How to help a friend find ways to dig out of debt
By Erica Sandberg
July 6, 2016
A friend of mine is seeking financial advice. She is not behind on her payments (not in collections), but she has a lot of debt and needs help. She did lose two homes. One was in bad shape, and the contractor made it worse. Not sure how she lost the other one, but I believe it was upside down in the real estate downturn. I believe she said she was around $150,000 in debt, which included student loans. She makes $53,000-$60,000. She needs debt relief, a payback program for what she owes, and she needs to start a savings or retirement plan. Any advice you have for her on how she can find a trustworthy adviser would be really helpful. — Just call me Jan
I want your friend to focus on the reality of her situation. From what you’ve described, it appears that her earnings are insufficient to satisfy all her obligations.
It’s a case of simple mathematics. If her annual salary is $60,000, she’d be left with about $3,750 per month after taxes are deducted (I used a 25 percent tax rate). How much of that would she need for housing, food and other necessary expenses I don’t know, but I doubt very much she’d have enough for substantial debt-repayment.
I rarely recommend bankruptcy, but I urge your friend to at least consider how it might benefit her. If the majority of her obligations are not student loans, these debts would be dischargeable, as most unsecured accounts can be forgiven in a Chapter 7.
If she qualifies for this type of bankruptcy and goes through with it, your friend would no longer be saddled with all of her obligations. Then what she had been paying can be re-routed to her remaining debt and to building a retirement fund. Of course, bankruptcy is not right for everyone. She would have to qualify, and assets might be at risk, but it’s worth exploring.
Regarding the student loans, much depends on whether or not your friend’s accounts are in default. If they are in default, she may arrange for a “reasonable and affordable” payment plan to get back on track. This particular payment plan is difficult to set up, but it is her legal right. By making nearly a year’s worth of payments that are within her budget, the loans will be rehabilitated. After that, she can arrange a payment plan that works for her income and expenses (which is also available to her now if her loans are in good standing).
To get the process started, have your friend contact a nonprofit consumer credit counseling agency (find one via either the National Foundation for Consumer Credit Counseling or the Financial Counseling Association of America) that is also certified to provide bankruptcy counseling and education. In the initial budget and debt appointment — which is free — a counselor will look at all the numbers and develop a plan based on your friend’s specific situation. If the counselor does suggest bankruptcy, the agency can take it from there.
Then again, the counselor may detect another way she can resolve her financial problems, such as increasing income, reducing expenses, using their debt management plan (usually reserved for credit card balances) and settling debts for less than they’re worth. Even doing nothing can be an option. If your friend has no property that a creditor can take and her income is protected from garnishment, she may be what’s considered judgment proof. She can still be sued for a debt, but they can’t do anything to claim the balance due.
And if filing for bankruptcy is her best option, please let her know that it’s not the end of the world. This kind of protection exists for a good reason — to give individuals (and companies, too) relief so they can gain a fresh financial start. Besides, she has her future to consider.