Surviving a personal financial
meltdown: Don't panic, make these moves
Mundis woke up one morning $50,000 in
debt with no visible means to repay it.
As a former
business editor with The New York Times, Mundis did what
any good journalist might do -- he dove into the story. How could
he get such a sizable monkey off his back with a guaranteed income
of $350 a month and expenses of $3,500 a month?
years later, Mundis was debt-free and street smart in the ways of
surviving a personal financial meltdown, as detailed in his book,
How to Get Out of Debt, Stay Out of Debt & Live Prosperously.
are approximately 30 million Americans who are overwhelmed by personal
unsecured debt to the level that they are never going to get out
and another 30 million who are living in some level of daily stress
or discomfort because of it," says Mundis. "This is an
you be next?
What would it take to rock your financial world? How well could
you manage, and for how long, if your working spouse walked out
or your company suddenly downsized you? Are you living so hand-to-mouth
that even major home or auto repairs could send you reeling?
recommend tucking away three to six months worth of living expenses
to weather a financial crisis, but as a nation, Americans traditionally
save very little. Last year, with the economy in the first recession
in a decade, albeit a mild one, personal bankruptcies hit a record-high
agree that, short of reinstating the debtor's prison concept, Americans
are going to continue to party.
how to survive if, like Mundis, you suddenly find yourself stuck
with the bill.
A personal financial crisis is first an emotional blow, says Mundis.
is tremendously disorienting. It is stressful, it is depressing,
it is frightening. These are normal responses. It's normal to feel
like you just want to go to bed for the next five days."
vulnerable time, and one in which some people strangely do further
damage to themselves, according to Kerry Hannon, author of Suddenly
Single: Money Skills for Divorcees and Widows.
kind of in denial that it's happening," she says. "When
you lose a job or go through a divorce, sometimes you feel like
you want to do something nice for yourself and you overspend initially.
You're not really thinking about the consequences a couple months
you're in over your head is the first step.
how far is the second.
A financial crisis is a quick and painful way to learn the difference
between wants and needs. You may want to keep your summer
getaway cottage, buy a new car and expand your art collection, but
you need to pay the mortgage, keep the kids in school and
satisfy your creditors.
suggests taking a cold, hard look at the new realities of your life.
your last two or three months worth of bills and just trim, trim,
trim," she says. "Instead of belonging to a health club,
just go walk your dog. Cut where you can cut. There are some things
you're not going to be able to cut, but you don't need a $3 cup
of cappuccino at Starbucks every day."
McAdory, branch manager of Consumer
Credit Counseling Service of Hattiesburg, MS, warns that time
works against you in a debt crisis.
credit cards, generally if you get behind three or four months,
they start talking about charging off the account, which puts an
R-9 rating on your credit report, and that's not a good rating to
have," she says. "It will stay there for seven years and
prevent you from getting the job you want, promotions on the job
or even from renting."
agrees. "If you have a prudent reserve, you may have one to
six months worth of grace. If not, you're going to have to move
up those credit cards
Oh, and about those credit cards? Suddenly, they can't help you.
In fact, racking up any more unsecured debt, especially at 17.9
percent APR, could have swift and severe consequences.
primary goal here is to avoid unsecured debt, because unsecured
debt is devastating. It's just going to make your situation much,
much worse," says Mundis.
the worst thing," Hannon agrees. "It will drag you down
deeper in a hole."
makes her clients cut them up right in her office. "They pretty
much have to learn how to live on a cash basis," she says.
says if you can consolidate your high-interest credit card debts
onto a single low-interest card, do so -- but beware of those enticing
zero percent balance transfer offers which often revert to astronomical
APRs after a few months.
Now the real work begins.
by prioritizing your debts. You'll want to pay secured debts first:
your mortgage, your car payment, things that you could lose to foreclosure
or repossession. Next, pay unsecured debts on which you could owe
interest or finance charges, giving highest priority to the most
expensive debts. Last, pay unsecured debts that carry no interest
clear you can no longer pay all of your bills, it's time to contact
your creditors, not run from them.
the most important step," says McAdory. "We've had creditors
who started garnishment on people's wages only because they did
not contact them. Don't avoid your creditors because they won't
avoid you. It shows that you're willing and want to repay your debt."
is a simple business transaction," Mundis agrees. "Call
them first, explain your situation and ask for a moratorium for
three months on all of your payments. If possible, agree to pay
the ongoing interest during that period. Tell your creditors you
will stay in touch every month, and do so. In most cases, you'll
be able to get a moratorium. That takes the pressure off you right
debt penetrates further up your priority list, take these actions,
and get any revised payment agreements in writing:
contact your local utility and ask for special payments. You may
have to curtail service and make partial payments.
contact your mortgage company immediately if you are unable to
make a payment, If you have an FHA or VA mortgage, request a forbearance
or other secured debt: request an extension and try to make
monthly interest payments to avoid incurring further debt.
contact your landlord and suggest ways you might work off all
or part of your monthly rent.
a good idea to file a consumer statement with your local credit
bureau, bank and some creditors, briefly explaining your situation.
tips are available online at Myvesta
(formerly the Debt Counselors of America and the National
Foundation for Consumer Credit.
When your creditors no longer offer extensions, you may be able
to shift that debt by signing a promissory note with friends or
family members who are willing to put up their assets as collateral.
slowly dug his way out of debt in part by debt shifting. In one
instance, a friend put up stocks for a loan on which Mundis made
the payments. In another, Mundis signed over copyrights on one of
his books in exchange for a loan. He recommends paying friends and
family back with interest a couple of points above current money
market rates "to take some of the sting out of it."
only consider a home equity loan as a last resort -- and only if
you are certain that you can improve your situation in time to avoid
losing your home.
realistic and patient
Until you get back on your feet, experts say the key is sticking
to a realistic budget and remaining patient with yourself. Don't
cut your spending to exclude reasonable entertainment and recreation
-- you're going to need to relax and disconnect from time to time
to see this through.
need help to design a livable budget or work with creditors on your
behalf, there is plenty available. Check out Myvesta, Slash
Your Debt or the NFCC Web sites to locate national and local
credit counseling resources in your area.
future crises, you might want to consult a financial Adviser through
your bank, employer or organizations such as the National
Association of Personal Financial Advisers.
has this word of advice about financial ruin: don't go there.
devastating condition sucks the joy out of a life. It wrecks marriages,
it gets adult children into fights with their parents, and the stress
takes a toll on one physically and emotionally, too. That shows
up at the office or on the job. Accidents are more likely to happen.
I have even known cases of suicide because of indebtedness."
--Updated: June. 21, 2002