- advertisement -

Surviving a personal financial meltdown: Don't panic, make these moves

Jerry 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?

A dozen 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.

"There 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 epidemic condition."

Could 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?

- advertisement -

Experts 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 1.5 million.

Most experts agree that, short of reinstating the debtor's prison concept, Americans are going to continue to party.

Here's how to survive if, like Mundis, you suddenly find yourself stuck with the bill.

Take the blow
A personal financial crisis is first an emotional blow, says Mundis.

"It 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."

It's a 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.

"You're 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 ahead."

Recognizing you're in over your head is the first step.

Assessing how far is the second.

Survey the damage
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.

Hannon suggests taking a cold, hard look at the new realities of your life.

"Take 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."

Julie McAdory, branch manager of Consumer Credit Counseling Service of Hattiesburg, MS, warns that time works against you in a debt crisis.

"With 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."

Mundis 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 immediately."

Cut 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.

"Your 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.

"That's the worst thing," Hannon agrees. "It will drag you down deeper in a hole."

McAdory 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.

Hannon 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.

Contact your creditors
Now the real work begins.

Start 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 charges.

When it's clear you can no longer pay all of your bills, it's time to contact your creditors, not run from them.

"That's 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."

"This 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 away."

If your debt penetrates further up your priority list, take these actions, and get any revised payment agreements in writing:

  • Utilities: contact your local utility and ask for special payments. You may have to curtail service and make partial payments.
  • Mortgage: contact your mortgage company immediately if you are unable to make a payment, If you have an FHA or VA mortgage, request a forbearance agreement.
  • Automobile or other secured debt: request an extension and try to make monthly interest payments to avoid incurring further debt.
  • Rent: contact your landlord and suggest ways you might work off all or part of your monthly rent.

It's also a good idea to file a consumer statement with your local credit bureau, bank and some creditors, briefly explaining your situation.

More money-saving tips are available online at Myvesta (formerly the Debt Counselors of America and the National Foundation for Consumer Credit.

Shift your debt
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.

Mundis 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."

You should 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.

Be 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.

If you 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.

To avoid 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.

Mundis has this word of advice about financial ruin: don't go there.

"This 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

 

top of page
See Also
Make a money-smart spending plan
Living below your means
Cheap is chic
Savings glossary
More savings stories



 
- advertisement -