Chapter 1: How Much Do You Owe?
To successfully plan your strategies with your creditors, you need to come to terms with your total amount of debt. You might find this uncomfortable, but most credit counselors will tell you that people tend to overestimate their debt burdens.
You’ll start by comparing what you bring in each month with what you owe on your monthly expenses (such as food, housing, and utilities) and your other debts (for example, student loan payments).
However, having a ballpark idea of the amount of your income and debt burden is not enough to tackle your debt problem. Getting precise numbers is a crucial part of the process, so you won’t want to skip it. This process will help you prioritize your debts and help you decide which strategies to use to solve your money troubles.
To figure out how much you earn and how much you owe, follow the instructions on the next pages and use the online worksheets. If you are married or have jointly incurred most of your debts with someone, fill out the worksheets together. (You’ll find the worksheets mentioned throughout this book in Appendix C.)
| Warning Signs of Debt Trouble |
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If you have panic attacks when you try to figure out your total debt burden, you’ll feel better if you skip this chapter and come back to it when you are better able to confront the information. Before doing that, however, ask yourself the following questions. If you answer “yes” to any one of them, you are probably in—or headed for—serious debt trouble:
- Are your credit cards charged to the maximum?
- Do you use one credit card to pay another?
- Are you making only minimum payments on your credit cards while continuing to incur charges?
- Do you skip paying certain bills each month?
- Have creditors closed any accounts on you?
- Have you taken out a debt consolidation loan? Are you considering doing so?
- Have you borrowed money or used your credit cards to pay for groceries, utilities, or other necessities (for reasons other than convenience or to get perks on a credit card)?
- Have you bounced any checks?
- Are debt collectors calling and writing you?
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How Much Do You Earn?
Start by figuring out how much you earn each month. You’ll need a calculator and your pay stubs to complete the first online worksheet—Worksheet 1 (see Appendix C). You’ll enter your monthly income from each source. If you are paid more often than monthly, use the instructions on Worksheet 1 to convert your pay to a monthly amount. If you have income that doesn’t fit into one of these categories, list it as “other.”
How Much Do You Owe?
On Worksheet 2, you list your debts. Gather the documents that show payments on all your debts, the total amount owed on each debt, and any amount past due, including any interest or fees that have been added. Be as thorough and complete as possible. Once complete, Worksheet 2 will tell you exactly how much you should be paying each month to remain current on your debts, as well as how far behind you are. Here’s how to fill it out.
Column 1: Debts and other monthly living expenses. In Column 1, enter the type of debt. Don’t enter a debt more than once. So, for example, if you already deducted from your income in Worksheet 1 a debt that is paid out of your paycheck, such as child support, don’t deduct that same debt again here.
If you are married, you may not be certain which debts are yours and which belong to your spouse. If your marriage is intact and you’re having mutual financial problems, enter all your debts in Column 1. If, however, you are separated or recently divorced, or are married but having financial problems of your own, see Chapter 2 for help on figuring out which debts you are obligated to pay. If you generally share expenses and maintain a household with someone else, consider combining your income and paying all of your debts with joint funds, regardless of who actually incurred the debt. Enter both partners’ debts in Column 1.
Column 2: Outstanding balance. In Column 2, enter the entire outstanding balance on the debt. For example, if you borrowed $150,000 for a mortgage and still owe $125,000, enter $125,000. Your latest account statement might list the entire outstanding balance. If not, the creditor’s automated telephone system or online account information might provide the information you need. If you can’t get the balance and you prefer not to talk to the creditor, use your best guess for now.
Columns 3 and 4: Monthly payment and total past due amount. In Columns 3 and 4, enter the amount you currently owe on the debt. If the lender has not established set monthly payments—for example, for a doctor’s bill—enter the entire amount of the debt in Column 4 and leave Column 3 blank. If the debt is one for which you make regular monthly payments—such as your car loan or mortgage—enter the amount of the monthly payment in Column 3 and the full amount you are behind (monthly payment multiplied by the number of missed months, plus any fees or charges that have been added, like over-limit fees or late payment charges) in Column 4.
For credit card, department store, and similar debts, enter the monthly minimum payment in Column 3 and your entire balance in Column 4. But keep in mind that eventually you should make more than the minimum payment on your credit cards. (Chapter 10 discusses the danger of making only minimum payments each month.)
Column 5: Is the debt secured? In Column 5, indicate whether the debt is secured or unsecured. A secured debt is one for which a specific item of property (called “collateral” or “security”) guarantees payment. The most common type of secured debt occurs when you sign a credit agreement (sometimes called a security agreement) that allows the creditor to take a particular item of property under certain specified conditions—without suing you first. Examples of conditions that might allow the creditor to take your property include your failure to make a payment, your failure to maintain insurance on the property, or your failure to comply with the payment agreement in some other way. Typically, you sign a credit agreement giving the creditor a security interest in your property when you finance a car purchase, get a mortgage, get a second, third, or additional loan on your home, or buy an appliance or a piece of furniture with store credit.
A creditor might also be able to secure its debt without your agreement by filing a lien against your property. This can happen in two circumstances. First, the creditor can file a lien if the law specifically allows for it. An example is a mechanic’s lien—the law specifically states that a worker or material supplier can file a lien against your real property if you or the contractor fail to pay them. Second, a creditor can file a lien against your property if it has sued you and obtained a judgment against you. This is called a judgment lien.
Unsecured debts are typically bank credit card debt; bills owed for utilities, medical, or legal services; student loans; and spousal or child support.
Secured property is usually something very important, like your car or house. Because such property can be taken quickly, without the delay of a lawsuit, secured debts are usually a high priority for you to pay.
Specify the collateral the creditor is entitled to take if you default on the debt. (After you have read more about whether a debt is secured or not in Chapter 4, you can come back and review Column 5 to see if you need to make any changes.)
Column 6: What priority is the debt? Leave Column 6 blank until you read Chapter 4. It will help you prioritize the debts.
Add it up. When you’ve entered all your debts in the worksheet, total up Columns 2, 3, and 4. Column 2 represents the total balance of all your debts, even though some of it may not be due now; Column 3 represents the amount you are obligated to pay each month; and Column 4 shows the amount you would have to come up with to get current on all your debts.
RELATED TOPIC
Don’t forget your other expenses. None of us have monthly expenses consisting entirely of loan or credit payments. We also have to pay rent and buy groceries, pay for movies and restaurants, buy clothing and household goods, and so on. These other expenses are covered in Chapter 3, and now might be a good time to review that information. By listing your non-debt-payment expenditures, you will get a more complete picture of your finances to help you determine how much you have left to repay debts.
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