Financial advice needed.

January 1, 2011 6:03 PM

How can I get my financial house in order? Lots of debt and terror.

I have spent my whole life running away from financial responsibility. This year I want to change that. But I do not know where to start, really -- except by asking you all for help.

Most of my creditors have been wonderful and let me pay in bits and pieces. My credit rating is truly awful, and I hesitate asking friends or family for loans, because it is a bad, bad idea.

1. I have a full-time job. I live paycheck to paycheck. No major credit cards -- just a debit card and a low-balance card ($500) for crises. Last year I had a lot of "insufficient funds" fees at $34/pop, which killed me. I estimate it added up to $4,000.

2. I owe significant amounts of money to a variety of people, medical and otherwise ($6000, $1300, $800, $3700) that I am paying off slowly.

3. Terror. I have had bill collectors dunning me for years (a total of $25,000), and one of those debts has gone to court and a legal notice has been sent to garnish my paycheck. Can I stop them doing that? Should I talk to a lawyer first?

4. Terror, Part 2: Years of unpaid income tax. When does this get written off? After 7 years?

Assume I know nothing about budgets or online budget trackers. Should I talk to a debt counselor? What are some good recommendations?

I am completely terrified and scared to be even asking this question, so thanks in advance.

posted by anonymous to work & money (12 answers total)

(I've assumed you are in the US).

Go talk to a credit counselor, preferably one off of the U.S. Trustee Program's list, and start getting the credit/medical things under control. It may be that your best move with regard to the credit and medical bills is to declare bankruptcy. If so, talking to a credit counselor on that list will set you up to do so.

Bankruptcy would stop the wage garnishing; nothing else that I'm aware of will.

As for the income taxes: call the IRS and talk to them. Income taxes do not get written off - they just keep accruing interest and penalties. The IRS is actually rather understanding about some things, if you talk to them. If the debt you owe is something you cannot pay off now, they might put you on an "uncollectable" list. The debt won't go away (not even bankruptcy will discharge income tax debt) but you can arrange for a livable repayment plan.

If you want some handholding, feel free to drop me a MeFiMail.
posted by LOLAttorney2009 at 6:24 PM on January 1, 2011 [2 favorites]

Also, perhaps reading Dave Ramsey's "Total Money Makeover" would help a little. It's not a helpful book if your income is... unstable or unpredictable, but I can see where it might help give you ideas of how to dig out from under this debt.
posted by LOLAttorney2009 at 6:26 PM on January 1, 2011 [3 favorites]

"Income taxes do not get written off - they just keep accruing interest and penalties."

Well they don't get "written off" but there is a statute of limitations on their ability to audit and collect.

I believe that if the IRS does not audit or assess penalties within three years of the date of liability, they cannot do so after that. But they have 10 years to collect. And these time limits may be extended if you committed fraud.

Check with an attorney or qualified accountant concerning your particular situation.
posted by mikeand1 at 6:59 PM on January 1, 2011

Here are the statutes concerning the statutes of limitations for federal taxes. (State tax laws may differ, particularly if you live in California.)

Did you file any returns at all, or no returns? I think most of these assume you've filed something.
posted by mikeand1 at 7:06 PM on January 1, 2011

Gaah... ^^^ Those are for criminal penalties. You're probably more interested in civil penalties, which are described here.
posted by mikeand1 at 7:07 PM on January 1, 2011

I talked to an IRS agent at a party last night. He said they have three years from date of filing to audit you and demand fees, penalties, etc. (No time limit if you committed fraud, though). However, if you haven't filed, then their three years hasn't started yet.

You really need to speak to a financial adviser to make a plan for sorting this out. LOLAttorney2009's suggestion is a good place to start.

IANYL, TINLA.
posted by spacewrench at 9:27 PM on January 1, 2011

Without knowing your income, making specific recommendations is difficult. Based on your numbers, the amount is $36,800 (assuming none of the dollar amounts you gave overlap). If you make less than $50,000 per year--and given the wage garnishment you say is forthcoming--I would recommend consulting a bankruptcy attorney. You will be required to go through credit counseling prior to being able to file bankruptcy, so you should probably also consult a local Consumer Credit Counseling Services office. The counselors there will be able to personally advise you, but I would like to point out in advance that many people are in financial distress so there may be a bit of a wait. Bankruptcy is the only option I know of that will stop a wage garnishment, unless you somehow get the court order overturned (which is quite difficult to accomplish).

If you've filed your income tax returns, that's a very good thing. Even if you haven't paid, you can still work with the IRS. Look at the IRS website for something called an Offer in Compromise where you ask to make small monthly payments over a term that will result in your paying less, based on your inability to pay now or for the foreseeable future. Filing bankruptcy will temporarily stop collection activity on the past due taxes.
posted by fireoyster at 11:04 PM on January 1, 2011

I think the first thing you should do is take some pride in the fact that you're working on addressing it, and then realize that your biggest obstacle here is actually the fear part.

So I think if I were you I'd imagine that as the first problem - before any individual bill, before the IRS or the money being taken out of your paycheck. You've engaged in a lot of avoidance behavior, and avoidance behavior tends to reinforce and build on fears (I'm an expert!)

To deal with the fear, you have to get better at the avoidance part. The fear doesn't go away on its own, unfortunately. I tried.

Maybe make a list of the problems, assign them each a numeric value of importance/terror. Get your facts right - either by researching them on your own (not all at once! one at a time! Maybe start with the IRS one) or by finding a reputable lawyer who specializes in this stuff or a financial adviser. Be careful about credit counselors - use lolattorney's link. And then do what they tell you -- file form 837448594uuiojtjjfakjA or whatever it is. Probably one form to acknowledge your debt to them and one to set a time frame for paying it off. They'll be lullingly bureaucratic.

Second thing is the wage garnishing. I think you need a lawyer to talk to about that. And frankly, if you're this freaked out (and trust me, I totally understand) you should probably have a real person to talk to about this anyway. Possibly even a therapist. At this point, you're so embarrassed by this, and your fears have gotten so solidified, that it is hard for you to get through the movements you need to make to address it and getting help to work through the shame and fear will make it easier for you to fix this problem, which is fixable.

Third, as a veteran of bounced check fees, I say this: stop doing that. Go to your bank's online presence, keep track of your balance every other day or so. Maybe at first, just do it every day. Write down outstanding checks, and keep them written down until they clear. I do this on a Post It. You may prefer a cool iPad app or something. I like paper because it's incredibly flexible, I can write down that I have an outstanding check for $18 and my insurance will be auto-deducted on the 3rd, and that my mom's birthday is on the 7th, and that I have X dollars available. It took me a long time to get like that, but now I'm uneasy if I don't know the financial situation.

Last, you need a budget. You make decent money, and it's likely you need to give yourself an allowance, set up a teensy emergency fund (Sharebuilder's good for this), and if you're doing things like buying your friends drinks, have bought more than two pairs of shoes in the last month, or are paying for water delivery, these things are also things you might want to stop doing so that you can pay down the debt.

Once that's in motion, you can work toward better financial health and think about retirement savings, emergency fund savings, a vacation fund, etc. Take some books on financial health out of the library.

Good luck to you!
posted by A Terrible Llama at 3:23 AM on January 2, 2011 [5 favorites]

I agree with A Terrible Llama that the fear is the lynchpin that's keeping all these patterns in place. You are in the driver's seat of your financial hooptie, you're barreling down the highway at 80mph in heavy traffic, and you're too scared to even look through the windshield and grab the wheel.

Inconceivable as this might seem, I think you need to find some way to make paying attention to your finances and taking responsibility for them feel good. If balancing your checkbook(or even reading about how to do so) makes your skin crawl, then you need to counteract that discomfort with some sort of reinforcement. Do you like Doritos? Great! Buy a bag of Doritos. Open the bag. Stick your nose in the bag, and inhale deeply. Then open your bank statement and unfold the pages. Take ONE chip and eat it. Savor the flavor. Start looking at the statement. Have you really looked at it and focused your eyes so you can read the print? Awesome! Eat another chip. Read the first line. Have you really read it and understood what it means? If yes, then eat another chip. No chip until you totally understand the line you're looking at. No skipping lines, either. Keep chipping (heh) away at your lack of understanding. Keep rewarding yourself for small bits of progress.

Try not to obsess about the depth of the hole you've dug yourself into. Start where you are and begin climbing out. Find some small rewards you can dispense to yourself in real time, while you are actively working at financial tasks. Reward yourself for even the slightest move forward. You can totally do this.
posted by jon1270 at 5:24 AM on January 2, 2011

From the OP:

Thank you so much already! Just having people acknowledge how scary this is means a lot.

Some clarification:

1. I owe (all told) a bit more than half a year's salary.

2. I am paying off a loan on my 401(K), which will be done by the fall.

3. Have not filed taxes.

4. What are some good online budgeting programs? (That are, needless to say, free.)

5. None of the debt is credit card-related.

6. The bigger debt ($25,000) has gone to lawyers. One lawyer ($3,500) has already written my employer to garnish my wages. I don't know about the others ($15,000 and around $2,500, I think). I have thrown out all of the letters.

Should I talk to the first people who are garnishing directly, or should I get a lawyer of my own? I have no money!

And yes, have just begun to address this in therapy.

Thanks again, everyone.

posted by jessamyn at 10:25 AM on January 2, 2011

I have thrown out all of the letters.

I have done stuff like this. In retrospect, I don't know what I was thinking. Maybe I thought I'd vanish off the face of the earth and that would take care of it. Be abducted by aliens. You can hope, but it probably won't happen.

You do have money; it's just going out -- you need support and someone to help you prioritize your debt and think through the steps. Given the circumstances, I think you really want a lawyer. They can help you prioritize the debt and run interference with some of the other legal types who are chasing you around. You need an ally; so I think you should get a recommendation from someone you like and respect at work or personally, and then call the attorney, and they'll talk you through a schedule of fees. Maybe at minimum you could get someone to see you just for a consultation, to draw you a road map of what you need to do.

Spend the money -- you need the expertise -- sometimes in life it's just smart to turn to someone who knows the terrain. Between a therapist and a lawyer you can start taking the baby steps that will someday allow you to look at this period in your life's rear view mirror.
posted by A Terrible Llama at 3:14 PM on January 2, 2011

I want to second everything A Terrible Llama said about the fear factor here being totally legit. You are being very strong here to face up to this pile of debt directly, and don't let anyone tell you otherwise.

Once you get your debt under control you may want to give some thought to how you want to live and think, financially. There is a big difference between the mindset of living paycheck-to-paycheck and living once you have your legs under you. I've seen friends get out of significant debt and then struggle with unexpected emotions that come with suddenly having enough. Also, I find the distinction between 'cheap' and 'frugal' helpful in guiding my purchasing decisions.

As far as online money managing tools, Mint is free and extremely useful. I recommend it as a complement to, not substitute for, reading more about money managing. Also, are you aware that many banks offer alerts? For example, I have my checking account set to text message me if my balance gets below $200.

Blogs: Get Rich Slowly, The Simple Dollar (I recommend starting with the author's story, since he does a great job of analyzing the emotional and cognitive patterns that lead to his financial meltdown and ultimate recovery).

Books: The Money Book for the Young, Fabulous, and Broke has great advice on how to prioritize when you're really broke. Good advice on the drawbacks of declaring bankruptcy too.
posted by squasher at 8:06 PM on January 2, 2011