Money Makeover By Dorothy Rosen, "The Dollar Diva" • Bankrate.com

Money Makeover: Debt junkie hopes to avoid a second bankruptcy

The money problem
"I earn good money but still live from paycheck to paycheck," laments this week's Money Makeover. "Actually, that's not even true. I sometimes need to charge my groceries because I have no money for food."

Hilda Ross is a 48-year-old debt junkie who filed for bankruptcy in 1981. She went on the wagon for 14 years, scrimping and saving to repair her credit so she could buy a home. Her dream came true in 1995.

Hilda positioned herself for success by buying a two-flat -- a vertical duplex with one residence atop the other. With a tenant to help pay the mortgage and a good-paying government job, Hilda was on her way to financial freedom. But her home needed fixing, she was short on cash and found herself listening when the debt devil began to whisper in her ear. Before she knew it, she fell under debt's sway again.

Debt transformed Hilda's house into the home of her dreams. It bought new carpeting, central air conditioning, tiles for the kitchen floor, appliances and a nice paint job. Then debt got ugly again.

"I have borrowed money to pay off other borrowed money; I have two outstanding loans against my retirement account and have maxed out my Visa, Discover, MasterCard and home equity line of credit," she laments. Her debt now totals $36,000, and she's run out of places to borrow.

"The methods the credit peddlers use are just like the ones the devil uses when he guides you into sin. He masks it so it looks good, tastes good or feels good. Once you're hooked, he removes the mask, lets you see the monster behind it and laughs in your face," says Hilda. "Well, he who laughs last, laughs best, and once I clean this mess up I expect to be the one laughing -- until I leave this earth!"

Hilda wants to get out of debt, but doesn't want to go through another bankruptcy. "I have tried to figure out a budget but became so overwhelmed with my situation and so upset with myself for allowing this to happen that I lost focus. I need someone to help me develop a plan of action."

The Diva is here to give a helping hand.

Getting out of deficit spending
Hilda's monthly expenses are $570 more than her net income. Draconian belt-tightening will save $270, but that still leaves her $300 in the hole.

Hilda's deficit spending picked up steam about eight months ago when she was transferred to a more expensive city without a commensurate raise in pay. She rents out the apartment she owns in her hometown ($640), but that doesn't make up for the high rent she pays in the new place ($890). Since she didn't have a clear picture of her upside-down financial situation, it got worse as time went by.

Luckily, Hilda can make extra money by working overtime. One hour of overtime each day will net her an additional $400 a month. There's the $300 needed to break even plus an additional $100 to pay the debt down faster. "I've decided to work all the overtime I can," Hilda says. "I can pay off the high-interest department store charges in no time if I bite the bullet and do this."

The more she works, the faster she unshackles herself from the debt.

Get rid of the credit cards
A sugar junkie needs to keep candy out of her house; a debt junkie needs to keep credit cards out of her pocket. Hilda needs to cut up all but one credit card, which she should store in ice in the freezer to be used only for the direst emergency.

From now on, Hilda pays cash. There can be no new debt, no matter how good it looks on paper. This is not negotiable.

Groceries ($20): Generic brands; cook in bulk; meatless meals.
Clothes ($50): Her closet is bulging with clothes from her "big spending" days.
Dry cleaning ($20): Use a spot cleaner; mist clothes with hot water and hang to get wrinkles out.
Charity ($40): Minimum giving until debts are paid down.
Beauty salon ($120): Fancy nails and hairstyles are luxuries she can't afford.
Travel ($20): One trip home per month until the debts are paid off.

The above cuts will reduce the $570 deficit by $270. Her overtime will cover the $300 balance.

The Diva's "payment push" strategy
Before the Makeover began, Hilda said, "I will be lucky if I am out of debt when I retire at age 67."

With $36,000 in debt and serious negative cash flow, it would have taken more than luck. However, by making a few changes and following the Diva's "payment push" strategy, Hilda could shed her debt in four years. Here's how:

Hilda continues to make the same $750 payments she currently makes on her debts. The "payment push" means that every extra dollar goes toward retiring debt, starting with the debt with the highest interest rate. Her department store credit cards get the "payment push" of the extra $100 from overtime and the $175 and $100 she expects to net from raises in November and January. Whenever she pays off one debt, she shifts all extra money to the debt with the next highest interest rate. And so it goes, until all debts are history.

Debt-free, Hilda will have an additional $1,125 in her pocket each month -- enough to loosen her belt some, contribute to her retirement plan at work and save for emergencies. She will also be in a position to refinance her mortgage from a variable to a fixed rate.

Conclusion
Hilda is committed to ending her spending and paying off her debt and thinking outside the box is going to help her reach her goal. She's started the wheels rolling on a self-development plan sponsored by her company and hopes to be eligible for additional training and education so she can make more money in the future. She's gone on the wagon before and the Diva thinks she's ready to do it again.

However, just to be on the safe it wouldn't hurt to investigate Debtors Anonymous. It's a 12-step program, like AA, and its mission is to help compulsive debtors get back on track and stay on track, especially when the debt devil starts whispering in their ears.

For more hints on becoming debt free, read the Diva's "Climbing out of debt: a two-year plan."

Success is a journey, not a destination. The Diva wishes Hilda the best of luck along the road to financial freedom. The Money Makeover is a weekly feature of Bankrate.com in which experts help readers untangle their finances. Do you need help untangling your finances? Could you benefit from the guidance of a customized financial plan? If so, click here to enter the Money Makeover contest! To read more makeovers about people just like you, click here.

-- Posted:July 23, 2001