It started with a car.
Florida is not a public transportation friendly state. If you want a job, you pretty much need a car. However, you can’t buy a car until you have a job. But once you get the job, you figure you can buy the car. The solution seems clear…financing!
Photo by BonkedProducer
I frugally picked out a reliable, used Nissan Altima for $6,500 and my godfather cosigned my loan. When all was said and done, I would pay over $10,000 on the vehicle – not counting any repairs – but I figured that I would make even more money so I would come out ahead and establish my credit. (Mistake #1)
But money, as often happens, got tight.
Because Greg had cosigned my loan, missing or making any late payments was simply not an option for me. So I cut back the coverage on my car insurance. (Mistake #2)
I did not realize at the time that I was legally required to carry full coverage on a financed vehicle and for some reason my cut rate car insurance company (Mistake #3) never told me that I could not reduce my coverage.
I then had a near fatal accident.
I also had no health insurance. (Mistake #4) My x-rays and other accident related expenses cost almost $2,000 and I still was responsible for paying off the entirety of the loan…because I had reduced my car insurance coverage.
My mother, over my protests, insisted on driving her husband’s Thunderbird over from Texas. (Mistake #5) The water pump starts to go bad but I don’t replace it immediately because I don’t have $200. (Mistake #6) It’s now blown a head gasket and it costs almost $2,000 to fix the car.
My godfather then offers his extra vehicle, a 1995 Ford Taurus. I accept. (Mistake #7) I replace the engine, the transmission, and the entire break system, as well as other more minor repairs. I figure “Hey, it’s not that bad. I own the car and it costs less than a car payment.” At this point, I’ve spent almost $7,000 trying to keep this car alive.
I am, meanwhile, putting myself through university while working full-time. And though I did receive many merit and financial based scholarships, school – even state school – is not cheap.
I also (Mistake #8) cosign my brother’s student loan.
The Cycle of Debt
Most people approach debt management with the idea that people swimming in debt are folks who just spent a bunch of money on their “wants”. While that is in many cases true, the reality is far more ominous and complex.
The fact is, it costs more money to be poor…and not always because you are financially illiterate.
If the margin between your income and expenses is so slim that you cannot save, you’ll have no money for emergencies. If you use credit for these emergencies, you have then incurred additional expenses which your immediate income does not cover. Realizing you need to make more money, you go out and get another job which has probably only marginally increased your income. But it’s just enough. You have then merely established a new financial equilibrium until the next crisis.
In the midst of this cycle of financial destruction, it is hard to see a way out.
Personal Finance Advice
Most personal finance blogs will suggest that you lower your expenses, raise your income, and use a debt snowball or snowflake or whatever to pay off your debt. They also recommend setting up an emergency fund of at least $1,000.
And it’s good advice. Very good advice. But there is an underlying feeling at these blogs about filing bankruptcy. That it’s cheating. Lazy. Walking away from your responsibilities. Bankruptcy is never considered a valid financial management tool.
By the time most people file for bankruptcy, it’s too late. They’ve taken out second mortgages to consolidate credit card debt. They’ve dipped into their 401Ks and paid huge penalties to access money in the hopes of making their debt load lighter. They’ve sold everything of value just to pay the minimum tribute that their debt monster requires.
The Power of Personal Responsibility
In America, we value personal responsibility over everything. If you’re fat, it’s your fault. (You didn’t have to eat it!) If you are in debt, it’s your fault. (You didn’t have to buy it!) If you lost a bunch of money in the stock market, it’s your fault. (Stocks are risky, duh!)
Even when I finally decided that filing bankruptcy was the right decision, I still felt deep shame. It didn’t matter that I had been working to feed my family since I was 14 years old. It didn’t matter that I had pulled myself out of extreme poverty through sheer determination. Nothing mattered except the fact that I had failed.
“B” Stands for Bailout
It started with the bailouts. Banks and insurance companies were clamoring for “stimulus” money without which they would surely perish! Still, however, rewarding failure with posh retreats and bonuses.
While my family is scraping by on the absolute bare minimum, these corporations had the audacity to act that way? While we are foregoing Christmas and birthday and anniversary presents, they’re applying for bailout money just as fast as their people can type out requests?? While I am learning how to bake my own bread and grow my own food, these guys could barely be pried away from their private jets??
Yeah, don’t come talk to me about “personal responsibility”.
The Wrangling Begins
I started getting phone calls from those very same banks and credit card companies. Aggressive representatives attempting to make me feel guilty for paying late or defaulting on my loan. My interest skyrocketed to 30%.
Only when it became clear to them that I would not be paying, were they even willing to discuss modifying my loans. I simply couldn’t believe it! If I had been able to modify those loans much earlier, I never would have even considered bankruptcy.
In fact, the only reason I finally decided to go forward with bankruptcy in the first place was because I was more afraid of Sallie Mae (my brother’s student loan provider) than I was of filing bankruptcy.
[NOTE: Never ever ever default on a student loan. Seriously. It can ruin the rest of your life.]
The Merry-Go-Round of Financial Mistakes
I’ve made so many mistakes, well-intentioned and reasoned mistakes. In hindsight, I can see every misstep and pitfall. Mistakes that had a way of compounding themselves until they effected lasting damage.
Not all of my financial mistakes are fixable with bankruptcy.
I will never, ever, be able to discharge my brother’s student loan. To date I have paid approximately $30,000 towards his loan and it doesn’t appear that he will be assuming that responsibility any time in the future.
Bankruptcy is not an easy financial solution but it can be successfully used as a tool to give a person, or a corporation, a fighting second chance. And while we still don’t have health insurance, I am no longer terrified at the prospect of becoming pregnant.
10 comments
Comments feed for this article
May 29, 2009 at 7:26 pm
positivelypresent
Wow, this is very interesting. Thanks so much for sharing your personal story and your insights. I didn’t know much about bankruptcy before and I’ve learned a lot about personal financial responsibility from reading this post!
hayden tompkins says:
Yes, adequate insurance! Hopefully you will never be in this situation.
May 29, 2009 at 7:33 pm
vanessaleighsblog
You say some powerful stuff here, Hayden. And, all true. More often than ever these days, I am afraid.
We, as individuals or as a family, have ever filed for bankruptcy. But, I have two siblings that have. You are so right about the guilt and shame of financial debt and dilemmas. We went to meet with a financial advisor last year, about transferring/consolidating our retirement investments, and he also wanted to suggest that we consolidate our debt, mainly our credit card debt, to be able to save more. I was filled with embarrassment about the amount of debt in credit cards that I have. That I had to use through our lean years for things like groceries, oil for our heat, car repairs, and college credits that I needed to graduate.
So, in the last two years, we have actively decided to choose something other than shame about our debt. We are doing something about it now, paying off what we can a bit at a time; we have paid off several items in the last six months, we are renovating our front porch with cash, and we manage to save money every month toward our ongoing, bigger expenses such as heating oil, insurance, and taxes. We have worked SO HARD to get to this point.
Keep the faith, do what you can, and things will get better bit by bit. And, don’t cave to the shame as much as you can. You don’t deserve it…….
hayden tompkins says:
Thank you for your love and support!
I should have mentioned one thing about credit cards in particular. Using them the first time is pretty difficult but it does get easier, which can be a huge problem. It, at least for me, became a security blanket. I didn’t worry about emergencies because I had a credit card.
Now that we are in a position to start and grow our savings, I feel the same way about our savings. I don’t worry about emergencies because I have money in the bank.
When I think of how much of my credit card debt was devoted to fixing vehicles, I could cry. Boy was that the definition of throwing good money after bad! It’s also why I am so adamant about finding honest, awesome mechanics.
I am so happy that you have been able to get a handle on your finances and are starting to turn things around. It is well worth it!
May 30, 2009 at 6:21 am
susan
I have recently finished two books written by Larry Winget. There was a lot of insight in his book ‘You are broke because you want to be’. He blasts every common excuse to pieces. Ultimately, we have choices over how we spend our money. I think he has the nickname Pitbull of personal finances for a reason. Good read to expand one’s horizons.
hayden tompkins says:
I am a HUGE fan of Larry Winget. He also has a show on AETV called “Big Spender” which is phenomenal.
I understand what you are saying, but I will have to partially disagree. There are many people who are ‘broke because they want to be’ but that is not the case for everyone.
One reason I wrote this article is because of that mind-set. For some reason, when it comes to personal finances, this country is very judgmental about someone’s personal character when it comes to debt and bankruptcy. But if a business files for bankruptcy, we barely bat an eyelash and we certainly don’t rail against the business for their lack of responsibility. (Excepting, of course, the businesses involved in the recent bailout.)
The system is broken and stacked against the consumer. Especially young consumers.
If I were to have an accident or a major illness, I would be paying for every expense out of pocket since I have no health insurance. It is true that I wouldn’t “have” to get treatment for cancer, but if they pull me into a hospital after an accident I wouldn’t really have a choice as to getting treatment.
Anyway, my point is that your point (and Larry’s) is a very good one – but it doesn’t (it can’t!) apply to everyone’s situation.
May 30, 2009 at 1:46 pm
Betsy
Hayden – This post is remarkable not only for your honesty and candor, but for the analysis that shows “conventional wisdom” the boot. These are not conventional times! Most of what we’ve been taught is the right thing to do and how to do it is now actually more detrimental to overall financial health than not!
Your examples re: emergency funds, snowflaking, and other methods like expense reduction, etc. illustrate the disconnect between conventional circumstances for which the advice makes sense, and those of others who simply can’t reduce expenses any further, much less add income.
Other Draconian realities like usurious credit card rates, universal defaults (late on one, the others raise your rates and lower your limits, too, thus plummeting your scores) and late payment charges, “minimum” payments that don’t place you under the credit limit so you get ding’ed again with late payments, and other practices pretty much ensure no way out.
Add to this picture the folks who do everything to keep their mortgage current, often by borrowing more money to pay it. All because “conventional wisdom” says don’t ever default or risk foreclosure. That was us on my house after we got married. We each had a house, moved into “his” and put mine for sale just when the market tanked. What was going to be our equity ticket to financial freedom instead sucked our finances dry and eliminated our retirement savings. We accessed all credit available, even life insurance loans, to pay the rising mortgage. Oh yes, it had adjusted in that time to triple the original payment. We paid more in mortgages alone for that 14 months than Pete’s gross salary. All in the name of keeping current.
We eventually sold the house for $40,000 less than was owed. In the past, we would have owed income taxes on the $40,000, but thankfully the Bush administration rammed a legislative remedy past a reluctant Congress, on whose radar screen these issues had yet to appear.
Calling lender bluff is something that isn’t widely taught, and is less widely known. It can be done, but it feels as though one is traveling the wilderness when one embarks upon that path. Navigating the labyrinth of modification with lenders is near impossible. You never speak with the same person twice, and often times the department that handles these issues is buried within the organization, so you go through the same automated phone process and tell the story innumerable times to different individuals before you get put through to someone who might actually authorize a remedial plan. It’s no wonder people throw in the towel.
Many times one isn’t eligible for any modifications if one is still current with one’s payments! So, in other words, if you know trouble is coming, it has to happen (and affect your credit score) for quite some time (60 days past, 90 days, whatever the lender policy) before there can be anything done. And remedy sometimes consists of making your payments higher. Great sense when you already can’t afford them, eh?
While certainly there are people who use bankruptcy as a get out of jail free card, the sad reality is that many could have avoided it completely were the system more amenable to prevention. Instead, greedy lenders have shot themselves in the foot. Now they can’t get their fees out of higher risk borrowers who are defaulting, so they’re turning to folks who have played by the rules. The result will be the abandonment of credit as a tool, and the subsequent consequences will be an economy that is further stagnated.
Legislative traction belatedly appears now that regular folks find themselves with reduced incomes/without jobs and in default. Even so, while it’s easy to say there is “no shame” in bankruptcy, a lifetime of messages to the contrary ensures there will be an emotional toll, and judgment from family members and others adds to it. Not to mention the stress factors contribute to physical reactions – stroke, heart attack, using alcohol, nicotine, and other things to self-medicate, etc.
It is so easy to get sucked in. As you rightly say, the portal for many is educational loans. How does a social worker with a masters degree repay $100,000 in student loans? How does a newly-minted graduate go work for a non-profit, or volunteer to tide themselves over until the economy rebounds, as Michelle Obama suggests, and not default on the debt? Let alone eat!
The system as it stands right now is tilted toward ensuring bankruptcy for more and more individuals seeking to finance their educational dreams and their vision of what used to be considered middle class: a home, a car, etc. The future for our own household will be mortgage and used car debt only for the remainder of our days. We’re done with other credit, and slowly we are accomplishing our goals on a cash only basis. Thankfully, our children appear to be frugal and mistrustful of credit cards and debt in general. The real shame is that it didn’t have to get to this point at all.
Sorry this turned into such a long rant Clearly, your awesome post resonated. Thank you.
hayden tompkins says:
Thank you for writing this comment, for sharing your story, and for being able to clearly articulate some very specific problems with our financial system.
You identification of the disconnect between debt management strategy and the financial reality was (if you’ll forgive the pun) on the money.
I think what strikes me the most is how it often doesn’t matter how intelligent or well-educated you are, people at all levels find themselves in a financial disaster-zone.
I would also like to add that insurance companies are also very complicit in “Draconian” actions against the consumer. Most people don’t see a problem with insurance companies, but after living in Florida for most of my life (and seeing how insurance companies respond to hurricanes) I can tell you that they are almost as culpable as credit card companies and banking system.
And if an insurance company decides that you are not covered, for whatever reason, you have almost no recourse. And I am just going to re-print this paragraph because it is so true and needs to be said more.
“Other Draconian realities like usurious credit card rates, universal defaults (late on one, the others raise your rates and lower your limits, too, thus plummeting your scores) and late payment charges, “minimum” payments that don’t place you under the credit limit so you get ding’ed again with late payments, and other practices pretty much ensure no way out”
June 1, 2009 at 12:22 pm
Kip de Moll
It is people like us who dare to stand up and proclaim that we have chosen bankruptcy and survive who can reduce the stigma and help others build their way successfully out of the system that ensures debt and a debtor’s prison. Thanks, Hayden, for being so clear and brave about it.
For me, the shame vanished when I was “negotiating” with Chrysler to buy and repair my truck which they would not consider even as they were begging Congress for their own bailout. Considering no less than full payment and refusing to finance any of it, I had no remorse turning it back to them broken. And they’re welcome to the five dollars I have left in my pocket!
Betsy:
“The result will be the abandonment of credit as a tool, and the subsequent consequences will be an economy that is further stagnated”.
I think the economy (and all of us) will eventually thrive when we live on a more “cash only” basis. It is already happening in my own little experience, and will be a much better system for everyone.
Now, I’ve got to go turn my $5 (since Chrysler didn’t want to be bothered with that either) into $1,000 by the end of the week…by earning it!
hayden tompkins says:
I think a very large part of my financial difficulty has been my complete optimistic faith. Faith, without facts, that Sean would step up and pay any part of his student loan. I had absolutely not anticipated that in my financial planning and, looking back on it now, I cringe at just how naive I was about that.
At one point I was begging him to send me anything, even $20. And absolutely nothing showed up in my mail. Part of this process has been my extreme disappointment in him, and myself for not knowing better.
And the more I’ve learned, the more I realize just how common this attitude is. People are typically overoptimistic about their finances, even when they are looking right at the facts. Responsible financial planning means not assuming the best case scenario.
June 1, 2009 at 4:30 pm
Birdie
OH WOW!
I totally know where you’re coming from. When you’re in a tight situation with a car that’s older and prone to breakdowns, using the card is a great out-of-sight-out-of-mind-way to rack up a big credit card bill (throwing good money at bad).
“The fact is, it costs more money to be poor…and not always because you are financially illiterate.” – This is soooooo true. In fact, when you’re trying to get out of the cycle, many debt management companies that offer help out of these situations don’t lower your interest rates and manage your payments for free.
I decided to go with one of these companies after a harrowing split with my ex, a load of racked-up debt (on his behalf and for expenses much like yours), and the realization that there was no easy way out. I’m still paying for it, but it’s managed into payments I can afford plus a $13 monthly charge for their service.
The silver lining to your story is, because of all this, you probably have a good handle on what it means to live within/above your means. You’ll come out of this with a better grasp of how to do it right the second time (I know this from experience!). Sometimes I think they should leave our country’s budget up to someone who’s been poor before (and dug themselves out of a hole) because we’re the ones who realize what living on a budget means!
If you ever want to chat personal finance, you’ve got my email.
hayden tompkins says:
Oh, god, if ever there was a perfect post about personal finance it’s about unmarried folks who live together. I can’t even tell you how many stories I’ve heard where, after the breakup, one person leaves yet the utilities are still in their name. Surprise surprise their ex didn’t pay the utilities or rent or whatever.
I could probably write REAMS on how romantic relationships can wreak havoc with your finances if you aren’t vigilant!
I’m watching this happen with a friend of mine and it is beyond painful. And, now that I think about my response to Kip’s comment, it has a lot to do with being naively optimistic. We want to believe in the people we love.
June 1, 2009 at 6:47 pm
Night Writer
Once upon a time, due to bad advice and a challenging attitude, my wife ended up with a significant IRS bill and penalties when she was single. Her problem became our problem when we married. As you noted, the IRS and government agencies don’t feel they have any reason to negotiate and insisted on a re-payment schedule on their terms. My wife had already had a change of heart about these liabilities before being contacted by the IRS collection droogs, and we had a very sharp tax attorney who found an explicit way within the IRS’ own regulations to dismiss a big chunk of the liability through bankruptcy. Despite being able to avoid these charges we proposed to the IRS that we’d pay in full (taxes and penalties) if we could have a less draconian payment schedule. They said “no”; we said we’ll file bankruptcy and remove a sizable part of the obligation if they didn’t agree. They still said “no”. So my wife filed, the obligation was nearly halved and we paid the remaining balance over the next couple of years.
The temptation that came with that, however, was to also discharge other unsecured debts through bankruptcy at the same time. We chose to honor those instead and pay them off; the IRS was the only entity that didn’t get what they had coming. (Btw, this was at a time when we had been underemployed and had just finished paying off a daughter born without health insurance). We made it through this with relatively little trauma and were even able to purchase two new homes over the next five years while also keeping our debts to a minimum (especially credit cards). The second house we bought is our current one and when we looked to re-fi a few years ago to do some remodeling the loan officer gushed, “Your credit score walks on water!” (Right before he tried to loan us 3x the amount we wanted or needed, which we refused).
We certainly learned a lot during that experience, including that bankruptcy doesn’t have to be fatal if you don’t have a bankrupt lifestyle, but one of the things our wise attorney told us brought a perspective that has really stuck with me: “Your problem can be solved with money,” he said. “Any problem that can be solved with money isn’t really a problem.” The meaning being that there are some real problems out there (such as health) that no amount of money can solve.
hayden tompkins says:
One part of going through the process (not of bankruptcy but of wrangling our finances in the years prior to it) has been my financial education. Not about stocks and IRAs and 401Ks, but about frugal living and purchase habits. It’s one thing that I have been able to excel in, which is why I don’t write personal finance posts about making money or investing but of living frugally.
The idea was to get expenses to the bare minimum so that I could devote more income to debt repayment. I have yet to invest in stocks, for example, because I believed that any return (which is not guaranteed anyway) could not compare to the interest I was paying on the debt.
In retrospect, if I could do it over again, I would have closed every credit card account. The debt still exists and you still have to pay it, but interest and fees stop accruing. Otherwise you are on a financial treadmill to nowhere.
One major component of filing bankruptcy for me has been the effect it has had on my marriage. It isn’t a case of having accrued debt together and I felt very guilty about using Chris’s income to pay debt that he was never involved with. He is turning 37 years old this year and I have been putting him off about starting a family because I didn’t want to start a family in the midst of a financial disaster. (He also wasn’t able to put money towards his retirement because it was all headed towards my debt.) Don’t get me wrong; he never once complained but I felt I was putting his future and our marriage at risk.
Anyway, it was not an easy decision to make. It’s a choice that I made after a lot of deliberation, and it isn’t a good one but I am convinced it is the right one.
June 2, 2009 at 7:01 pm
Night Writer
You’ll be fine. Ours was a similar situation: it was my wife’s debt but I quickly counted it as “our” debt because we married to go through things together. In a way, going through this together made us stronger. We know we have a stable foundation that isn’t going to crumble like a house of cards when the financial storms blow, and we always managed to pick each other up whenever the other felt down about the situation (and we had one kid with another on the way as we were doing so). Just keep telling yourself, “We will outlive this.” It can seem like an all encompassing, never-ending situation, but you’ve already taken the steps to assure that better days are ahead!
hayden tompkins says:
June 24, 2009 at 7:44 pm
How to Let Go « Through The Illusion
[...] how I have been laser focused on getting rid of my debt and I end up being able to file for bankruptcy which eliminates all debt but my brother’s $50,000 student loan all because of my continued [...]
September 16, 2009 at 11:58 pm
My Year As A Trophy Wife « Through The Illusion
[...] I filed for bankruptcy. [...]