Now that you’ve done your mid-year financial checkup, is a financial fast up next?

What is a Financial Fast?

From Singletary’s article: “During this fast, you will not shop or use your credit cards. For three weeks you must refrain from buying anything that is not a necessity. And by necessity, I mean the bare essentials, such as food and medicine. You will refrain from going to the mall or retail stores…No restaurant meals…You can’t stop for coffee…You are not permitted to buy gifts or gift cards.”

The fast also includes eliminating all plastic from your life – including both credit and debit cards – and getting serious about creating a budget and paying off debt.

Taking Fasting to Extremes

Singletary’s idea of debt fast isn’t really anything new – after all, I myself preach the benefits of a “no-spend weekend” every now and then. But this pretty extreme, advocating staying nearly spend-free for almost ¾ of a month! What I find most difficult about this financial fast is the idea of no gifts – while it’s true that it’s easy to go overboard on spending, I don’t think we should be discouraged from giving appropriate gifts if we really can afford them.

For someone just starting on the path to good financial management, I question whether a financial fast is really the best approach. If you are in deep debt, or have no money saved for retirement, or simply spend every single penny of your paycheck every single month, getting your finances in order is truly a marathon. Sprinting out of the gate will get you ahead – but might make getting to the finish line that much harder.

I liken the idea of a financial fast to an actual fast – or at least a really strict diet. If a diet tells me I can only eat grapefruit for three weeks, I’m liable to do it for one day and then eat double the next day to make up for it – ditto cutting spending then making up for it by going on a shopping binge. If a diet tells me I can’t have a piece of bread, ever, I’m likely to just decide not to do the diet at all. I feel like the financial fast falls in the latter category – if I can’t buy a birthday or wedding gift, or even a single cup of coffee, I might decide to avoid the program altogether.

Should you fast?

I do think a financial fast would be good for some people. Specifically, a financial fast is for you if…

• You’re generally good at managing your finances, but feel like challenging yourself to go the extra mile.
• You need a little extra cash or want to generate extra income to meet a savings goal or pay off that last bit of debt.
• You are really committed to getting in financial shape this year, but you’ve already fallen short on your New Year’s resolutions and need that extra something to kick you into gear.

On the other hand, some people either just don’t need or are just not ready to take this drastic step. A financial fast might not be right for you if…

• You are just learning the basics of personal finance. Instead, check our our list of best personal finance books and start learning about budgeting, debt reduction, and savings, and take your transformation one step at a time.
• You are generally judicious with your money and avoid major financial mistakes.

If you decide to do the financial fast, or something like it, I’d love to hear from you in the comments! Just make sure that to reap the benefits by avoiding splurging once your fast is over. And if you decide not to do it just yet, that’s ok – there are plenty of other ways to jump on the path to prosperity!

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Student Loan Reform Bill

The federal government has officially ended the bank-based system of distributing federally subsidized student loans through the passing of the Student Aid and Fiscal Responsibility Act (SAFRA), which was included in the health care bill signed into law on March 30, 2010.

This has been in the works for quite some time; over the past five months or so when I signed into my Sallie Mae account, the loan manager tab became separated by “loans owned by the government” versus ones that are not owned by the government. This is because with the drying up of the credit markets in 2008, the government stepped in and purchased the government-backed student loans from lenders such as Sallie Mae and Bank of America. The Department of Education has already directly purchased $52.3 billion in loans from private companies through the Loans Purchase Commitment Program, and now they own roughly 80% of all student loans.  

So how will this new law affect students?

Where to Get Your Student Loans

Beginning on July 1, 2010, students will go to designated private lenders, who are competing for the contracts from the US Department of Education. Included in the Obama student loan reform, private lenders must lend loans from the Direct Loan Program to students at the same rates, terms and benefits.

Expanded Financial Aid

More than $40 billion in Pell Grants will be available now due to the health care bill student loan provision, which will roughly double the total amount of funding available for Pell Grants. The Federal Pell Grant will be awarded according to the Consumer Price Index from 2013-2017 at an estimate of $5,550-$5,975. Currently the maximum Pell Grant awarded for 2009-2010 academic year is $5,350, with an added option for receiving an additional disbursement of $2,675 in the summer.

Help to Community Colleges

The government will now be saving an estimated $67 billion by directly loaning to students and cutting out the middle man in the student loan bill. The government plans to use $2 billion of this money to bolster community colleges, which are becoming a much more popular and viable education option for working adults and older students.

Student Loan Forgiveness Program

The student loan bill expands the existing income-based student loan repayment program (IBR). According to a White House press release, students who borrow money starting July 1, 2014 will be able to cap their student loan repayments at 10% of their discretionary income (currently it is 15%).

After 20 years of consistent, on-time payments, a student’s loans will be forgiven. Furthermore, public service workers (teachers, nurses, military service) will have debt forgiveness after 10 years.

Check out the entire health care series:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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Foreclosure leaves a big black mark on your credit report, and can drop your credit score by up to 150 points, making it hard for you to get new credit in the future. And with foreclosure expected to keep rising through 2010, many people are facing the prospect of life – and building credit – after foreclosure. If you or someone you know is facing a foreclosure, know that there is hope. While it will take seven years for the foreclosure to completely drop off your credit report, you can still take steps today to improve your credit and raise your credit score.

Strategies for Improvement

1. Choose future housing wisely: Wherever and whenever you find your new home, be honest with yourself about what is affordable – taking on too large of a housing payment ended in foreclosure. This time, limit housing payments to no more than 28% of your total income, and total housing and other debt payments to 36%. Set aside money for your housing payment before paying any other bills or making any other purchases. If at all possible, make future housing arrangements before foreclosure proceedings begin. This will make it easier for you to find someone willing to rent to you, without regards for the damage the foreclosure will do to your credit.
2. Use existing credit wisely: Since it is unlikely that you will be able to get new credit immediately after a foreclosure, it is important that you are very smart with any existing credit. This means doing everything in your power to avoid other bad marks on your credit – stay current on all accounts that are reportable to credit bureaus, including credit cards, student loans, auto loans, housing payments, utility payments, medical payments, and even library accounts. If you have open revolving credit (credit cards), use it to the extent that you can pay the balance off in full each month – the point is to keep your accounts open and prove you can be responsible with credit, without going further into debt. This will improve your credit score.
3. Pay down debt: If you have existing debt, paying it off will result in increases to your credit score. If your new housing is substantially cheaper than the mortgage you had to foreclose on, use any extra money to jump start your debt payments. Use the snowball method, avalanche method, or whatever other method you want – the point is to get a plan and stick to it. Every time you reduce a balance, your credit score will climb – and zero balances will reward you psychologically as well as on your credit report/score.
4. Live within your means: Understand your income and expenses – then create a budget and stick to it. If your current expenses exceed your income, you need to spend less or earn more. Anything else will just create more financial problems, and thus more problems on your credit report. Living within your means will prevent you from acquiring any more debt and allow you to get back on track.
5. Get help: If you feel in over your head even after getting rid of a mortgage payment, it may be time to get help from a professional. Check with your church or community center for any programs that will allow you to get financial counseling for free. Otherwise, check out non-profit organizations such as GreenPath or Consumer Credit Counseling Service. A personal credit counselor can help develop a personalized plan to get you back on track.
6. Monitor your progress: Throughout the process of rebuilding your credit, use free methods to check your credit score and credit report every 6-12 months. This will allow you to watch as your efforts pay off in the form of a higher credit score – but also lets you check for and dispute mistakes, to improve your credit as quickly as possible.
7. Wait: Unfortunately, the best way to repair your credit after a foreclosure is simply to let time pass – as you move further away from the foreclosure, it will have less of an impact on your credit score.

Moving Forward

Rebuilding your credit after foreclosure can be a long and frustrating process, but it can be done. If you put your mind to creating and executing a plan, you can find relief in just a couple of years.

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Now that the holidays are officially over, I must admit that I feel a little void where holiday cheer, family and peppermint candies used to fill.

If you are suffering from a slight case of holiday hangover, here are some common post-holiday blues, and ways to beat them.

You Overspent and are Feeling the Financial Headache

It is too bad that some aspirin and water won’t cure this holiday hangover!

If you got swept up in all of the holiday cheer and great sales, don’t fret. For those of us who overspent on our credit cards and cannot pay the bill in full come January, the best solution is to buy yourself some more time at no cost to you.

Open up a new credit card with a 0% balance transfer option, (check out our Free Money Page for updates to these credit card offers), and transfer your credit card balance to this new card. Do not charge anything else to this card because in most cases you will sacrifice your finance charge grace period on new purchases for the courtesy of the free balance transfer. Instead, work out a payment plan to pay off this credit card balance in full by the last month of the 0% apr offer. This is usually six or twelve months.

If you overspent from your bank account and will now have trouble paying bills in January or having cash for variable spending, there are a few ways to handle this. First of all, cash in any of the gift cards you received over the holidays on Plastic Jungle. If you have a savings account to tap, you can do so to cover your bills; however, treat this as a loan and make sure to pay yourself back within a certain amount of months. If you have your W-2s and other tax documentation collected, and if you are expecting a tax return, you can e-file in January and set your tax return for automatic deposit into your bank account. This should take between 8 to 15 days. Carpooling with someone at work starting in January is a way to add a few extra bucks to your wallet. If you have a credit card as backup, you can use this to pay your bills in January, and then pay this off in February during the grace period (please note, if you use this method, then you will essentially be paying double bills in February: January’s bills via your credit card statement, and February’s bills via your bank account).

Traveling over the Holidays Has Left you Feeling Stressed

Sounds like you need a cheap, staycation to get the relaxation you were hoping for (but did not get!) from being off of work. Choose a weekend in early to mid January to stay home and relax. This weekend is not for taking down Christmas decorations, working on house projects, paying bills, or anything of the like. It is literally to decompress, light a fire, read a good book, or to do anything else that you personally find enjoyable and relaxing.

You Received Gifts You Do Not Want

Your first option is to return the gifts if you also received a gift receipt. If there is no gift receipt, but you happen to know which store the gift was purchased at, then you can probably exchange it for store credit. Check with the store’s policy. If not, are any of these gifts re-giftable? Another option is to donate your gift, or to simply just give it to another person who you know can use it or would enjoy it more than yourself.

You are Suffering from Post-Holiday Blues 

The holidays can be such a whirl of fun, excitement, and out of the ordinary good cheer for everyone. Coming down from such a high can leave some of us a little blue. If you are feeling these holiday blues, don’t forget that most of the activities that you do around Christmas time are really ways to celebrate the season of winter. For example, playing in the snow, drinking hot chocolate, lighting cozy fires and candles at night are all things that you can do throughout the entire season of winter. Perhaps you and your family or friends can meet-up for a nice Sunday meal once or twice throughout winter to extend that feeling of closeness most often associated with the holidays.

No matter what your holiday hangovers may be (and I would love to hear what they are in the comments below!), I hope that your holidays were well worth it. Put some thought into finding your own cure, as well as use the suggestions above to start your 2010 off right.

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The sky has fallen, and a lot of us are in over our heads in debt and worry. But the recession doesn’t have to be a bad thing. Just as a company can emerge from a bankruptcy as a more stable, more efficient business, you too can use this economic downturn as a time to reflect on your finances and lifestyle and reinvent yourself for the better. After all, what doesn’t kill us will ultimately make us stronger. These tips will help you survive the tough times and come out smarter and stronger and ready to tackle the next bump in the road.

Cut Costs

Survive: Eliminate Nonessentials. Cable TV, landlines, data plans on your cell phone, broadband Internet, movie theater tickets, fast food, takeout, top shelf liquor at the bar, soda pop and everything else you don’t need has got to go. Believe it or not, you can live without these things. It may feel like torture to go the whole day without your morning soy chai latte, but it’s better to sacrifice these mini-luxuries now than to have your heat shut off next December. Start living within your means now.

Thrive: Better Yourself. In addition to being expensive, much of our nonessential habits and expenditures happen to be mind-numbing and unhealthy to boot. Instead of spending hours in front of the TV, visit the library and get a book or plant vegetables in your own garden. Instead of grabbing a burger at the drive-thru, have a nice, healthy home-cooked meal with some friends. Instead of watching 30 second clips of cats watching TV on YouTube, go for a run, or a walk or do anything to get off your duff and on your feet. Replace the time-wasting money drains on your life with educational and inspirational activities that will make you feel better about yourself and keep your finances in the black.

Give and Receive Free Stuff

Survive: Make Do Without New. With an eye towards conservation as well as thriftiness, now is the most critical time to be resourceful and innovative. New clothes, new cars, new TVs and anything else shiny and expensive are luxuries that few can afford, and, in reality, luxuries that few should afford. Furniture, computers, textbooks and numerous other essentials can be obtained on the cheap if you buy them used. And because others are eager to turn their possessions into cash, you can often find excellent deals when shopping around on Craigslist or eBay. You can also get items for free from services such as FreeCycle.

Thrive: Do it Yourself. Leaky faucet? Creaky door? Smelly carpet? Instead of paying a professional to come fix it, do it yourself. You’ll learn a new skill and save a substantial amount of money. If you are unsure where to begin, ask a friend to help or give you some pointers. You can also visit your library for books on home improvement and simple repairs. You can often rent any special tools needed or borrow them from a neighbor. Once you fix one thing in your house, you’ll likely be inspired to check off more of those items on the “Honey-Do” list. Maybe you’ll even increase the value of your home while you’re at it.

Clean Up Your Balance Sheet

Survive: Tackle Your Debt. Interest payments, late fees and dings to your credit rating are a vampire on your present and future finances. A solid debt reduction plan is a stake to the heart of the forces that are systematically draining your capital. Depending on your situation, you may need to consider debt counseling or debt consolidation. If you aren’t in too awfully deep, though, you can begin chipping away at your debt with a solid plan of action (consider the debt snowball method) and a newfound resolve. Pay down high interest debt first, don’t let any payments go delinquent and don’t rack up any more debt along the way.

Thrive: Build Your Emergency Fund. If you have your debt under control, the next step is to create a backup plan so you can avoid going into debt again. In these times, a bit of extra money to squirrel away seems like a vast luxury. But by cutting back on some of your discretionary spending – a coffee a day, a night out at the movies, a new electronic gadget – you can begin building up a solid cushion. Of course, don’t even think about stashing money in a savings account until you’ve paid down all your high interest debt. As long as the interest rate on your loans is higher than the interest rate on your savings account, CD or bonds, then you’re wasting your time.

Take This Job and Shove It Thank Your Lucky Stars

Survive: Keep Your Job, or At Least Keep In Touch. Now’s not the time to be picky. Bankruptcy looms everywhere. With the economic stress worldwide, your job may become especially taxing and your superiors may become increasingly irksome. But now’s not the time to complain or drag your feet. Be a team player and pitch in a little extra to help the company get through these rough times, even if there are no immediate rewards. Because in the end, the grand prize may ultimately be your job. If you do get the pink slip, don’t make yourself a victim. Being laid off is better than being fired – take the termination with class, thank your employer for the opportunity and stay in touch. Ask if there is anything you can do to help in the meantime, even though you won’t be employed and when things turn around, you’ll be at the top of their list to call back.

Thrive: Rise Above the Chaff. If you were lucky enough to survive the last round of layoffs, now’s the time to shine. Your company’s workforce is now much leaner and with so many vital positions cut, there will be ample opportunity for you to rise to the occasion. Pick up the slack where your fallen colleagues have left off and make your boss glad that he chose to keep you around. Your willingness to tackle extra responsibility will make you indispensable if the ax falls again, and will make you a shining star when it comes time for promotions.

Hedge Your Bets with a Paying Hobby

Survive: Hone a New Marketable Skill. You never know when your main source of income will disappear. Take the time now to expand your marketable skills in case you have to start updating your resume. To make it relevant, take a class or a pickup a book that can apply to your current job or hobby. That way you can justify the time commitment in the near term as well as appreciate the skills you’ve gained in the long run.

Thrive: Start a Side Business. Turn your hobby into cash by starting a side business. You’ll find it fulfilling as well as fiscally rewarding and you’ll have some extra income to fall back on if things go south with your main gig. Enjoy writing? Start freelancing for web and print publications or start a blog. Into crafts and collectibles? Start an eBay business. Good with computers? Start a computer consulting business. By monetizing something you enjoy, you may also be launching the career of your dreams in the process.

Keep Your Head Up

Lastly, it’s important to keep your head up. Count your blessings if you have them (and you most certainly do) and don’t despair. If you feel like you’re at the end of your rope, talk to someone. You may discover that you’re not alone and you may find inspiration and ideas where you never thought to look for them. An economic downturn – whether global or personal – will be the end of rampant spending and living beyond your means. But it isn’t the end of the world. Stay strong, stay diligent, and you’ll emerge as a savvier consumer and a happier person.

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The program caught my eye, because it looks like a fantastic arbitrage opportunity!

ARC Loan Program

The loan program offers loans to small businesses 100% backed by the small business administration. The idea is to help businesses experiencing hardship, which includes declining revenues; common for many small businesses right now. The loans are structured as follows:

Loan Terms. Loans up to $35,000, at 0% with no fees. No collateral is needed.

Repayment. The loan money is distributed over 6 months. Repayment begins one year after the last distribution and can last up to five years.

Time Frame. The loans will be offered until September 30, 2010. It will end sooner if all the funding is used before then.

ARC Loan Eligibility

To qualify for the ARC loan, businesses must meet the following criteria:

• Show profits in one of the past three years.
• Show cash flow projections for the next two years to meet loan payments.
• Established business, in operation for at least two years.
• Current on all debts, or no more than 60 days past due on any loan.

Arbitrage

I’ve been a fan of using 0% balance transfers for credit card arbitrage for a long time. This is another opportunity to keep that arbitrage wheel spinning!

You’ll need some current business debts to qualify, which can include credit card obligations. Since we’ve used business cards to super-size our credit card arbitrage in the past, we’ll have plenty of “business debt” to show.

Action Plan

Our business will hit the 2 year mark later this year, so I’m planning to submit an application. Because I’m taking time off this summer, I’ll have no problem showing a decrease in revenue!

What a fantastic way to convert some 0% balance transfer money into five years at 0%!

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Unfortunately, I’ve found that many of the details aren’t on the general MakingHomesAffordable.gov site. Instead they are buried in supplemental directives written for the lenders. Luckily, they are all available to us, so we can get the additional information we need.

Here are some of Laura’s questions about the loan modification. I’m sure that many of you considering the loan modification have some similar questions.

Loan Modification Q & A

We have about $10,000 in savings. Are we expected to use up all our savings before we will be considered for a loan modification?

Not necessarily. The loan modification program allows you to exclude an emergency fund, which they define as equal to three times your monthly debt payments. So if the $10,000 is your only cash reserves, then they will not require you to use it first.

We own two vehicles outright that are valued at around $10,000. Do we need to sell those before we apply?

Cash reserves are defined as cash, savings, money market funds, marketable stocks and bonds. Their is no mention of having to sell your vehicles before qualifying for a loan modification.

We have about $25,000 in retirement accounts. Do we need to raid those first before we can get a modification?

Retirement accounts are excluded from the calculation of cash reserves, so they will not expect you to use any retirement money before getting a loan modification.

I remember you had a post about you and your husband possibly applying for a loan modification (Would You Take a Loan Modification?).

But I would imagine that you are not having trouble paying your mortgage since you and your husband seem to be really smart with your finances. What would you write in your financial hardship letter? And do you know if it makes a difference that you leaving your past job was voluntary?

Thanks for the compliment. You are correct, we are not having trouble paying our mortgage. However, one of the hardship choices is a reduction or loss of income that was supporting the mortgage. It does not specify the cause of the lost income. I would reference that hardship reason, and be honest about the circumstances.

When I spoke to some of the servicers, it did not seem to matter that me leaving my job was voluntary (I can see light bulbs going on in people’s heads reading this!) However, three months after I left my job, the position was eliminated, so I would be sure to include that.

I’ll be writing more about our adventures with a possible loan modification in the future…. so stay tuned!

I am hoping to modify my mortgage because it currently takes up 51% of our gross income. We definitely qualify for a modification according to the numbers, but, we haven’t suffered any life changing event such as a job loss, loss of work hours, or sickness.

The hardship criteria is based on “are you having trouble paying your mortgage?” not necessarily a life event.

Here are all the types of hardship from the supplemental directive. You’ll notice that only the first four reasons reference a change of events. Options 5 and 6 reference a shortage of money, but no “life event” so there appears to be a lot of room in the hardship definition.

Hardship Affidavit

Every borrower and co-borrower seeking a modification, whether in default or not, must sign a Hardship Affidavit that attests to and describes one or more of the following types of hardship:

1. A reduction in or loss of income that was supporting the mortgage.
2. A change in household financial circumstances.
3. A recent or upcoming increase in the monthly mortgage payment.
4. An increase in other expenses.
5. A lack of sufficient cash reserves to maintain payment on the mortgage and cover basic living expenses at the same time. Cash reserves include assets such as cash, savings, money market funds, marketable stocks or bonds (excluding retirement accounts and assets that serve as emergency fund – generally equal to three times the
   borrower’s monthly debt payments).
6. Excessive monthly debt payments and overextension with creditors, e.g., the borrower was required to use credit cards, a home equity loan, or other credit to make the mortgage payment.
7. Other reasons for hardship detailed by the borrower.

Making Home Affordable Lender Information

Want to find out all the other details about Making Home Affordable? Check out the materials and website that are targeted to the lenders:

• Home Affordable Program Administrative Website for Servicers
• Supplemental Directive 09-01 – Home Affordable Modification Guidelines
• Supplemental Directive 09-02 – Home Affordable Modification Guidelines

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The government has determined that even if you receive a loan modification on your first first mortgage, having an unaffordable second mortgage could still put your at risk of going into foreclosure.

Second Loan Modifications

Here’s how the second loans will be modified:

Amortizing Loans

• Reduce interest rate to 1% for 5 years, then step up to the rate on the first mortgage after modification.
• Extend the term to match the term of the first mortgage after modification.
• Provide principal forbearance in the same proportion as the first mortgage.

Interest Only Loans

• Reduce interest rate to 2% for 5 years, then step up to the rate on the first mortgage after modification.
• Adjust the amortization time period.
• Provide principal forbearance in the same proportion as the first mortgage.

Second Lien Program Details

Incentive Payments. In addition to the modification, borrowers can receive $250 incentive payments per year for 5 years, applied to the first mortgage.

Loan Forgiveness. Instead of a modification, lenders can also opt to extinguish the second loan all together for a larger incentive payment.

HELOCs. There is no mention of including second liens when there is a home equity line of credit instead of a loan. We’ll have to wait for more details to see if they specifically include them or exclude them.

Helpful Links

• Second Lien Press Release
• Second Lien Fact Sheet
• Second Lien Case Examples
• List of participating Lenders
• MakingHomeAffordable.gov

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In a weird twist of events, it looks like we qualify (on paper) for the loan modification program.

Home Affordable Modifications

To find out of you are eligible for the Home Affordable Modification you need to answer these questions from MakingHomesAffordable.gov:

1. Is your home your primary residence?
2. Is the amount you owe on your first mortgage equal to or less than $729,750?
3. Are you having trouble paying your mortgage?
   For example, have you had a significant increase in your mortgage payment OR reduction in your income since you got your current loan OR have you suffered a hardship that has increased your expenses (like medical bills)?
4. Did you get your current mortgage before January 1, 2009?
5. Is your payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) more than 31% of your current gross income?

Ironically, I can answer yes to these questions since I left my job. Number 3 has some gray area, since technically, we did have a significant reduction in income, but it was voluntary on my part.

However, because my job was actually eliminated a couple months after I left, I did confirm with the housing counselors that it would qualify. Their definition of “trouble paying your mortgage” is based solely on income from a job (or self-employment) and doesn’t include all of our alternative income sources.

Do We Need It?

No. When I left my job, I set aside money in CD Ladders to cover our yearly expenses.

The bank’s requirement of “31% of your current gross income” doesn’t include passive income, living off of retirement income (unless you are actually of retirement age), or the use of CD ladders. Ultimately, it would never occur to a bank that all of a household’s income doesn’t come from a JOB in their underwriting.

So while it looks like to the outside world that we can’t afford our mortgage; we’re perfectly fine. I realize we’re in a very unique situation, though.

How Much Would We Save?

Just for fun, I calculated the after tax savings if we were to use the loan modification program. It would save us over $60,000 over the first five years. And because the rate only adjusts 1% each year after that, there would be more savings in years 6-8.

That’s not small change!

Ethics of a Loan Modification

I have lots of questions about the ethics of using this program. Where does this program fall?

For example, many people will get to take advantage of the $8,000 First Time Home Buyer Tax Credit, who were planning to buy a house anyways. Is this along the same lines?

If we were to use the modification, does it take away the ability for others to use it who really cannot afford their mortgage due to losing their job?

I’m a taxpayer who reports all my income, so I’ll be helping fund this very program with my tax dollars. Does that make a difference?

Your Thoughts

My lender isn’t participating anyways, so it’s not possible for us to take advantage of the program, whether it’s right or wrong.

But I thought it would be a great topic of discussion. I’m sure many of you have very strong opinions on the topic!

Would you take a loan modification if you qualified?

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How to Get Your Free Credit Score

1. Enroll at Credit Karma.
2. Verify your email address and personal information to obtain your score.

Really, that’s it! It took me less than two minutes to sign up!

Additional Credit Information

Once you get your score, you can utilize additional fun features:

• Credit Compare: View what percentile your credit score falls in for all Credit Karma users, your state, and your age bracket.
• Credit Simulator: Predict your future score by changing some of your information. For example, what will closing some cards do? Obtaining a new loan? Inquiries?
• Credit Snapshot: Find out your adverse action factors. These are the reasons your score is what it is, and you commonly see them listed on adverse action notices from financial institutions.

Credit Karma Credit Score

There are thousands of credit scores available, so this one isn’t going to match the one your insurance company uses, or the ones your bank uses, since it’s not a FICO score. But chances are, it will be close enough to give you an idea of your credit worthiness. The Credit Karma score is based on a scale of 300 to 850.

I didn’t have my FICO score handy when I enrolled at Credit Karma, so I’d be interested to hear some data points for those of you who check your Credit Karma score, and FICO score on the same day!

Credit Karma Details

Underlying Credit Report. Credit Karma uses the TransUnion credit report to calculate the score.

Credit Karma Blog. Credit Karma also operates a company blog.

Credit Reports

Credit Karma doesn’t give you access to your credit report. If you want to get your credit report along with your credit score, you can check out the following options:

• Free FICO Scores & Credit Reports
• Free Credit Report and Scores

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There are two components for home owners, refinancing and loan modifications. Participation is voluntary and the lender has to choose to participate. Details of both plans are below.

Home Affordable Refinance

Borrowers who haven’t been able to refinance because their home value decreased now have an option to refinance into a 30 or 15 year, fixed rate loan.

Eligibility is as follows:

• Your loan is is owned or controlled by Fannie Mae or Freddie Mac.
• You are current on your mortgage payments.
• You have stable income to support the new mortgage payments.
• Your first mortgage will not exceed 105% of the current market value of the property.

Want to find out your FICO score before you refinance? Get your Free FICO Scores & Credit Reports.

Home Affordable Modifications

Requirements for the loan modification program are:

• Your loan must have been obtained on or before January 1, 2009.
• Have a first mortgage with a balance less than $729,750.
• Be owner occupied in a one to four unit property.
• Document income with signed IRS 4506-T, two most recent pay stubs, and most recent tax return.
• Sign an affidavit of financial hardship.
• Modify by December 31, 2012.
• Have a mortgage payment that is no longer affordable, examples include significant change in income or expenses.
• Go to counseling if household debt is more than 55% of income.

The loan modification will lower the interest rate to make the payment (principal, interest, taxes, insurance, and home owners association dues) 31% of income. After five years, the rate will adjust 1% each year until it reaches the prevailing market interest rate on the date the modification.

In addition, there may be an incentive payment for borrowers for on time payments. Over five years the total principal reduction is up to $5,000.

Making Home Affordable Program Plan

Complete details, and a tool to find out if you are eligible, are listed at Financial Stability.gov or MakingHomesAffordable.gov:

• Borrower Q&A
• Summary of Guidelines
• Fact Sheet

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One of the sad things I found when helping my brother-in-law get out of debt, was that he couldn’t even remember where he spent most of the money. Without knowing where the money went, it’s hard to make the connection to your daily life and your debt.

Emotional Debt Payoff

In How to Pay off Credit Card Debt, we discussed some common methods to pay off debt, including paying the highest interest first or the smallest balance first.

Here’s a different approach, one that helps you make the emotional connection to your debt.

1. Itemize. Go through your debt to find out exactly what you purchased.
2. List Amounts. Make a list of each item with the amount.
3. Rank Your List. The first item should be the one that bothers you the most. Now that you know you’re paying 15% interest to sit on your new living room couch each day, how does it make you feel? If it’s lousy, pay it off first. Or if you have $100 worth of charges from dining out, and it kills you to know you’re in debt for food that is gone, make that first on your list.

   Here’s an example of what your list might look like:

• Dining out: $100
• Lawn Mower: $200
• Furniture: $900
• Kids Toys: $50
• Clothes: $600
• Interest and Late Charges: $250
4. Print Your List. Hang it where you will see it often.
5. Pay It Off by Item. Here’s where we skip the traditional payment methods and get creative. Attack the debt with the biggest emotional impact first (the item ranked first on your list).
6. Brainstorm Strategies. Find ways to pay off each category faster. For example, don’t allow yourself to purchase any more kids toys until you’ve paid off the ones on your debt list first. Or put a freeze on dining out until you’ve paid off that category. Could you sell the lawnmower on craigslist and buy a cheaper one to get the job done? The more connections you make between your debt and daily activities, the more you’ll succeed.
7. Celebrate. As you pay off each item, you’ll be able to celebrate the victories, both in terms of money and emotional attachment.
8. Follow Up. Mark a date on your calendar three months out. Compare how far you’ve come, and rerank your list if necessary.

My Story

I actually used this strategy when I took money out of savings to cover my last maternity leave. I wanted to build back up the savings, but just looking at a $10,000 number wasn’t very motivating.

When I put it into the perspective of purchases, I was able to work much harder to build back up our savings. You can see how the strategy would work for either replenishing a savings account or paying down debt.

Emotional Attachment

While we can all say that it’s purely math and money, the truth is that debt takes an emotional toll on your life; especially now, when many people are feeling the effects of the current economy. The more emotional baggage you can shed, the better. By dividing your debt into individual purchases and paying off the debt that disturbs you the most, you’ll be happier.

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Because his credit report was trashed from late payments, collections, and settlements, he wanted me to check into the statute of limitations for credit reporting. Originally, we didn’t explore an avenue of disputes or other credit repair, since all the negative actions were correct. Five years ago, we discussed that he would have to “wait it out” for him to prove that he can handle credit again.

Obtaining His Credit Report

He got a free copy of his credit report from Annual Credit Report. In addition, he wanted to see his credit score, so I showed him the offer for Free FICO Scores & Credit Reports. Armed with the information of his financial past, he was ready to take some action.

Statute of Limitations

For all debts after December 29, 1997 the reporting period is 7.5 years. The clock starts ticking on the date of the last missed payment; 7.5 years from that month, the negative trade line remarks must not show on the credit report.

It’s common to believe that taking action on the debt will start the clock over, however, that’s a misconception (one that I didn’t know about either!)

The following events do not restart the clock:

• The creditor writes off, sells, or transfers the debt.
• You sign a payment agreement with a collection agency.
• You dispute the debt or negative remark with the credit bureau.
• You make payments or other activities on the account.

This point is worth restating: if you make payments on the debt, it does not restart the clock!

Please note, that some states have their own laws. Be sure to check your home state. In addition, the reporting laws for bankruptcies are different.

Once the reporting time period expires, it’s OK if the trade line still shows up on your credit report. It’s the negative trade line remarks from the action that began over 7.5 years ago that cannot show up.

Next Steps

Now that he has the information for the statute of limitations, he can dispute any negative remarks from over 7.5 years ago. As time goes on, his credit will be restored, and he can begin house shopping!

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Originally they were able to keep them current and had good credit ratings. Unfortunately, when the husband lost his job last summer, they fell behind on the credit cards and the penalties are piling up. Now they are considering bankruptcy. Brenda wants to help, but doesn’t know how.

Meet My Brother-in-Law

I thought this would be a great time to share with you the story of my brother-in-law. He was in a similar situation, racking up credit card debt.

When he found himself without a job, he stopped paying on the cards. Collection agencies, phone calls, sky high penalties and interest made it almost impossible for him to recover, even when he found a new job.

Back in 2004, he called me for some help. After a very open and frank discussion about how we would need to handle this, he gave me power of attorney and access to all his accounts.

Getting Out of Debt

Once I took over, here’s what I did:

• Get organized. The first step was to try and figure out how much he even owed and to whom. He gave me a box of papers and unopened mail, and I pieced together his financial world for the first time.
• Make a list. I listed every credit card and debt, the amount owed, if it was past due (or in collections), and the interest rate.
• Figure out a budget. I put my brother-in-law on a strict budget, giving him only enough money each week to keep food in his stomach. Until we could get things under control, there wasn’t any money for entertainment or frivolous spending. It was rather harsh, but it was temporary. The rest of his incoming money was earmarked for getting the debts under control.
• Keep paying on current cards. Any card or loan which was current, keep it that way. It’s one less account that will have a negative history on your credit report. If all the cards are current, you can use How to Pay off Credit Card Debt as a resource.
• Call on past due accounts. For the accounts that hadn’t gone into collections, but were a month or two late, I called to find out how much it would take to bring the account current and paid it immediately, if he had enough money. If he didn’t have enough I asked how many days we had before it would be turned over to collections.
• Forget about bankruptcy. He wanted to declare bankruptcy, and even saw a lawyer. I told him that wasn’t going to happen, so forget about it. The long term repercussions from declaring bankruptcy would be much more harmful; in addition, it wouldn’t have taught him anything about the responsibility for his actions.

Dealing with Collections

Once an account went into collections, it seemed I was playing a whole new game. Here’s how I handled that part.

• Do your research. I spent a lot of time doing research at the Credit Boards forum, specifically the beginner index (you need to register to access the index). The transcripts are a little difficult to follow, but there is a “Cliff notes” for each transcript that helped summarize the information. Since I hadn’t ever been in a similar situation myself, I needed all the help I could get.
• Calculate Actual Charges. For each debt that was in collections, I calculated the actual charges versus the interest, late fees, and over-limit fees. He felt that he was responsible for paying what he actually bought. What I found was that many times the actual purchase was less than half the total debt. It was sad to see that a $900 purchase could turn into a debt over $2,000 in just a few months.
• Save Up. Each month I took all his leftover money after paying the current accounts and put it into a savings account at ING Direct. Once I had saved enough to cover the actual charges, I called the company and offered to pay that amount in full that day to settle the account. Every single time, they were more than willing to accept it. One by one, we settled each account.
• Wait it Out. It takes time. A lot of time. It took time to build up the debt, and it takes time to repay it. At the end of the year, when I turned his accounts back over to him, we’d made a huge dent, but he still had a long way to go.

Taxes and Retirement

Taxes. Taxes are a big part of settling debts because the forgiven debt is considered taxable income. It’s something a lot of people don’t realize when they settle accounts.

Retirement. I felt is was very important that my brother-in-law not only pay off his debts, but begin saving for his retirement. At the same time that he was aggressively paying off the debt, I enrolled him in the government TSP program and opened a Roth IRA.

The contributions to the retirement accounts allowed him to lower his tax bill substantially, because he was able to qualify for the the saver’s credit.

Next Steps

I’ll be back later with Gettin’ Out of Debt: Part II in my brother-in-law’s gettin’ out of debt story!

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Here’s the situation that he is dealing with (see the story for all the details):

• Personal Line: $3,500 balance @ 15% – $7,000 limit
• Credit Card #1: $2,300 balance @ 9.6% – $5,000 limit
• Credit Card #2: $6,600 balance @ 8.5% – $8,000 limit
• Credit Card #3: $1,900 balance @ 18% – $2,000 limit

He has $1510 available each month for payments and $9300 in company stock and upcoming bonus money available.

What I Would Do

I promised that I would put together a plan for him in paying off the debt. If it were me, here is how I would handle the payoff.

1. Pay the minimums on all cards.

It’s important to avoid late fees, overlimit fees and other penalties for not paying the minimum. Make sure that each month all minimum payments are made before any other strategies are used.

2. Evaluate the utilization percentages.

This is a key piece of debt paydown that many people skip. People often believe that they can’t get a new card with a lower interest rate; however, a few key changes to utilization could make all the difference (assuming there are no adverse credit report problems like bankruptcies, late payments, etc.)

Credit card #2 has used 82.5% of the limit and credit card 3 has used 95% of the limit. Ideally, his balance should be less than 50% on all cards; they should absolutely be less than 90%. Pay $980 on credit card #3. This will lower card #3 to less than 50% utilization.

3. Pay cards with highest interest rate.

After paying the minimum, and the high utilization card, use any leftover money toward the card with the highest interest rate. Each month, continue to direct all extra money toward the card that has the highest rate. First pay extra on credit card #3 at 18%, then the personal line at 15%.

4. Ask for a reduced interest rate.

Call all the companies and ask for a reduced interest rate. The worst they can say is no, right?

5. Check your credit report.

A few days after the end of the billing cycle for card #3, order your credit report to be sure that all the cards have the utilization updated. You should see a bump up in your credit score too.

6. Use a 0% balance transfer.

Here’s where adjusting the utilization and checking your credit report will pay off. Use the list of 0% Balance Transfer Credit Card Offers to identify 2 or 3 cards with different companies. Apply for the cards (on the same day). Once you are approved, transfer the highest interest rate balances to the 0% card in this order: (1) Credit card #3, (2) Personal Line, (3) Credit card #1, (4) credit card #2.

Be sure to check the terms and watch for maximum balance transfer fees. You may be able to have the balance transfers deposited into you checking, where you can avoid multiple fees.

7. Evaluate stocks separately.

Determine what percentage of your portfolio the company stock makes up. If it’s significant, you may want to sell. You can then decide if you’d like to use it to pay off debt. It’s important to keep a balanced asset allocation with or without debt.

Be sure you know the impact that taxes will have on selling the stock and set aside the appropriate amount to cover and capital gains taxes.

8. Aggressively pay off the debt.

Because he has a goal to be debt free in November, I would pay the cards down as fast as possible. I’m just guessing here, but I’m thinking that purchasing a house may be in the plans for November. It will be best to be free of all credit card debt before then.

At this point, hopefully all the balances will be at 0%. If not, continue to pay the highest interest rate. Once you have all 0% balances remaining, pay off those with the smallest balance first to get the “emotional high” of eliminating debt.

9. Avoid future debt.

Once all the cards are paid off, continue setting aside some of the money you were using to pay down debt into an emergency fund.

10. Earn rewards.

He mentioned that credit card #3 is a JetBlue Card from American Express that he’d like to use to earn free travel. Use the card for necessities, and be sure to pay off all charges every month.

Another Approach

For another idea and some number crunching comparing two payoff options, check out what Steward would do in this situation at My Family’s Money.

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