1 How to Get Out of Debt & Build Wealth Stephen T. Craig Bankruptcy Attorney Professional Debt Negotiator
2 Psychology of Spending Intention- who am I trying to impress? Ask will this improve the quality of my life? Trying to keep up with the Jones Considering sustainability-simplify when possible Can I buy this used for half price? Marginal Utility Theory Form over function Develop a this is good mindset
3 Avoid the sugar high spending 24 hour rule- If you see something you want to buy, leave. Wait 24 hours or more. If you still feel a need for the item, then buy it. Don t charge something you won t have when you get the statement (e.g. lunches, concert tickets) Reduce trips to places like the mall, Costco, Target, etc. (where you go in for one thing and come out with 3)
4 Non-Bankruptcy Debt Relief Options Consumer Credit Counseling The Snowball Method Debt Negotiation
5 Consumer Credit Counseling Non-profit agency works an agreement with your creditors to lower interest rate and reduce payment. CCCS consolidates your debt and you make one monthly payment.
6 Consumer Credit Counseling PROS- lower interest rate lower payments one payment CONS- The non-profit myth 3-7 year plan 140% payback credit is severely damaged Only takes credit cards
7 Optimal Candidate for CCC Almost no one, but ok if Lower debt amount (under 20k) Reasonably good income
8 The Snowball Method A strategy for reducing debt that involves paying the minimum on all other card bills while attacking the one with the lowest balance.
9 The Snowball Method PROS- Rapid Debt Reduction Works with income you already make Credit rating improves CONS- Strict budgeting is required Requires discipline No discounts
10 Optimal Candidate for the Snowball Method Anyone who has a lot of discipline Someone who insists on keeping a good credit rating
11 Debt Negotiation Also called debt settlement, it involves negotiating with your creditors so they accept less than the full amount owed to them. Expect cents on the dollar.
12 Debt Negotiation PROS- CONS- Compromise with creditors Repay only cents on the dollar Rapid debt reduction (18 months) Unregulated industry Credit is damaged No Court Protection Possible tax consequences Higher monthly payment or lump sum req d
13 Optimal Candidate for Debt Negotiation Does not want to file bankruptcy Debt in excess of $40,000 Wants debt relief rapidly (18 mos or less ) Has a lump sum of 50% of your debt, or Can pay 3-4% of your debt per month
14 Bankruptcy Debt Relief Options Chapter 7 Chapter 13 Chapter 11 & 12
15 Chapter 7 Bankruptcy Chapter 7 bankruptcy is a federal court procedure in which individuals are able to eliminate most types of unsecured debt. Chapter 7 bankruptcy is often called the liquidation bankruptcy and aims to give individuals a fresh start.
16 Chapter 7 Bankruptcy PROS- CONS- Receive a fresh start All unsecured debt is wiped out completely Emotional weight is lifted quickly Immediately stops all collection activity against you Can usually keep home, car and other assets Effect on your credit rating You surrender non-exempt assets, if any You must come to grips with it emotionally
17 Optimal Candidate for Chapter 7 Has low income (below median) High debt level (more than 20k) No significant assets
18 Chapter 13 Bankruptcy Chapter 13 bankruptcy is a federal court process in which individuals are able to repay all or some of their debts through an interest-free payment plan over a 3 or 5 year period. Chapter 13 bankruptcy is often called the reorganization or repayment bankruptcy.
19 Chapter 13 Bankruptcy PROS- Forces a repayment plan on creditors You are not asked to surrender any assets Can work to save a home in foreclosure Can work well if you have IRS tax debt CONS- On your credit report for 10 years Unlikely to succeed Other methods work as well or better w/o bankruptcy
20 Optimal Candidate for Chapter 13 Has high income (above median) May have significant assets Individuals with tax debt Individuals trying to stop a foreclosure
21 Establish a budget You have no control of your finances until you know where your money goes Keep track of every dollar spent for 2 mos Factor in everything including miscellaneous, gifts, etc. Rent/mortage & Car should not equal more than 40% of net income Nothing happens without a plan
22 Developing a Savings Plan Understand the time value of money Saving $10 per day at 10% is $227,881 in 20 years! Understanding the Rule of 72
23 Find your Latte Factor Starbucks Dining out The new wardrobe Expensive gifts Lottery tickets Buying snacks throughout the day Parking Gym (if you don t use it) Bank fees/late charges Bottled water Cigarettes Craigs list
24 Turbo charge the Latte Factor: Recurring monthly expenses Keep monthly recurring expenses low as possible Insurance Rent Premium Cable Phone bills Car payment and related auto insurance
25 Buy your cars with cash A common denominator for wealthy people Expensive Car payments- common denominator of most people filing for bankruptcy Avoid investing in depreciating assets Mobile Homes, Motor Homes, Boats, ATVs, etc.
26 Managing credit cards Interest rates matter Credit card companies want you to pay the minimum If you owe $10,000 at 19.99% and make minimum payments, it will take you 37 years to pay it and the credit card company makes $19,000 in interest Balance transfer to the minimum Late fees
27 Pay yourself first Save 10% of everything you earn. This is the foundation of building wealth. It must be automatic Where to put it- squirrel it away
28 Cash Management The envelope system Squirreling it away Holding savings sacred Getting frequent flyer miles
29 Surely I can make a little more More education to improve your hourly rate Being paid for performance vs. by the hour Have more than one source of income
30 Debt- avoid it like the plague This should be your main goal Live simply and your wealth will grow If you can t pay for it in cash don t buy it Don t borrow to look rich Example of the $2000 TV that really costs you $4500 Compare that to a craigslist purchase Use student loans with caution
31 Life Insurance Treat it as a luxury and avoid it if you can Unless you have dependent children or spouse Life Insurance is a lousy investment Only buy term insurance (not whole life)
32 IRAs and 401ks Invest the maximum amount allowed by law, every year Employer matching 401ks-the true no-brainer Do not cash them in to pay off credit cards Cashing in and IRA and the IRS The amazing one person 401k for self employed
33 Avoid these money mistakes Refinancing your home to pull out cash Don t ask for a cosignor, don t be a cosignor Don t get friends involved Never take advice from a commissioned sales person Owing the IRS
34 Understanding Risk Risk and Reward are related Limiting your downside risk If it sounds too good to be true Diversification
35 Understanding Mortgages Fixed vs. variable rate 40 or 50 year mortgages Interest only mortgages Mortgage insurance Income tax deductions Paying extra on your mortgage Biweekly payment plan Paying your mortgage off
36 Invest in appreciating assets Real Estate Growing population Principal of leverage (works both ways) Understanding supply and demand Getting in at the right time Stocks Market risk vs. risk of an individual stock Diversification
37 (Non) Secrets of the Wealthy They pay cash for cars They pay themselves first They squirrel money away where they can t get it They have 2-3 sources of income They pay additional money on their mortgage They invest in education They invest in increases in earning capacity (snowblower example) They reinvest their profits (Warren Buffet) They watch small expenses They hate debt
38 The Millionaire Mind They thing long term vs. short term They think in terms of profits not wages They prefer to be paid by results not by the hour They look for the opportunity to leverage They look for passive income They detest high monthly overhead
39 A word on Greed Marginal Utility Theory revisited Money has its own diminishing returns