Debt Repayment - Where to Start?

[Firefly]

Hi everyone, I am new to WIR. I have been out of work for almost 2 years and starting a new job next week. I have bunch of small accounts in collection, one credit card that is chargeoff, a car loan that is current and student loan that is not going to be in repayment until probably June next year since I will graduate in December. I want to start paying off with the first check I get but I can't figure out where to start and I was hoping some of the more experienced people in this community could direct me where to start. CC# 1 6300-----charged off Car loan 6000 monthly payment 361 Collection # 1 468 Collection # 2 800 Collection # 3 588 Collection # 4 740 Collection # 5 2,112 is still showing as balance on my credit report but was paid off April 2010 i am trying to have it removed from credit now The job I am starting on Monday I will be paid 2000 after taxes. Rent including utilities is $400.

Please help me prioritize to figure out whether I should even attempt to contact creditors before I save at least couple of months to start an emergency fund.

[constanz22]

Congratulations on trying to make a plan to pay your debts. It might be easier if you edit your post, or re-post and put your debts in list form:
CC#1
CC#2
CC#3
etc.
Give the interest rate on each, if you know it. Also, it would be helpful to know your whole financial picture. As well as listing your debts, if you can do the same and list your budget:
Income 2000
Rent 400
Groceries
Gas
Insurance
Cell Phone
Cable
Entertainment
Etc.
That would be much more helpful for anyone to give the best advice on your situation.
Typically, you should have some sort of EF in place before you start paying on debts. At your income level, $500-1000 would be fine. I'd save this as fast as possible, with your first couple pay checks, by selling crap you don't use, etc. Once you have at least $500 in an EF, then I'd start to tackle these debts. The ones in collections will likely settle for less than you owe. It's going to take a lot of phone calls and work on your part, but you can probably get a pay-off amount that is 60% of the total owed, but you have to have that amount, in full, to offer them. So, it gets a little tricky when you have so many of these accounts. Luckily, most of those debts are fairly small. Have you heard of Dave Ramsey? I would go to the library and check out "Total Money Makeover" and read it immediately. He has good advice on how to deal with creditors and tackle these debts, as well as sample letters to send creditors. NEVER send a post-dated check, NEVER allow them to access your account by setting up ACH payments, ALWAYS get any agreements from the creditors IN WRITING. Please re-post with additional info when you have time.

[Firefly]

Thank you daphne87, Actually none of the debt I listed have interest rates as of now since they are either in collection or chargedoff. My car loan has a balance of $6,000 payment is 361 and is 9% I am glad they didn't raise it when my credit rating went to the toilet. All the other balance are not charging interest as far as i can tell from the credit report but I want to pay them off and re-establish my credit.
I am trying to decide how much I can pay and which creditor to contact first. I think all the collection agency's have given up on me because I don't get any calls or letters from them anymore.
Household expense
$400 rent including utilities
$35 internet
$70 cellphone
$300 grocery
$150 cigarettes
$59 insurance for the car
$140 for gas

[Firefly]

Thank you guys that give me a lot to think about. One thing I want to say is that I wasn't paying anything before as I was living with my parents. The cost of living that I listed is my estimated budget once I move in September so hopefully I wont' use all $300 for grocery. The way I see it is that I have two options: 1) to start saving at least $500 a month for at least 6 months before contacting creditors and have some kind of settlements with them at that time. Or 2) contact them all now and start some kind of payment plan with them which I would imagine would cost me more in the end.

Also I have $4000 coming in a couple of weeks, which at first I was planning to pay down my car but now I am having second thoughts. I am thinking of calling the charged off discover card and asking if they would settle for $3500.

Sorry if I am keep coming back I just feel lost.

[daisylu]

If all accounts except for the car loan are in charge-off or closed (meaning that you are not currently making any payments), I would use the $4000 to immediately pay off collections 1,2,3,& 4. This would clear those up and leave $1404, which would make a tidy EF. Then, make payment arrangements for the $2112 & $6300.

If you do settle for less than the original debt, you will also have to pay taxes on the amount that you did not pay.

[stanthedevil]

Will you have roommates? The $300 is high for one person once you get settled, but the first few months will probably be expensive because you'll be buying things like salt, pepper, and spices (which last forever) and cleaning supplies, light bulbs, etc. All those initial expenses add up pretty quickly. Once you've bought them, you should be able to get buy on $100-150 if you're eating a lot of fresh food and not doing any couponing or sale shopping. I spend $60-75 a month now on groceries. I eat a lot of fresh food and organic products, so I shop sales but rarely use coupons. Instead, I shop at the local farmer's market and buy a share in farm every summer to keep that number low.

[Peace77]

Which check will you receive first? Out of each check you receive, first set aside 20% for savings for an emergency fund.

If the $4000 check is first, use those funds to pay off the accounts in collections #1,2,3, & 4. If you do not receive that check, make payment arrangements on those accounts.

You may need to pay a security deposit on your new place. Use some of the $4000 for that.
Put the remainder in a savings account. Look for an account paying at least 1% interest. See www.Bankrate.com for banks paying good rates for savings and money market accounts.

It will cost more the first few times that you go grocery shopping as you probably won't have staples (flour, sugar, oil, etc) or condiments in your new place.

Save your money first before contacting the charged off card.

When considering to make payments or settle a debt, include the cost of paying taxes on the difference. The IRS counts forgiven debt as income.

[Firefly]

I will have a roommate - she already lives in the apartment so I wont need any deposit. I think I will be getting the $4,000 and my first paycheck around the same time, if my tax calculation is right it will be $1000 after tax but I suppose I will find out on the first.

I like the idea of paying off all the collections and starting a payment plan if they allow it with the one credit card that has the highest balance. However, on top of paying my debt down I have other expenses that are coming up. For example I need to come up with a $1000 to sit for the CPA exam in November. I also need to save at least 500 to open a secured credit card so I can build good history since all my cards are closed and you need not only pay down debt but create new history to improve credit.

My problem is that I have let things get out of hand and I want to be back on track asap. That way it doesn't jeopardize my employ-ability, after paying closed to $40,000 for student loans, I don't want to be not hired because of bad credit.

[mizbear]

nadiya- I would put the credit card on the back burner. If you are paying on a car loan, that should be going on your credit report. If you have been on time with your payments, they will have that on your credit report, when you pay that off, they will put that on there that it was paid as agreed or something like that (I can't remember what the term is). I don't want to discourage you about he credit card, but if you wait on it, you may be able to get a lower rate, if you feel this is the way to go.
After having credit card problems, I have tried to stay away from them. I built my credit back up without them.

[daisylu]

IA, with all the negative listings opening even a secured CC will not help your credit. Those need to be cleared up first. As for payment arrangements on the 2 larger bills, ask the creditors if they will report your payment arrangement to the credit agencies after say 6 months of payments.

NO CC will repair the damage that these accounts have done. The only way to move forward is to clear this up FIRST.

[haapai]

nadiya, your accounting education will come in very, very handy while digging yourself out of this hole. You're probably going to find yourself making a lot of spreadsheets. You're probably going to discover just how little of your accounting education was about personal finance. You'll probably have an epiphany regarding the purpose of the statement of cash flows.

At least those were my experiences.

Try not to beat yourself up too much. A lot of accounting majors find themselves in similar pickles and buy into the world's belief that accountants should know more about money than to get themselves into messes like this. My personal belief is that the academic classes that accountants take have very, very little to do with personal finance and may actually encourage some pretty poor financial habits and dangerous risk-taking.

On the other hand, what you learned about spreadsheets and personal income taxes will come in very handy. You may also discover that while double-entry accounting can be quite tedious, it stores useful information incredibly well as long as you actually do it. (If you had interest-bearing debts and were certain regarding the balances, I'd be telling you to start with a trial balance.) Even intermediate accounting and your auditing course will come in handy. The fact that you got through both of them proves that you have the ability to handle mountains of dry and confusing material.

You're probably going to be shocked by how long it will take to dig yourself out and how tight things are going to be for a while. I'd suggest that you keep records and create metrics of progress.

Since you are still in school, you are in a good position to ask around whether it is even worth taking the exam without doing prep courses.


But above all, I suggest that you get organized, and reorganized, and reorganized again.

[mizbear]

haapai-

[Pants]

nadiya: if you have $40k in student loans coming due in december, what will your monthly payment be??

[qofcc]

I would put $1K aside for the CPA exam and another $1K aside for emergencies (put $500 of it on a secured card).

Don't contact the collections ones until you have money to negotiate a payoff, but as soon as you do, contact them and see if they'll settle for 50%. Start with the small balance first, because the number of collection accounts is more important than the total balance owed and you have 5 accounts. If you can't negotiate a lesser payoff, try to negotiate if you pay in full will they remove it from your credit report. The worst they can say is no. With the credit card, if you have to pay in full, ask if they will re-open your account. Then the late payments will fall off after 24 months of on-time payments.

Make sure you pay your car payment on time every time. Set up automatic payments.

You should be able to feed yourself for less than $300/mo and you have no business spending $1800/yr on cigarettes when you can't pay your bills.

When your student loans come due, consolidate them and apply for the income based repayment plan. Make sure you make all of your payments on time.

[stanthedevil]

With the student loans be sure to explore all your options before you consolidate. For example, several of my loans are part of a program where once I make 36 on time payments, my interest rate drops to 0% (provided I continue to make on time payments). However, if I consolidate, I lose that eligibility. These same loans (and the others) all qualified for a rate reduction if I enrolled for automatic debits. Again, I lose that if I consolidate.

My understanding is that these incentives vary from state to state and lender to lender. (Just because your loans are all serviced through one place doesn't mean they all originate with the same lender. My loans are all serviced by Nelnet, but I have 4 different lenders.)

Of course, if a nonconsolidated payment can't fit into your budget, then the entire discussion becomes moot. But, if you can swing the individual minimums, it may be worth it in the long run. Talk to someone in the financial aid department at your school, my counselor was a wealth of good information in terms of consolidation vs. not.

[haapai]

For good information regarding how your student loans work, try finaid.org. (I'd suggest bookmarking it even if you don't find it helpful now. Just knowing that it exists and how to find it will probably come in handy eventually.)

You can figure out what your student loan payments will be. If you have not retained enough paperwork to know what the balances currently are, the national student loan clearinghouse can help. The office of financial aid can also be quite helpful and handy and you will have access to it until you graduate. You have the math chops and nerdiness necessary to figure out what your balances will be when the loans enter repayment. Figuring out your options will probably be more difficult. The sooner you start mulling those options, the better off you will be. (It takes a while to digest all that math and wade through what finaid has to say about them.) There is no need for you to wait for letters from Aunt Sallie.

I really think that you should accumulate an emergency fund prior to contacting your creditors and I don't think agreeing to repayment plans is a good idea. I understand that it would be very satisfying to see your liabilities go down with each payment, but there's a lot of risk that you will commit to a repayment schedule that you cannot sustain.

You will probably need a rent deposit after your roommate's lease expires.

ETA: I typed most of this, ate dinner, and then hit send. Despite what it looks like, I wasn't just paraphrasing stan. Honest!

[stanthedevil]

haapai

[Firefly]

Aug 12, 2011 14:52:33 GMT -5 Pants said:

nadiya: if you have $40k in student loans coming due in december, what will your monthly payment be??

I will be done with school in December and as far as I know there is 6 months grace period so I have breathing room until June. I don't know how much the monthly payment will be yet, it is on my to do list though.

I think a lot of you gave me good advice and a lot to think about. The $1000 for the CPA exam is on top of my list because that is the only way I can get a better paying job. I also really want to open the secure card so I will use $1,000 to open that and use to rest pay at least two of the collections. After I move and settle in with my new job I will reevaluate and see how much I can actually afford to go towards debt repayment.

[stanthedevil]

You do get a six month grace period. You can check out all your federal loans at www.nslds.ed.gov/nslds_SA/. The site gives you a detailed breakdown of each loan including which company services it. For example, mine are all serviced by Nelnet and Direct Loan Servicing (www.dl.ed.gov). If you log in with the servicing company you should be able to get minimum payment amounts. The only variable will be if you have unsubsidized loans which have been accruing interest. All unpaid interest is capitalized at the start of repayment which can bump your minimum payment by a few dollars. (Mine went up like $8.)

[haapai]

The interest on unsubsidized student loans does not have to be a variable. It can be calculated well before a letter arrives asking whether the borrower prefers to pay it or have it capitalize.

If you are working, it is usually in your best interest to pay that amount instead of letting it capitalize. It's a valuable before the line deduction. You'll probably get 15% of that amount back from the feds and something from the state as well. (Most state income tax returns start with AGI, so anything that reduces AGI reduces your state income tax as well.) It pays to keep in touch with your student loan lender and know what that letter will say before it arrives.

I believe that I was also given the option of paying only a part of the interest and letting the rest capitalize.

nadiya, you absolutely need to know what your student loan payments will be before agreeing to any repayment plans. What you've told us so far indicates that you probably do not have the income to handle payments on the charged off credit card ($6300) and the student loans simultaneously.

[haapai]

It may not be necessary for you to consolidate your student loans to get a longer or more favorable repayment plan, especially if the loans are all with the same lender or with the right lenders. There's a lot of folk wisdom and obsolete information floating around regarding consolidation. Basically, it used to be necessary to consolidate in order to stretch out payments but that isn't always the case anymore.

I'd recommend that you do not consolidate unless you absolutely have to. The hardship provisions of your student loans are extremely valuable and you pretty much get one set of them with your original loans and another set after you consolidate. If a borrower consolidates right away, they effectively lose that first set of get out of jail cards.

[bring in the new year]

nadiya,

Where's your job? If you're working for a cpa firm or a large company in an accounting department, check out the benefits.

CPA firms used to pay for the exam as long as you passed.

I'm also assuming that the $1000 is for the prep class and not the exam itself. If it's for the prep class and you're working in an accounting function, check out whether or not it's considered a business expense.

I doubt taxes are on your mind right now, but if you have chargebacks and they are income, you're going to need all the deductions you can get.

Good luck.

[chicg]

"The $1000 for the CPA exam is on top of my list "

I'd pay your prior obligations before saving $1K all at once to take the CPA exams. I realize taking the exams will help increase your income however you have prior obligations. Based on what I've seen others post, you need to take several sections of the CPA exam and you take the exams in a series, not all at once, so why don't you save money in monthly installments? You can put money aside for your first section and then as you study for that, save for the 2nd section, then the 3rd, etc?

[haapai]

Aug 12, 2011 6:58:29 GMT -5 Firefly said:

Also I have $4000 coming in a couple of weeks, which at first I was planning to pay down my car but now I am having second thoughts. I am thinking of calling the charged off discover card and asking if they would settle for $3500.

These are both ideas worth examining.

Paying down the car loan by as little as $2500 will get it paid off before the student loans hit repayment. While such a choice will leave you with limited savings, the effect on discretionary income will be huge. It's also possible that if you make big lump sum payments toward the car loan, your due date will be advanced. You'd have to get the details on how the extra payment will be treated from your loan agreement or by calling your financer.

Getting the big credit card debt out of the way will put you in a position to pick off the other collections one by one. It won't beautify your credit score quite as much as zotzing the the little ones first, but it leaves you with tackleable debts. There's quite a bit to be said for momentum. By the way, potential employers will probably be looking at your credit report instead of pulling a score.

nadiya, you are unusually well-equipped to tackle this. You've got the background to do the math and mapping yourself instead of listening to what others have to say. Harness your numbers geek! Spreadsheets, especially spreadsheets with dates in them, are your friends.

P.S. If you had slightly less short-term debt, even $1000 to $2000 less, it would be so much easier to find a path through this. That's not an attempt to invoke hindsight, it's just how the numbers and timeline work. Is there any way that you can increase your income or decrease your expenses between January and June?

[reader79]

Aug 12, 2011 10:53:09 GMT -5 Firefly said:

For example I need to come up with a $1000 to sit for the CPA exam in November. I also need to save at least 500 to open a secured credit card so I can build good history since all my cards are closed and you need not only pay down debt but create new history to improve credit.

My problem is that I have let things get out of hand and I want to be back on track asap. That way it doesn't jeopardize my employ-ability, after paying closed to $40,000 for student loans, I don't want to be not hired because of bad credit.

I would use the $1K for the CPA exam, only because it is an investment in your career = making more money.

How did you go from needing $500 for the secured card, to $1K? You want to spend money to allow yourself the opportunity to get into even more debt? Forget about it. Your credit will improve as you payoff your existing debt, and as time progresses. Use the rest of the $4K to make settlement arrangements with the accounts in collections. If they won't remove them from your report in exchange for payment, then at least try to get them settled for a significant discount. Ask to pay 25%, what's the worst they can say, no?

[reeneejune]

nadiya - If I were in your shoes, my priorities would be:
1) staying current on the car loan. This will help you re-build that credit score.
2) pay for the cpa exams. Otherwise that degree is a really expensive piece of wall art.

As far as the old credit card and collection accounts go, remember that once their paid and removed from your credit report, they disappear. So future employers won't see the work you've been doing to pay off those accounts, only their presence (or absence). Have you considered sitting down with someone at a non-profit debt counseling service? NFCC and Consumer Credit Counseling are the two that come to mind. They look at your whole debt picture and help you come up with a repayment plan and can often negotiate to lower interest rates and fees without charging you an arm, a leg, and your firstborn. And if you don't like their advice, no harm... you can follow their advice in whole or part or not at all.

I do want to caution you though, don't assume that just because the accounts are in collections that they aren't gathering interest and fees. Sometimes the second you make contact with the collections agency, they start charging interest again and/or adding on fees. The other thing to be aware of is the possibility of garnishment. The chances that one of the smaller collections accounts would go to the expense are small, but if a collections agency buys several of your accounts/debts and lumps them together they may try it. (It happened to me)

[Firefly]

I have called couple of the collection agencies trying to figure out if they would give me settlement offer and so far I am not having any luck. I am still waiting on the law office the credit card company sold the 6300 charged off account, I have offered them 60% settlement and they keep telling me they will submit it to the client and let me know but so far every time I call they are trying to get me to make a payment without giving me an answer. Anyway finally I got hold of someone that said they can get me an answer next week so if they accept that I would rather have that big charge out of the way and if they don't is back to the drawing board.

By the way I didn't have to reply to all of you but I appreciate all your input and insights. Thank you.

[Peace77]

If the accounts in collections don't want to settle, offer to make payments. Offer them a small amount that you will have no trouble to pay such as $10, $20 or $25 per month.

I suggest that your priorities should be:
1) $1,000 Emergency fund
2) $1,000 for CPA exam (if it's not needed add it to your emergency fund)
3) Stay current with car loan
5) Make small payments to all of the accounts in collections
6) Make extra payments or pay off CC #1
7) As you have the money, pay off CC #2, then CC#3, then CC#4
8) Save up to pay the charged off card. Do not contact them until you have at least $3,000 to offer in settlement.
9) Make additional payments on the car loan and at the same time
10) Increase the emergency fund to $2,000

[TD2K]

What state are you in? The statute of limitations can be as little as 2 years in some states for some types of debt which it sounds like you are coming up on. Once the SOL is past, it gives you a lot more power to negotiate payment schedules with a collection agency, have interest reduced or dropped, fees reduced or dropped, etc since you can simply tell them to go pound sand.

[Deleted]

I'm confused. This is from the OP:

"charged off Car loan 6000 monthly payment 361"

Does that mean the car has been repossessed? If the account is charged off and the car is gone, why would nadiya give that payment and account preference over the other collection accounts? At least that's my impression of what other posters are suggesting.

Nadiya, I wouldn't contact any creditors until you're sure of what you need and are able to do. If they're calling you and you talk to them, be VERY careful what you say. I also wouldn't try to get a secured credit card yet. Even if it would help your credit immediately (which I doubt), I think you need to get a handle on what you have going on now and in the near future (student loans coming due) before you even think about more credit.

Also, your proposed budget is missing several things, so if/after you move, I suggest you just sit tight for a minute, see how much things will really cost you and then finalize your plans.

Speaking of which, do you absolutely have to move now? Can you stay put and pay your parents rent for a while until you get your plan together?

I understand not knowing where to start. Been there, done that. That's why I urge you to plan very carefully and make sure your plan covers everything you have coming up, before you start allocating money and making promises.