In debt, trouble paying, what to do?
July 11, 2012 5:05 AM   Subscribe

I'm in debt, behind, and can't afford the minimum payments. I freelance and haven't made enough money to cover expenses for a good while now. Although some recent changes to the way I do business have had a positive impact, I'm still not making enough to pay for said debt on top of my regular expenses, let alone catch up. I'm returning to school soon for a two-year degree that, by all available information, should ultimately lead to a good middle-class income. But until it does, what do I do? Who do I talk to? Do I have options?

In all, my debt is $40,000. My credit card debt is $16,000 total, spread across four cards with APRs ranging from 0%-20%. Minimum payments for all total about $600/mo. I owe $13,000 on my apartment (worth about $90,000) at 6.38% ($260/mo). I owe the IRS $1,300 in taxes at 3% ($26/mo). So, adding those payments to the credit cards: $1100/mo to stay even with debtors. I'm currently behind several car payments ($900) and credit card payments ($1800).

I rent out the co-op apartment I own for $1,000/mo which, after mortgage and maintenance payments, leaves me with $200. I live rent-free for now (this may change when I return to school). isn't playing nice with my bank so I can't really break down my monthly expenditures at the moment; I can very vaguely say I spend an additional $2,000 per month on top of debt payments and maintenance/mortgage.

My credit rating sucks. I'm 37, just married.

A couple thoughts: I don't think giving up freelancing and getting a regular job makes sense right now because business is improving and pays pretty well when it pays, and it will be very helpful to be able to continue that business while in school. I've read a tiny bit about debt consolidation, but I'm scared of going through that process and then not even being able to pay the reduced, consolidated payment...and what then? So...what now? if you want to contact me directly.

Thanks all.
posted by anonymous to Work & Money (12 answers total) 6 users marked this as a favorite
Can you take a second job? You just got married...can your spouse take on some of the payments until your business catches up? Have you called your creditors and asked if they can reduce payments in some way?

There are only so many ways to catch up financially. Either you increase your income (a second job could pay an extra $1,000/month), lower your payments (consolidation, paying off some, deferring some), find extra income somewhere else (spouse, selling things), or declare bankruptcy. It's up to you to decide which path best suits your needs.
posted by xingcat at 5:22 AM on July 11, 2012 [1 favorite]

I agree with above, that a second job (for both you and your spouse potentially since you're in this together) sounds like a good start. There are also all the usual money saving suggestions:
- make a very clear and detailed budget and then STICK TO IT and update and revise it continually. Simply by being mindful of where your money is going is an important step.
- get a roomate (if there is an extra bedroom in your apartment)
- get rid of all non-essential services (cable, home phone, internet, gym memberships, subscriptions, etc)
- don't eat at restuarants. Make all of your own meals and research ways/recipes that make your money stretch as far as possible.
- if you have to keep your car, drive it as little as possible and walk/use public transport instead to reduce gas costs (assuming you've done the math and figured out that public transport actually would be cheaper)
- stop drinking alcohol (this may not apply to you)
- engage in free dates/social outings, instead of going out to dinner or the movies or other expensive things.

Also, a good starting point would be to sit down with your spouse and have both of you, together, go through all your finances, see exactly how much you guys owe, how much you're bringing in, where most of your money is going each month, etc. Both parties need to be on board.
posted by PuppetMcSockerson at 5:41 AM on July 11, 2012

You owe $16k in credit card debt. It's time to seriously think about filing for bankruptcy. There's no realistic way of paying that off unless you were to increase your income by an order of magnitude. You're not likely to do that, so yeah.

You can't get rid of your back taxes that way, and you would probably want to reaffirm the house and car payments, but you can likely make the $16k in credit cards go away immediately. That'd save you $600 a month right there.
posted by valkyryn at 5:45 AM on July 11, 2012

You could sell your co-op and then pay everything off. I think you'd have to be living in your co-op as your primary residence to protect it in bankruptcy, but IANAL.
posted by Ruthless Bunny at 6:17 AM on July 11, 2012

My thoughts were the same as Ruthless Bunny's. If you sell the apartment, you clear maybe $67k. Pay off the credit cards, taxes and the car and you can be debt-free with a substantial chunk of change in the bank, improving credit and the flexibility to move elsewhere if necessary to earn that solid middle-class income you're looking forward to. You need cash. The apartment is strangling you.
posted by jon1270 at 6:46 AM on July 11, 2012 [2 favorites]

Here is some tough love: stop making excuses!

You can’t make a budget because Mint and your bank don’t play nice? Get a piece of paper and a pen and start analyzing! Freelancing is not paying enough but you don’t want to switch to another job because it’s what, not comfortable? Get over it!

You are spending 2K on top of the $1100 of debt payments while you live rent-free? Take a good look at that – what do you spend all that money on?

Check your calculations again: you say you have $600/month minimum pay on credit cards + $260/month for your apartment + $26/month to the IRS. For me it adds up to $886/month. What about the difference to the $1100 you are talking about? How do your missed car payments ($900) and credit card payments ($1800) factor in here?

You rent out the apartment for $1000 – is this a going rate where you live? Could you increase rent (with current or new tenant)? Also how do the $1000 rent -$260 of mortgage leave you with only $200 at the end of the month? Are you really paying $540 in maintenance every single month? Am I missing something?

It might make sense to pay off debt with the high interest rates first and then go for the other debt.

“I'm returning to school soon for a two-year degree that, by all available information, should ultimately lead to a good middle-class income. But until it does, what do I do?“

I urge you to think beyond that point! How do you plan to pay for school? What do you think happens to the 40K in the meantime? What happens/how do you plan to pay for the collective debt (40K+interest rates+ possible new student loans) after you have finished school?

Take agency! It will feel so much better to not have those 40K hanging over your head.
Please consider seeking professional assistance. I don’t know where you are, but there might be free debt advisors /counselors available to you. Here is more info for NYC: Debt advisor/counselor. There are financial empowerment centers in NYC that offer free counseling. More info here.

I know it can seem scary and overwhelming to have all this debt – but please tackle it. Those professionals have heard it all and are there to help you see and set a path! You can do it!
posted by travelwithcats at 6:49 AM on July 11, 2012 [8 favorites]

I can very vaguely say I spend an additional $2,000 per month on top of debt payments and maintenance/mortgage.

1- Seems to me that you have a spending problem more than you have a revenue problem. You have over $3000 to play with every month, and you can't make your minimums?

2- Nobody is going to let you file for bankruptcy with that kind of cash flow and that kind of assets.

3- Figure out where your money is going and plug the holes.

4- Figure out whether the business is actually paying you. I have a family member who was in a similar situation, who did not want to find out that his business wasn't making a profit, so he kept doing things like it sounds like you are doing: paying costs with credit, calling revenue profit and ignorantly saying he was making tons of money.

When you go to school, will you be able to live in your apartment/co-op? No? Sell it! Sell it now! Pay off your debt, start from scratch.
posted by gjc at 7:05 AM on July 11, 2012 [4 favorites]

Pick up a copy of "How to get out of debt, stay out of debt, and live prosperously". You might be able to find it at a library. There are also lots of books on living frugally, such as "How to survive without a salary" and "The tightwad gazette".

Work on trying to cut your living expenses. The numbers you list sound like a high-ish income to me with substantial assets. Work on getting expenses down and changing your lifestyle so they stay down.

If possible, credit card surf. If you can move all credit card debt to a zero interest card, it will reduce yoru monthly payments, reduce real costs by eliminating interest for a time, and the month you move the debt it will free up cash flow because it will be viewed as "payment" by one credit card company while not actually coming out of your bank account. You could also look into debt consolidation.

If you are going back to school, you might be able to get a student loan and use that to restructure some of your debt. Upside: You typically have no payment while in school, interest is typically reasonable, payments are typically reasonable. Downside: Student loans cannot be discharged by a bankruptcy. If you are considering bankruptcy, do not go this route.

Once things are more under control, start working on paying down debt. Start with your highest interest rate debt. As one loan gets paid off, take the freed up cashflow and apply to the next loan. Repeat until they are gone.

The first book I mentioned will have a lot more advice on how to call your creditors and work something out. With my latest financial drama, I have spent the last two days on the phone explaining my mess and trying to do damage control. Everyone cooperated with me. As one person said: "We can't take what you don't have. I will work with you." I have agreements of various sorts concerning three loans. Even if I don't commit bankruptcy, my mess will eventually be cleaned up. It's just going slow.
posted by Michele in California at 8:42 AM on July 11, 2012

I would caution against using student loan money to pay off other debts. Doing this would replace dischargeable debt with non-dischargeable debt.

If you do that, only do it with Federal loans that qualify for income-based repayment schemes. Otherwise, you may be caught in a situation where death or crippling disability are the only options instead of bankruptcy.
posted by Hollywood Upstairs Medical College at 9:39 AM on July 11, 2012 [3 favorites]

Nobody is going to let you file for bankruptcy with that kind of cash flow and that kind of assets.

Not true. Chapter 13 is specifically for people with assets AND cash flow.

That said, the FIRST STEP should be a session with a qualified credit counselor. Do NOT use the phone book! The basic way this works is they set up a plan and budget for you to pay off your debts in 60 months or less, and then you need to stick to it. If and ONLY if you can't do it this way, you may qualify for bankruptcy, which would allow for e.g. the unsecured consumer credit to be discharged and paid off at less than 100% (possibly as low as 0%).

So find out what your situation is from a qualified agency, then choose between that plan and doing it yourself if it seems possible (and I'm guessing for you it may be).
posted by dhartung at 12:42 PM on July 11, 2012

I wouldn't recommend bankruptcy in your case: you could probably qualify, but in five years you will be asking us this question again. If you take care of your spending problems you will be better off.
posted by twblalock at 1:28 PM on July 11, 2012 [1 favorite]

OK, I'm confused about a couple of things.

1. You're spending $2000 a month AFTER housing costs and debt service? On what? (You really need to look at this first. Screw Mint and go directly to the bank website.)

2. You rent out your condo for $1000, and your mortgage is $260, but this only nets you $200? Is the maintenance fee that expensive? (Can any of it be assessed to the renters when they re-up the lease?)

3. You're working on paying off the 20% APR credit card first, right? And not using it anymore, right?
posted by moammargaret at 3:16 PM on July 11, 2012

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