They may negotiate paying $100 less a month now only to find out later that you have to pay $125 more down the road. NOt only does this cost you more in the long run, you pay for that priveledge up front.

Of course, always read the fine print. But you can instruct them to only negotiate lower rates, as opposed to entering you into limited time promotions or things like that which would cause the rates to go back up eventually.

 

[katmatry]

Bankruptcy.....great solution. Live above your means till you have accumulated so much debt that the monthly payments are greater than your income....file bankruptcy and wipe the debt clean. Makes me so angry.

 

[nkereina]

Bankruptcy.....great solution. Live above your means till you have accumulated so much debt that the monthly payments are greater than your income....file bankruptcy and wipe the debt clean. Makes me so angry.

Its like welfare... some people truly need it because of circumstances beyond their control, while others take advantage of it because they can. Bankruptcy is not without consequences though so the decision should not be taken lightly.

 

[TwoMisfits]

Honestly, we might need a little more info to help her figure out her best option. $3000 minimum credit card payments are different for folks who make $50K vs folks who make $500K. They are also different for folks who have zero mortgage and folks who have a $4K mortgage. They are also different for folks with $1M in assets vs folks with $0 assets. So, before offering financial advice, I figure I'll offer life advice which will be helpful in all of these situations.
1. Cut up all her credit cards, save 1 (and this is for emergency use only). Starting today, nothing gets charged. Nothing. She needs to go debit/cash only, so she doesn't continue to spiral up. The only way to get out of credit card debt is to stop using the credit cards...period.
2. Create a budget and stick to it.
3. Every non-essential purchase (kid activities, phones, dining out, vacations, car leases, house size, telecomms, clothes, makeup, hair, etc, etc, etc) needs to be immediately put on hold and evaluated for need vs want. A bare minimum hopefully can be kept to maintain life happiness and continuity, but at an "emotional need" level, not the likely "have what I want" level they probably currently have.

 

[TwoMisfits]

Its like welfare... some people truly need it because of circumstances beyond their control, while others take advantage of it because they can. Bankruptcy is not without consequences though so the decision should not be taken lightly.

Bankruptcy is not a be all and end all. You may pursue bankruptcy and not get any debts discharged if the court feels you can pay them (and the op's friends sounds like they could be in danger of that with the sufficient income stream). And if you pursue bankruptcy, and get some debts discharged, it will be years before you can do this again. So, it should never be done unless the circumstances are dire b/c it always has negative effects (wrecked credit, court costs, possible lawyer costs, etc) and it can make you even worse off if you don't change the behavior that caused the issue in the 1st place.

 

[VillainFavs]

If her minimum monthly payment is $3,000 then her credit card debt is WAY beyond tens of thousands. You're talking probably more like $100,000. Think about it. If you have $1,000 on your credit card. They want, what, maybe $50 or so as a minimum payment? Put it in perspective. If she owed $20,000 they're not going to ask for $3,000 as a monthly minimum.

This is way beyond cutting out a few little items here or there. Cutting $100 a month on cable isn't going to dig them out. A couple pizzas a month isn't going to do it. This is MAJOR lifestyle change time.

 

[TwoMisfits]

I also want to add - if you are in Pennsylvania (going with Pocono for the name), you cannot file Chapter 7 if you are high income and fail the means test. High income is defined as above the median below. If this is the case, she will have to file Chapter 13 (if she does bankruptcy) and pay back a (possibly large) portion of the debt...so if this is the case, she will probably want to pursue bankruptcy only if her situation is hopeless (card companies won't work with her, etc)...

Median Income (above this number, must use means test)
Individual Family of 2 Family of 3 Family of 4*
$48,982 $57,870 $72,866 $85,765
*For each additional family member over four, add $8100. Applies to cases filed on or after May 15, 2015. Source: U.S. Census Bureau.

 

[pocomom]

Honestly, we might need a little more info to help her figure out her best option. $3000 minimum credit card payments are different for folks who make $50K vs folks who make $500K. They are also different for folks who have zero mortgage and folks who have a $4K mortgage. They are also different for folks with $1M in assets vs folks with $0 assets. So, before offering financial advice, I figure I'll offer life advice which will be helpful in all of these situations.
1. Cut up all her credit cards, save 1 (and this is for emergency use only). Starting today, nothing gets charged. Nothing. She needs to go debit/cash only, so she doesn't continue to spiral up. The only way to get out of credit card debt is to stop using the credit cards...period.
2. Create a budget and stick to it.
3. Every non-essential purchase (kid activities, phones, dining out, vacations, car leases, house size, telecomms, clothes, makeup, hair, etc, etc, etc) needs to be immediately put on hold and evaluated for need vs want. A bare minimum hopefully can be kept to maintain life happiness and continuity, but at an "emotional need" level, not the likely "have what I want" level they probably currently have.

I'll get more specifics later, but I know they have a mortgage on a 300k+ house, one car payment on a couple years old car and one paid off and they made somewhere around 250k a year and now probably closer to 200-225k
They also send a few hundred to his mother every month, but that is not really something they can give up doing, she is very ill and unable to work.

I doubt they have much equity, they moved into the house just a couple years ago and sold their old home at a loss.

I'm sure there are more expenses I am unaware of, but like I said nothing seems extravagant - no vacation home or boat or anything big thing like that.

 

[TwoMisfits]

I'll get more specifics later, but I know they have a mortgage on a 300k+ house, one car payment on a couple years old car and one paid off and they made somewhere around 250k a year and now probably closer to 200-225k
They also send a few hundred to his mother every month, but that is not really something they can give up doing, she is very ill and unable to work.

I doubt they have much equity, they moved into the house just a couple years ago and sold their old home at a loss.

I'm sure there are more expenses I am unaware of, but like I said nothing seems extravagant - no vacation home or boat or anything big thing like that.

Chapter 7 is probably completely out. And if they go Chapter 13, they could be on the hook for the vast amount of those bills.

With $200K+ in income, they should be able to pay off the debt if they live like they only make $100K. They should also have significant assets to tap to pay off these bills. It could be as simple as living way above their means and only one adult knowing it. Once both adults are aware of the problem (and with their income, it's almost certainly a spending one), they can likely use pre-existing assets to bail themselves out of the hole they made. However, I would never tell them to take out assets until they have changed their spending paradigm.

So, if your friends talks to you, you should first find out if the spouse knows. Both parties will be necessary to make the decisions they need to make.

 

[tvguy]

Free credit counseling would be the first stop IMHO. We have the freedom to make poor financial decisions, and while I think bankruptcy is far too easy to file, for a lot of folks, it is the only option.
We have some very close friends who just found out the husband has a terminal illness and 2 months to live. She let it be known that they had just refinanced their house, and owe $320,000. On a house they purchased 27 years ago for $160,000. That's not including the roughly $450,000 in payments they have already made over the last 27 years. They're both 60. Not sure how they expected to pay that house off even they both had been healthy, now I'm not sure they can sell the house without losing money.

 

[TwoMisfits]

I'll get more specifics later, but I know they have a mortgage on a 300k+ house, one car payment on a couple years old car and one paid off and they made somewhere around 250k a year and now probably closer to 200-225k
They also send a few hundred to his mother every month, but that is not really something they can give up doing, she is very ill and unable to work.

I doubt they have much equity, they moved into the house just a couple years ago and sold their old home at a loss.

I'm sure there are more expenses I am unaware of, but like I said nothing seems extravagant - no vacation home or boat or anything big thing like that.

And smaller expenses can add up faster than large ones - if they eat out 5-6 times a week as a family/individuals and hit Starbucks every morning, they can easily spend $500/week. That can be $25K per year that seems like "nothing". Same for so many other things...