Case Study - Debt Slave Fighting Back.

[arizona56FW]

Hi. I'm Ari. I like fighter jets & I'm in debt.

Ok... so.. full disclosure, I am a financially illiterate punk. I just found MMM a few months ago & my mind is kind of blown. I am trying to take things a step at a time. I have realized I don't want to be a debt slave the rest of my life. I'm figuring out how to make things better. I have made some big mistakes. My biggest financial mistake has been buying a car with a 7 year loan. I thought it would work out. It took me about 9 months to realize that I had financially destroyed myself & it took me another year until I was desperate enough to move back home.  Over the last 2 years at home, I have been paying the car loan debt off... along with some other debt. I am on target to pay off my car loan 3 years early if I make my payment next paycheck. It has been an exhausting journey. I hate my car. I don't know how I justified such a horrible purchase. I went through a lot of other awful experiences because of my debt.. including getting into more debt.. and now I am trying to clean up the mess. I have made enough progress that I would like to share my case study and ask for help. I consider myself very lucky to have health insurance. This job is the first job I've ever had a retirement benefit at... so that's pretty sweet as well. But I have a lot to figure out.
 
What do you think?? How can I get back on my feet??


Category           Payday       Monthly           Comments                     Annual
Gross Salary           $1,526.43      $3,052.86     10 month contract        $32,055
                                                            Paycheck every 2 weeks   
Retirement              $175.23       $350.46         Total=12% of Contract.$3846.6
Medical Insurance    $79.04        $158.08                                                 $1580.80


Federal Tax 1 person / No children
Fed Tax                   $115.06      $230.12                                           $2862.00
Soc. Sec.                  $90.32      $180.64                                          $1987.41
Medicare                  $21.12      $42.24                                              $465.00

State Tax
@2.7%                    $34.60      $69.20                                                   $865.48

Total taxes              $261.10   $522.20                                               $6179.89
         
Income After Taxes,
Retirement, & Insurance:
                                 $1011.82  $2023.64                                 $20447.71

I had been overpaying my state taxes... somehow I was in the highest bracket! I changed it once I realized what had happened and now my paychecks are higher.... holy crap yeah!

Monthly Expenses:         
Car Insurance                                                    $98.00        
Fuel                      $70per payday / $35week / $140.00 monthly      
         
Groceries              $100per payday/$50week   / $200.00   monthly   
         
Phone (cell)                                                       $38.11

Anything else        $20per pay day / $10week / $40.00 monthly

Total Expenses:       $258.00            $516.11

Debt Payments:       $600-700.00   $1200-1400.00 .......anything left over after debt payments pretty much goes to food.

DEBT:
Car Loan - 21K @8% over 7years... Paid down over 4 years to $300.00... next paycheck is final payment!!
NEVER AGAIN!!! 1st & LAST CAR LOAN.

Credit Cards:
CC1-1200
CC2-2000
CC3-4800
All of these cards have been charged off. A few months after getting my car, I lost my job and lived off credit cards for about 6months... when I got another job, I wasn't making enough to make the cc Payments & the car payment. I paid the car, thinking it was better to do that than risk it getting repo'd. The balances are more than twice what I actually charged on them, due to the late fees and increased interest rates tacked on when I was unable to pay. I don't know what I was thinking, I was kind of living in fear at that time. I'm not sure what to do about it now.

CLOSED BANK ACCOUNT-800
When I lost my job, I was fired... and the company I had worked for withheld my last pay check, PLUS took back the two prior paychecks, a whole months of wages.. leaving me with no savings and $800 in the negative due to the bank. I was employed on salary at the time, so I had no way of fighting back against the company that took back my wages. Due to being overdrawn at that bank and having a bad credit score, I currently cannot open a new bank account... but I had an old bank account that I was able to use to deposit paychecks into that saved me from check cashing hell.

RETIREMENT ACCOUNT-3890.00
When I started my latest job, I was told about the mandatory retirement plan.. and assumed it was being taken out of my paycheck, but found out this year that it actually had not been taken out at all the first year. I was told this was due to an accounting glitch but that I am still responsible for paying it. I now owe their retirement plan 3890 and they are charging me 8% annual interest until I pay it back. I had no clue...

I don't own anything (except the car when I pay that off soon... but I'm dreaming of a life without a car!!) or have any investments. The biggest thing I have in my favor is living at home rent free and I have no children. It's pretty sad though. I never do anything but worry about money.

...... After I pay my car off, What should I do next? Thank you for your time & consideration!!!!

[vagon]

Alright, welcome to the forum and congrats on taking the first steps.

Some questions:
Can you expand on how if you've already accounted for groceries that "anything left over goes to food"?
Can you explain what you mean by groceries being 100/50 a week? Is that alternating or a range?
Do you need your car to get to work? or for work?
How many mpg do you get from your car?
Does the overdrawn bank account incur any fees/interest?

I would rank all your repayment obligations in order of interest and fees charged, highest first.
I am assuming it will look something like:

1. CCs
2. Car loan
3. Retirement account (because the 8% is of-set by whatever gains you're making here)
4. Overdrawn bank account.

Now pay them off in order. If you can stand delaying the car payment it makes more mathematical sense to pay off the credit cards which I assume are 15-20%.

[Allie]

Well, it looks like you have hit the bottom of the hole you were falling down!  Which is a good thing!  You are paying over a grand per month to debt, so you will be out of the hole in a little over a year, maybe a couple more months for added fees and interest.  It sounds bad, but you have a plan, a cheap place to live, and job.  You need to keep all of those things!  If you stop the serious debt repayment, lose your job, or get booted from your family's place, you may be in a world of hurt, so keep up what you have got going. 

I would wonder if there would be any benefit from selling your car and buying something cheap or going carless with a bike or bus pass.  I know you spent a ton of time and money procuring the car, but if you can net even a few thousand, it may be worth it to shave a few months off of your repayment plan.  A fancy car isn't worth living at home with creditors breathing down your neck.

Also, if your job doesn't require a significant amount of time get another job, side hustle, or lots and lots of overtime.  No kids, young, healthy, in a ton of debt...40 hours a week should be the tip of the iceberg.  Go forth and be productive and busy! 

When you get out of debt and get a second job, you will have at minimum 1,200 per month extra which should cover a place to live with a roommate and additional savings. 

More details on what you do, where you are located, and what your long term goals are may help you get some more focused advice.

[MDM]

More details on "retirement account"?  E.g., is it a 401k, 403b, 457b, private pension, public pension, ...?

Are the "medical insurance" and "retirement" payments pre-tax or post-tax?

See also http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/ for more general and specific suggestions for how you might present your information to get the best feedback (more or less what Allie and vagon have mentioned).

Welcome and good luck!

[former player]

You've been paying that car loan so long, paying it off will be a big psychological win.  Less than two weeks to go!  Congratulations.

Your savings rate (paying debt is a form of saving) is completely badass: retirement plus debt payments is over 50% of gross.  If you can keep that savings rate up for another 6 months you will have cleared everything except what you owe in retirement.

Can you claim back your overpaid state taxes?  Was it your current employer who was responsible for putting you on the highest rate?  If so, you are entitled to be pretty pissed at them.

Also, that 8% your current employer is charging in interest on your unpaid retirement: I'd be pretty pissed at them about that as well.  In fact, how sure are you that you should be paying that at all?  What paperwork have they shown you to justify the charge?  If it was their mess-up, I would have said that they should be paying any charge that results.  Now, I know that you depend on this job and possibly need to be a bit careful.  But if you can find some free employment rights advice from somewhere (or join a trades union that would be able to provide help), you may be able to stop or have repaid that 8%.

Congratulations on what you have done so far.  You are very close to being back on your feet and completely debt free.

[arizona56FW]

Hello! oh my, that was quick... thanks for the welcome. :)


I was writing amounts in the specific columns, but to clarify.. $100payday/50perweek etc. is what I meant. I was breaking it down more to show you better. I chip in a lot at home, like buying groceries and making meals for my mom and brother. I really love to cook and get good prices at the store. We're a working single mother family, my mom is underwater on her home tho and doesn't own anything either. I don't want to end up like that.

No, the overdrawn account is charged off debt. So are the CC's. They only give you so many months to pay before they chuck it... but I have an army of debt collectors that call my house all the time. I'm looking into settling the debt, but I'm not sure how to yet.

Man.. they can take my car from me if that doesn't get paid. So that is #1. I bought my car to get to work.
I drive 26miles one way.. 52miles a day. about 25miles/gallon. about 1K miles a month. Typical clown car habit... but I had a really hard time finding a job a few years back and had to take what I could get. I didn't realize how bad it would impact me financially. I figured it out the hard way. I pretty much work to pay my car to get to work. I live in Phoenix, there is no public transportation in my neighborhood. I would love to move to a place that has public transportation. And clean air. But I can't move anywhere due to the debt. I've looked into getting a room near work, but it would be more than the cost of gas I pay now.. so I'd rather stay at home a bit longer and pay more debt.

I actually agree with you about selling my car... the cost of keeping it is huge, even when I pay it off. I'm super sad that I didn't use the money to put into some kind of investment for the future. It's all money that's been wasted. I just can't imagine living in Phoenix without a car unless I moved to a totally new area and got a new job and everything... and I am not in a strong enough position to risk that. But yes, I am thinking about it.

And yes to you again, Allie.. I am looking for another job. I did have a second job waiting tables for awhile, but the place was dead and I didn't even make my gas money some days... so I left. but having more money would help me pay my debt faster. So I need to put more effort into that. Thanks for the reminder. I shall go forth!!! :)

MDM... I want have an answer for what you are asking me about 401K/401B/etc.. but I don't. I have no idea what it is and I've been paying into it for two years... Gawd.... I will have to go look those up. I don't know what you mean about insurance and retirement payments being pre or post tax either.

former player... Thanks. Yes, A HUGE load off my shoulders to pay off the car!! & I am able to save money by not spending/not having bills..  I am facing a little problem because I am not a full year employee. I have to get another job in the summer & won't be at the same levels of income.. which is another reason I am in a rush to pay off the car while I still have an income. I did get back my overpaid taxes and I applied it ALL to my car loan FTW! It was my employer's mistake... grr... and yeah, I have to pay back the retirement money. It goes to a state system. The state government has already sent me multiple notices that I have to pay it. ... I don't really think there are such thing as workers right here. Especially not against the state.. but I would love to fight if I thought I could win.

Thank you all for your great comments...

This is what I am thinking of...

try to find a job closer to home.
continue to pay car loan.
get a second job
pay off retirement money
save up, sell car, relocate to a city with public transportation??
then try to settle CCs once I am re-established..?? (this step is way far off...)

But I'm focused on being stable and paying off my debts for now...... :)

[MDM]

We're a working single mother family, my mom is underwater on her home tho and doesn't own anything either. I don't want to end up like that.

MDM... I want have an answer for what you are asking me about 401K/401B/etc.. but I don't. I have no idea what it is and I've been paying into it for two years... Gawd.... I will have to go look those up. I don't know what you mean about insurance and retirement payments being pre or post tax either.

All the comments (yours and other posters) about increasing income, paying off debt, etc. are on target - have at 'em.

Meanwhile...there may (or may not...) be significant tax-related opportunities depending on your exact situation.  E.g., do you file taxes for yourself and claim your own personal exemption, or does your mom claim you as a dependent?

For the retirement, is this what you are paying onto: https://www.azasrs.gov/content/retirement?

For pre- and post-tax, what does your pay stub say?  E.g., are "gross income" and "federal taxable gross" the same, or do they differ by some amount?  If they differ, does the amount equal either the retirement or insurance or both, etc.?

Can you find a mentor at work (supervisor, older colleague, HR rep, Union rep, etc.) who might explain "the system" to you?  You have a bit of an uphill climb ahead, but understanding some of these items will make things clearer.  And it seems you recognize that, so good for you and don't stop until you do understand!

You can also ask questions here.  The best kind of questions are ones in which you also propose an answer, so people can confirm or deny your understanding.  But if at first you have no idea, that's ok too.

[Bambam100]

Like you, I'm new to this lifestyle, following many years of financial stupidity. 

Here are some things that helped me:
Chapter 7 Bankruptcy.  Go to NOLO.com and type in Chapter 7.  Ch7 involves a means test, which means if you're income is below a certain level, you can file chapter 7, and your debts will be discharged in a hearing if the court agrees that you need a clean slate.  In CT, where I live, your income has to be below $110,000 (or at least it was when I filed).  The advantages to doing this are, it gets rid of the calls and puts closure on this ugly episode of your life.  It's a fresh start, and take advantage of the resources offered, like the financial counseling.  This is not fun, but really got me on track.  The downsides are the cost of an attorney ($1200, but this is in CT, land of expensive living) and the damage to your credit.  Here's the thing though, days, and I mean days, after my discharge papers were in my hands, I began to receive offers from credit card companies to get right back in trouble!  So you see, what a hypocrisy credit card company crocodile tears of being "cheated" are about.  Take them up at your own risk.  I would say, wait until you have an envelope system under control, if you ever go back.
For more lasting change, I would suggest reading and following the steps in Your Money or Your Life, a book by Joe Dominguez.  This was a game changer for me, and you'll find it to be Mustachian, if I may dare use that term.  If your public library has it, borrow it, but I've found it to be truly the most helpful finance book I've ever read and a good investment.
Of course, everyone here is very helpful, and I really enjoy MMM.  I still pull out chin hairs with my tweezers when I find them, so it may be a while before I can boast of a mustache.
My situation was much worse than yours, and I can assure you, change is possible, but hard work.  I've made several mistakes since my bankruptcy, but now am much more aware of a better definition of "enough" and not trading my future for the present.

[Allie]

Have you called any of the debt consolidation groups?  Not the scammy ones, I mean the non-profit legit ones?  They may be able to help you negotiate the debt down a bit, get on a payment plan, and keep the debt collectors from calling.  I haven't used any of them, so YMMV.  You can google or try http://www.suzeorman.com/resource-center/managing-debt/.  She has some information and links under the counseling section.  I'm not saying she's the best resource, but it's a place to start. 

Good luck!

[Sibley]

Regarding the income taxes - if more was being withheld than was necessary, you'll get it back when you file your tax return.

I'm guessing your credit is shot to hell. For the credit cards, I'd suggest negotiating with them. After your car is paid off, call the first cc. Tell them that you'd like to make arrangements to pay your debt, and ask for an interest rate reduction and forgiveness of late fees/penalties in exchange for payments of $xxx per month until it's paid off. It can't hurt to ask! Basically, once the car is paid off, use that money every month for the cc's. Tackle each credit card in turn - highest rate to the lowest. When they're paid off treat yourself to a scoop of ice cream.

Then repay the bank. Don't screw up your current, active bank account.

You need to figure out what's going on with the retirement account at work. Ask questions. Tell them you don't understand and ask if they can help you. You're trying to figure out what it is, how it's supposed to work, and what went wrong in your case. Once you know how things should work, if the mess up was their fault then I personally would refuse to pay any interest or penalties.

[curler]

CLOSED BANK ACCOUNT-800
When I lost my job, I was fired... and the company I had worked for withheld my last pay check, PLUS took back the two prior paychecks, a whole months of wages.. leaving me with no savings and $800 in the negative due to the bank. I was employed on salary at the time, so I had no way of fighting back against the company that took back my wages.

I'm not sure what you mean by had no way of fighting back.  This is a lot of money and something you are entitled to.  They can't just un-pay you for time that you worked.  You should contact your state department of labor right away for assistance in getting the pay that you are entitled to.  http://www.dol.gov/whd/contacts/state_of.htm or federal http://www.dol.gov/whd/america2.htm .  They are there to help you get what you are entitled to.

[Bambam100]

I would never advise following the advice to negotiate a payment plan with credit card companies.  You've probably paid them 3 times over.  They cheat consumers constantly.  Don't let the shame involved in a chapter 7 deter you.  It really is a good option if your credit is already shot to h*ll anyway.

[Zamboni]

Welcome!  You sound like a good son.

I'll second the advice to ask a lot more questions at work about the retirement plan.  Probably there is someone somewhere in human resources who can sit down with you and explain it all.  Does your employer have a website with HR contact information?  A phone number? My current employer doesn't tell anyone anything unless they ask . . . but they are happy to help if a person asks!  You really need to talk with them, probably more than one time, to sort that out.

What are the interest rates on each of the cards?  It should be very clearly indicated on your statements.  If they are in collections, what are the details?

Chin up: you are actually not in all that much debt.  Your current rate of paying is going to get you free and clear very quickly unless some shady practices are happening on the collections side.  Focus on that goal:  no debt!  I don't think of what you owe the retirement plan as debt, by the way, just the car loan and credit cards.  Get those gone!

Good luck to you, and please keep checking back in as you make your journey.

[lemonlime]

Call your state labor board and report your former employer. It is illegal for your company to withold pay for time worked. Being salaried has nothing to do with it.

Agree with the commenter who said to speak to HR/benefits person at current job and make them explain to you what they are doing and why they have no responsibility for their "accounting glitch."

Save up and pay off the overdrawn bank account. Then the retirement account so you can have more money in your paycheck. You can ignore the credit cards, if you have to, until they sue you. When you are ready to settle the credit cards, for each one (and one at a time), find out what you owe and save up half, then make them an offer. From what i've read, you will need to be prepared to deal with A-holes and you will have to make the offer multiple times (read/listen to Dave Ramsey's advice on this). If they sue you, make sure that you call the lawyer suing you and negotiate a settlement and payment plan. You will probably have to provide them with some financial information, but they are likely to settle for much less than the current balance that includes lots in late fees and interest.  If they never sue you, once the statute of limitations passes (depending on your state), they can't sue you and make you pay them back. Some would argue you still have a moral obligation to settle the debt,and if you feel that way, you will have to negotiate a settlement with them, but you should be able to get pennies on the dollar as it the original debt will have been written off as a loss by your original creditor and sold, for pennies on the dollar, to a debt collector at that point.

Ultimately, your biggest problem seems to be a lot of flying blind and just accepting things at face value. This has led to you getting seriously screwed. Now that you've woken up, start educating yourself. Don't just believe what people tell you, employer or any authority figure. Ask questions, get answers, figure out for yourself and figure out who is reliable enough to guide you. Get freaking organized and don't ever let this stuff happen to you again. Take control Ari!

I don't agree with the bankruptcy recommendations, though I'm no expert on it. But, your debt is low. You also need the life lesson and learning curve of digging out to never let this happen to you again. I did, lots of people do. Some of us have to learn some things the hard way.

Read Dave Ramsey for getting out of debt. Once that's done, follow the Mustachian way for building your financial independence. You can do this.

[Bambam100]

Call your state labor board and report your former employer. It is illegal for your company to withold pay for time worked. Being salaried has nothing to do with it.

Ultimately, your biggest problem seems to be a lot of flying blind and just accepting things at face value. This has led to you getting seriously screwed. Now that you've woken up, start educating yourself. Don't just believe what people tell you, employer or any authority figure. Ask questions, get answers, figure out for yourself and figure out who is reliable enough to guide you. Get freaking organized and don't ever let this stuff happen to you again. Take control Ari!

I don't agree with the bankruptcy recommendations, though I'm no expert on it. But, your debt is low. You also need the life lesson and learning curve of digging out to never let this happen to you again. I did, lots of people do. Some of us have to learn some things the hard way.

Read Dave Ramsey for getting out of debt. Once that's done, follow the Mustachian way for building your financial independence. You can do this.

Lemonlime's point about flying blind is great.  Also about calling the state labor board.  It's illegal to withhold your pay.  That is covered under the FLSA (Fair Labor Standards Act). 

Five years ago, I would not have considered bankruptcy.  But, it is one solution to a problem and more efficient than all that calling on the phone and negotiating.  Having an attorney protecting you gives you some power.

Your debt isn't that low compared with your income.  Just because many other people have paid off ridiculous fees and usuarious interest doesn't obligate you to.  This is business.  A bankrupcy filing is also a stern life lesson if you need one.  I think this is another option you should consider.   Weigh all your options.

[RobinAZ]

I am a litigation and bankruptcy attorney here in Phoenix.  You are right, it is very difficult to live here without a car. You would have to relocate closer to your job to make public transportation feasible. That may be more expensive than maintaining your car, which is now paid off.

If the debt from your credit card was not the result of cash advances, you can likely settle them with the collection agencies for $.25-$.40 on the dollar for a lump sum, a little more for payments over time. But it is my experience that the law firms here that represent the credit card companies will not negotiate anything but a paid in full settlement once they have filed suit.  They have little motivation- they will just get a judgment and garnish you until the client has recovered in full.

I would suggest totaling your debt, figuring out what % each debt represents of your total debt (for ex., if your total owed is $10k and you owe Visa $1200, then Visa = 12% of your total debt).  Then call each creditor and try to negotiate a settlement monthly payment to each that is each creditor's % of the total debt (for example, if you have $1000/mo for debt settlements, Visa gets its 12% or $120).  Then negotiate as few months as you can with each, trying to keep the total under 50% if possible.

This plan takes effort but with settlements in place, you can avoid getting sued and garnished.  If you can't handle the negotiations and manage regular payments, then maybe consult with a BK attorney.  BK is the nuclear bomb of credit trouble- it should be saved for catastrophe, whereas you may have other options.

Good luck!!

Robin