Debt Column

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Want to Feel More Confident? Get Into Debt!

Debt PaymentThe way Millennials view money is something that has been the subject of much interest lately, since money habits are changing as a result.

From marriage to the way they accomplish internships, to gap years and whether or not college is the right decision, Millennials seem to be doing things a little differently from past generations. And that even includes the way they get into debt — and the way that debt is viewed.

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Help a Reader: Settling Old Collection Debts

Reader Shaun sent me an email about an old credit card debt from six years ago that, as a result of not paying, was drawing from his bank account. Technically, it went to court and the courts ordered a garnishment on his bank account. As it happens, since the creditor wasn’t garnishing his paychecks, though they could have, he stopped using that bank account.

In his words:

I have an old credit card debt from 6 years ago that had a judgement placed on it. They garnished money from my bank account only, not my paychecks. It has been 6 years and I have not had a bank account since. I finally have the money to clear up this issue. I have a few questions about what i can do. Can I have a lawyer send them a letter asking to settle for less than the $4000 that i owe? Can they charge me interest on top of the $4000 from 6 years ago? Is it likely that they will settle for less than judgment amount?
Any help would be greatly appreciated!

To be 100% honest, I’m not an expert on credit card debt, especially after you’ve defaulted and it goes as far as garnishment. I do know that this typically happens after the debt is sold to a debt collector and the debt collector can’t collect on it or settle. They simply turn to the court system for garnishment.

Here’s the interesting part… it’s been six years. If you declared bankruptcy six years ago, a lot of the pain, at least to your credit score, will have subsided. The bank account levy (which is the official term) is only on that bank account and I’ve read experts online suggestion that you just open another checking account.

To be 100% honest, I don’t know what the answer is for you. I do know that you should talk to an expert on debt collections before you offer to settle or contact the debt collector.

Anyone have any suggestions?

 Debt, Personal Finance 

What are the REAL Causes of Bankruptcy?

Bankruptcy“The popular conception is that people who file bankruptcy buy about three TVs a week and then fly to Aruba to relax,” Daniel Gershburg, Esq., says.

Gershburg is a bankruptcy lawyer in New York City, and he sees a number of cases each year. “Realistically, only a handful of cases fall into that category. There is so much more to bankruptcy.”

Some of the reasons that Gershburg cites include job loss, medical bills, and the accumulation of smaller bills that get out of control. But are these the main reasons that people go bankrupt? And what can consumers do about it?

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Should You Co-Sign that Loan?

co-signingOne of the more interesting items I read recently on CNN Money had to do with a new trend: Looking for co-signers on Craigslist. Co-signing a loan is a big enough risk without adding in the potential for getting scammed by a stranger over the Internet.

There are a lot of a reasons you shouldn’t co-sign, though. And if you want to make a profit from someone by helping them get a loan, you might be better off using other options, such as P2P lending.

Problems with Co-Signing for Someone You Find through Classifieds

Borrowers looking for co-signers on Classifieds sites like Craigslist actually offer money to those who are co-signing the loan. You might be offered $500 in cash to co-sign on a loan for $3,000. You get a little cash in your pocket, and the borrower is approved for a loan that he or she wouldn’t be able to get on the strength of his or her credit.

Right off, you can see that there are problems:
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Dave Ramsey’s 7 Baby Steps

The Total Money MakeoverOne of the most well-known personal finance gurus is Dave Ramsey. He often talks about how he pulled himself out of debt, and now lives debt-free. He also develops products and sells books designed to help his followers lead debt-free lives.

Among the ideas that Ramsey has developed is The Seven Baby Steps. These are steps that, if used in order, can help you get your financial house in order, and start down the path to financial freedom. The idea is to follow the steps in order so that the steps build on each other.
Here are Ramsey’s 7 baby steps:

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Does Good Debt Really Exist?

We’ve all read the articles, talked to the experts, and thought through this question in a number of different ways but still, we’re not sure of the answer. Like so many topics dealing with finance everybody has an opinion and there’s not an answer that fits everybody but we can get pretty close to a hard and fast answer. That answer is, no, for most people good debt doesn’t exist.

I know that by taking such a hard and fast stance there will be people who disagree with such a statement but I’m prepared to defend myself. Let’s look at a few reasons why I believe good debt doesn’t exist for most of us. It’s an old fashioned financial street fight.

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Do You Need a Debt Counselor?

debt counselorMany of us like to think that we can handle our debt problems on our own. And, in many cases, it is possible for you to come up with a debt reduction plan by yourself, and execute it. However, some find themselves overwhelmed by their debt, and unsure of what to do next. It can seem like a hopeless case, and that, in turn, can worsen the debt spiral.

If you are finding it difficult to put together a debt pay down plan on your own, it might be in your best interest to look for a debt counselor. A debt counselor (also called a credit counselor) will look at your current financial situation, take a look at your debts, and then help you come up with a plan to pay off your debt in a way that is manageable. You will have fees to pay, but for some, just having that outside help can be just the thing.

Not all debt and credit counselors are the same, though. You need to do your homework before agreeing to work with one.

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Debt Avalanche vs. Debt Snowball Calculator

One of the big debt reduction debates has always been math versus psychology. How much debt you have has more to do with human behavior and psychology than it does with mathematics. People are, for the most part, smart enough to realize the math behind debt. They know that if you charge more than you can pay off, you’ll be in debt.

The same is true for repaying that debt. There are two schools of thought when it comes to repaying debt. You can take the mathematical approach and pay off your highest interest rate debt first, thus reducing your total interest payment. This is commonly referred to as a debt avalanche, a reference to the other, Dave Ramsey method called a debt snowball. A debt snowball is where you pay the smallest debt amount first, then roll that payment into the next smallest debt amount. Your payment grows and grows, your debts are knocked off as quickly as possible, and this provides a psychological boost to help you finish. It’s clearly not optimal, no one disputes that, but it works off psychology and it has worked for a lot of people.

Here’s the key question – how much does the debt snowball cost you over the traditional method? As much debt as we may have, chances are no one goes through the effort of calculating it. We simply pick the one we think is best, either math (avalanche) or psychology (snowball), and we run with it.

What if there was a tool that did this? I found, written by Jordan Santell (@jsantell), a calculator that calculates all that for you. If you enter in your debts, your payments, and how much you have to pay each month – it spits out the difference you’ll pay in interest. No more guessing, this is concrete data.

I put in some dummy data just to see how it worked. Two loans:

  • $300 to pay each month
  • $5000 – 6% interest – $50 minimum payment
  • $6000 – 8% interest – $75 minimum payment

With the avalanche, I’d be debt free by December 2014 having paid $1343.92 in interest. With the snowball, I’d be debt free by December 2014 having paid $1519.60 in interest. Going with the snowball, and it’s psychological boosts, would cost me $175.68. Is it worth it? Maybe, but at least now I can decide knowing it was going to cost me $175.68, rather than “more.”

And the calculator is really pretty. 🙂

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