If you don’t know that the economy is in bad shape, turn on the radio and prepare to be enlightened. On any given station, at any time of the day or night, you will hear advertisements for companies that will tell you how to eliminate your debt. Each of these companies has a different method for getting rid of debt. Some of them work and some of them don’t. There are bankruptcy attorneys, debt relief agencies, debt consolidation agencies, get rich quick schemes, reverse-mortgage lenders, and companies specializing in negotiating with the IRS. I’m a bankruptcy attorney, so I tend to be biased towards relief from debt under the Bankruptcy Code. Luckily, I can support my bias with solid results, statistical evidence, and common sense. However, this article isn’t about bankruptcy.
What you generally won’t hear about on the radio is the virtues of writing down a budget. This approach works but it doesn’t make much money for debt settlement companies, so it is largely ignored. It’s also not as sexy as a “secret” trick to settling debts. Let’s face it; we all want a quick, easy fix. As a bankruptcy attorney I spend all day looking at my client’s budgets. A lot of people earn enough money to get their financial situation under control without filing bankruptcy. Struggling with your situation and don’t believe me? I want you to do three things. First, write down a budget of what you think you should be spending your money on each month. Don’t forget recreation. We all need to enjoy ourselves sometimes. Second, write down a budget of what you think you actually spend your money on each month. Don’t cheat and look at bank statements, credit card statements, etc. Finally, get out your bank statements, credit card statements, ATM withdrawals, etc. and categorize each of your expenses into the categories on your budget.
On occasion I meet a client who has a high income but doesn’t believe that they can afford their bankruptcy payment. I ask them to perform this exercise, and more often than not they are shocked at how much money they are spending on things like going out to dinner and the movies, groceries, clothing, and their utilities. If you have the same reaction to your spending habits after calculating a budget, consider making minor (maybe major) changes to what you spend money on. Take that money and reallocate it to paying off debt. Pick the credit card with the highest interest and start pouring as much money into it as you can afford each month. Paying off debt can be like an avalanche. It starts out slowly but picks up speed towards the end. As you pay off individual debts that money can be allocated to other debts and the money available to pay off the next debt grows with each creditor paid off. Most people get frustrated because the process starts out slow or because they aren’t self-disciplined enough to stick with their budget, but if you can get one creditor paid off, the satisfaction of doing so may be enough to help you focus on the next one.
If you find that the amount of debt and the interest accrued prevents you from making gains on the principal each month, you should contact someone to help you with your financial problems. If you have primarily consumer debt contact a bankruptcy attorney. If you have tax debt, contact a tax attorney and see if you can file an offer in compromise. If repaying your debt simply isn’t possible, don’t waste years struggling with repayment. Accept that you cannot repay your debt and do something about it.