Cancellation of Debt

Back in January of 2009, as we were deciding if we were going to file bankruptcy or not, we had been talking to my husband’s creditors, which was really easy to do as they were calling us at least once every day. I encouraged him to let them know that we were close to filing and to ask them if they would be willing to 1) drop the principle, and 2) drop the interest rate. One of our creditors proposed a significant settlement deal that was really hard, but resulted in a cancellation of debt.

At the time, I was advised by a family member to look out for tax forms to include in our 2009 tax return, but that we shouldn’t be concerned about it affecting our taxes. This family member happens to work very closely with the IRS, so I trust them to steer me in the right direction.

When I started working on our taxes last month, I had forgotten that we were advised to take care of that debt cancellation form in a specific way. Luckily, when I got it in the mail, I talked to the family member and she clarified that:

If you are insolvent at the time that your debt is cancelled, you do NOT have to include the cancellation in your income (*)

You have to fill out a special form (IRS Form 982  - Reduction of Tax Attributes Due to Discharge of Indebtedness) and have records that show that you were, in fact, insolvent at the time of cancellation. In our case, were were (sadly) VERY insolvent – we had over $60K in debt and no real assets (under $20K worth of personal property), so we qualify for this.

So, we are able to take the $4,500+ that was written off and leave it out of our income, which helped to make our potential tax return even greater (yahoo!)…

We didn’t include this amount in our starting amount (and some of out other debts), because we started the blog after we had already started paying off our debt,  so the reality is that we actually started this journey at over $70K…yikes… but to know that we have reduced our debt by more than $30K in a year – that tells me that we can get to the end…

* I am not a tax advisor and every person’s situation is different. Consult your tax professional for information about your taxes.

Original debt probably more than previously reported

I was talking to my husband about our milestone of getting past $10K in debt reduction and he asked me if the figure included the reduction that he negotiated for one of the liabilities. Um….no?

So it looks like I’ll need to adjust our “starting out” numbers in the next few weeks when we find out the total amount that was written off by the creditor – we think it was around $4,700 – which would bring our total debt reduction to $15,000. Wouldn’t *that* be something!

More on this later…

Regrets…I’ve had a few

The last couple of weeks have been spent contemplating and thinking about what the next post should share about this journey, so even though I haven’t been posting new content, I have been thinking of you, dear readers.

As long as I can remember, I’ve been determined that I had no interest in ever owning a house and that I would be just fine with moving around the rest of my life nomad-style. I married an artistic type, and he seemed agreeable to that and the only time that we really brought up owning a house was when we had the “If we win the lotto…” conversations.

Part of this is the fact that I grew up in a military household and the wanderlust that was instilled in my formative years took root – to date, I have moved 25 times. Yes, 25.

I can’t identify what has made me turn a corner on this issue, but in the last few weeks, I have  started watching HGTV (specifically My First Home and House Hunters) with my husband and we’ve started talking about what we would like in a house. The market in Los Angeles is truly a buyers market at this point (I think it has fallen at least 25% in the last year or so) and there are some amazing properties out there that are way more reasonably priced than they were 3 years ago.

Here’s the irony: with the $60K that we are going to pay off in this process, we could have had a great down-payment and be set up to actually afford house payments, especially in this market.

I had always felt the weight of this debt in other ways, but it has never been tied to the idea that we are going to miss out on getting a house in LA when they are more affordable. I’m not a person that has many true regrets – but this is going to be one of them.

I guess that we can take comfort in knowing that we’ve never been closer to freedom than we are right now. And every day we get closer.

Have any of your financial decisions caused you to have regret? How have you addressed this or changed the situation?

The Fear of Sharing

This weekend was somewhat of a breakthrough for us in the “talking to friends about our situation” area. As I’ve mentioned before, we’ve kept our situation pretty close to the vest, even with our close friends. We’ve since determined that there needs to be a certain level of healthy discussion with those you care about or else you could end up distancing from them in other ways, too. 

It goes beyond just turning down invitations to do things that are expensive – it impacts the other parts of your conversation with people, usually unintentionally. The way we experienced it was last fall when we had to move and drastically reduce our lifestyle, but felt strange about disclosing all of the details to our friends as to the “why” of our move. We would say, “it is just too expensive, we need to downsize” but not elaborate. We thought we were doing this so that we wouldn’t burden our friends and become “Debbie Downers,” but we really were doing them a disservice and unintentionally communicated that we couldn’t trust them. 

The other facet is that when we did talk to our friends, we were coming from a “survival mode” and they were coming from their own places, usually good things, so I can see how we might have come off as distant or cold or self-involved – all we were thinking about is “how are we possibly going to make this work.” 

I think we’ve made some inroads on this matter in the last few months. We have started making being intentional to discuss it with some of our better friends and while we haven’t talked dollar amounts, we have talked about some of the mis-steps we have made and the reality in which we find ourselves. In one instance, the wife of the couple asked what kind of blog I was going to be working on for the next three years, and so I told her. She shared that she and her husband went through a similar process and was able to borrow money from family to reduce their debt and then live frugally to pay it all back. I systematically started setting up times to talk to our friends face-to-face about what we’ve been living through, and we’ve been so thrilled by the response of our friends. 

The conversation that I have been struggling with the most is the one with one of my best friends – we’ve been friends for over 5 years, and there have been some things that both of us have held back. This weekend, after spending the day together and having a great dinner, my husband and I started to share about our debt reduction plan on the way back from dinner. I started with the date that we are going to be debt free (July 20, 2012) and said that I knew it would be a tough road, but I knew we could do it if we were just disciplined. Her response floored me. She said “That’s awesome. You know, I’m so mad at myself. I got into trouble years ago, and then finally worked myself to a place of being debt-free, and now, I’ve let it creep back up and I’m in exactly the same place.” This was HUGE for us. Neither of us had volunteered this information and now we know that we are each going through it. 

I’m so pleased that we are continuing to fight the fear – at first it was a fear of facing our debt, then taxes (more on that later) and now the fear of sharing. It is much more freeing to face all of this head-on, I think…

Bankruptcy Research and What We Found

Today’s post is a little more about our history and what we learned from our Bankruptcy research.

I wrote before about how a conversation about our finances led my Mom to suggest that we needed to file for bankruptcy. She told us “stop paying your credit cards, meet with a lawyer and file the paperwork this week.” So the next Monday, we started researching the process and we found out the following:

1. Before you can file for individual bankruptcy, you need to attend a pre-bankruptcy counseling session (either in person on online) to obtain a Bankruptcy Counseling Certificate. 
2. Chapter 7 takes your assets and distributes them to your creditors and the rest of debt (except student loans and a few other types of debt) are discharged. Chapter 13 develops a payment plan so your creditors get as much as they can for 5 years. (These explanations are over-simplified – I’ll post some resources that help with providing more detail later).
3. After you file, your creditors can no longer call you, until the Meeting of the Creditors where you have to face your creditors.
4. Both filings stay on your record for 7 years.
5. If you are married, only one spouse *can* file, but both incomes are taken into account, which adds to #6.
6. It’s really difficult to qualify for Chapter 7. 

The bulk of the debt is only in my husband’s name ($42,000+) and filing might cause some complications with my job, so we decided that my husband would contact his Employee Assistance Program and get a referral for a Bankruptcy lawyer. He was connected with one and the lawyer did a phone consult with my husband. The lawyer was very terse and said, “you can’t file, you make too much money.” This seemed to conflict with a lot of the research that we had done, so we contacted the EAP again and my husband got a meeting with a new lawyer – one who worked at a Bankruptcy practice. He took all of our financial records with him and at the end of the meeting it was determined:

1. We could file for Chapter 13.
2. The payments would take 5 years.
3. The firm would require $2,400 to file the paperwork.
4. Our credit lines would be closed. 
5. Our standard of living would be very, very low for 5 years. 

Both my husband and I felt a little defeated – it had already been a really touch 18 months, and we felt so hopeless. We had really hoped that we would be able to file for Chapter 7, but even though our debt (over $60,000) was more than our annual take home (under $60,000), we “made too much money” to have any of our debt discharged. 

So, as our creditors were calling every day (seriously, EVERY day), I asked my husband to try and cut a deal (settlement) with them. I suggested that he tell them that we were about to file for bankruptcy and did they want to work something out with us so that neither party had to go through the system – I told him we should ask them to drop the principal and interest rate. Here is what happened:

• MBNA – dropped the interest rate to 4.25% (from 19.95%) and put us on monthly payments of $370/month, which lowered our monthly payments by almost $200.
• Citibank – dropped the interest rate to 9.9% (from 32.24%) and put us on monthly payments for $319/month, which lowered them by $200-300
• Direct Merchants (they weren’t as friendly, but they cut us a good deal) – they cut our principal by 25% and took the interest rate to 0% – *however* we had to pay the balance monthly within 6 months – those payments are the $1,600+ payments (only 2 left as of this writing). 

The “hitch” for all of this: (1) the cards/lines of credit are closed, (2) my husband cannot apply for any credit while paying these off or the terms will revert to the previous agreement – this is for 5 years, (3) if we miss a payment, all the terms will revert. 

But all in all, I’m actually glad that we went through with this process instead of going through the bankruptcy filing. Sure, there would have been more protection and it would be nice to have it a little more “out of our hands,” but I really think that this allows us to push even harder to reduce our debt as our circumstances change. And even though the payment plans are 5 years, we’re still committed to being done with this process in 3 years, 3 months.

The Earnings Gap and the Social Implications

I remember the day, about 12 years ago) that I found out that we weren’t going to talk about money amongst the social circle. It was after college and I had asked one of my good friends what he was offered when Microsoft was courting him. He said, “I don’t discuss money with friends.” It was really shocking to me, but I accepted it. After all, he had this great career and I was still working retail management and going to school part-time. And that was my experience all through my college career – I worked full-time and went to school part-time (I’m still doing it now during grad school). And I’ve never made very much money, because I needed to find the jobs that are flexible enough for me to attend classes, and those jobs don’t tend to invest much, because everyone involved knows that it is just temporary. 

But as I’ve gotten older, my husband and I notice that there is generally a very large gap between what we make and what we have discovered our friends make. One of our closest friends makes more by herself than we do put together. Now, she’s been in the same company for 10 years and has an MBA, but we’re in professional jobs, too, just at non-profits. And a large number of our friends own houses (in metro Los Angeles, nonetheless), while we can’t imagine that we will ever be able to afford to buy in this area when the median house price for the County is $360,000 and over $600,000 where we live. I’m sure that this is not uncommon for most people – if you are out there and being social, you’ll probably have a mix of people in your life that represent the whole spectrum of Net Worth. So why am I writing about this?

I’m writing about this because our experience of going through the financial crisises that we have over the last few years has further illustrated the gap between the “haves” and “have-nots” in our social circle. This is shown when we have to decline dinner plans at restaurants, or give homemade gifts because we can’t afford to eat out of purchase the $100 saute pan on the registry. And we haven’t had much luck talking to our friends about our money woes and our very real worry about filing for bankruptcy, because they talk about being broke, or money being tight, but they are also putting away several thousand in savings each month. It is simply two different scales of economy. So, we made the choice to reference it, but not to give details. I think this was a mistake – we should have been more transparent and explained to our friends that “no, we don’t make 6 figures with our combined incomes” and “yes, our total debt is more than we take home in a year.” We should have just told them. I think we were afraid that we would be judged and our friends (and family, to be honest) would think poorly of us and that it would affect our relationship with them. 

I guess this means that my husband and I need to think about letting all of that worry go and have honest conversations with the people that we care about – not ALL of our friends certainly, but I think the burden might not be so heavy if others were walking along side…

Have any of you had those conversations with your friends/family? What was the outcome? Were you surprised?

Loans from Friends and Family

One of the most embarrassing and potentially harmful thing we did was to put ourselves in a position where we owed friends and family money. In our case, we borrowed $6,000 from my grandfather to put together with the $1,000 that we saved for a down-payment on a car the we desperately needed as our workplaces had changed and we lived too far away for any type of public transportation. We had started paying my grandfather back (and with substantial amounts) until we hit some hard times financially. He said “pay what you can” and we did a horrible job of keeping up with our payments. Flash forward to a conversation he had with my mother where he told her that we still owed him money and this is at the top of our radar. We thought that we had been really clear with him over the first  few years that money was so incredibly tight and we weren’t doing much with it but paying bills, but it has strained the relationship and evidently was weighing on him as much as us. 

Now, we need to address it directly with him (boy, that’s not going to be fun) and apologize for not making it a priority. And then we need to start making payments – consistently and soon.  We would have started this month, but we had the car repair (extra $400 of expenses) so we are beyond tight. Hopefully April will be a different matter.

We also owe our friends money for their truck that we purchased a few years back. It’s a really old truck (17 years) and we know that our friend charged us more than blue book for it $1,000, but we had another situation where we needed two cars and this was the best answer. We made steady payments until the cancer diagnosis and then the rest of the things (see The Crisis) that caused problems fell into place. So we still owe $250 to them, but we’ve also communicated to them that money is so tight and $250 pays for more than the majority of our food  in a month, so we’ve not been able to make the payments. I think that part of  the reason that we haven’t pushed harder is that we hear from them all the time about the really expensive things they are doing ($800 dancing lessons, just because; $1,500 baby photos; lots of traveling). As my husband and I see our parents once every 1-2 years, we have a hard time when one of them says “we really need the money.” This is incorrect thinking on our part – we know we have this obligation and we really want to be able to pay it and have it behind us. But it makes it hard to have empathy for them. This also brings up a future topic I’ll write about – what happens when the Earnings Gap between families widens.

What has been your experience with family/friend loans?

Okay, so now what?

So I’ve written about the crises that lead to our realization that things need to change. There were a few additional things that urged us along to start to take more action and control of our finances and lives.

First, in the late spring/early summer, our church had a Sermon Series called Money Talks and there were some challenging sermons that really called us to task our our greed (living beyond our means with the constant use of credit cards). The church offered the opportunity to work with a Financial Counselor for a 4-6 month period and we decided that we really were entering full-on crisis, so we applied to the program. After filling out our paperwork, we found that we had a $1,534.84 DEFICIT every month. We had been making up the shortfall by using credit cards, but then our credit card payments would just get higher and higher. We were paying over $2,400/month to service the debt and with our high interest rates, it didn’t look like we were going to be able to get out of debt for over a decade.

So we determined that it was time for us to move and to try to cut $1,500 from our spending (or make more money). Here’s a list of what we did:

1. We moved. We went from a wonderfully quiet 2-bd, 2-ba townhouse to a 1-bd, 1-ba bottom-floor apartment (with no door on the bedroom. This saved us $355/month. It’s really loud, and sometimes it takes my husband 10 min to find parking at night (and there is a stack of stuff in the middle of the front room that needs to find a home because we’re out of storage space). But we just couldn’t afford to live where we were anymore.
2. I called my phone company. I was sure that we shouldn’t be paying $100/month for our phone and DSL. After calling and asking if there wasn’t a better bundle, I was told that we could be saving $50/month.
3. We cancelled our Netflix and Blockbuster Online. We just couldn’t afford the monthly payments of $40/month anymore and we have DirecTV, so we’d just settle for using the movie channels.
4. I changed health clubs. I LOVE Curves, but the location I was a member of was over 20 miles away from my house (I live in a very dense urban area, so this is pretty far away) and while I was getting a student discount (from grad school), $25/month is a lot more than the $9/month to go to the Bally’s Fitness that is 2 miles from my house. The hours a better, there is a better chance of me going because it is close and we could save $16/month.

That only brought us down $461, which still wouldn’t make us “balanced” each month.

So, after a tearful conversation with a parent, we were advised that we should file for Bankruptcy.

More on that to come…

The 2008 Crisis

Today, I’ll write about the crisis(es) that lead us to making drastic changes to our lifestyle. As I mentioned before, if we had been good stewards before, we would have been able to weather these things better, but these are the consequences of our actions.

My husband and I started accumulating joint debt before we were even married. It started with a loan to address a financial crisis and to purchase our wedding rings. I had  Victoria’s Secret, Express, JcPenny, Sears, and a Mastercard credit cards with low balances, but was a minimum payment person.  This debt kept growing and growing as we moved from one city to another, all the while promising each other that we would address it and pay off our debt. 

And we tried. I made excel spreadsheets that projected a re-payment plan – It calculated interest charges and projected payments and the timelines went from one year to two years.  We continued to open credit cards and at one point we got a $26,500 loan to consolidate our debt. Without a budget, we couldn’t keep to the plan and as time went by, our debt grew and the timeline continued to move further and further out.

In March of 2007 (a mere 2 years ago), after spending two months of starting a Microsoft Money profile for our finances, I started putting a budget together. It was another unreasonable budget, so it didn’t stick, but I used the exercise of getting it all together to take an honest look at our finances. With all of that information, I updated another one of my Excel Spreadsheets to project when we would be out of debt. With our jobs and my husband’s bonuses, it looked very likely that we would be out of debt in March of 2010. This felt very promising and we even started saving up for our first vacation ever. We had done fundraising for a mission trip (I was a staff person, so my trip was paid for) and were excited to continue our aggressive debt reduction plan of paying more than $2,400 toward consumer debt each month.

When we returned from the trip, I got the results from medical tests that were done before we left and it turned out that I had a rare cancer. My insurance coverage was very poor and we had to make some home improvements in our apartment to prepare it for my recovery from my cancer surgery and treatment. This stopped our progress and put us back into the “minimum payment” lifestyle.  

In early 2008, my husband and I each had job changes. I was in a position that was phased out in the middle of a 10% staff layoff and my husband found his dream job. I returned to a previous employer and continued my 6-year history of working for a non-profit and my husband started his first round at a non-profit, too. My husband was working part-time at the same place that I was leaving and he had to leave also. That resulted in a $10,000+ year income loss – coupling that with the $7,000 loss from no more bonuses and we were looking at a $17,000 annual reduction in income. 

The question became “how are we going to maintain our life here” and the answer quickly became “we can’t.”

TO BE CONTINUED

:: HOW ::

One of the reasons that we have found it hard to talk to people about our financial situation is because of the “how” – sometimes it’s really painful to accept that you are the reason that your life is hard and that you have made foolish decisions. Although, I think it is harder to change poor habits than it is to just accept responsibility, but you can’t change until you accept the reality.

The reality is that we did this to ourselves. 

That’s tough and it sucks, but it’s time to put on our big kid pants and accept that it was our lack of discipline that brought us to this point. 

Admittedly, there were some things that happened to us that made it all even more difficult (cancer, job loss, etc.), but we would have been able to deal with those so much more easily if we hadn’t already been in such bad shape. So what mis-steps can we identify?

1. Living beyond our means :: we moved away from our parents in the first year of marriage and out of a sense of guilt, we managed to travel “back home” almost every two months for two years. This is after moving to West Los Angeles – a very expensive place to live – and we started to rack up a ton of debt, all the while excusing it because we felt it was “worth it” to see our families. 
2. No accountability :: we didn’t set up any type of monitoring system, either internal or external, to hold us accountable for the debt we were amassing.  Whenever I confronted my husband about using a credit card for food, we’d get into a fight about the fact that we were too busy to cook and that we didn’t have the cash flow. And my husband is a wonderful, sweet guy who wants me to have whatever I want, so he wasn’t about to tell me no and my spending went un-checked.
3. Lack of a budget :: we didn’t have firm financial goals and I would set up un-realistic budgets that we couldn’t meet. I’d feel overwhelmed with work, school, community service and didn’t find a good way to ask for help from those who better at taking a realistic look at life. The irony is that I created and maintained budgets for several non-profits, and they were never a problem – I just couldn’t get it together for my own family.

I know there are more, but this is enough for now. Soon, I’ll write about how we’re starting to address these particular issues and get ourselves on a better path.