Debt-Free Forever (23 page)

The number-one question I get when I talk about bankruptcy is, “Will I lose my home?” Well, that depends on whether you’ve kept up to date with your payments and your taxes, how much equity you’ve built up, and whether you can carry the property.

If you haven’t kept up to date with your payments, your lender will likely call your mortgage as soon as you declare bankruptcy. If you have, the lender may have faith in your ability to continue making your payments on time, and cut you some slack.

If you have equity built up in your home, that equity has to be used to repay creditors. The less equity you have, the less you’ll have to come up with to give your creditors. So being in a down housing market could have its upsides if you’re planning on going bankrupt and want to stay in your home.

Let’s say your home is currently worth $220,000 and you have a mortgage of $200,000, so you have equity of $20,000. That’s the first step. Now you have to take into account all the costs associated with selling the home to realize the assets for debt repayment. Here’s an example to illustrate my point:

So you’d have to come up with $850 to give to the trustee for creditors before your bankruptcy was completed to be able to stay in your home.

There are, of course, people who don’t want to keep their properties. People who can’t keep up with the maintenance, who are way behind on mortgage payments or taxes or utilities, or who can’t come up with the “equity” to give a trustee and decide to just walk away.

As part of living through the bankruptcy, you’ll also have to take some lessons on how to manage your money. This may be with your trustee, or it may be in a group setting, but since you got yourself into a mess once, this is a good idea to avoid doing the same thing again.

You must stay current with your payments to your trustee. If you miss a payment, you’ll delay your discharge date. And the faster you get to your discharge, the sooner you can start rebuilding your credit history and return to a “normal” life.

Most discharges for first-time bankruptcies happen at the nine-month mark. If your discharge is opposed by a creditor, by your trustee (because you haven’t followed the rules), or by the courts, you could receive a conditional or suspended discharge. Yuck! Just do what you’re supposed to, and never make a mess again!

No doubt living through bankruptcy will have been tough. Once you get to the other side, you still have some work to do. You must now re-establish your credit rating while avoiding the mistakes that got you into trouble in the first place.

Start by rebuilding your credit history. It’s going to be pretty tough getting a lender to trust you if you’ve declared bankruptcy
(or gone through a consumer proposal or even gone to credit counselling). The key tool you’ll use to re-establish your credit history is a secured credit card.

With a secured credit card, you put up cash to cover your balance. Lenders often want twice the credit card limit, so if you want a $500 credit limit, you’ll have to ante up $1,000. Once you’ve established your ability to manage the card—anywhere from six months to a year—you can ask for the security requirement to be dropped and your deposit returned.

Secured or unsecured, a credit card can be the cheapest way to build your credit file. In the old days you had to take a loan, which you then repaid to establish yourself. All the while the interest clock was ticking. So you were “buying” your credit history. With a credit card, you can build a credit record without it costing you a cent. That’s because credit cards let you use the issuer’s money for a specific period of time interest free. And as long as you repay the outstanding balance in full every month, you can continue to use that credit at no cost. What a deal!

Make a commitment to never carry balances on your credit cards again. Having been to hell and back, once you’re back on track credit-wise you may find the temptation to splurge—take that vacation, buy those shoes, eat out every night for a month—almost too much to resist. Resist! While it can be tough to get to the end of the month before you get to the end of the money, know that any money you charge and don’t immediately pay off is setting you back on the rocky road to Debt Hell. Now that you’re back on your feet, you must protect yourself from the crap that life brings, which can push you back over the edge. If you’re carrying a balance on your credit
cards, should something terrible happen, you won’t have a financial cushion to help you deal.

Paying your balances off in full each month isn’t such a tough habit to get into. It means keeping track of everything you spend and not spending more than you can afford to pay off when the bill arrives.

Next, get a copy of your credit report from all credit bureaus and check to make sure that they show your discharge.

When it’s time to apply for credit and you sit down with a lender, get your story straight. If you’re a deadbeat, you don’t have much hope of re-establishing your credit history. But if you got into trouble for some other reason—unemployment, illness, divorce, widowhood—you want to be able to tell your story succinctly (that’s in less than a minute) so you can explain why you had to file for bankruptcy. Tell a good story and lenders will be more willing to work with you. Be upfront and honest, and they’ll feel your pain. Show remorse and they will understand that things were beyond your control.

Stay positive. Some people are so psychologically devastated after a bankruptcy that they can’t let go of a penny. Some are so afraid of making the same mistake again that they won’t go near credit with a 10-foot pole. Some are so ashamed, they won’t tell anyone, and delay getting their credit histories shined up so they can get on with their lives. There’s no point in hiding. You need to accept that you were in a bad place, that you’ve done what it takes to fix your problem, and that the rest of your life is full of hope and promise. Don’t be so resistant to getting back on track credit-wise that you wait too long to re-establish your credit history. The longer you take, the harder
it will be. When you do need credit for something important, like buying a house, you want it to be available, and you want it
not
to cost an arm and a leg. Having a healthy credit identity is the only way to make sure you can get credit at a reasonable cost when you need it.

Crap happens. That’s life. It’s how you deal with it that separates the grown-ups from the dopes. Roll up in a ball like a hedgehog, and you’ll make no progress. Figure out what you have to do to get through whatever it is that life has thrown at you and you stand a good chance of coming out the other end in one piece. There’s an old Jamaican saying: “What don’ kill yu, mek yu strongah!”

Y
ou ought to be proud. You’ve done the hard work and come up with a plan. You’ve put your life in balance, taking care of past mistakes and minimizing future ones. You’re well on your way to Debt-Free Forever. Congratulations!

Now don’t go getting complacent. As soon as we think things are fine, we often stop paying attention to the plan. I’ve seen it time and again. We become unconscious, doing things by rote, and hoping for the best. Having been through Debt Hell, you won’t want to do this again, right? So this chapter is all about how to keep moving forward to stay Debt-Free Forever!

People are always setting goals for themselves and then beating themselves up when they miss by a mile. Then there are the folks who are so tired of missing the mark they’ve just
stopped setting goals completely. From the school of “I can’t miss if I don’t throw the dart,” they’ve given up trying.

But if you don’t know what you want, if you don’t devise a plan for getting from one point in your life to another, you’re just wandering in the woods blindfolded. You’re probably going to tumble down a steep slope, trip over some roots, or fall in a hole. You will get hurt. And then you’ll be angry, frustrated, sad. Wouldn’t it just be easier to take off the blindfold?

Becoming debt-free must be one of the goals you set for yourself if you hope to create a new financial reality. Becoming Debt-Free Forever has many components to it, and each of those steps should be goals that you set so that as you move toward the Big Goal, you have successes you can celebrate along the way. Here’s an example of what I mean.

If you’re walking around with $63,472.97 in consumer debt, being consumer debt-free may seem like too large a spoonful to swallow all at once. Instead of choking on a too-big mouthful, take small sips to get the medicine down. Set a milestone along your way to Debt-Free Forever to have that dumb credit card with the 28.8% interest rate and the $5,200 balance paid off by June. Once you’ve swallowed that, you can move on to your next milestone. Take it one step at a time and keep moving forward.

A plan followed blindly is as bad as no plan at all. And yet, sometimes when we set a goal for ourselves, we become so slavishly committed to meeting that goal that we can’t see the damage we’re doing to ourselves elsewhere in our lives. There’s
no point in being so determined to pay off the mortgage in 10 years or less that you squeeze your budget too tight and end up racking up credit card or line of credit debt when you run short of cash every month. And there’s no point to ruining your relationships with your best buddy because you’re so committed to being debt-free that you become a hellion, uncaring of other people’s needs and of whatever else is happening around you.

Goals, like budgets, must be flexible enough to cope with the changes that crop up in life. Sure you wanted to go back to school to get that degree, but when you found out your Mini-Me was on the way, it was time to adjust the plan. Thinking you could do it all—refusing to shift goals—is a sure way to be disappointed and to disappoint others. As I always say, “You CAN have it all. You just can’t have it all at the same time!”

That’s not to say that every change in your circumstances means another path to take. A change simply means you must pause to think and to re-evaluate. Sometimes sticking with the original plan and avoiding distractions is what will get you to your goals. Sometimes a slight adjustment in the plan will suffice. Sometimes a whole rewrite will be necessary. You must have the flexibility to correct for the winds and turbulence with which you will be faced.

Don’t think that having set a goal, the path you walk to achieve your dream will be a smooth one. Nope. Life has taught me that most paths have some rocks, a few holes, and the odd
dragon. But giving up isn’t going to get you to where you want to be. Having some gumption—a combination of courage, resourcefulness, initiative, and common sense—will.

Sometimes the first road you choose isn’t the one you actually want to end up on. You have to try out a road to see whether it’s going the right way and then adjust your direction as you go. Having walked down that road you’ll know one of two things: you like where you’re going or you don’t. Whichever you discover, you’ll know what to do next. You must be brave. Sometimes it takes great courage to fly in the face of what you’ve always considered “normal” and do things differently.

If you’re afraid of failing, you’ve got to let go of that fear. If you miss the mark, correct your aim. Miss again and you’ll have even more experience, more information to go on for the next attempt. A key determinant of whether you’ll be successful is not how many mistakes you make along the way, but how persistent you are. If you don’t give up when facing initial failure, if you’re able to work up the excitement, enthusiasm, and support to push forward, you’re more likely to be successful.

All this is to say that goal setting isn’t a science, it’s an art. It requires that you balance what you need now with what you want in the future. It necessitates juggling competing desires. And it will only work if you accept that Big Goals need to be broken down into smaller, more chewable milestones if you want to stay motivated.

Setting goals and working toward a new financial reality will be tough. You must change your behaviour. You must change your
attitude. Your initial energy and enthusiasm will wane within a few weeks because same old, same old is so much more comfortable than change. Having a Goal Pal can help keep you on track, particularly when you’re heading up a steep hill.

Find a body you can count on to support and encourage you, particularly when you backslide. You need a person who will listen and reaffirm your commitment when your doubts threaten to take you off the rails. In my life I’ve used girlfriends, my partner, co-workers, just about anyone who would listen, to help keep me on track when I’m working toward a particularly difficult goal. You won’t need a Goal Pal for every goal, just the ones you’re most likely to try to blow off because making the changes required seems too hard. Hey, if you really want to achieve the goal, you can. You can do anything. It’s just a matter of how badly you want it and how well you equip yourself to get it.

Anything done to the exclusion of everything else is unhealthy. If you’re so focused on debt repayment that you do not set some goals for building an emergency fund and establishing a retirement savings program, that short-sightedness will come back and bite you in the butt. Having a balanced financial life means taking care of all the details—yes, you’re going to have to think of more than one thing at a time. And if you need some help doing this, you should find yourself a financial guide to help you through the process. Whether you have a bank manager with whom you have a great relationship or a good friend who has his stuff together and is willing to be your
coach, if you don’t have the perspicacity to see the holes in your own plan, you need someone who isn’t afraid to tell you where they are.

It doesn’t matter how small you start, you must start to save. And if anyone tells you it’s a waste of your time to save when you have so much debt to pay off, it’s simply because they don’t know better. Don’t listen to fools. You know you have to save; it’s the only way you’re going to have some cash at the ready when you need it.

Cash in the bank gives you the means to deal with life’s lumps. Your son breaks his arm playing in the yard, and you have the means—the money—you need to take a day off work, get him to the hospital, and cope in whatever other ways you must. Your partner is downsized and you have the means to pay the mortgage and keep food on the table until he finds new ways of bringing home the bacon. You bang up your car, watch your shingles blow off in a windstorm, or find yourself in the throes of a divorce, and you have the means to keep the financial boat afloat while you find ways to cope with all the other stress in your life.

Whether you’re building a big, fat emergency fund, creating a retirement savings pool, or putting aside some money for your children’s future education, set some goals. While you may not be able to predict how much you’ll need for retirement because it’s still a long way away, you can still set a goal to save 3%, 7%, or 10% of your net income. If you don’t have much to save, it doesn’t matter—the important thing is just to start … to convert your intent into action by setting goals, creating milestones, and putting momentum on your side.
As long as you haven’t started, you’re not creating the means for dealing with what life will inevitably throw at you. Once you’ve begun, you’re on your way, and then it only becomes a matter of how to boost the amount you’re setting aside to grow your stash of cash.

When it comes to getting your money management cleaned up, the rules are simple. What you have to do is straightforward. But let me tell you, boys and girls, there’s nothing easy about it.

While some people want you to believe that you can clean up your money mess in Seven Simple and Easy Steps, executing those seven steps is the Big Test. When push comes to shove, it isn’t about knowing the steps, it’s about taking the steps. And that’s where the whole ball of wax can melt into an unmitigated mess.

“Living within our means” is not a difficult concept to understand. So why are there so many people who aren’t doing it? Why are there people who buy whatever they want whenever they want, without a thought for how they’ll pay for it?

It’s simple. (Drumroll, please.) It is too easy to spend money we don’t have when we have access to credit, and it is so hard to control our spending when we have no limits. We know we shouldn’t, but we do. And that makes “living below our means” seem like climbing Mount Kilimanjaro with a yak on our backs.

We have become so used to satisfying our every whim that we have regressed in our development (or not grown up at all), acting like little kids in a candy store every time we see
something we desire. New TV? Yeah, I’ll take it. Never mind that I already have two perfectly good TVs at home. New car? Yeah, I’ll take it. Never mind that I’m being asked to pay a whopping amount of interest. New shoes? Sure, I’ll take ‘em. After all, they’re just $30 and who can pass up a deal like that?

The idea of spending less than you make isn’t complicated, but it’s also not easy. It requires a commitment to living within your means. It demands that you prioritize saving. And it involves living on a budget and having the discipline to stay the course long-term. Living within your means most of the time isn’t good enough. It’s an all or nothing affair. And that can be a hard thing to do.

People say they wish things were different in their lives. People want to make a change. But wishin’ and wantin’ won’t cut the mustard. If you are truly committed to making your money work for you, then you’ll find the strength to do the simple but hard stuff that’ll make you successful.

A big part of your success in taking control of your money and your life involves your attitude. Having the right attitude is the difference between seeing the doughnut and seeing the hole.

If you’re like a lot of other folks, you may have far more wants than money, leaving you feeling deprived. Then you end up hating the budget, your income, and your life, so you grab a credit card and head to the mall.

Look at a budget as a constraint and you’ll always feel squeezed. Think of it as a stop sign for spending and you’ll always be bucking and railing against it.

Start thinking of a budget as something that tells you what you
can
do with your money and you’re seeing the positive side of things. Look at a budget as your plan for how you will spend your money on the things that matter to you the most and now you’re fulfilling your dreams.

While you probably don’t love paying the mortgage, you probably really enjoy having a home you can call your own. And while grocery prices may be squeezing your ability to buy a new whatever, it’s nice to know you don’t have to subsist on Kraft Dinner and wieners. Perspective is everything. Knowing your parameters—read “having a budget”—means you can work within those parameters to make every dollar you have really count.

Shift your attitude so that the things you
need
also become the things you
want.
Say aloud, “The things I am spending my money on are the things I want the most.” Now it won’t be about what you don’t have, and your budget won’t feel like drudgery or something that restricts how you spend. Instead, it’ll be about keeping the things that you truly value front and centre in your mind so you continue to enjoy them, instead of taking them for granted.

When you first make a budget, you should also make a date to review it in about eight weeks so you can see what’s working and what’s not. With a little tweaking based on your experiences with the budget, you can create a plan that really works for you.

Often, as we get comfortable living on a budget, we also get complacent and our costs start to rise. Review your budget at
least twice a year. Look at your previous last month’s spending to see whether it is still in line with your planning. Have food or gas prices risen significantly? Do you have to trim in some areas to rebalance your budget? Are there other changes that have taken place since you did your budget—new children’s activities, increases in fees, an increase in utility costs—that you need to incorporate officially?

Your budget has to be up to date if it’s going to act as an accurate guide. The thing about a budget is that it not only shows you where you’re planning to spend your money, it asks you to make choices every time you get the urge to spend. Want to go out for dinner? If you don’t have any more money left in your entertainment budget, will you use your food budget or your transportation budget to grab some sushi? It isn’t about
not
having the sushi. It’s about what else you’re willing to give up to be able to go out for dinner. You can only use your budget as a guide to spending your money wisely if that budget is current. Get in the habit of tracking your spending and re-evaluating your budget so you’re always working with an up-to-date plan.