Bankruptcy When It's Your Own Fault

Yep, today I'm probably going to tick some people off, but this topic keeps coming up and you should know where I stand. I am truly against filing bankruptcy for debts that somebody accumulated by living beyond their means.

If I create a debt, I feel obligated to pay it back. It might sound cliche, but my husband and I see it as a matter of “honor”…we created the debt, so we need to pay it back.  Coming to a payoff agreement is a mutual decision between the creditor and the buyer, so I’m cool with that. Simply declaring bankruptcy and never paying back what you owe seems wrong. Yeah, you get years of bad credit, but that’s not payment…that’s a consequence of not keeping your word.

I cringe at tv ads and online suggestions that explain to people how to get out of their financial obligations. I know people that work their debts off and wish others would do the same.

When I post about debt, it’s about how to save to get rid of it, not how to declare bankruptcy to make it go away.  I understand life can serve up crappy scenarios like medical problems, job loss, death, etc, but I also know that you should have emergency funds and enough insurance coverage to be able to handle financial emergencies that may pop up along the way. Being prepared for bumps in the road is just as necessary as paying your monthly bills.

So, there you go.  That's my spiel.

Where do you stand?  Does bankruptcy seem like a justified way out?

Suggested Questions for the Always Broke

Yahoo Finance had the article, 8 Questions for the Constantly Broke, and I thought they were worth rehashing.  Here's their questions and my take on them:

1.  Do I know where my money is going? 

I do believe that the first step of getting finances under control is to keep up with what you are spending your money on.  If you don't know what you are spending on, how can you cut the fat?

2.  Am I focusing too much on the month, instead of the year? 

The point of this question in the article was to suggest keeping up with one-time annual expenses as well as normal monthly ones.  That's a great idea.  We started our car and home maintenance fund after being "surprised" by our homeowner's insurance the year after we bought our house.  We haven't ignored annual expenses since then.

3.  Do I do something everyday that wastes money? 

Daily habits like soda, lunches out, beer, smoking, etc can all kill a budget.  My hubby cut back on soda when he realized how much money and calories were being wasted.  I started saving a ton of money for us by starting to bring my lunch to work this year.  I'm so proud that I've only eaten out three times for lunch in 2010.

4.  Do I know my own weakness? 

For us, this falls into the same category as daily habits.  My weakness was eating out and I still have a slight addiction to Shirt Woot.  My husband's weakness is hobbies...we started fun money accounts so we could see exactly how much hobby spending was costing.  Now he balances his hobbies with a set amount of money so our monthly budget isn't messed up.

5.  Am I saving too much? 

The point of the article was that if you have high interest debt, you shouldn't be saving more than makes sense - receive the maximum company matching on your 401k, but funnel the rest towards the debt.  I completely agree since high interest debt sucks money out of your wallet faster than a vacuum cleaner.

6.  Is my relationship hurting my bank account? 

I know that love isn't controllable, but I do think you can choose some habits to be attracted to.  My husband and I both agree that part of our attraction was the fact we had similar values...one of those is fiscal responsibility.  We just wouldn't be as close if we didn't hold the same goal to save and have a comfortable early retirement.

7.  Are the big items dragging me down? 

The big expenses really do hurt the most.  Even if you cut as many small expenses as possible, that probably wouldn't come close to how much you spend on a mortgage, car, health, debt, and grocery payments.  Our largest budget cut was our food bill this year.  Eating at home more often is actually saving us more than $2400 this year alone since we successfully cut $200 off our monthly food budget.

8.  Am I wasting money by carrying debt? 

As I mentioned above, debt eats money.  The less debt you have, the more money you'll have for things you choose in life.

In short, this article seemed spot on to me.  What do you think?  Would you add anything to this list of questions?

Debt

I hit on the main ways of diagnosing your financial health in this past post.  I'm going to use Wednesdays to go further in depth on each point since I truly believe that financial health leads to less stress and happier lives.

I have already covered the first three points - Spend Less Than You Earn (you can use free budget software), start an Emergency Fund, and review Retirement Savings.  The fourth point was to take a look at your debt.  This means actually making a list of your debts and coming up with an agressive plan of attack.

Make a List of Your Debts
There are a variety of debt elimination methods, but I'd start with prioritizing your list of debts.  Place your high interest debts like credit cards or payday loans at the top and your lower interest debts like car loans, mortgages, and student loans at the bottom.  I'd go even further and list the high interest debts from least to most actual debt and do the same for the lower interest ones as well.  This completed list will show you which debt to attack first.

As a side note, high interest debt is so detrimental to your overall financial health, I'd rate its importance above most retirement savings.  If I had debt that was at 10% or more, I'd keep a two month emergency fund, only contribute the minimum needed to get my full employer match on my 401k, and then I'd take care of the debt.

Attack the Debts in Order
In order to pay down debt, you will need extra money every month- you'll need to consistently spend less than you earn.  While paying the minimums on all debts, your extra money should be applied to the first debt on the list mentioned above until it's completely wiped out.  After paying off one debt, put that entire amount towards the next debt on the list.  Repeat this process until you are completely debt free.

Freedom from high interest debt will give you options and lighten your mental load significantly.  Freedom from all debt will give you wings...so I've heard.  :-)

Our Debt Situation
As I write this post, my husband and I have about $10,000 left on a 4.6% interest car loan we took out in 2008 and $73,000 left on our 5.375% interest mortgage.  Since finally coming to my senses at the beginning of this year, we are hitting the car loan pretty hard whenever possible.  We've been overpaying our mortgage by $160 a month since it started in 2007.  We're currently on track to have the car paid off sometime in 2011 and our home paid off by the end of 2017.  I cannot wait for the feeling and options that come with complete debt freedom.

How about you?  What kind of debts are you trying to eradicate?  Do you have any suggestions for us?

The Feeling of Being Debt Free

The Simple Life in France posted Where Would You be Without Debt? and got me thinking.  Debt freedom has to feel amazing. In our case, it would open up a bunch of options and really boost our early retirement goal.

Right now, we have a total of two debts:

1.  Car Loan - $9,900 at 4.6%
2.  Mortgage - $72,700 at 5.375%

I am currently concentrating on paying off the car loan as soon as humanly possible.  My husband has even taken to this battle since he found out we wasted almost $700 on interest alone for the car in 2009.  If we successfully pay it off by August 2011 as planned, that will be at least an extra $500 a month to "play" with since the payment is $330 and we've been contributing extra that comes our way.

We might use that extra money to tackle the rest of the mortgage.  We are currently on schedule to have that paid off by December 2017, but I think it would be possible to move that up to 2015-2016 without hurting too much.

My only hesitation in any of this debt repayment is that it will be very difficult for us to open a second Roth IRA this year if we're pretty much channeling that money to the car loan instead.  We are going to try to do both, but I won't really know if that's on track until August or September 2010. 

Have I mentioned that I have no patience?  If not, I am not a patient person.  Ever.  Waiting sucks.

Anyway, that's where we stand.  Debt freedom is less than 7 years away.  I think it will feel like being surrounded by free candy and chocolate...I'd be oh-so-happy and would enjoy figuring out where to start.

How do you stand?  What's your debt freedom date?  How do you think it will feel?