Chapter 4

The Great American Lie

Having a lot of consumer debt is the single most wealth-destroying mistake you can make because the compound interest you pay destroys your future even as you sleep. It's the turnpike to Financial Hell. Getting into consumer debt has demolished the futures of millions of people, because it's so easy to do. Merchants all around you will gladly loan you money to buy cars, furniture, vacation cabins, cruises, designer clothes, computers, appliances, cruises, jewelry, video cameras, home entertainment centers, motor homes, expensive dinners at fine restaurants. Anything the mind can conceive that you don't really need and can't really afford can be financed or put on a credit card; it's a kind of sweet slavery.

LIAR, LIAR, PANTS ON FIRE!

And it's a terrible threat to America! Why? Because our whole economy is built on a lie. Millions upon millions of people are big liars, only pretending to be rich. Maybe you envy them because they have two late-model cars, a big house, kids in college, a ski boat in the driveway, a home theater, two or three of the latest upgraded computers, and maybe even season tickets for major-league professional sports, at $50 to $200 per seat per game. And you can't tell the liars from the honest people by the medallions on their cars or the size of their houses. All that probably tells you is how far they are in debt. The truth is that they don't really own all that stuff; anonymous lenders own it. And sooner or later, all liars eventually get caught. In this case, they will be exposed for what they are if (or when) the economy really turns sour and they lose their jobs, their businesses fall on hard times, their investment portfolios take a dive, or their pension plans come up short. The liars' biggest enemy is a recession—or, Heaven help us all—a depression, because it rips away the facade and reveals the empty shell inside. Most of these liars are only one or two paychecks away from bankruptcy. Collectively, they have created the biggest bubble in human history—the debt bubble. Maybe we should rename it the liars' bubble.

DOES POLLYANNA HAVE A POINT?

“So what's so bad about debt?” I hear you Pollyannas say. “After all, it enables me to live as if I were rich, and it keeps the wheels of commerce turning. Without credit, I wouldn't own a nice late-model Lexus, a ski boat, a big-screen TV, and our lovely home in a nice neighborhood. Debt enables my family to have a much better life while we are young enough to enjoy it.”

That's the seductive siren call of debt, and it seems to work out fine as long as the economy is moving upward so we have our jobs, our income continues to grow, our employer remains secure and solvent, there are no major health emergencies so we can't work, we don't get a divorce, and the present prosperity lasts indefinitely into the future.

But there are some growing clouds on the horizon. Millions of Americans are beginning to worry about their debts and are calling companies that have sprung up like weeds that claim to help worried people deal with their debts. Even worse, bankruptcies have been setting new records every quarter, starting in the last two allegedly prosperous Clinton quarters, and the pace is accelerating. Millions of people are right on the edge of catastrophe, and living lives of quiet desperation.

Soaring debt has made us obscenely vulnerable if a recession or depression shatters our dreams of solvency, or if our appetites get bigger than our incomes can support. Enough people getting collectively in financial trouble will cause a debt implosion that will destroy the balance sheets of America's biggest banks and corporations that loaned them the money. And that's exactly what will happen when a recession becomes deep enough that millions of people lose their jobs, find they can't make their monthly payments, and finally file for bankruptcy. Millions of apparently prosperous families are so overextended that being out of work for only two or three months means the end of the big lie. When someone files for bankruptcy, an asset (their debt) is wiped out of some lender's balance sheet, and another chunk of America's wealth disappears as though it had never existed. A major debt implosion will be as deflationary as the Depression of the 1930s; wealth will disappear along with its purchasing power, the money supply will shrink, and lines may again be forming at Salvation Army soup kitchens.

For many years we have nurtured the delusion that the prosperous and dependable present will remain prosperous and dependable forever. As Neal A. Maxwell has said, “Too many of us seem to expect that life will flow ever smoothly, featuring an unbroken chain of green lights with empty parking places just in front of our destinations.” History tells us that is an impossible dream. Every 50 to 70 years we have to live through a depression, and the last one began more than 70 years ago. All it takes to create a depression is for a recession to get deep enough to trigger mass layoffs and personal and corporate bankruptcies, taking our corporate dominoes and overextended consumers—first one by one, then by the millions. As this is written, despite apparent good times, we are flirting with such a depression, although I hope with all my heart that we can stave it off.

The bottom line? Corporate and personal consumer debt has created an increasingly vulnerable society as tens of millions of fragile balance sheets are built on an increasingly shaky foundation of consumer debt.

So why do we voluntarily rush to create and submit to such dangerous chains? Because these chains are like a tree that bears bittersweet fruit, even though the bitter usually lives on long after the sweet is history. This fruit is the by-product of a near universal human tendency—the craving for instant gratification.

RUFF'S RULES OF DEBT MANAGEMENT

Out of my own painful experience and the observed experience of others, over the years I have evolved Ruff's Rules of Debt Management to help you fight off this most seductive and carnivorous temptation and convert it into positive cash flow, earned compound interest, and a growing estate, thereby insulating yourself from the coming debt bubble implosion.

Ask yourself an honest question: If your regular paycheck was cut off for one, two, or three months, would you be in trouble? Are you really sure your monthly income would never be in danger? Do you really know your employer isn't another Enron, WorldCom, or United Airlines? Are you positive your pension plan is fully funded and earning enough money on its portfolio to stay solvent when the stock market is imploding and banks are paying 1 percent interest?

Even if there is no universal catastrophe, many of you are already sweating over your debts and considering a little of the hair of the dog that bit you. Maybe you are thinking of borrowing to the hilt against your home equity to maintain your standard of living, thereby increasing your debt total and turning an asset that should be your ultimate security into a bigger dagger aimed at your heart. Or possibly you have borrowed from relatives or friends, transferring your risks to them. Maybe you are only one or two missed paychecks away from bankruptcy.

According to government statistics, consumer spending is now exceeding income, and as the gap can only be bridged by more borrowing, total debt is growing much faster than the economy. I forecasted in early 2000, long before the bombing of the World Trade Center, that we were sliding into a deep recession or depression, which would have happened even without the New York catastrophe. Company after company was already laying off thousands of workers, and job security was slipping away at an accelerating pace. But conversely—and perhaps perversely—even in the face of that painfully obvious economic slowdown, in late 2003 Americans are still blithely borrowing to buy cars and big appliances, the Fed is pumping up the money supply and cutting interest rates to keep the credit ball rolling, and Wall Street remains mindlessly optimistic, just as it did between 1929 and 1932 as the world slid inexorably into the abyss of the Great Depression. Debt is so much a part of the national psyche that, perversely, the monetary powers that be look on rising consumer debt as a “positive indicator,” and we have to run faster as a nation just to stay in place.

Let's face it, the old-fogy national philosophical and moral debate about debt is over, and instant gratification has won. In the wake of the World Trade Center bombing, we were even told that borrowing and consuming was “a patriotic duty.” If we don't keep borrowing and spending, “the terrorists have won.” What madness!

Let's look at some data so you can see if you have been as foolish as your neighbors.

MEASURING UP

• The average household has as many as five credit cards with an average balance of $4,000 each, at an average interest rate of 18.9 percent or more. That means that if you are that hypothetical average American, you pay at least an average of $756 in interest every year per card. If you make the minimum monthly payment, it will take you 41 years to pay it off. You will pay more than $12,000 in interest per card, three times your original principal balance. The typical minimum monthly payment is 90 percent interest and 10 percent principal.
• If you didn't have average credit-card payments starting at $80 per month, and instead invested that money every month in an 8 percent tax-free savings plan (such as an IRA) for 40 years, you would retire with $151,000 in the bank. At 6 percent it would total $78,000. So credit cards not only cost you thousands of dollars in interest, they also keep you from building a retirement estate earning compound interest every day, every hour, every minute. Those payments not only hurt you now, they destroy your future. Rather than giving your money to the credit-card company for the rest of your life, here is another opportunity to avoid the middleman and flush your money down the toilet.
• Americans paid out approximately $65 billion in compound interest in the year 2000, and despite the highly touted, alleged Clinton prosperity, a record 1.3 million Americans filed for bankruptcy, wiping out untold billions of dollars in lenders' balance sheets. That figure rose sharply in 2001 and 2002. If that has happened in good times, imagine what would happen in a really deep recession!
• The credit-card debt bubble may be deflating as I write, because payment delinquencies are rising. In the second quarter of 2001, they rose one-third above the delinquency rate for the first quarter. In fact, delinquencies are at the highest rate since the government began tracking them in 1980.

We are suffering from a national infantile inability to postpone gratification. I remember seeing a sign of the times in a roadside diner in Arkansas that read, “Lord, give me the gift of patience, and I want it right now!” It's become the American way.

Following are the seven rules I have evolved over the years to keep you out of consumer debt trouble.

1. Borrow only to buy a home and one car, and in an emergency to replace a leaky roof or a necessary appliance, such as a washer or refrigerator, or perhaps for an education. Pay cash for everything else, or do without. Most homebuyers buy the biggest house the mortgage broker says they can afford based on the mortgage payment, and it's usually a lot more house than they really need. Less is more if you are trying to accumulate an investment stake. Also, the smaller it is, the sooner it will be paid off.
2. Use cheap mortgage debt only to pay off expensive consumer debt. I express this principle like porcupines making love—very carefully! If you have 18 to 24 percent nondeductible interest credit card or charge account balances, refinancing or taking out a home equity loan with 5 percent or less tax-deductible interest and paying off the credit card balances makes a lot of sense, depending on what you do with the money. If you use it to buy big-ticket consumer items like a more expensive car or a European vacation—or even worse, as a down payment to buy something you don't really need, incurring even more debt—it's a really lousy idea. More about this later. Use mortgage debt to pay off your high-interest debt, thus slashing your monthly outgo and freeing up money every month to add to your wealth accumulation stash and maximize the power of compounding in your life. This is one of the smartest things you can do. Paying off your home mortgage should be your ultimate goal, although it is the last debt you will liquidate. This is a very old-fashioned idea. Six decades ago when I was a kid, I remember being at my Aunt Erva and Uncle Earl's mortgage-burning party. Mortgage burners are an endangered species, and it's a lot easier to reach that goal if you have a more modest house.
3. You need one good new or late-model car that you intend to drive until you have to shoot it to put it out of its misery. Unfortunately, a luxury car can be like a boat, which is a hole in the water into which you throw money. A BMW, a Lexus, or a Mercedes is nothing but a money-eating ego trip. If you buy a new car, prepare yourself mentally and emotionally to drive it at least 5 to 10 years. It will still get you from here to there sitting down in relative air-conditioned comfort, if you baby it. I love my seven-year-old town car when I'm on the interstate. If you start craving a new car, don't yield! Buy a lovely used car that is at least two to three years old. By the third year it will be about 40 percent cheaper than when it was new. I recently bought a two-year-old Yukon Denali for cash and saved about $18,000.
4. Seriously consider trying to get along with just one car. Just the money you save on insurance, if invested in safe, interest-bearing instruments, could mean as much as several hundred thousand dollars at retirement time. If you really need a second car—which can be a necessity for a young suburban couple with children—buy an older car for Dad to drive to work, preferably one you can pay cash for or at least pay off in no more than a year, then let Mom drive the newer family car.
5. Not all debt is bad; in fact, you will discover in Chapter 15 that the Really Rich are often heavily in debt. Borrowed money is an essential tool if you want to become rich, so it's not just okay to borrow to fund a new business or to buy income-producing assets, it's an essential tool on the way to real riches. But there is one fundamental rule: Only borrow if the borrowed money when put to work will produce enough dependable cash flow to service the debt from day one, so the debt will be self-liquidating. Then, when it is paid off, you will be left with more assets and no debt. When Ted Turner was asked how rich he was, he said, “I must be really rich, because I owe a lot of money.” He built CNN, TNT, and TBS with borrowed money.
6. The most urgent short-term goal of your newfound frugality is to accumulate cash equal to six months of contractual obligations and living expenses, such as mortgage payments and living expenses like food and other real necessities. That way, if you lose your income stream for any reason, you can still pay your bills.
7. Get rid of your debts as fast as possible so you can redirect your former compound-interest-paying payments into compound-interest-earning investments.

A STRATEGY TO EMULATE

There's a couple I've known for several years. (I've concealed their identity at their request to protect their privacy.) The husband is employed by a company whose stock was red-hot during the bull market, and they had both stock and options. After a lot of prayer and soul-searching discussion, they took the counsel of their church leaders, liquidated their stock holdings, and paid off their house. Free of mortgage payments, they were now liquid with money in the bank, and were able to help when a relative became unemployed. They are very secure and happy with their newfound freedom from the tyranny of debt.

Their decision to sell their stock earned them the derision of the husband's coworkers during the hot stock market of the late 1990s, but after the high-tech stock collapse of 2000, the stock they sold is now worth a fraction of what it was when they liquidated. They managed to turn a paper asset into real wealth before the fickle stock market swept away their phantom profits.

“THOU SHALT NOT COVET”

Most, if not all, of humanity's ills are because of our failure to obey the Ten Commandments. We can all agree we shouldn't lie, steal, or kill, we should honor our parents, and so on. But why is there a prohibition against coveting among God's Top Ten, and what does this have to do with debt?

In modern times, to covet means to want something you can't or shouldn't buy just because your neighbors have one, and it is the root of irresponsible borrowing. Drive down any street in an upper-middle-class or wealthy part of town and look at the boats, cars, and big houses. I'll bet you anything that not more than 1 in 25 of these households is free of consumer debt and that many of them are sweating bullets over their monthly bills. Even so, you covet what they have. The irony is that you will be judging their apparent wealth not by how much they earn, but by how much they are in debt.

It's an almost self-evident truism that expenditures rise to meet income, no matter how much money you make. Even though you are probably already worried that there will be too much month left at the end of your money, when Jones has a new boat in his driveway you want one too. Jones gets a new Mercedes, so you trade in your two-year-old Ford for an Audi or a Lexus. Jones and his wife go on a vacation to the Caribbean, so you use your credit card to cruise the Baltic or the Mediterranean or Alaska. You mortgage your future to keep up with the Joneses. You covet!

It all seems harmless as long as your income is rising or stable and you can make your payments, but servicing as much as $70,000 to $100,000 in high-interest credit-card debt, as many big fat liars do, will cost you as much as $20,000 a year in interest and many hundreds of thousands of dollars at retirement time. You are a slave to those cards and charge accounts because your future revenue stream is no longer yours.

Also, this only works as long as we remain upwardly mobile as a society. In the last 16 years, millions have benefited from steadily rising incomes, which also has meant expanding lines of credit. We have accepted the credit card offers that stuff our mailboxes and used that expensive credit (18 to 27 percent, after the low “introductory rate” that sucked us in) to maintain an artificial standard of living better than the one we would otherwise have had. In some instances, when we have eaten up all of our current income with debt payments, we use our credit cards just to buy necessities. I am appalled and astounded to see how many people at the supermarket swipe their credit cards to pay for their groceries. I can only hope they are using a debit card or will pay off the bill in full when it comes due, but that's not the way to bet.

Today most newlywed couples start their married life heavily in debt with a house that's better than the one Kay and I had after two decades of marriage. They also drive two nice cars. Debt has become their American way of life, so deeply embedded that it is a negative economic indicator when people stop borrowing. The Fed accommodates by keeping interest rates low enough that people can qualify for bigger loans and buy bigger houses, bigger cars, bigger TVs, and home theaters.

Like most sins, the bill for covetousness (the monthly payment) keeps being presented month after month, long after you have committed the sin. I would suggest you repent of your covetousness.

LIQUIDATING DEBT

What I have suggested so far may be easier said than done. How do you get off the turnpike to Financial Hell by converting debt payments into investible cash flow, short of bankruptcy? Several ways. The following strategies should become part of your family life, mutually agreed on. Include the kids in the decision making, because this financial plan will affect them.

• Don't incur any new debt. The first step is to draw a line in the sand, say, “No new debt,” and mean it. At least you are not digging a bigger hole for yourself. If you can't or won't do that, all bets are off. You should do what our youngest daughter, Terri Lynn (age 20), did. She realized that her paycheck was being eaten alive by credit-card and charge-account payments, and she was becoming increasingly addicted to impulse buying because her cards made it so easy. So last Christmas when she was home for the holidays, she gave us her cards. She, like many of her contemporaries, was becoming like the alcoholic who foolishly keeps beer in the refrigerator, and a radical plastic-ectomy (or plastic splurgery) was the only sure way out.
• Look your debts in the eye. Most people don't. Add up all your credit card balances and monthly interest charges and face reality to bolster your resolve. Organize them with the highest-interest-rate debts at the top to set your debt reduction priorities.
• First pay off the debts with the highest interest rates, starting with the smallest total balance. This is almost always your credit cards. You should pay more than the minimum payment on those you're targeting. The added amount will almost always be principal, and as the principal is paid down, a smaller and smaller portion of each payment will be interest. Pay only the minimum payment on your lowest-rate cards until the more expensive ones are paid off.
• Economize, and apply the savings to an accelerated repayment schedule. Go to cheaper restaurants, movies, and vacations. Get a cheaper car. I am not asking you to take a vow of poverty or make huge sacrifices, but $10 here and $20 there a few times a month can make a huge difference over time. Don't think of these things as sacrifices; take righteous pride in sticking with your program and glory in your shrinking debt and your growing nest egg. Resolve that you will use your credit cards only for essentials, such as travel, hotels, and business expenses, and pay them off in full as soon as you get the bill. Even get a debit card from your bank.
• As a temporary expedient, get a new credit card with a low introductory interest rate and transfer your balance from your high-interest-rate cards to the new card so you can pay off the principal balance faster. Just make sure that the introductory rate lasts long enough to pay off your balance, or that the eventual increased rate is no worse than the one for the old card.
• Consider a debt-consolidation loan, but only if you have drawn that line in the sand and the consolidation loan carries a much lower interest rate. The ones offered by finance companies never do. Home-equity loans are usually the best.
• As each debt is paid off, apply the freed-up cash to an accelerated payment schedule on your other debts. Once they are all paid off, immediately start investing the monthly cash flow savings every month to earn compound interest.
• Give yourself a few rewards along the way. You might decide to devote some part (definitely not all) of the money you are saving as you eliminate installment payments in a modest, family-approved reward; perhaps a short vacation, or a new dog, or... well, I'll let you think of the possibilities. Just make sure you get right back on the program.
• Consider selling your home and buying a smaller one, preferably in a lower-cost area. That's what Kay and I did when we moved from Utah County, Utah, to Washington, Utah, where we live now. It's only a 3½-hour drive from the family and a lot more house for a lot less money. That will produce a big chunk of cash right away and some positive monthly cash flow to invest prudently and compound safely or to swing for the fences in the markets when the time is right. Smaller doesn't have to mean worse: $500,000 in capital gains on the sale of a principal residence is tax-exempt every two years ($250,000 for singles). You can buy a more modest home, pay off your credit cards, and add the remainder to your compound-interest-earning nest egg.

PROFESSIONAL HELP: YOU DON'T HAVE TO GO IT ALONE

As the tide of consumer debt and consumer bankruptcies has risen ever since the late 1990s, you may have seen and heard a flood of radio and TV ads from “non-profit” corporations offering debt relief. The headlines scream: “Reduce Your Debt Payments by up to 50 Percent,” “Slash Your Interest Rates to as Low as 0 Percent,” “Stop Harassing Calls from Creditors,” “Eliminate Your Debts in the Time,” “Eliminate Late Fees and Over-Limit Fees,” “No Loans Necessary,” and “Past Credit Problems Are Not a Problem for Us.” The organizations that make these claims are “credit-counseling companies,” sometimes identified as such by name. They first sprang up in the 1970s, and now there are thousands of them—mostly “nonprofits,” which doesn't necessarily mean they aren't designed to be profitable. It just means that profits aren't distributed to shareholders as dividends, but are paid out to managers and key employees in the form of high salaries or bonuses. Actually, these companies are immensely profitable. The term nonprofit, while an accurate legal description of their tax status, is really a stroke of PR genius for them, as customers flock to them, thinking they only have their best interests at heart, with no concern for profits. Not so!

The good news is that the reputable companies in this industry can usually make good on these claimed benefits, but the bad news is that much more often than not, your good credit will be seriously damaged, if it isn't already trashed. If your debt troubles are so bad that your credit score is already trash, you may have nothing to lose.

The bottom line? These plans are very helpful to some, but a big mistake for others. Let me explain.

The Good Side of the Coin

If you are already way behind on your payments, if your credit score would gag a maggot, or if bankruptcy appears to be your only other option, a good credit-counseling company can help you get out of debt much faster than you could on your own and keep you out of bankruptcy. There can be some very real benefits:

• Lower monthly payments. These companies can renegotiate your monthly payments down to about 2.2 percent of your balance owing. (If your payment is already this low, that is unlikely.)
• Reduced interest rates. In most cases a lender wouldn't even consider renegotiating your interest rate (or anything else) with you, but the credit-counseling industry has already pre-negotiated such deals with the big lenders, and can easily make deals that you couldn't that will mean huge interest savings for you.
• They can manage your “rollups.” This means not reducing the total amount that you apply to your debt reduction program as each debt is paid off, but instead applying the newly freed-up cash to one of the remaining debts to pay it off much faster. While in theory you could do this yourself, the credit-counseling company will rightly point out that nearly all of those who try this on their own fail to follow through to the end.
• They can “re-age” your accounts. This eliminates late fees and over-limit fees, which can be as much as $60 a month, until you are completely current on your originally agreed-upon schedule.

The Bad Side of the Coin

There are some very serious disadvantages to going with a credit-counseling company:

• Credit-counseling companies can only work with your unsecured creditors, such as credit cards, finance companies, old medical bills, old utility bills, or other unsecured debts that have been sent to collection. They cannot help you with mortgages, car loans, boat loans, or other secured debts.
• They will trash your credit. Most of your creditors will report to the credit bureaus that you are “not paying according to terms” or that your debt is “being paid by a third party.” This will cause most, if not all, of your creditors to close your accounts. This is not necessarily all bad because it will help you make good on your commitment to stop adding new debt. But if you need a credit card for business travel for hotels and car rentals, it could pose a problem. And if you ever need to move, it will be nearly impossible to get decent terms on a mortgage for your new home.
• Their ability to legally re-age your accounts will not usually become effective until you have consistently made your payment to them for several months.
• Credit-counseling fees can vary widely. Up-front set-up fees average around $200 to $400 but range from zero (or voluntary) to over $1,000. Many require you to pay the company your next monthly payment as a set-up fee while they skip a payment to your creditors during the renegotiation month. Sometimes this is not disclosed up front. Monthly fees can be as low as $20 a month or as high as $100 a month. These companies derive some of their compensation from a commission, called fair share, paid by the lenders, that averages about 8 percent of each monthly payment.
• On the positive side, the credit-counseling industry has been a win-win deal for lenders and borrowers. The borrower gets out of debt, and many unsecured debts have been paid in full (with reduced interest) when they might have been discharged in bankruptcy. The debtor can also preserve his or her personal integrity in honoring his or her financial obligations.

But don't choose credit counseling unless your credit is already trashed and you have little or nothing to lose!

Debt Settlement Companies—Aggressive Debt Retirement on a Faster Track

There is another class of companies, called debt settlement companies, that help you eliminate your unsecured debt more aggressively; the only faster way is bankruptcy. They can lower your payments more than credit-counseling companies and usually promise to eliminate your unsecured debt in a short 24 to 36 months. The downside is that the damage to your credit is significantly worse than with credit counseling.

Here is how debt settlement companies operate: You send your new lower monthly payments to the debt settlement company. Instead of sending it on to your creditors, they let it accumulate for several months. Then they start negotiations to settle with your creditor for approximately 20 cents on the dollar and keep working at it until each of your debts is settled. They charge you about 40 percent of the savings that they negotiate for you. They usually keep your first two payments as a retainer against the fees they will charge you.

The downside is that your creditors will usually not cooperate with them. They will continue to press you for the full amount of your obligation and they will proceed with judgments against you, which will be devastating to your credit—sometimes worse than a bankruptcy. Avoid debt settlement companies at all costs!

Debt Plans for the Creditworthy—By Far Your Best Choice

A few companies offer comprehensive debt plans that have no negative impact on your good credit, and can get you out of debt, including your mortgage, in nine years or less! They are by far the best choice if you have a mortgage, at least $15,000 in nonmortgage debts, still have good credit, are a homeowner, and have some equity. Some of them start off with a debt consolidation loan against your home, while others simply manage your existing debts. If you have a lot of debt, these debt plans will save you tens of thousands of dollars in interest (as much as $100,000) and have you completely debt-free (including your mortgage and other secured debts) in less than 10 years. You make one monthly payment to them and they implement a roll-up plan that eliminates all of your debts in the most efficient manner possible. Setup fees range from $3,500 to more than $9,000, which is usually not out of pocket, and monthly fees range from $20 to $100 per month. Since the typical savings on one of these plans usually exceeds $100,000, the cost turns out to be a tiny percentage of the savings. It can be well worth the fees to have professionals handle the whole program for you. This will not increase your monthly outgo.

The company I am most familiar with is No More Mortgage, founded by my son Larry. In the interest of full disclosure, I do have a financial interest. I am such a passionate believer in this concept that I loaned the company some money and serve as chairman of the board.

When you call the company, the first thing they will do for you, even before you commit to them, is give you a comprehensive, personalized seven-page debt analysis of your individual situation generated from the information you give them over the phone. You can see a specimen of a typical debt plan on their Web site at www.nomoremortgage.com, which illustrates how the plan will work, how much you will save, and when each debt will be paid off. It will also show you how to transform your debt into retirement wealth. Your personal plan will project your financial status 20 years from now compared with the results of the track you are currently on. The typical client's 20-year window can change from $100,000 in debt if they do nothing to $200,000 in the bank and growing when they take advantage of the plan.

No More Mortgage's fees are the lowest in the industry, and if you decide to proceed, you will also receive a comprehensive financial education in the form of a Money Mastery Financial Kit, complete with videotapes and workbooks and a monthly newsletter to help you stay on track. Next, the company will arrange the most advantageous financing for a debt consolidation loan to save you the maximum amount of interest and get you completely free of debt the fastest. This may be a low-interest refinancing of your home or a low-interest home equity loan. The proceeds will be applied to your debts. Set-up fees are based on a small percentage of what the company will save you and come out of the proceeds of the loan at escrow, meaning there will be no out-of-pocket costs.

Then the company will manage your payment schedule with a monthly draft from your bank account. Your funds are protected by a bonded third-party administrator who disburses the debt payments and provides a monthly statement showing the progress of the debt elimination plan and an annual summary, complete with an audit of each of your creditor statements to ensure you have not been overcharged by a creditor. (The FDIC has reported that interest miscalculation by creditors has caused debtors more than $8 billion in overcharges.)

Perhaps the greatest value to you is that No More Mortgage stays with you until you are completely debt-free, and you can call them anytime for financial advice. If you relocate, replace a vehicle, or add to or restructure your debts, they will make appropriate adjustments to your plan with no additional fees. They will also help you to take advantage of your improved credit scores by lowering your interest rate, shortening the time it will take you to be debt-free.

The best thing about the plan is that it has no bad effect on your credit because it does not involve any negotiation with creditors. There is no out-of-pocket expense or increased monthly payments. If there is such a thing as financial salvation, assuming you have some home equity and your credit is not thoroughly trashed, this is it!

BIWEEKLY MORTGAGE PLANS

Biweekly mortgage plans focus on your first mortgage only. Instead of making your usual mortgage payment of, say, $1,000 per month, you pay $500 every two weeks. This results in 26 half payments each year, which is the equivalent of 13 full payments each year. I know this is hard to believe, but this extra payment each year usually results in the mortgage being paid off in about half of the normal time and results in savings of tens of thousands of dollars in interest, because the extra payments are applied to your principal, thus steadily reducing your interest. If you are paid biweekly, such as every other Friday, this program can be ideal. If you are paid twice a month, budgeting is a lot harder. You can do this yourself or work with a management company. Set-up fees range from $250 to $3,500. Monthly fees range from $20 to $40. These plans are also available from No More Mortgage.

DO-IT-YOURSELF DEBT PLANS

But, couldn't you do all of this on your own, eliminating the fees that the companies charge? Sure you could, but few of us have the discipline or the know-how to follow through on our own, month after month and year after year. It is too easy for the initial resolve to be honored for a while and then for the discipline to fall apart when “things come up.” Things always come up—car repairs, Christmas, weddings, veterinary bills, clothes, and other nonbudgeted items. If you have tried and failed before, the external discipline of a good plan with a good company is more than worth the investment. If, however, you decide to go it on your own, here are some suggestions:

• Stop adding new debt right now. A firm resolve from both you and your spouse is essential.
• Start off with a realistic budget, one that you can really live with. If it is not realistic, you will soon find a way to undermine it. Don't forget to include in your monthly budget the things that come up annually, like Christmas, tires, car repairs, car registration, birthdays, wedding gifts, family vacations, honeymoon trips, prescriptions, insurance premiums, and so on. Realistically estimate these expenses on an annual basis, divide that number by 12, add it to your monthly expenses, and then set the money aside in a savings account every month without fail.
• Apply at least the same amount to your debts every single month, adding to it as debts are eliminated, freeing up some cash flow, until you are completely debt-free. Never decrease this amount because one of your debts is paid off.
• Do not count on future windfalls to wipe out your debts. Anytime you experience a modest windfall, apply at least half of it to your debts and enjoy the rest. Consistency wins this race, and trying to go too fast can soon undermine the discipline of consistency.
• Target smaller debts first for early payoff, even if they are not the ones with the highest interest rates. There are two reasons: First, it gives you an emotional boost every time a debt is paid off; and second, when you pay off a debt, there is more money every month to apply to other debts or to give you a bigger margin of financial safety. The bigger your margin, the more easily you can withstand an unexpected financial emergency by lowering your debt payments if you absolutely have to.
• As you pay off each debt, consistently add the newfound money to the highest-interest-rate debts first. Work from the top down—highest interest rate down to the lowest. Your shortest path to becoming debt-free is to target the highest-interest debt for early payoff.

HOME EQUITY LOANS AND REFINANCING

All of this new thinking will inevitably bring you to the question of whether or not you should take out a home-equity debt-consolidation loan or refinance your home. There are several advantages to doing so:

• This is the only kind of loan where the interest is tax-deductible. For example, if you are in the 30 percent tax bracket, you will save in taxes 30 percent of the amount you pay in interest on that loan.
• This type of loan will carry a much smaller interest rate than your credit-card balances and charge accounts, so you could use the proceeds to pay off those debts and immediately cut your monthly overhead.

But there are some avoidable booby traps here. Home-equity loans are usually stretched out over a much longer time than the old debts. You should insist on no prepayment penalty, then, as each old debt is paid off, start immediately applying the old payment to another debt and pay it off sooner. Work down from the highest interest rate to the lowest, and your mortgage(s) will be the last paid off.

A Test of Character

The biggest booby trap in home equity loans has a lot to do with character.

First, you will be sorely tempted to abandon your debt-reduction program when the home-equity loan eases the pressure of the old debts. Only do it as part of your total debt-elimination program. Second, I have a visceral fear of further encumbering my castle. It is my security blanket, and I might start thinking of it as my cash cow. Borrowing against your home should be done like porcupines making love—very carefully. Make it a critical part of your debt elimination plan, and use any cash proceeds only to pay down other higher-interest-rate debts. It's also an emotional security decision. You will have to decide that for yourself.

There is competent professional help for debtors, but this burgeoning industry is loaded with booby traps. At a minimum, check them out with the Better Business Bureau (BBB) at bbb.org. Proceed with extreme caution into your debt-free future; there is a brighter day ahead.

Many readers just don't have the mental and emotional discipline or knowledge to carry out a long-term debt reduction program, so they need some professional help to see that they really do it. Do not despair, because the professionals can help you do just that. Some are very helpful to those who are way behind in their payments with ruined credit. Others can be really helpful to those who still have good credit and are current in their obligations, but have taken my message to heart and want to get rid of their consumer debt to get off the turnpike to Financial Hell.

BANKRUPTCY

Bankruptcy is a last-resort strategy. You may have borrowed yourself into insolvency, your debts may far exceed your income and/or assets, and many of the things you bought may be depreciating faster than you are paying for them. If the recession comes to roost on your doorstep, you may lose your income and be unable to meet all of your monthly payments without a desperate juggling act, like using your high-rate MasterCard® to pay off your high-rate Visa®.

In Great Britain before our revolution, if you owed money and couldn't pay it as agreed, you would be put into debtor's prison. Finally the government figured out that people in jail couldn't make any money to pay their debts, so America created the bankruptcy laws that say if you can't pay your debts, society will give you a chance to legally get rid of them and start over. There are two types of bankruptcy for individuals:

• Chapter 13 of the Federal Bankruptcy Code allows you to work out a plan to pay your creditors because you think you can do it. These plans are more complex and require the approval of all your creditors.
• Chapter 7 of the Code is your most realistic bankruptcy option. It says that if you can't or don't want to pay your debts as agreed, you can wipe them out and start over. Another name for this is “stiffing your creditors,” and it has a devastating impact on your credit rating. However, there are legitimate times, either because of past indiscretions or circumstances beyond your control (such as the loss of a job or the failure of a business) when you simply can't meet these obligations. As this is written, there is a bill before Congress that will change the bankruptcy laws to make it harder to cancel your consumer debts. Lobbying by lenders paid off for them big time.

What about the morality of stiffing your creditors? Bankruptcy has only one moral use: Rather than spending your life fighting off creditors and going nowhere on your comeback road, you can ethically use the bankruptcy laws as a temporary shield between you and them while you rebuild your wealth, with the goal of eventually paying them back. After all, it's hard to make forward progress with your eyes on the rearview mirror.

I filed bankruptcy back in 1968 when my speed-reading franchise was abruptly canceled and I was left with no income and a half a million dollars in business debts that I had personally guaranteed. I should not have been in debt in the first place. Kay and I were living very well indeed, taking home a lot of money and spending all of it. We gave big contributions to the Oakland Symphony. I bought Kay a $1,000 designer original dress to wear to pre- and post-concert receptions so we could get our pictures in the society pages. When my speed-reading franchise was canceled, my doors were padlocked and I had a pile of debts with no income to pay them, and we were forced to file bankruptcy.

As a practicing Mormon, I have to be interviewed every year by my stake president (the Mormon equivalent of an archbishop) to see if I am worthy to renew my Temple Recommend. This card entitles me to enjoy the additional spiritual benefits of attending the temple (for sacred ordinances during the week, as opposed to regular public Sunday services in the ward chapel). In the interview, members are always asked routine questions about our moral and ethical behavior to verify that we are worthy to enter a place kept clean and sacred by attempting to exclude all those who don't meet certain moral and ethical standards. After all the routine questions, my Stake President said to me, “I understand you have filed bankruptcy. When are you going to repay your debts?” I was stunned because I was worried about buying food for my family, and paying off half a million dollars in debts seemed totally ridiculous. I was even looking for a job, something I thought I would never do. It hadn't yet occurred to me that I could simply come back and start a new business and that my prior business success was at least partly a result of my talents. When I told my stake president that I had been legally discharged of these debts, he replied, “Well, the court may have forgiven your debts, but the Lord hasn't, and you should pay it back.”

After I recounted the conversation to Kay, we decided that even though there was nothing mandatory about accepting this counsel and we might have to spend the rest of our lives paying off the debt, we would do just that. That ethics-based decision actually laid the foundation for the much bigger fortune that I created later, but the initial motivation was simply to meet the moral commitment to pay for that dead horse.

I knew that if I was going to pay off half a million dollars, I couldn't do it in installment payments out of wages. You can't cross a 10-foot ditch with six-inch jumps. I had to get rich! So I did. This was the most important money decision of my life to that point because I had made an irrevocable decision to become rich.

Bankruptcy was a shield that kept creditors off my back while I started and built my financial newsletter; it bought me time to mount a comeback. It was tough telling people I couldn't give them my first hard-earned seed money. Kay and I had to drastically alter our spending habits, and I had to reinvest the money I made into direct mail to build my business. I pyramided the subscription money as it came in and poured it back into more subscription mailings.

The end result is that we balanced the books with God and all those creditors. It took 12 years to pay back every penny with interest. I cannot tell you the satisfaction I felt as I wrote that last $12,000 check, and I won't tell you how much money I made later as a result of that simple decision to pay for a dead horse.

If you have to file bankruptcy, do it with the intent of eventually paying off your debts, even if it takes everything you have later on. I would rather die broke but even with the world, and face God blamelessly, knowing I couldn't take any of it with me anyway.

This is a plea that, if you use bankruptcy to get out from under your debts, you do so with an honest intent. You can inform your creditors that even though you are no longer legally obligated, over the coming years you will pay them back somehow, sometime, someplace. If you are not able to, at least your creditors will know you made a good effort.

Bankruptcy and Credit: The Good News

But won't bankruptcy leave a permanent stain on your credit rating? Yes it will, for 7 to 10 years. That is probably the best thing about it, because it was borrowing that got you into trouble in the first place. Bankruptcy will make it much harder to borrow again. If ethical principles are important to you, bankruptcy is just a tool to help you meet your moral obligations.

SUMMING UP

To recapitulate, start now to get out of debt. Start a whole new lifestyle. Cut your artificial standard of living so you can start rapidly accumulating a nest egg to invest. Drive an old rattletrap of a car if necessary. Live in a smaller house; perhaps even rent. Save and set aside at least 10 percent of your income every month—possibly more—to eventually pay back your debts and build a nest egg, and work your tail off to meet your moral obligation to pay for that dead horse.

This will require a total change of attitude. You must be willing to simply burn up all those mail offers that come to newly minted bankrupts from credit-card companies, department stores, and so on, offering you a chance to start “re-establishing your credit” (i.e., begin a new debt cycle). They know that because you can't file bankruptcy again for at least seven years, you are a pretty good credit risk. Don't go near that old debt trap. However, I have one word of caution: Be sure these offers are all burned or shredded, or at the least put into the trash just before the garbage collector comes. Such documents are treasure to the identity thieves who can use them to pretend they are you, and run up purchases in your name or loot your bank accounts.