Financial question: young friends totally in debt--what is a good debt

[Nay]

restructuring outfit to go to? They are totally desperate -- using credit cards to pay the minimum on other cards, behind in the mortgage, bought a car that they can't insure, on and on. Can someone tell me their experiences with different ways to get out of such a predicament?

Thanks, everybody! I am a cheapskate skinflint, and never have had a problem with overspending, so I can't help them.

[pitohui]

1. sometimes bankruptcy is the best option

you can re-affirm the debt on the mortgage and the car note so you can keep your house and car while getting rid of credit card and other debt

i have friends who were homeowners and had to declare bankruptcy because the breadwinner had cancer and couldn't pay bills that piled up while he couldn't work because of chemo, it saved their house and car

getting restructured is just as bad on your credit record as bankruptcy so it is not always a good idea to continue to struggle, get a fresh start and move forward


rarely if ever would you be able to get rid of student loan debt thru bankruptcy so if that's a big factor, rather than just credit cards, i'm afraid fleeing to brazil is the only answer that springs to mind

[JuniperLea]

2. Those unfortunate youngsters...

The problem with those debt restructuring outfits is they cost money... and most people are left with the same old VERY BAD spending habits. If their credit is good, they may be able to get a signature loan or a home equity loan and pay everything off, but the spending habits that seem to have gotten them into this situation are the real problem and with the pressure of debt (sort of) off their shoulders, there is a very big chance that they will go hog wild and spend themselves further into debt. That is a pattern with so many people it isn't even funny. And then many blame it on the lender or mortgage company that took a chance on them. It's all risky business.

Not knowing what part of the country they live in, I would suggest talking to a mortgage broker. And research local debt counselors. The main thing is to get some counseling that includes helping people change their spending habits and learn to live within their means.

So many young folks leave their parents and think they can automatically afford everything that was provided for them while with said parents. Yikes. I wish them well. I've seen this so many times. We really need to teach our kids about money very early in life.

[pitohui]

3. it's even worse than that

the couple i discussed in my earlier example, where the breadwinner had cancer, of course they tried credit counseling first

the credit counselors were supposed to pay their bills on a certain schedule, of course they did not, so even though they were struggling to come up with the money, it was still not getting to creditors in a timely fashion and late fees continued to accrue

bottom line, no one cares abt your finances as much as you do, a clerk at the credit counselors doesn't care about letting your check sit around in the wrong file for a week or six while more late fees pile up

[Nay]

4. this is exactly their position. Their spending habits are totally

undisciplined, they try to ignore bills that come in, they are obviously frightened out of their wits and can't face what is happening to them. They have no equity in the house since they just bought it 5 months ago. They have maxed out 5 credit cards that I know of. No one (my son is a friend of theirs) can talk sense to them -- they are both 20 years old and have low-level jobs. How they ever got the cards and the house, I have no idea. It should be a crime to lend money (except in very small amounts) to kids like these. And now they are in this mess.

[SoCalDem]

11. 20 yrs old WITH a house?? THAT's their problem

20 yr olds, most of them, should be concerned with saving some money, getting the schooling finished and what to bring to the party this weekend...NOT remodeling a house, or choosing furniture for a new house..

[JuniperLea]

12. Dang! I was hoping my initial reaction was way off base!

Those poor kids. Well, if they won't listen to reason they are doomed to pay for their ignorance. I know that is harsh and I really do wish it was not so. The best you can hope for in this situation is that they learn a lesson when they loose everything... and they will. That's why they are called "Trust Deeds"... the mortgage company owns far more of that house than those kids do, and they aren't going to bend. They'll take the house in a heartbeat. Same for the car; there are no benevolent souls in finance! No one is going to give a rat's ass how badly these kids feel. It's the school of hard knocks. Time to pull out my favorite quote of all time:


There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves.


I'm betting your son learns an important lesson from this. My other favorite quote, and I kick myself for not jotting the author down... nothing is so bad that something good can't come from it... or something like that.


The lenders are not to blame. These kids did it to themselves. I know that is hard to handle, but it's true. If they fall into the trap of blaming the creditors, they will learn nothing from this experience.

I wish there was a magic pill for this, really I do. I truly feel for them. I wish I could be there and work out a budget for them and smack their little hands when they reached for that hot credit card or fancy new car. This is going to be tough no matter how it turns out. They will have to give up a lot of clothes, shoes, CDs, movies, lattes, etc. It's not going to be pretty.

[newportdadde]

5. They could check out Dave Ramsey or just come up with their own

debt program. Dave Ramsey is religious but his radio show advice is good. First sell the car if its a newer car or has payments, buy a 'cheap' car say 2-3k. Example Dave went from driving a Jag to a rust bucket piece of crap.

Both people will then need to get one part-time job each on the weekend/evenings, every dime goes to paying off the smallest balance credit card, when its paid, take the payment going to that and your part-time job money and go on to the next one and so on so forth, its called debt snowballing.

Once they get the credit cards under control and 6 months of salary saved for an emergency fund(in cash like a money market acct at a bank) they could cut back on the extra jobs.

Other tips I've learned since becoming a father of 3 on one income(one two year old, and newborn twins), wife stays home with them:

No eating out(huge money sink).
No movies or renting movies.
No purchases beyond basic food needs to survive.. no clothes, no new gadgets/crap, no computers etc.
Basically nothing fun or extra at all.

Pay Cash ONLY, Cash hurts, make each purchase a must have, Credit Cards are too easy. If it is expensive you will have to save for it..

Its hard, its depressing but if they are serious they can do it, it takes tremendous personal discipline.

[ktlyon]

8. yes good advise

pay cash
cut up credit cards
make a budget and stick to it
more income is also good
eat peanut butter sandwiches and macaroni and cheese

[Tierra_y_Libertad]

6. Sell house. Sell car. Take lumps. Learn how to pay cash.

Went through a similar predicament about 25 years ago due to "wants" exceeding common sense. We were able to get a loan from our credit union, pay off the credit cards and other "sign on the dotted" line, debts, and grow up. Amazing how much stuff you don't "need" if you have to break out the cash.

Life is a great teacher.

[Nay]

7. Yes, I am afraid that this is what it will take. I will be sitting down

with them on Friday. I wish I could have known their spending habits before they bought the house -- maybe I could have talked them out of it. Thanks for your help, everyone.

[SoCalDem]

9. they need to see a bankruptcy lawyer.. It's still possible

especially if they do not own a house.. The sooner they DO it, the sooner they can get past the 10 yr credit hit, and without credit cards, they could start saving money for a change..

MOST people who are still filing, ARE more than eligible....They CAN waive the counseling, if it;s obvious there is not enough money to go around..

[Bigmack]

10. Buy them a copy of "Two Income Trap...

Why Middle Class Parents are Going Broke" by Elizabeth Warren.

I'm an old cheapscrew myself, but I found that at least part of young people's problems are unavoidable... in fact, those troubles have been carefully planned to put couples in that jackpot.

The author says that car payments (unavoidable), health care (unavoidable), and child care costs (unavoidable) are what bring on the vast majority of bankruptcies. Those expenses are unavoidable because both people in the couple have to work, so both need cars, and child care eats a huge hole in the budget. If somebody gets sick, the kids charge their way out of it... and never get free again. They owe their souls to the "company store".
- - - -

Copied from the Publisher's Weekly Review...
Presenting carefully researched economic data to support their arguments, the authors contend that, contrary to popular myth, families aren't in trouble because they're squandering their second income on luxuries. On the contrary, both incomes are almost entirely committed to necessities, such as home and car payments, health insurance and children's education costs. When an unforeseen event such as serious illness, job loss or divorce occurs, families have no discretionary income to fall back on. The authors recommend a number of useful societal solutions to get families out of this trap, such as legally prohibiting credit card companies from charging grossly unfair interest rates and exposing banks that employ a loan-to-own strategy that steers minority customers to higher mortgage rates with an eye to future foreclosures. Warren and Tyagi point out that families buy homes they cannot afford in order to live in a neighborhood with better schools.

[SoCalDem]

13. That's why we always got used cars, and I was able to be a stay home Mom

We did the math after our third in 5 yrs was born.. I would have netted about $80 a month after all the expenses and tax implications were taken into account..

Ot sounds like a fine plan..on paper.. but we all know that "taking your lunnch, and not buying any new clothes,shoes,goodies" lasts about a month, and then you are trapped into working just to pay for all the stuff you wouldn;t even need if you didn;t work outside the home..

I loved the fact that I didn;t have to schlep three kids in snowsuits to a sitter's house at dawn, and have to cook fast crappy meals because I was too tired.. My kids could run around in jammies all day if they wanted to,(me too) and if I felt like a nap...it was naptime..

We had NO "extra" money, but no one starved, and people didn;t have to bring their own chairs to our house.. My kids wore handmedowns, and we rarely ate out, but we always managed to pay the bills..:)

I don;t regret it one bit.. I did go back to work when they were all in school all day, and I was fortunate to be in a management position where I got to make my own schedule, but when my youngest was in high school I quit for good.. I wanted to go to his mid-week games and to practices..and I wanted to be there when he and his friends showed up to raid the fridge..

[Bigmack]

16. I'm not arguing with your choices...

... and plans, my wife and I made some similar choices, but....

That sounds like a few years ago. That's ancient history now. I'm not just being partisan when I say things started to get a lot tougher for couples about 5 years ago.

The author points out:

Housing is MUCH more expensive in most urban areas now. A lot of young people can barely get into the cheapest house available. That eats up all their spare cash. A lot of them could only get variable rate mortgages, and they're headed up.

Health care is MUCH more expensive now... both premiums and costs.

Fuel is MUCH more expensive for those commuters now.

If the two incomes are roughly equal... starting teachers for example... the couple can't simply drop one job, because each job is vital to pay the mortgage. Renting a home throws away the biggest chance for kids to move up. Buy... sell for inflated price... buy....sell for inflated price. That's how lots of us leveraged into the middle class.

Used cars can break down, and both partners need reliable transportation to two different jobs. Repairs for used cars come at really inconvenient times.

The authors point out that the single most economically dangerous thing a woman can do is to have a baby. She is totally at the mercy of the marriage. If the marriage breaks up after kids, she's screwed....gotta work... gotta have day care, gotta live somewhere. That is really sad.

Now bankruptcy can't even save them. The Repubs closed that little "loophole".

[rpgamerd00d]

14. I am a financial advisor, read please.

You should have them contact a financial advisor. There are generally three different "kinds" of financial advisors:

1) Ones that work for a specific financial firm
2) Ones that work for a bank
3) Independents, that have contracts with many firms/banks and get the best deals for their clients.

Clearly, I am pointing you at #3 here. Find an independent. Make sure they are not a "Captured Agent". "Captured" means they work for one company. For example, a Smith Barney Financial Advisor is captured, they only offer SB funds and products. The same is true for any bank F.A., they only offer solutions from their own bank. This is why you need to find an independent F.A.

Virtually all F.A. will do a free financial analysis. If they don't do it free, tell them you will just find the next guy in the phone book who does, and believe me, it will be free.

Independent F.A. firms should be easy to find in the yellow pages.

[lastknowngood]

15. Consumer credit counleing service. One of the oldest and best

n/t