Friend in financial trouble

[davper]

If they are making 200k+, and don't have a high mortgage or car payment as you indicate, then they should be able to get out of this mess without bankruptcy. They don't have an income problem, they have a spending problem.
Stop spending, cut out non-essential expenses, cut back on essentials, eat cheap meals made at home. Sell stuff you don't need. Even if it is at a loss. Sell the car with payments and buy one with cash for a few $K. Stop your retirement and college savings.

And cut up every single CC. Don't save one for emergency because they are in an emergency now by having CCs. Put cash aside for this. Once you find that you dug yourself into a hole, stop digging!

Make a budget that has every single penny accounted for and stick to it. In 4 years or less, they can be free of this debt. 3 additional years and they can be mortgage free.

 

[DnA2010]

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.

Echo this- to get into that kind of debt with that kind of income, I can't see how their financial trouble can't be about their spending, especially if they have average cars, no vacation homes etc. Maybe some massive health care bills? Even on 100K, as the poster quoted mentions, they should be able to live comfortably with a 300K mortgage, small car loan etc.

 

[pocomom]

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.

I was taking a stab in the dark. I don't carry a balance so honestly don't pay attention to my minimum payments to compare - I just know that sounded like a LOT of money.

 

[MagicaDeSpell]

First of all, sympathies to your friend, that's a tough spot to be in. With debts that large, the first thing I'd look at is a new or second job for her since she's had her hours cut. The second I'd look at is downsizing. I've known a lot of people who felt their quality of life improved after thoughtfully downsizing, so if she can get some money out of the house and get into a more manageable house, condo, or townhouse, she might lose a lot of expenses (hefty home owners insurance, bigger energy costs, all those 'surprise your oil tank is leaking' type bills, a lawn maintenance service) that might help her in the long run while shedding some of the stress of the situation.

FWIW, I've known a few freshly minted college grads with that much debt in student loans with no (financial) assets whatsoever at the other end, many of them are well on the way to digging themselves out of the hole on their own, so it can be done.

Also, I agree with TwoMisfits up there, it's the little things that get you. If I'm ever off my budget, I can guarantee you it isn't that we splurged on new electronics, but that my husband grabbed 'snacks' (more like bonus supper) and coffees while he's at work.

 

[VillainFavs]

I was taking a stab in the dark. I don't carry a balance so honestly don't pay attention to my minimum payments to compare - I just know that sounded like a LOT of money.

I wasn't sure either because we always pay off every month. I just looked at this month's statement. Our balance was $3,000. Minimum payment $60. That's 2%. If her cards are the same and her minimum payments are $3,000, her total debts are $150,000.

I just read online that most cards are 4%. That would mean her total debts are $75,000.

So it's got to be somewhere in that range. That's a WHOLE LOTTTA debt on top of the mortgage and car payment and whatever else there may be.

 

[Pesky]

If her hours just got cut, time to look at a 2nd job as well. I agree with negotiating a lower fixed rate and perhaps a fixed payment plan. And then Dave Ramsey. He gets pretty full of himself but the advice is sound for gradual debt reduction and coverage of emergency expenses, as well as inspirational success stories of people who eliminated debt. I'd also encourage her at this time to look at what they are doing and where they can cut back. Like eating out -- maybe that is saved for once a month and is something like family pizza night. Kids' activities -- see what you can cut there or limit. Basically if you don't give up one thing, you need to give up something else so it all fits into the financial pie. It will take time but financial discipline now will pay big dividends later.

 

[mjkacmom]

If her hours just got cut, time to look at a 2nd job as well. I agree with negotiating a lower fixed rate and perhaps a fixed payment plan. And then Dave Ramsey. He gets pretty full of himself but the advice is sound for gradual debt reduction and coverage of emergency expenses, as well as inspirational success stories of people who eliminated debt. I'd also encourage her at this time to look at what they are doing and where they can cut back. Like eating out -- maybe that is saved for once a month and is something like family pizza night. Kids' activities -- see what you can cut there or limit. Basically if you don't give up one thing, you need to give up something else so it all fits into the financial pie. It will take time but financial discipline now will pay big dividends later.

I think most credit cards are way over 4%! I'd say closer to 14%.

 

[Marionnette]

I think most credit cards are way over 4%! I'd say closer to 14%.

I think the PP was referring to the percentage of the total balance which is used to calculate the minimum payment. Most credit cards have a minimum required payment that is 1%-2% of the outstanding balance. 4% would be on the very high side.

 

[pocomom]

I wasn't sure either because we always pay off every month. I just looked at this month's statement. Our balance was $3,000. Minimum payment $60. That's 2%. If her cards are the same and her minimum payments are $3,000, her total debts are $150,000.

I just read online that most cards are 4%. That would mean her total debts are $75,000.

So it's got to be somewhere in that range. That's a WHOLE LOTTTA debt on top of the mortgage and car payment and whatever else there may be.

Wow. That is A LOT. That kinda makes me nauseous to think about.

 

[QueenIsabella]

Some initial thoughts:

I agree that the credit card debt is likely north of $100k. The other expenses you list don't add up in my mind, to being that far in debt. The family needs to take a hard, clear-eyed look at their expenses, because they're bleeding money, and it's not new. I don't know if it's eating out, gambling debts, expensive hobbies, or what, but they need to sit down with their bills and see where the money is really going. The good news is, if they can make some changes to their spending, they have a decent income and should be able to knock this down if they get serious.

A few suggestions: they could use more income in the short term. Whether this is another job, selling on eBay or having a yard sale, they need to consider all options. Obviously, more meals at home if eating out is an issue. If kids' activities are an issue, see if they could barter something. At our dance studio, you can work the front desk a couple hours a week to cut down your dance fees--a lot of sports could use coaches, referees, even people to set up or clean up. If the kids are old enough, they could even do these things, to offset their costs.

Most importantly, they need to look at this and do it as a family. Include the kids (again, assuming they're old enough to understand and pitch in). Make it a family goal, and plan (cheap!) rewards as various goals are met--pay off a credit card, celebrate with family movie night.

 

[quagmire0]

The $3000/mo minimum balance sounds way off. I can't even imagine how one would rack that up - especially if they were making ~200k/year. My wife and I are making probably a little less than that and we might charge $3k a month - which we pay off every month. To own $3000/mo *minimum* would be mind-blowing. You're definitely in bankruptcy territory at that point.

 

[afan]

Selling the house wouldn't help even if it made money. They may not qualify for a new mortgage with their debt and the payments may not be lower. Mortgage payments are quite a bit lower in many areas depending on what kind of mortgage and rate they got.

I never would have sold their old house for a loss, they might have made money renting or at least not lost money. That's a waste and makes me wonder what other waste they have. I rent my home because I couldn't sell it without taking a loss due to the market in that area. I make money after management fees and mortgage each month. It all goes straight to savings.

They could look at their car and home insurance, they may be able to save there. Also reevaluate their medical ins when it's open enrollment. Maybe the kids aren't on the best plan or a spouse should be on the other policy instead of paying more at their own job. And with her hours being cut I would start looking for another job if the hours won't come back. Part time at least.

 

[chris31997]

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.

Like a couple people have suggested: they need a budget. They both need to sit down and look at everything. She or he can not do it alone.

They are nickel and diming themselves to death. They need a list of everything they spend money on from kids to mom to mortgage. They both need to go to cash.

 

[kymom99]

Pl

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.

Please don't suggest chapter 13 bankruptcy. My husband went that route shortly after we married because he was sued and had a very large judgment against him. It was a nightmare and took forever to recover from it.

 

[pocomom]

Ok, so some of my numbers were off but not the important one. Their house is closer to 400k so higher mortgage payment but still manageable for their income. It is a modest house, just in an expensive NE city area, so I don't think selling and moving would do them any good.
She said they basically have carried a balance their whole marriage, adding more each year.
The debt is near 100k she didn't have an exact number. They pay off a big chunk when a bonus comes in but then they just turn around and add back the money. She thinks $20k was added this year to their debt, but there is general unawareness of specific numbers or she doesn't want to tell me ...

It does not sound like they have done a budget or really know where their money is going.
I'm wondering if there is a program or spreadsheet anyone can recommend ? I agree the first step is to actually make a budget, but I think she also needs to know where it is going now to make one that will work.
Her dh is NOT fully on board with making the necessary cuts (lots of coffee, lunches out, latest tech etc -feels entitled due to good salary) either so I think data will help with that.
She has a lot of anxiety over it right now and is very upset and worried about staying above water. I am concerned because she is more concerned with replacing the income-which is obviously a piece or the puzzle, but I feel like more income will be useless if they don't figure out their spending.

 

[ruadisneyfan2]

Another vote here for Dave Ramsey's snowball method.
I used to have cc debt from spending on stupid things that I thought I "needed" at the time. The first time, we were planning to refinance our mortgage anyway so we paid our cc's off by taking out some equity. It fixed a symptom, but not the problem. We never really learned to budget though and it started creeping back up.
The only way to do it, imho, is to do it the hard way. Cut back expenses and pay them down one at a time.
It forced us to budget and once we started seeing progress and a real light at the end of the tunnel, it truly motivated us to cut back more and pay it down faster.
Now, we only have a small car payment, $170, for a used car we bought ds19. We would have paid cash for an older car but I worried about having something reliable and possible spending huge amounts on repairs.

I think paying off debt is a lot like trying to lose weight. If you go for the quick and easy fix, say liposuction, you may appear thinner but you didn't really change your ways. If you do it the hard way, diet & exercise, it works and in the meantime you learn what habits were causing you to gain weight in the first place. Losing weight and paying off debt are both all about making sometimes painful lifestyle changes.

Also it's good to have an emergency fund in cash so it's not tempting to start adding to debt to fix little issues that crop up: vet bills, or some unforeseen expense. I think it may sound minor but one of the harder aspects was just being able to tell people, "No thanks, we can't afford that."
Your friend needs to get used to saying that to everyone: kids, relatives, coworkers, friends, etc. or she'll get roped into frivolous spending.

 

[kymom99]

Another vote here for Dave Ramsey's snowball method.
I used to have cc debt from spending on stupid things that I thought I "needed" at the time. The first time, we were planning to refinance our mortgage anyway so we paid our cc's off by taking out some equity. It fixed a symptom, but not the problem. We never really learned to budget though and it started creeping back up.
The only way to do it, imho, is to do it the hard way. Cut back expenses and pay them down one at a time.
It forced us to budget and once we started seeing progress and a real light at the end of the tunnel, it truly motivated us to cut back more and pay it down faster.
Now, we only have a small car payment, $170, for a used car we bought ds19. We would have paid cash for an older car but I worried about having something reliable and possible spending huge amounts on repairs.

I think paying off debt is a lot like trying to lose weight. If you go for the quick and easy fix, say liposuction, you may appear thinner but you didn't really change your ways. If you do it the hard way, diet & exercise, it works and in the meantime you learn what habits were causing you to gain weight in the first place. Losing weight and paying off debt are both all about making sometimes painful lifestyle changes.

Also it's good to have an emergency fund in cash so it's not tempting to start adding to debt to fix little issues that crop up: vet bills, or some unforeseen expense. I think it may sound minor but one of the harder aspects was just being able to tell people, "No thanks, we can't afford that."
Your friend needs to get used to saying that to everyone: kids, relatives, coworkers, friends, etc. or she'll get roped into frivolous spending.

This is very true. It seems like everyone I know is selling something these days. I have started saying no I don't have the money for that, no matter who it is selling it. Except things like Girl Scout Cookies.

 

[afan]

I agree with the saying no, though that applies to anything. If it's something you don't want to do, can't afford or whatever it's ok to say no. Don't feel guilty for saying no and you don't have to give an excuse for saying no. Think of it like an rsvp card you have to mail in, you check the no with regrets and are done there's no line you have to fill out to tell them why you can't go. It's no one's business why you say no, maybe you just want to hang out at home watching a movie or reading the disboards

 

[ruadisneyfan2]

Ok, so some of my numbers were off but not the important one. Their house is closer to 400k so higher mortgage payment but still manageable for their income. It is a modest house, just in an expensive NE city area, so I don't think selling and moving would do them any good.
She said they basically have carried a balance their whole marriage, adding more each year.
The debt is near 100k she didn't have an exact number. They pay off a big chunk when a bonus comes in but then they just turn around and add back the money. She thinks $20k was added this year to their debt, but there is general unawareness of specific numbers or she doesn't want to tell me ...

It does not sound like they have done a budget or really know where their money is going.
I'm wondering if there is a program or spreadsheet anyone can recommend ? I agree the first step is to actually make a budget, but I think she also needs to know where it is going now to make one that will work.
Her dh is NOT fully on board with making the necessary cuts (lots of coffee, lunches out, latest tech etc -feels entitled due to good salary) either so I think data will help with that.
She has a lot of anxiety over it right now and is very upset and worried about staying above water. I am concerned because she is more concerned with replacing the income-which is obviously a piece or the puzzle, but I feel like more income will be useless if they don't figure out their spending.

YNAB. I've never used it but so many people rave about it.
Also I like www.debtMD.com

The pp who said your friend could be out of debt in a few years and have their mortgage paid off in another few years is not joking. debtmd spells it all out. You enter all of your debt balances, interest rates and min payment amounts. Also enter how much extra beyond the minimum you can add. Then it shows you each month, paying the same total oop, but redirecting to the next debt when one is paid off instead of spending it. If we keep applying to our mortgage what we were once applying to all of our credit cards, it would only take something like 5 years to pay it all off.
Very much like DR's snowball. You start with the smallest amount, not necessarily the highest interest rate. Mathematically, it doesn't make sense but as DR says, if you were doing proper math to start with, you wouldn't be spending more than you earn.

Good luck. She has a real uphill climb with a hubby being a spender in denial. At least my dh has always been a saver so he made it easy.

 

[TwoMisfits]

Ok, so some of my numbers were off but not the important one. Their house is closer to 400k so higher mortgage payment but still manageable for their income. It is a modest house, just in an expensive NE city area, so I don't think selling and moving would do them any good.
She said they basically have carried a balance their whole marriage, adding more each year.
The debt is near 100k she didn't have an exact number. They pay off a big chunk when a bonus comes in but then they just turn around and add back the money. She thinks $20k was added this year to their debt, but there is general unawareness of specific numbers or she doesn't want to tell me ...

It does not sound like they have done a budget or really know where their money is going.
I'm wondering if there is a program or spreadsheet anyone can recommend ? I agree the first step is to actually make a budget, but I think she also needs to know where it is going now to make one that will work.
Her dh is NOT fully on board with making the necessary cuts (lots of coffee, lunches out, latest tech etc -feels entitled due to good salary) either so I think data will help with that.
She has a lot of anxiety over it right now and is very upset and worried about staying above water. I am concerned because she is more concerned with replacing the income-which is obviously a piece or the puzzle, but I feel like more income will be useless if they don't figure out their spending.

If her husband is not on board, she should pull out all of the CC debt payment and show it to him as a package...sometimes, actually seeing a 6 figure debt and just the interest that he's accumulating for no return is enough to shock people into new behaviors. And she should pull all the charges for one month (like March) and add up all the coffees/lunches out (just as one item) and show him how much money is wasted and what it's really costing him (b/c paying minimum balances means you pay like 3x min the value of what you charge now - who wants to drink a $13 latte?). And she should be ready to really make her voice heard on this, and not just back down at his 1st or 2nd cruel/snippy comment (like "we wouldn't be in this situation if your hours weren't cut" - wrong - or "then just let me handle the money and bills and stay out of it" - wrong - not gonna help - you get the idea)...