Living Beyond Your Means?

A great article was published via Yahoo! Finance on Monday titled “Five Signs That You Are Living Beyond Your Means”.  This article stresses several key factors that many struggling with debt are acutely aware of:

1. Your Credit Score is Below 600
2. You are Saving Less than 5%
3. Your Credit Card Balances are Rising
4. More than 28% of Income Goes To Your House
5. Your Bills are Spiraling Out of Control

What struck me more than any of the other statistics quoted in the article was that the personal savings rate has severely deteriorated over the past couple years.  The following chart was provided based on data from the U.S. Bureau of Economic Analysis.

For the full article provided by Investopedia on Yahoo! Finance click here.

Technorati Tags: personal savings rate, debt settlement, budgeting, economics

When I Grow Up I Want to be in Debt

Does that line sound familiar?  Of course not.  Kids grow up saying things like they want to be a doctor, an astronaut, or a zoo keeper.   No one grows up saying they want to be in debt one day, so why is it that Americans have a combined credit card debt of over $900 billion? 

There are many theories and possible explanations that all have some truth behind them.  One possibility is that most people have simply forgotten the basics of sound financial planning.  Traditional financial planners will tell you that you need to have a reserve emergency fund with enough cash to last you at least six months should something unexpected occur, such as job loss.  If your emergency lasts longer than six months then maybe, just maybe, you will use the little piece of plastic to buy food or pay for utilities-just the absolute bare necessities.  Once you are back on track you do all that you can to rebuild that emergency fund, pay off that credit card, and then put the credit card away so that it will be used only in the next dire emergency.  Yes, this may mean some months of clipping coupons and postponing that vacation, but that is what being financially responsible is all about.   

That was then; this is now.  Credit cards are no longer used just for emergencies.  They are used every day to pay for everything from utility bills and groceries to shoes and vacations.  So how did this happen?  Well, first there’s the convenience factor.  Carrying a credit card is definitely easier than carrying a wad of cash in your wallet.  It makes your purse a little lighter and if your purse gets stolen, you can cancel your credit cards. Cash, on the other hand, cannot be canceled and issued to you again.  Convenience is great.

Second, once you get accustomed to using credit cards to purchase daily needs, the line of demarcation between necessity and want blurs.  For example, food is a necessity.  A $100 per person dinner at the new trendy restaurant is a want.  A credit card can marry the two, such that you can satisfy your basic need and your desire at the same time.  Since credit card use has become a habit, the $100 dinners continue and then voila, and 3 years later you’re still paying for that dinner.  This is great…well, not really.

Does this mean that I believe everyone in debt is in their situation because of poor money management, distaste for cash, and lack of self discipline?  No, of course not.  As I mentioned above, there is not one single answer to explain all of this; rather, there are many factors fueling America’s growing debt problem, including the job market, legislation and credit card companies themselves.   However, I think that if Americans are to start trying to resolve this problem, and more importantly, teach our kids how to avoid putting themselves in this same situation, we all need to go back to the basics of sound financial planning and responsible credit card use as soon as possible. 

Technorati Tags: budgeting, debt problems, American personal debt, financial planning, credit card debt

My Favorite Conversation in May

I had a chance to speak with a lovely older lady last month about our debt settlement program.  

This woman has had a series of misfortunes with her health that affected her work and her income.  She had to move out of her house last year due to a foreclosure, and now she’s at the point of being unsure whether she’ll be able to keep up with her credit card payments.  Despite all of this, she had an upbeat attitude and she made me laugh all the way through our conversation.  She’s a “glass half full” type of gal.

Unfortunately, Provanta could not help her for reasons that I won’t go into.  Instead, we talked about ways to minimize her expenses and I gave her ideas on how to manage her budget.  The most important advice I gave her, the one I give to anyone who wishes to become debt free, is to stop using credit cards. 

She said to me, “I’ll just freeze them.”

I asked what she meant and she replied, “I used to put my credit cards in a big bowl of water, then place the bowl in the freezer.  Whenever I felt the urge to buy something, I would have to wait for the credit cards to defrost, which could take up to a day or even two.  By then, the urge was gone.” 

I still smile whenever I think of her and imagine a bowl of frozen credit cards in her freezer.

(Ref. 1513)

Technorati Tags: budgeting, client hardship, medical hardship, foreclosure

Debt Settlement Programs Can’t Help Everyone

Most companies in the service industry are focused on enrolling as many clients as they can.  Provanta is no different, but we do have to decline requests for enrollment from time to time if debt settlement simply is not a viable option for them. 

A woman who was referred to Provanta through the local Better Business Bureau (who has been kind enough to refer a number of clients) walked into our office last week and asked to speak to someone about our program.  Luckily, I was available to speak with her.  We spent about 45 minutes talking about our services.  I provided her an estimate for her program based on her current statements.  She said enthusiastically that she wanted to enroll into the program because it would help her financial situation and she felt comfortable with our approach and background.  We set up an appointment two days later for her to come back and complete an enrollment application.  I asked her to bring along some other documents including a pay stub and a list of all her monthly expenses.

During the appointment, I realized she only made about $2,600 a month after taxes but her monthly expenses with her mortgage, car payments, medical bills, food costs, etc totaled over $4,500.  She was upside down nearly $2,000 per month.  There was no financial way she could afford her current expenses let alone the additional $1000 she would need to provide for the debt settlement program — she owed $58,000 on credit cards.  Even if she was able to eliminate her mortgage and her car payments tomorrow, she still could not afford the program.  It was difficult for her to accept.  She asked me to ignore her income and she asked if I coud even lie about her income to our underwriters.  She insisted that she would find a way afford the program and she would make it happen. 

I had to be firm with her and explained that it was simply irresponsible and unethical for Provanta to enroll her.  She had over extended herself long ago because of poor budgeting and because her creditors allowed it to happen.  Her creditors should not have extended over $50,000 of credit on credit cards to someone who only makes $2,600 a month and she should not have been able to purchase a home where the mortgage payment accounts for more than half of her monthly disposable income.  It’s unfortunate for her, but she’s at a point where it’s unlikely any debt program could help her.  She asked about bankruptcy and I told her that it may be worthwhile for her to consult with an attorney specialist.  

(Ref. 1509)

Technorati Tags: bankruptcy, debt settlement, BBB, Better Business Bureau, debt settlement underwriting, bankruptcy attorney

Being Perfect is Hard But You Still Have to Try

Sometimes our clients are exasperated by the amount of questions our Program Management Department asks them when they call in to request an EFT (Electronic Funds Transfer) reduction or skip.  The line of questioning often includes:

1. What is the exact reason for your request?
2. Is there any other way for you to pay for that unexpected emergency, expense, etc?
3. Can you reduce or cut back on any other expense this month instead of using your Settlement Fund?
4. Have you reviewed your entire budget to determine this? If no, let’s go through it together.
5. Can you pay for that unexpected expense over the next few months instead of all at once?
6. Can you obtain the money elsewhere?
7. Can you increase next month’s EFT to make up for this?
8. Can you increase any future EFTs to get you back on track with your EFT schedule?

It is not our goal to give our clients the third degree every time they call in (believe me, it’s not that fun for our Program Mangers either), but it’s extremely important that our clients maintain the EFT deposit schedule if we are to provide the best results possible for them.  Provanta cannot effectively negotiate for debt forgiveness settlements to creditors if there are no funds to work with.  In addition, if a client reduces or skips their EFTs and does not make up for them in the future, our client’s program will undoubtedly take longer than the original estimated time frame.  Longer programs expose our clients to higher chances of above average settlements and higher chances that the creditor may give up on negotiation process altogether and look into litigation.

This does not mean we deny our client’s request.  We understand more than anyone else that life happens and there will be unexpected emergencies during enrollment.  That’s why we honor most of the requests without having to resort to a suspension or withdrawal of services, action reserved for egregious and repeated abuse of the client agreement.  We just want to make sure the client understands that the EFTs need to be placed at the top of the priority list, along with other absolute necessities such as mortgage or rent, food, utilities, car payments, medical payments and insurance. 

Technorati Tags: debt settlement program, debt forgiveness, debt negotiation, financial settlements, debt consolidation

Can You Afford A Debt Settlement Program?

In talking to thousands of potential clients over the years it has become abundantly clear that the primary issue for most individuals struggling with debt is simply an inadequate grasp of cash flow. Many people believe that because they are current with their monthly minimum payments to their creditors they will then be able to afford a debt relief program whether it be debt settlement or consumer credit counseling. The reality of the situation may indeed be quite to the contrary. It comes as a shock to many when they discover that they are actually running negative every month. Let me give you a quick example.

Joe and Mary’s net income is $5,000 a month. They currently have about $40,000 in credit card debt. They pay about $1,200 a month in minimums to their creditors. They are not behind on payments and actually happy that they have been able to maintain a relatively good credit score. However, they have recently discovered that they are approaching the limits on the credit cards and that their debt to credit ratio is in decline. The credit score that they used to be so proud of has begun to erode and they know that something has to be done. They have not actually used the credit cards for purchases in about a year and are now looking into a debt settlement or credit counseling program.

A quick review of Joe and Mary’s expenses reveal that their regular monthly living expenses including the: mortgage, homeowners insurance, property taxes, utilities, car payments, insurance, gas, maintenance, food, clothing, daycare, school lunches and supplies totals $5,000 a month. When the credit card minimum payments are added to this total it brings their grand total to $6,200 a month. In subtracting their expenses from their income it is discovered that they are running negative each month to the tune of $1,200. They realize that the only way they are staying current with their creditors is via balance transfers and cash advances.

Joe and Mary decide that a debt settlement program will provide the best solution to resolve their $40,000 in credit card debt. They quickly learn that a monthly payment to a debt settlement program lasting 3 years is approximately $667. While this is substantially less than the $1,200 a month they are currently paying their creditors the debt settlement company will not enroll them because they are still negative by about $667 a month.

The only way for Joe and Mary to afford the debt settlement program is to eliminate some of their monthly living expenses or increase their income. Because Joe and Mary are already working overtime and cannot possibly generate any more income they decide to sell one of their vehicles and move into a smaller apartment. The decrease in living expenses increases their available income by about $800 a month allowing them to enroll in a 3 year debt settlement program.

Technorati Tags: budgeting