I’ve decided to start a new series entitled, “Credit Card Enlightenment” revealing a portion of what I spend on a monthly basis from my personal credit card and any enlightenment that is found through the analysis.  This monthly series will be a good way to track expenses and keep things from getting out of control as peripheral income grows.  In other words, tracking credit card expenses is one way to battle lifestyle inflation.

The use of credit cards is critical in the way I spend.  I buy items with confidence knowing that I have 30 days interest free to pay it off.  I also like how credit cards provide reward programs and buyer protection in case of product dissatisfaction and fraud.  Finally, I do not like carrying much more than $80 in my wallet.  Credit cards are easily replaced if my wallet is lost or stolen, whereas cash is usually gone forever.

Besides my mortgage, my credit card is my largest monthly expense.  I own three cards: a corporate card for work, a corporate card for my online business, and a personal card.  The discretional spending really comes from my personal credit card, hence this card is what I will focus on in this post.  I try and put everything other than business expenses on my personal credit card because the credit card tracks all my expenses, provides free financing, and produces rewards points.

PERSONAL CREDIT CARD EXPENSES FOR NOVEMBER, 2011

My goal is to spend $1,500 or less each month on average.  $1,500 is the normal monthly operational costs, which excludes big ticket items such as the two week cruise.  Did you notice the line item that says, “No idea!”?  I don’t recall charging such a large amount on anything since coming back from Europe, so this mystery charge is quite alarming.  If one excludes the $690.50, I spent around $1,000 for November which is in the ball park.  

As you can tell from the entries, my largest expenses are food and tennis.  It’s not a surprise since I love to eat, and I play tennis three times a week on average.  My tennis club bill includes all food expenses, guest fees (I have a lot), and anything I buy at the proshop e.g. strings, grip, shoes, hats and so forth.  Tennis is part of my lifestyle that I love and can’t do without.  There needs to be a balance with the mental (writing, work) and the physical.  I’m really not into spending money on clothes or other material items beyond what I need for sports and work.

PAYING IN FULL

Paying one’s credit card bill in full every month is a must.  Credit cards charge some of the highest rates around, second only to perhaps payday loans and the black market.  My credit card interest rate is a ridiculous 10.25%, which is high given the 10-year yield is only at 2%.  My primary home mortgage rate is only 3.125%, therefore it’s clear that my credit card interest rate is relatively absurd.  The good thing is that the high rate is all the more reason to always pay the bill in full every month!

I seldom ever look at the line-items in my credit card statement, only the total.  If the total is under $1,500 or right around there, I’m complacent.  If the total is much higher than $1,500, I eyeball the largest figures and figure out whether they are “one-off” or recurring and adjust my budget accordingly.  I’ve got to change this habit with this monthly credit card series post.

To help put things in perspective, I save 100% of each bi-weekly paycheck and about 20% of my second bi-weekly paycheck a month to target at least a 60% after tax savings rate for the year.  There is also a potential year end bonus I’m eligible for if the world doesn’t come to an end.  Based on this math, you can calculate what I make a month at least, and draw your own conclusions about being frugal or excessive as this series goes on.  The online income I make is entirely separate, and would correspond with my online business corporate card.

CREDIT CARD ENLIGHTENMENT

The enlightenment in this post is that I’m not as detail oriented with my finances as I thought.  After doing some research on what the $690.50 charge is, I confirmed that the charge was for a rental property appraisal as part of my refinance, which is reimbursable.  It’s somewhat worrying that I couldn’t recall what this relatively large charge was for.  It could mean that I either make too much to notice, or am lazy and don’t really care.  I think I’m the latter, and also too trustworthy to believe all charges are legitimate and must be necessary otherwise I wouldn’t charge it!

Furthermore, I realize that I spent ZERO in gas in November thanks to the sexy bus, while common expenses such as internet access and mobile phone usage are charged to my online business corporate card.  I also have a partner who alternates with the personal bills, such as groceries, cable, and utilities as well.  Hence, if I were to add up my personal credit card bill and hers, I would venture to guess we average $1,500-$2,000/month.

I encourage everyone to keep track of their monthly expenses in such a way that things are as clear as day.  We do the same exercise when we want to lose weight, there’s no reason not to do the same thing when we want to control or reduce our spending.

Readers, do you have a monthly credit card expense target?  Do you look at your bill in detail every month, or just the total to make sure it’s within budget?  Anything jump out at you?  Is this a lot or a little?

Photo: Wooden Mini Gong For Enlightenment, Sam.

Regards,

Sam

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Alas, after 8 weeks my primary residence mortgage refinance is now done!  It took so long that I actually forgot I was refinancing my mortgage until the bank called to ask when I could meet the notary to sign all the documents.

The process was pretty painless since I refinanced with the same bank.  I sent them the general paper work such as my W2, bank asset statements,  and pay stubs.  They did one appraisal which took all of 20 minutes and all I had to do was wait four more weeks to get it done!  The refinance this year was much easier than the refinance in 2010, boding well for the thousands of others out there who are also looking to refinance their mortgages.

I learned some new things beyond the basics which you might find useful in your mortgage refinancing or initial mortgage application process.

MORTGAGE REFINANCE TIPS TO THINK ABOUT

* Try and refinance with the same bank.  If you go through the same bank, you might get some extra discounts given you are an existing customer and they want to keep your business.  In my case, they gave me an extra 3/8 credit and waved the $750 home appraisal fee so that there were no out of pocket expenses.  Furthermore, they had all the basic paperwork already and just needed some updated forms.  Staying with my existing bank made things much easier.

* You have one free pass.  Even after you “lock” in your mortgage, once your application gets approved you are able to ask for a lower rate if rates decline in the application approval process.  When I locked my 3.25% 5/1 ARM rate, the 10-year yield was at 2.1%.  Not bad I thought.  In the next two weeks, the 10-year yield plummeted to as low as 1.75%, or a full 35 bps lower.  Rates were very volatile and settled somewhere around 1.88% when I asked if they could lower my rate further.  They said yes, and lowered my rate to 3.125%.

* ARM loans are assumable.  Let’s say I want to sell my primary place in two years and 5/1 ARM rates rise to 8.125% due to inflation and a recovery in the economy.  If the buyer qualifies, s/he can assume my 5/1 ARM at 3.125%, thereby saving 5% in interest expense!  A lower mortgage rate is a huge benefit to the buyer because it allows the buyer to pay more or get more home.  In effect, you have shorted a bond in the amount of your mortgage and will capitalize on the gain.

* Title insurance is extremely important.  In fact, title insurance is like the bible for your property.  A title insurance policy is a contract of indemnification for loss by encumbrance, effects in the title, or invalidity, or adverse claim to the title to the real property that may occur prior to the effective date of the policy. In other words, the title company guarantees the veracity of the property you are purchasing or selling. If there are any discrepancies or disputes, the title insurance company will fight for you. Make sure you keep a copy!  You never know who will try and make an adverse claim on your property 30 years from now.

CONCLUSION

If you haven’t considered refinancing and can, please do so.  Rates from all along the curve are down by at least half a percent since 2010, which is the minimum spread you should consider before refinancing.  You must take advantage of the Federal Reserve’s policy of pushing rates lower.  Improving your cash flow is what it’s all about in personal finance!

To get a basic understanding of refinancing and how things work, please read, “Home Refinancing Tips For A Smarter You“. Now onto the rental properties!

Regards,

Sam

Debt and bankruptcy are two words most people frown upon.  After all, debt is usually the cause of bankruptcy followed by an excuse of a lack of income.  I look at debt as a key motivator.  Debt is something that has driven me to work harder.  Without debt, I would ironically feel a little empty making money because it doesn’t take much to make me happy.  Before buying rental properties 10 years ago, I sometimes questioned the point of working one’s entire life away.  It felt pointless logging onto a computer screen just to see your savings go up.

When you are single, you really don’t need that much money to survive.  Even in big cities like San Francisco, Manhattan, London, and Tokyo, $45,000 is enough to live a happy life as a single person.  There’s only so many fancy meals you can eat a year before you start getting sick of eating out.  Your Macbook and gigantic big screen LED TV should last you at least 4 years.  Meanwhile, the ladies love guys with bus passes since it shows that we are enviro-friendly and keep it real! A black Porsche 911 Turbo is so 2007.

So how does one go from a happy life to utter financial ruin?  Getting obnoxiously way over our heads in debt, that’s what.

BE CAREFUL WITH DEBT, IT MAY GET YOU DRUNK

If you were able to live 80 years on 5X what you really could afford thanks to debt, and then die, you win!  Who is going to collect your debt once you are dead?  Nobody, unless they send the Ghost Busters to hunt you down.  The problem is, some folks don’t calculate carefully enough how much debt they can take before they do die.  As a result, bankruptcy is often a way out where you hide from your creditors, and ruin your credit score for a nice 7 years.  I guess you could go into debt consolidation as well and eek your way out one dollar at a time.  But, it’s better to not have to do so in the first place.

Debt allows us to live a little better than we otherwise could.  The most common forms of debt are mortgages and auto loans.  I didn’t have the money to pay cash for a house in San Francisco.  When I first purchased my rental, I was living beyond my “cash buying means” by borrowing 75% of the value of the home.  Seven years later, I had the cash to pay down my entire mortgage, but with the price of money continuing to fall to such dirt cheap levels, I’d rather invest elsewhere and/or keep liquid.

I’ve never understood the concept of taking out an auto loan to buy a guaranteed depreciating asset.  If you can’t pay cash for the car, or are spending more than 10% of your gross income on the initial purchase price of a car, you can’t comfortably afford it.  The difference between an automobile and a house is that at least a house has a chance to appreciate.  A house is also providing you a tax break and a necessity called shelter.  Automobiles could really be the #1 wealth destructor for young folks.

Sometimes you might have such high conviction on a particular stock or bond that you go in debt to buy more than the cash value in your account.  That’s called going on margin.  It’s a very risky proposition because when you buy stocks or bonds, you are at the mercy of other people (management) and the perniciousness of the markets.  There’s a reason why the majority of actively manged funds underperform their index.  What makes you think you can outperform in the long run?  You can get lucky in the short run, but tough to say after several more trades.

DELUSIONS, BAD LUCK AND GREED

If you have no debt, the chances of you going bankrupt is small.  Debt and bankruptcy are generally intertwined.  You might borrow too much for your business which ultimately loses you a ton of money.  You might have decided to go on margin and buy stocks at the end of 2007.  Or you might have gotten greedy and bought multiple properties with an income level that didn’t support .  Whatever the case may be, just be careful with debt.  It can be used to enrich your life and live happily beyond your means.  Or, debt can be used to destroy your entire financial well being.

Readers, have you ever gone too much into debt?  Have you ever filed for bankruptcy, or thought hard about bankruptcy as your only way out?

Regards,

Sam

Imagine waking up one morning to see a Genie at the foot of your bed with milk and cookies.  She grants you the wish of converting your future earnings or current illiquid net worth into $250,000 cash.

For example, say you were to work for 20 more years and earn a median income of $60,000 a year before taxes.  Instead of methodically saving 20% for the next two decades, you can get all that money right now.  Would you take it?  I bet most would say “yes” since it’s your money and the present value of a buck is greater now than later.

The big question is, what are you going to do with the $250,000?  The stock market is volatile, bonds are bubbliscious, and savings interest rates are less than 0.2%!  Perhaps you’ll use some of the money to pay off your debts, further your education, and help out your loved ones.  Or maybe you’ll invest the money in your start-up company and watch it grow into the multi-millions.

Finally, maybe you’ll do absolutely nothing with the $250,000 and just keep it liquid for a rainy day.  The political landscape is pretty horrific as there’s no way the Jobs Act Bill will get passed since it attacks charities and municipal bonds which fund state construction.  Massive layoffs are imminent before the holidays despite cashed up corporate balance sheets because demand is uncertain.  You might very well be in for rough times, and that $250,000 + $1,600/month in unemployment insurance will help you get through!

Genies are appearing in front of many homeowner’s beds thanks to Ben Bernanke and the Fed’s low interest rate policy.  Few people would have ever expected the 10-year yield to drop below 2%, but it has.  Cash-out mortgage refinances are tempting people night and day now, but the party can’t last forever.  Ben’s nickname is “Helicopter Ben” for making it rain money.  I prefer to call him “Bengenie.”

WHAT I’D DO WITH $250,000 OF MY OWN MONEY (REMEMBER, IT’S NOT FREE MONEY!)

* Look for attractive 8%+ yielding 2 bedroom, 2 bathroom rental properties.

* Decide which municipal bond ETFs to buy.  Examples: CMF, CXA, HYMB, INY, ITM, PVI, NYF, PWZ, PWA, SHM, SMB, SFI.

* Invest $10-20,000 into the Yakezie Network for better user experience, interface, etc.

* Look for offshore high yielding, but stable assets given the USD will likely continue to remain weak or depreciate.

* Send $15,000 to my parents to help contribute to their home remodeling project.  Good luck guys!

* Do absolutely nothing with all leftover funds and wait for a potential recession to come when Obama gets re-elected.  There could be much better opportunities in the stock markets as a result.

Readers, what are some of the considerations before accepting the Genie’s wish? 

What would you do with an extra $250,000?

Regards,

Sam

The following is a guest post by Jasmine from Check N’ Go.

With the miserable state of the economy today, some are desperate to find ways to reduce their debt without filing bankruptcy or losing their home and savings.  The sad reality for many is that bankruptcy and foreclosure are the only events on their financial horizon.

In order to attack debt and free yourself from financial woes, it’s going to require some creative use of existing resources and changing the way you approach debt reduction.

Change Your Habits

For those with large amounts of credit card debt, it can be difficult to find the extra money to pay even the minimum balance on some of their cards. But a little effort can go a long way and extra cash can be made available for paying more than the minimum on at least a few credit card balances.

But this will entail some lifestyle changes. Reducing the amount of money you spend on convenience such as fast food, lunch out at work or luxury weekend dates can provide an untapped resource for cash that can be used to pay more than the minimum on credit cards.

What about downsizing your car? Taking public transportation more often? Imagine the money you could save by not having to fill up your gas tank every week!

Living beyond available means is probably the most common way many people get into debt in the first place! Lean towards a simpler way of life and not only will you pay off your debt faster, you may even learn to appreciate the freedom simplicity offers.

Get A Low Interest Credit Card, Or No Credit Card At All

Another method for reducing credit card debt is to shift the balance from your high interest card to a low interest one. Beware though! Credit card companies are catching on and imposing fine print penalties for trying to carry over debts.

While shifting balances from higher interest cards to lower interest cards is a time honored tradition among those looking to reduce their monthly payments, consumers must use this process carefully now, as credit card companies are now offering introductory 0% interest for six, eight or twelve months with fine print that consumers often miss.

Little known to most consumers, there are now catches involved with that 0% introductory rate that often require consumers to not transfer their balances to other cards for a period of time that is longer than the introductory rate.

Shifting balances from high interest cards to new no interest cards is great, as long as consumers follow the rules. If not, consumers can often find themselves in a worse situation than before. Transferring balances frequently, or “card-hopping”, can incur significant penalty interest fees if not done correctly. If a consumer is looking to transfer their debt to a low interest card, from a high interest card, get an airmiles card, or any other benefits type card for that matter.  This can allow for travel and vacations without costing a significant amount of ready cash.

Take Out The Big Guns

Other options for bringing down your debt could be taking out a home equity loan, cashing out a 401K, taking a loan against a life insurance policy, borrowing money from friends and loved ones.  However, these options are often out of reach for most consumers in serious financial trouble.

At that point, you should look into trying to settle your credit card debt, for less than the total owed. You can try renegotiating the balances on credit cards and loans directly. Not all credit card companies are going to go for this, especially if the consumer has chronic late payments or overcharges. But if the majority of your payments are on-time and within their credit limits, debt settlement can be a great alternative for reducing balances and interest on debt.

If renegotiating does not work, often the threat of bankruptcy will force the credit card company’s hand to reduce the balance or interest on a card. The credit card company does not want a consumer to default on their debt, as they rarely get paid anywhere near the balance owed in a bankruptcy settlement.

If all else fails, or the debt amount is too extreme, bankruptcy may be the only option. Prior to filing for liquidation or restructuring, you should exhaust every other method available, both common and uncommon.

I’m feeling a little sadistic right now.  A large part of me is hoping the equity markets take a big dump again before the end of summer.  Bring on the pain baby!  I thought I was absolutely done with refinancing my primary residential mortgage in 2010 when I got 3.625% for 5 years.  But, I just called my banker and he says I can now get 3.25% jumbo and no points or fees for the same duration!  Because I would simply refinance with the same bank, the process would be streamlined since they have all my documentation.

What is this world coming to?  Who does that, putting more money in the pockets of consumers who never asked for it?  Why save me thousands of dollars a year in interest expense when there’s a guy who’s been out of work for over two years and needs it more?  If I do the refi, living in my house will be cheaper than living in a 2 bedroom rental.  Something is wrong with how government policies are working.  The more the Fed and the Treasury meddle, the more unintended consequences result.

Those with debt are the bad guys right?  We’re living in houses we can’t afford to pay in cash, and we refuse to live in crappy rentals whose landlords never do any updating.  Debtors are living it up because they can, and know there’s only one life to live.  There’s no point making money if you aren’t spending your money.  Meanwhile, savers are getting squeezed as their rates head to 0% and their equity investments go down the tubes.  Debtors are being rewarded again for living beyond their means and that’s just fine by America and our politicians.

ROLLING THE DICE WITH CHEAP MONEY

I had 3.25% to lock down during the most violent of +/- 400+ point swings, but I got greedy and wanted another 1/4 credit from the bank i.e. they pay me 0.25% X value of my mortgage.  The loan officer’s manager wasn’t in, and I decided to wait for her to return so we could get down to business.  If the equity markets rally, and the bond markets sell off, rates rise, putting me at risk for even getting my 3.25% locked, let alone getting a 1/4 credit.  However, with the amount of volatility in the markets, I figure I’m hedged.  If the equity markets go up, great, that’s good for the equity portfolio and the economy.  And if not, “Hello juicy refi!”

At “no cost” (costs are just embedded in the rate), I would be saving hundreds of dollars a month for the remaining 5 years of my loans.  A 5/1 ARM is the duration I like to borrow on the yield curve, and a time-frame where I can comfortable pay off my loan if necessary.  It’s generally a good idea to match fixed duration with the length of time you plan to live in your home.  What we all should have been doing over the past 10 years, however, is borrowing at the shortest end possible since rates have done nothing but go down.

With the Fed telegraphing they won’t raise their Fed Funds rates until mid 2013, all of us literally have a green light to borrow at the short end of the curve.  For example, those who qualify can get a 1 month floating rate mortgage for only ~1.5%!    That is some serious savings, even compared to my 5 year fixed rate of 3.25%.  For those who know they plan on selling or paying off their homes at the end of two years, go for it.  I plan on owning my house for another 5-10 years, and don’t particularly like the process of refinancing so the 1 month floating loan isn’t for me.

UNDERSTAND THE IMPORTANCE OF BORROWING COSTS & ASSET VALUES

Remember, at today’s 10-year risk free rate of 2.4%, every $200 decrease in interest expense (or increase in cash flow) is like having an extra $100,000 in the bank.  In other words, if you had $100,000 in risk-free US 10-year government bonds, you would generate $2,400 in interest income a year or $200 a month.  Or put it another way, if I am a home buyer and it now costs $200/month less to own the same home, I can now afford to finance a house that costs $100,000 more.

Interest rates are a critical element to housing, consumption, and the overall economy.  This is a very important concept to understand.  The Fed has never before given such clarity in their interest rate policy.  I believe it is a good move because when people know what their future borrowing costs are, they tend to spend.  It’s the same thing with taxes.  A temporary tax decrease does nothing because most people would save for the impending tax increase.  No wonder why senior corporate leaders and small business leaders have no desire of hiring people, despite tremendous balance sheets.

Here’s hoping to a 1 hour market meltdown, a locked in refinance during that time frame, and then a recovery!  I’m ready!  Are you?

Important point: The last time the 10-year yield was at 2.25% was in 2009 when the Dow was under 7,000.  The world was ending then.  It is amazing to see yields at such levels with the markets 50% higher!  In other words, we are much wealthier now and yet, get to borrow money at Armageddon levels.  After each of the previous 10-year yield dips, you saw the Dow rally a full year afterward.  With the S&P500 yielding 2.4%, I have been buying the markets aggressively close to S&P 1,100 / Dow 10,800-11,000 levels.

Blue line: Dow Jones.  Green Line: 10-year Treasury Yield.

Readers, who else is taking advantage of the market meltdown and the bull run in bonds and refinancing again?  Do you think the Fed’s move to telegraph low rates for 2 years will seriously jump start consumption?  Aren’t you wealthier now than 2-3 years ago?

Regards,

Sam

The debt relief industry doesn’t really have the greatest reputation for some reason or another.  Perhaps the reason is because we secretly harbor resentment for people who get in way over their heads and look for solutions other than paying off their debt!  When you can solve your debt situation yourself by begging, pleading, calling your creditors to come up with a repayment program, why would you let a debt settlement company charge exorbitant fees?  If you make your case strong enough, you might even get the credit card company or the bank to forgive a portion of what you owe!

Thanks to the horrendous economy in recent years, consumer debt levels have risen to alarmingly high levels.  From buying that new car you shouldn’t have, to big screen TVs that ruin the feng shui in your bedroom, to luxury clothing with 95% margins that never get worn, to nice vacations which you think you deserve, to $100 meals per person, people’s consumer debt has blown up in a bad way.  Never fear though!  With the government ready to bail you out with incredibly long unemployment benefits, free money for your mortgage, and credits for paying on time (shouldn’t you do that anyway?), some consumers will be alright.  But for others, in come the debt relief companies to save the day!  Maybe.

The Issues With Debt Relief Companies

An acquaintance of mine was actually contacted by one of these debt settlement companies. He asked for my opinion, of which I had little, so I did some research. I posed as a potential candidate for this program and called a random debt settlement company I found online. I told them I had about $50,000 in credit card debt that I could no longer pay.  After a lengthy conversation, I found it interesting that they downplayed credit counseling programs in preference for debt settlement.

You see, these are two separate business offerings!  A credit counseling program comes up with a plan and provides educational services for a fee i.e. why are you such a donkey for getting into $50,000 in credit card debt if you can’t pay it off, here’s what you need to do.  A debt settlement company basically acts as your mercenary by trying to get your creditor to forgive some of your debt for a fee.

You’d think that debt settlement and credit counseling companies should work hand in hand to provide the best debt relief solution for a customer.  Instead, it’s one big land grab and sales pitch.  I mean seriously, what’s going on with this industry? If I was the average consumer, I would have definitely signed up for a debt settlement program if they could really reduce my $50,000 debt to say $15,000 and charge me less than $35,000 to do so.  The creditor gets $15,000 from me rather than $0, and the debt settlement company gets paid some percent of the recovery fee as a reward.  I spoke to my friend  and he decided that a credit counseling program, rather than a debt settlement company was best for him since it had the least affect on his credit score.  Sigh, he should just read this site or debt sites for free.

On Techcrunch, they profiled a company called Debteye.  You might have seen them around the blogosphere since they also have a blog.  After reading the article on Techcrunch, I decided to reach out to them and learn more about what they do, and more about the industry for my friend and the rest of you.

Q: So what does Debteye do?
A: We help consumers get out of debt without using expensive third party companies who charge outrageous fees to set up arrangements with their creditors. Our software will help customers set up payment plans and negotiate with their creditors to potentially lower their monthly payment.

Q: What are your fees?
A: Currently our software is free. Anyone who signs up will get a free lifetime account. We haven’t decided exactly how much to charge yet, but we expect that number to be anywhere from $10-$20/ month.

Q: How does your software help negotiate settlements for your customers?
A: Our software will automatically send settlement letters to the creditors at different times during the process. The creditors are also instructed to fax back offers/agreements to a specific fax # that we provide them. Clients can also call their creditors themselves to negotiate the account if the creditors are not responsive, but most collection companies respond within 72 hours.

Q: Isn’t it more effective to have service companies negotiate the debt instead of software?
A: Each creditor has their own process when it comes to lowering their interest rate or forgiving a principal balance. As a matter of fact, some creditors like Chase won’t work with debt settlement companies. We can replicate what the debt relief companies can do when it comes to negotiating with their creditors.

Q: How do you expect to change the consumer’s spending habit when it comes to getting out of debt?
A: That’s a great question. We believe that the most important piece of getting out of debt is learning how to stay out of debt after the program! We plan to encourage them by offering different tips & tools and rewarding them for good behavior. This is the next phase of development and will update you when it’s complete.

Q: What do you think the major problem is in the debt relief industry?
A: One problem is that many of them are not transparent with their fees. There are hidden monthly fees and customers are unaware of the fees associated with the program. Also, there’s no “one size fits all” debt relief product. Everyone has their own unique situation and needs to be evaluated thoroughly to see which program is right for them. There are very few companies who truly look out for the customer’s best interest.

CONCLUSION

It’s interesting to understand how everything has become so process oriented.  From the interview, it appears that one can’t just pick up the phone and call American Express to relieve you of $50,000 in overdue credit card debt, for example.  Instead, there is a process where you have to jump through hoops to get things done.  Paperwork, paperwork, paperwork, and bureaucracy!

I know several people with underwater mortgages who cannot even get someone to listen to their case.  Instead, they have to purposefully not pay their mortgage for 3 months and hurt their credit before the bank starts giving them the time of day.  How inefficient!

Y Combinator-funded Debteye has a good approach with their software system. After all, no one should really pay a third party company to handle their debts.  The real issue is the dang process of getting through and handling all the steps and the paper work.  Everything can be done on your own without seeking a debt relief company. Getting out of debt doesn’t have to be a confusing process.  The most important thing is to recognize the reasons why you are getting into debt in the first place, create a plan to get out of debt, and stay that way until you can better manage your finances.

Readers, have you had experience with debt settlement or credit counseling companies?  If so, please share your experience.    Why does it take several months of non-payment before banks and credit card companies are willing to discuss solutions?  Why can’t they be open to discussing before things it the fan?

Regards,

Sam

Refinancing now is generally a wonderful idea as jumbo loans are back to all time lows.  That said, what happens if you are so underwater on your mortgage that you feel it doesn’t make sense to continue paying anymore because you don’t think value will ever recover?  Banks have become so annoyingly stubborn regarding allowing underwater homeowners to refinance, that you might have a better way.

Have you ever wondered why there have been so many foreclosures in states such as California, Nevada and Flordia?  I’ll tell you.  If you live in one of the 12 “non-recourse” states of Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington you are in luck!  If you so happen to own property in one of these states, and have substantial assets elsewhere, you can legally hand over the keys to the bank and exonerate yourself from the mortgage with no penalty against your other assets!

AN EXAMPLE ABOUT GETTING IN OVER YOUR HEAD AND BAILING

You have a million bucks in the bank and you bought a house for $800,000 several years ago by taking out a $750,000 mortgage.  Real estate market crashes and the value of the home is now $400,000.  You’ve already paid $50,000 of the mortgage principal over the years.  $300,000 of your mortgage is now unsecured ($700K mortgage balance – $400K value of property), which means your house is now an under-secured debt.  Because you live in a non-recourse state, if you turn over the collateral (your house), your lender cannot collect on the $500,000 unsecured debt.  The lender assumed this risk when they approved your mortgage application, and you can walk away with your $1 million in cash and live happily ever after.

However, say you bought the house for $800,000 with a mortgage of $300,000, and then a few years later took out a second mortgage worth $500,000.  Real estate market crashes and the house is now worth $100,000, leaving you upside-down on the house by $300,000.  If you turn over the house, you can walk away from the first $300,000 mortgage, but you’re still liable for the second $300,000 mortgage.  Since you no longer have the collateral, the second mortgage is now an unsecured debt.  Unsecured debts can be discharged in bankruptcy.

BANKRUPTCY OPTION

If you want to file for bankruptcy, the $1 million cash is a problem.  Since you’ve got the cash on hand, the court is going to say you have to pay back your second mortgage.  But who has $1 million cash in this economy?  More realistically, you have $1,000 cash.

If your income is above the median, you are eligible for a Chapter 13 bankruptcy.  In a Chapter 13 bankruptcy, the debt is not completely erased, but is instead consolidated and restructured into an affordable monthly payment.  The debtor creates a three to five year affordable repayment plan to pay off a portion of the total debt.

If your monthly income is below the median for the state you live in, you are eligible for a Chapter 7 bankruptcy, which is a total liquidation and discharge of all of your debts, including the $300,000 second mortgage.  The slate gets wiped clean and you get a “fresh start” to start rebuilding your credit.  You are eligible for a new FHA home loan 2 years after your bankruptcy is discharged.

If your creditors are harassing you or if a creditor has served you with a court summons, if you’re facing a repossession or foreclosure, or you are only making the minimum balance on your credit cards, you should seriously consider filing for bankruptcy.  If you feel like your finances are way outside of your control, bankruptcy is the “fresh start” you need to get your financial health back in your own hands.

Most bankruptcies are caused by one of three events: loss of job/failed business, medical emergency or family emergency.  You may have been living within your means just fine, but then you lost your job and defaulted on a payment.  One missed payment can change your interest rate from 8% to 39%, causing your debt to quickly mushroom out of control.  Perhaps you or a loved one suffered a heart attack, resulting in thousands and thousands of dollars of medical bills that you simply cannot manage.

IS IT RIGHT OR WRONG TO WALK AWAY IF YOU CAN AFFORD IT?

There are actually plenty of people in California who have substantial assets who are simply walking away from their mortgages.  Financially, it makes sense, especially if they’ve put very little down.  Legally, they have every right to walk away as well.  After all, the banks performed due diligence and made the decision to lend you money.  Nobody forced the banks to do anything, as perceived profits are what drove them to lend.

Sure, for the first 5-10 years, your stellar 770 credit might get trounced to 570.  But, if you have another fine property you are living in, and another vacation home down in Malibu, what do you care whether you can’t get more credit or not?  You’re already living the dream and catching a break from an investment property that went sour!

Readers, do you think it’s wrong to walk away from a mortgage if you can afford to pay?  How much do you value your credit and how would you value your credit given the negative implications of walking away?

After sharing your thoughts, go check out a guest post I wrote on Untemplater entitled, “The Best Place For Online Entrepreneurs To Live And Work“.  It’s what I discovered after blowing my tax refund!

Regards,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”