Chapter 16
Strategies for Other Types of Debt
In This Chapter
◆ Payday loans have got to go!
◆ Keep car loans from driving you crazy
◆ Making nice with your doctor, lawyer, and the ex
◆ Standing up to the IRS
As a kid growing up in California, I spent a lot of time playing in the waves. We’d spend every summer day bobbing up and down in the ocean at places like Laguna and Newport beaches. Early on, we figured out how to tell who was a tourist and who was a local. When a big wave would come, everyone in the know would just hold their breath, sink to the bottom, and let the wave roll right over them. The out-of-towners, who didn’t know how to duck under the waves, would get tossed around like rag dolls. By the time they’d finally regain their footing, there was another wave just behind, about to break on them.
Owing money to a bunch of different businesses, people, and government agencies can feel a lot like that. Just when you think you’re about to regain control, something else comes rolling in on top of you, leaving you gasping for air!
Just like sinking to the bottom and letting the wave roll over you, there are tricks to surviving every one of these random types of debt.
Payday Loans
If there is one type of loan that can make you feel like you’re drowning, it’s payday loans. On the surface, they seem like a life preserver because they help your finances stay afloat in a month when money is tight. But thanks to the ridiculous rate of interest these loans charge (anywhere from 250% to 1,000% per year), you quickly figure out that your life preserver is made out of concrete.
Payday loans are so dangerous because they rob from next month to pay for this month. By the time next month’s paycheck rolls around, it’s already less than what you had this month when you couldn’t make ends meet. It’s a dreadful cycle that only snowballs because of the exorbitant interest rates.
If, in the course of eliminating your debts, you’re tempted to use a payday loan, don’t. There’s a good chance that you’ll never recover from the cycle of borrowing from the future to pay for today.
Breaking the Payday Loan Cycle
If you’re already caught in the payday cycle, you’ve got to figure out how to get out—now. Eliminating this loan is more important than any other loan you have.
So how do you get out of the payday cycle? The answer is both simple and frustrating at the same time. You need to find cash, wherever you can, as soon as you can. In fact, I’d rather you get behind on paying your other bills (as long as it won’t result in a repossession of your car or home), and divert all your available cash to ridding yourself of this financial parasite.
If you don’t have the funds to divert into paying off your payday loan, here are some quick ways to raise some cash:
• Check with your bank. Many banks, especially credit unions, share my hatred of payday lenders, even though theirs is more of a financial motivation. When you are caught in the payday loan cycle, it will slowly drain away all your other assets and eventually cause you to be late on your bank’s loans. To help avoid this situation, many banks and credit unions offer short-term “swing” loans to help you get out of this cycle.
• Borrow from family or friends. Normally, I’m not a huge fan of borrowing money from family members or friends. Besides the fact that it puts them on the spot when you ask for help, it can severely damage your relationship if you aren’t timely with your repayments. But in the case of payday loans, the amount is usually fairly small and the benefit is huge. Consider asking them for a loan and offering to repay them over three to six months, with a fair rate of interest. Then, make sure you follow through on your commitment to ensure money doesn’t become a barrier between the two of you.
def•i•ni•tion
A credit union is basically a bank that is owned by its customers. When you join a credit union and deposit money, you become a member of a group of people pooling their money and acting as their own bank. Often, because these banks are run by the members for the members, you can earn higher rates of interest on your deposits while also paying less for your loans.
• Sell some stuff. Two websites, eBay (www.ebay.com) and CraigsList (www.craigslist.org), may be some of your best friends as you battle to get out of debt. Whether it is that video game system you shouldn’t have bought or that extra bike you’ve got sitting in the garage, the sale of a few key items can bring in hundreds of dollars.
• If the tag is still on it, return it. If you have any purchases sitting around that can still be returned (clothes, electronics, etc.), take them back. You can always buy the stuff again later if you really need it. The reality is, by the time you pay the interest on that payday loan for another six months, you probably could have bought two or three of that item!
• Put it on your credit card. I know this recommendation sounds insane … and it is. But truthfully, paying 25% per year is better than paying 25% per month. If it comes down to it, I’d rather see you get a cash advance from your credit card than continue to lose perpetually more from each paycheck as the payday loan cycle continues.
Getting Help with Food Costs
If you are using payday loans and struggling to end that cycle, you’ll want to take assistance wherever you can get it. One way to cut back significantly is through the use of food stamp programs. Unfortunately, the idea of receiving government assistance for groceries may cut deeply into your pride. However, if you’re in this situation, I’d encourage you to remember that you’ve paid into the system with your tax dollars. There is no shame in relying on it when necessary.
Food assistance is based on income and has surprisingly high limits on who can receive it. For example, a family of four can earn over $2,200 per month and still receive assistance buying groceries. The benefits can be substantial and provide a huge boost as you try to eliminate debt. An individual may qualify for approximately $150 per month. A family of four may receive close to $550 per month. And amazingly, a family of eight earning $3,700 or less can receive up to $975 per month. Check out www.fns.usda.gov for more information.
Car Loan Strategies
Outside of your housing costs, paying off a car loan (or more than one) can be one of your biggest expenses. To make matters worse, the need for a car (and therefore, the need to borrow) reappears at least once per decade. Minimizing the amount of money that flows out to pay for the privilege of driving is crucial to getting your other debts eliminated and achieving your financial goals.
As with other things, controlling your auto payments must start with the essential questions of “Do I really need this?” and “Can I really afford this?” If the answer is no, then it is time to consider selling your ride.
Even if you only break even on selling your car, this still may offer you a huge advantage over continuing the payments. While you’d eventually own that car if you kept making your pricey payments, you may save thousands by starting all over with an economy car. Remember, you can always go back and buy a nicer car later. Right now, you need to get out of debt and get into a sane existence.
If you are not going to sell your car, you still have a number of options for bringing down your payments to a more manageable level. You’ll also want to take a long-term look at how you acquire cars and see if you can get out of the loan cycle once and for all.
Dollars and Sense
Most people dispose of their old car by trading it in at the dealer toward the purchase of a new one. Unfortunately, many people don’t know that they are literally throwing money away. Most dealers buy your trade-in at significantly below market value because they hope to also make a profit reselling it. Often dealers offer 25% to 50% of what you could sell it for to a “private party.” That extra money could go a long way toward eliminating some of your debt. Visit www.AutoTrader.com for tips on selling your used car for more than a dealer will give you. You can also get a low-pressure, trade-in quote by taking your car to any CarMax location.
Pay More Than the Minimum
The great truth of debt reduction, pay more than your minimum, applies to auto loans as much as any other loan. If you pay more each month than you’re required to pay, you will shave months off your repayment period and save hundreds, perhaps thousands of dollars in interest.
For example, a five-year auto loan for $20,000 at 8% would cost approximately $405 per month. That is a total of approximately $24,331 out of pocket, or $4,331 in interest on top of your $20,000 loan.
If you increase your payment to $500 per month, your five-year loan suddenly gets paid off in 46 months, or less than four years. Even better, your total cash out-of-pocket drops to $22,839. That’s a whole lot of green that can be used to enjoy life, pay off other debts, or save toward your other financial goals.
Refinance Your Auto Loan
Believe it or not, refinancing is not just for mortgages. Many banks are now offering the ability to refinance an auto loan, which may allow you to lower your payments through a better interest rate or a longer loan term. This can provide a huge savings if you purchased a car when your credit was less than stellar, but has since cleaned up your credit score.
For example, someone who purchased a $15,000 car on a 60-month loan at a (brutal) rate of 15% would have monthly payments in the ballpark of $356 per month. Their total of all their payments by the time that car was paid off would be $21,411. That’s over $6,000 in interest to buy a $15,000 car!
But after two years and some hard work, let’s say they get their credit significantly cleaned up and can now refinance their loan. At this point, their remaining balance is $12,993. If they refinanced this over four years at 8%, their new payment would be $317.
The refinancing would drop the total of their remaining payments to $15,225. If they kept their old loan at 15%, the total of their remaining payments would be $17,088. That’s a savings of over $1,800, which could be used to help speed the elimination of auto loans or other balances.
Set a Goal
There’s no doubt that you need to at least consider refinancing your car if your interest rate is higher than 10%. If, after checking your credit score and talking to your bank, you find out that you cannot refinance, you should try again every six months. Because your credit score can change significantly in that period of time, you may qualify for something then that you can’t now. Although you’ve been writing in your Debt Journal up to this point, I want you to pull out your calendar right now instead. Flip to six months from today and write “Try to refinance car loan!”
Pay Off Your Car with a HELOC
If you own a home and can get a home equity line of credit (HELOC), it may make mathematical sense to use this to pay off your loan. But using a HELOC can also set you up for failure if you’re not disciplined about how you pay it off.
The good news about your HELOC is that it’s easy to qualify for and will usually have a fairly low (and deductible) rate associated with it. The bad news with the HELOC is that they don’t force you to pay it off as fast as your auto loan. For many people, it takes them 5 to 10 years to pay off the HELOC they used to finance their car, because sizeable payments aren’t mandatory.
If you do choose to use your HELOC, commit yourself to paying it off in equal payments over your original loan period. In other words, if you used your HELOC to pay off a car that had 36 months left on the loan, divide the balance by 36 and make that your new payment.
Other Expenses
These expenses can be some of the most frustrating, because there’s very little control of when they pop up or how horrendous they’ll be. This can be so disheartening when you’ve worked hard for a year or more to eliminate your debt, only to be body slammed by one of these surprises.
The truth is, if you need medical care or timely legal advice, you get it and sort out the details later, as you should. When a marriage or partnership comes to an end, you often have very little control over the timing or the other person’s emotions.
To add insult to injury, these are never cheap events. Legal and medical services can easily run into the tens of thousands of dollars. Likewise, alimony and child support can easily run thousands of dollars every month.
In the Red
If you owe money because of medical expenses or a lawsuit judgment against you, you need to check your “other” insurance policies immediately. Many times, policies like your homeowner’s policy or auto policy have additional types of coverage attached that cover these types of expenses, if they occurred under certain conditions. Be sure to speak to your insurance agent if you think there’s even a slim chance a certain cost might be covered.
While there are a couple of unique strategies for each one of these situations, they all have a couple of steps in common. First, you should always try to negotiate. It’s key to realize that all the parties involved have very little “real cost” associated with the money you owe them. They didn’t carry much of an inventory, if any. Instead, they’ve decided that their time is worth a whole lot and charged you for it.
As time goes by and they haven’t been paid, most people in these situations begin to give up some hope that they’ll ever get money out of you. So when you wave an alternative amount in front of their faces, they often will jump on it and forgive the rest of your balance.
Second, they all rely heavily on collection agencies to collect their debts. Remember, doctors and lawyers make a lot of money per hour and won’t generally waste their staffs’ time calling to hound you. Similarly, a partner or ex-spouse has other obligations to attend to and very little ability on their own to force you to pay.
All this is important, because you want to stay out of collections if you can avoid it. Besides the fact that a collection agency hounding you is extremely stressful, most of the balances you owe to a lawyer, doctor, spouse, or someone who has sued you won’t show on your credit report. A collection agency going after you most likely will.
If you can agree on any type of temporary payment plan to keep them from turning your balance over to a collection agency, you should do it. The $25 or $50 per month you pay them just to give them hope can save you a lot of heartache.
Curing Your Medical Bills
Past-due medical bills, especially those owed to a hospital, are some of the easiest to cut dramatically with a little effort. If you don’t believe me, spend some time on the Internet reading up on the “negotiated rates” that are given to health-care plans when their customers use a hospital or doctor.
What you’ll find is that the same procedure that costs someone without insurance $10,000 might only cost an insurance company 25% to 50% of that. Besides the fact that that is semi-disgusting, it tells you that hospitals are used to taking much less than the full price for procedures. This means that your bill may be seriously negotiable.
Dollars and Sense
Getting injured at work does a double-whammy on your personal finances. Not only can you no longer earn a paycheck, but you also experience major medical costs. That’s where workers’ compensation comes in. These programs are meant to protect the financial interests and livelihood of someone who has been injured on the job. They usually cover a significant portion of your medical bills from a work-related injury or illness. Even if your employer doesn’t have a worker’s policy, you may still be covered because most states require these policies of even small employers. Be sure to file your claim promptly, because your injury is your largest piece of evidence. As your body heals, your case will begin to lose steam!
Remember my friend from Chapter 3 who got charged close to $10,000 for a couple of kidney stones? By the time he was done arguing with the hospital, as well as tapping other resources, he paid just over $800. Here’s how he did it, and how you can, too:
1. Cry foul. Now granted, my friend was in a lot of pain, but had he known that an MRI and a prescription to “take two Vicodin and call us in the morning” was going to cost nearly $10,000, he probably would have toughed it out. The truth is, the hospital did not disclose to him that his emergency room visit was going to cost as much as a car. While I’m opposed to tantrums in children, I’d recommend them for adults in this case.
2. Threaten legal action. Find a friend who is a lawyer to write you up a letter threatening to take the hospital to small claims court over their unexpected and inflated charges. Go get the letter notarized just for the heck of it … it doesn’t do anything, but it looks mighty official. By showing the hospital or the medical practice that you’re not going to roll over and take their unexpected charges, you’re going to raise their desire to close the case and move on.
3. Find out the usual and customary rate. As you bicker with your health-care provider, it would be helpful to know what insurance companies consider the usual and customary rate (UCR) for a procedure. Call your insurance company, or have friends call theirs if you aren’t insured, and find out what the going rate for a procedure is. This will help you make a counteroffer they will accept as well as know when to stand your ground.
4. Make a counteroffer. Once you’ve told them you won’t take being pushed around, threaten legal action, and find out what the customary rate is, then you make a counteroffer. I’d recommend offering about 25% above the usual and customary rate for a procedure. This will become increasingly attractive to a medical provider as the process drags out. If they come back asking for a small and reasonable amount more, you should consider taking the offer.
5. Look into state and federal programs. In addition to federal Medicare and Medicaid programs, many states have health-care programs that help lower-income people partially pay for medical care. These programs are especially generous toward adults over age 65 and families with children.
def•i•ni•tion
It’s easy to confuse the Medicare and Medicaid programs. Medicare is the federal insurance program that covers individuals over age 65 or those who are permanently disabled. Medicaid may cover these individuals, but also covers younger, low-income individuals and families. Helpful to people struggling with medical debts, Medicaid may cover expenses three months prior to your actual application for assistance. To find out more about Medicare and Medicaid services, visit www.cms.hhs.gov.
6. Look into medical assistance funds. Many hospitals and medical groups have some type of fund set aside to help individuals who do not qualify for other types of financial aid. Because you’ve probably butted heads with the Billing department, don’t waste your time asking them. Hang up the phone, call the hospital again, and ask the receptionist for whoever handles financial assistance for patients. Tell this new person your story and ask them if any financial assistance is available.
Settling Legal Debts
Owing money to an attorney doesn’t leave you many options besides those I’ve mentioned. But if you’ve been sued and a judge has decided that you owe money, there are some other options to consider.
By no means would I recommend trying to hide assets or put them in someone else’s name, as this could ruin your credibility in an ongoing lawsuit as well as result in additional legal action. Do your best to work within the laws to minimize the effects of a lawsuit, including one or more of the following techniques:
• Offer other assets in compromise. If you own a plot of land, a share in a business, valued collectibles, or anything else that might be saleable, consider offering those in lieu of cash. The reasoning might go something like this: “If I have to pay cash, it might take years for me to pay you off. How about I give you this piece of artwork and we’ll call it even.”
• Request a modified garnishment. Many times, when you are unable to pay a judgment against you immediately, a judge will order your wages to be garnished. If this happens, your employer is sent a court order to send a portion of your wages to someone to help satisfy your debt. If you can prove that the garnishment as it was initially issued is going to provide an extreme hardship, a court may reduce it at least temporarily.
• Keep an eye on the statute of limitations. Many judgments must be collected within a certain amount of time, after which someone loses their ability to pursue your assets or garnish your wages. I’m not suggesting that you hold out as long as you can, but an expiring statute of limitations provides you with a strong bargaining chip.
Dealing with Alimony and Child Support
Dealing with past-due child support and alimony is a tough one. It’s natural that parents and spouses who are struggling to manage a pile of other balances would also struggle to stay current on these obligations. I know there are plenty of selfish people out there, but I also know how hard it can be.
Not paying child support can have major repercussions on your finances. Not only might you get your wages garnished or be unable to register for certain basic services in your state, but you could actually end up getting jail time. Last time I checked, folks sitting in jail don’t make too much money and their debts often fall even further behind.
Similar to payday loans, you need to do whatever is required to stay working and productive so you can eventually find the light at the end of the tunnel. If you need to let other bills slip to stay out of legal trouble with child support or alimony, it’s generally worth doing.
As far as a unique strategy, there is one primary strategy I’ve seen work well for people who are behind on large amounts. The core of this strategy has to do with how alimony and child support are viewed for tax purposes.
Alimony is considered income to the spouse who receives it and a deduction (actually an “adjustment to income”) for the spouse who pays it. This means that a spouse receiving $1,000 per month may only keep $800 after taxes.
Child support, on the other hand, is not taxed to the recipient and not tax-deductible to the donor. If you are behind on a combination of alimony and child support, it is worth thinking over the merits of raising your child support in order to erase some of your back alimony.
For example, if you’re $20,000 behind on alimony, you might offer to increase child support payments $500 per month for the next two years if your ex-spouse agrees to release you from that overdue alimony. The smaller monthly amount may be doable for you, and also will avoid taxation to the spouse. It may be a win-win that keeps you out of trouble.
Dollars and Sense
What do you do if your ex-spouse owes you money but isn’t following through on his or her obligations? One quick remedy is to go after his or her retirement plans using a Qualified Domestic Relations Order (or QDRO, pronounced “Quad-Row”). While a court may not be quick to act in your favor if he or she doesn’t have sufficient income, your ex may be happy to give you a portion of his or her 401(k). Be sure to talk to your attorney about using a QDRO, especially if you live in one of the nine “community property” states in the United States.
Standing Up to the IRS
I’m not sure there is anything that will stop me in my tracks as much as an envelope with the IRS as the return address. It’s not like they send you letters when everything is just fine. I have yet to receive a Happy Birthday card or a Christmas letter from my local auditor.
It’s for good reason that the IRS freaks me out. No one else has the power like the IRS to collect on the money it’s due. Remember, these are the people who bring in the money for virtually every other type of government program there is. As such, the IRS is given a lot of latitude and immense resources to do its job.
For the vast majority of people who owe money to the IRS, it comes down to some type of honest mistake. I mean, really, the tax code is so complex that many IRS agents have trouble understanding certain aspects. But these letters are scary even if they’re about an honest mistake.
Even more frightening is when the letter they sent you says something more than “You forgot to sign your tax return.” If you owe money, you are in for a heck of a fight and some serious interest and penalties if you don’t act quickly.
The IRS Penalty System
There are three main penalties that taxpayers run into regarding their individual tax returns. Each has its own upfront penalty and unique interest calculation:
1. Filing a fraudulent return. Aside from the fact that willingly and knowingly filing a return in which you tried to cheat the IRS may land you in jail, it may also land you in the poorhouse. The penalty can run as high as 75% of the unpaid amount, in addition to the unpaid amount itself.
2. Failure to file. Surprisingly, the IRS comes down harder on people who fail to file a return than people who file a return but don’t pay the amount due. The penalty for failing to file is 5% per month of the amount owed, up to 25%.
3. Failing to pay. If you file a valid return but do not pay the amount owed, the IRS charges you 12% a year, up to a maximum of 25%.
These amounts may be determined automatically with you being notified by mail or may be the result of an audit. Either way, it is crucial to communicate with the IRS and to make your case as soon as possible. If you and the IRS cannot see eye to eye, you will likely receive what is called a deficiency letter or a 90-day letter.
This letter basically gives you 90 days to appeal your balance due through the U.S. Tax Courts. If you do not make an appeal within 90 days, you are on the hook for whatever balance the IRS notified you about. Period.
Dollars and Sense
If you were formerly married and filed a joint tax return with a spouse, you may not be liable for criminal or irresponsible actions committed by your spouse that you didn’t know about. The IRS calls this the “Innocent Spouse” rule and it exempts unknowing spouses from amounts and penalties owed. The IRS will not just take you at your word, though. Like other waivers of penalties, the IRS makes you endure a detailed process to establish your innocence. Talk to your tax advisor or refer to IRS Publication 971 for more information.
Installment Agreements and Offers in Compromise
The IRS is a world unto itself. This is not the place to prove that you could have gone to law school. I’d highly recommend hiring a certified public accountant, enrolled agent, or tax attorney to help you appeal your case, or use one of the following methods.
For taxpayers who cannot demonstrate extreme financial hardship, the IRS allows you to enter into an installment agreement. This is basically a payment plan that allows you to spread out your balance over an extended period of time, subject to some minor fees.
For taxpayers whose situation is extreme, the IRS may be willing to reduce the balance owed through what is called an “offer in compromise.” This process is very similar to debt settlement with the IRS or a medical provider, but your ability to pay will be heavily researched by the IRS. To be considered for an offer in compromise, you must complete Form 656 and file it with the IRS.
The IRS has its own internal and independent organization, called the Taxpayer Advocate Service, to help taxpayers who cannot get their IRS issues resolved or feel the IRS is unfairly pursuing them. While the service and attention you get may not be as fast as hiring your own professional, it is still knowledgeable and impartial. To find out if you are eligible for their services, you can call 877-777-4778 or go to www.IRS. gov and type “advocate” in the search box.
The Least You Need to Know
• Beg, borrow, or scrimp—do whatever it takes—to get out of the payday loan cycle.
• Consider refinancing your auto loan if your current rate is over 10% and you have a couple of years of payments left.
• The best way to cut your medical, legal, alimony, and child support costs is by offering a smaller but immediate payment.
• Use government programs whenever you can to help reduce your monthly expenses and medical costs while getting your feet back on the ground.
• Don’t delay responding to the IRS or seeking professional help to understand your situation.
• Seek out an installment agreement or an “offer in compromise” with the IRS.
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