Credit Counselors' Confessions: How We Got Ourselves Out of Debt

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Confessions of a credit councilor
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Helping their clients deal with financial struggles is the daily business of credit counselors, but many of them are all too familiar with the view from the other side of the table -- a vista that features seemingly unconquerable mountains of credit card debt, student loans, medical debt, or back taxes. For some counselors, dealing with their own money problems was what led them to their jobs in the first place. Others experienced financial crises while already working as credit counselors.

Regardless of what led them into their own fiscal crises -- accidents, health issues or just bad decisions -- each believes that their personal struggles increase their ability to empathize with their clients. For privacy, we're protecting their identities. But it's not their names that are important -- it's their stories, and the lessons they learned the hard way: Learn to live within your means, pay off your debt, and save, save, save for the emergencies everyone faces.

From Living in His Car to Owning a Home

"At the age of 17, due to an alcohol addiction, I dropped out of college, quit my job, was kicked out of my living arrangement, and moved into the "Crown Victoria Inn" -- aka the backseat of my Ford Crown Victoria. From the ages of 17 to 21 I made not one, but several very bad personal and financial decisions, and then I enlisted in the Wisconsin Army National Guard in hopes that it would turn my life around. It did! But the choices I made during those earlier years greatly impacted my future success. I had trouble finding gainful employment, finding housing, and obtaining any new forms of credit. In fact, it wasn't until this past year that my wife and I were able to obtain a mortgage. When I started working here in 2010 my credit score was a 569 and by March 2013 my score had risen to a 680."
-- R., a credit counselor with Financial Information & Service Center, a Goodwill program

Learning the Wrong Lessons From Dad's Illness

"When I was 16, my father was hospitalized and I had to pay the household bills. Credit cards were the biggest help and a future burden. Eventually he went back to work and started paying down the debt. It was a tough job for a young person, and I didn't do it well, but I did what I could to keep things afloat. Unfortunately, I didn't learn what I needed to. What I did learn was how to leverage good credit to supplement my income once I started to work. I took out credit cards, charged them to the limits, and even with a low, young person's income, I acquired a good amount of debt. A few years later, a friend was working for a consumer credit counseling service and suggested I get help. Not only did I go on a debt management plan, but I was referred to a credit union and refinanced my subprime auto loan from a 25% to a 6% interest rate. After I got out of debt, I applied to work at the credit counseling agency."
-- T., a credit counselor with Consumer Credit Counseling Services

Two Marriages, Two Different Wrong Ways to Deal with Finances

"It took a hard lesson for me to practice what I preach on a daily basis. When I was married, I didn't have to worry about money. I was a stay-at-home mom and anything I wanted I went out and bought. We had a big house, nice cars, and took regular vacations. When I divorced, that was the first time I had to manage my own bills, and I wasn't very good at it. I was getting a nice monthly check from my ex-husband and I went back to work, yet I didn't change my spending behavior.

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I didn't really start to worry about money until four years ago when I got married again. But then I thought together we would be good financially and be OK. Wrong. Soon after we married, he lost his job. He wanted to start his own business, which I funded, and because of his chronic medical condition, I paid for his medications. I was no longer getting alimony and needed to sell the house. I took money from my retirement to make the mortgage payments. It finally sold, but at that point I owed $30,000 in credit card debt and $10,000 in federal taxes. I was broke for the first time in my life and I guess that's what it took to finally make changes.

I dumped the husband, sold everything I had, and moved into a one-bedroom apartment. I enrolled in a debt management plan and am working with the IRS to settle the tax debt. I have two years left before I am completely debt-free, but I have never been happier. I have gotten over having to have 'stuff.' I guess for some people they have to lose everything in order to find out what is really important in life."
-- A., a credit counselor with Apprisen

The Spending Trap

"From 2000 to 2008, I racked up about $15,000 in credit card debt, took out a risky adjustable-rate mortgage, rolled negative equity from one new car into the next (twice!), and used part of my student loan payouts for nonessential expenses. In 2005, I spoke to a credit counselor who recommended a debt management program, but I declined, not wanting to give up the credit cards.

Three years later, I was laid off from a high-paying union job and was forced to liquidate my 401(k) to give myself a 'fresh start,' as I had not made much progress on my debt, and had no emergency savings and no job prospects. After three weeks on unemployment and a brief stint at a temp agency, I responded to an employment ad for ClearPoint Credit Counseling Solutions. After being hired and going through credit counseling training, I realized just how many mistakes I had made over the previous decade."
-- S., a credit counselor with ClearPoint Credit Counseling Solutions

A Little Bad Luck and a Little Bad Judgment

"About a year ago, I was financially fine. My car was paid off; my parents were letting me live in their second home, so my only bills were utilities and my phone. I was a recent college grad working part-time at a bank. But then my car was totaled when it got hit by someone running a stop sign. My insurance check was only $5,500, so I wiped out almost all of my savings, put $12,000 down on a car and borrowed another $5,500 from the dealership. But my insurance company wouldn't pay my medical bills, and the driver's insurance company said I would have to sue them for the money. I had thousands of dollars in medical bills, a new car payment, and needed a crown on one tooth. I took out a loan through the bank where I worked, but two months later my hours were cut.

Once I got a second job, I was working 67 hours a week at two jobs and spending three hours a week at physical therapy. I got rid of my smartphone, got cheaper car insurance, stopped going out, stopped buying things I didn't need, started couponing and only buying things on sale. Then I found a better job as a credit counselor. I still have about a year before I can finally relax, but I have a plan and a time frame. If I would have known what life was going to throw at me, I would have saved more and not bought such an expensive car. But I never gave up, I made sacrifices, and I got help when I needed it."
-- H., a credit counselor at Apprisen

Michele Lerner is a contributing writer for The Motley Fool.

Credit Counselors' Confessions: How We Got Ourselves Out of Debt
Think again. Even student loan debt can chase you into retirement.

The Treasury Department has been withholding as much as 15% of Social Security benefits from a rapidly growing number of retirees who have fallen behind on federal student loans -- five times as many as in 2001. Even something as simple as credit card debt can hurt you in retirement, says John Ulzheimer, president of SmartCredit.com.

"When it comes to credit card debt, you absolutely have to get out of it before you hang up your company badge," Ulzheimer says. "It's very likely the most expensive debt you're carrying at 13 percent to 15 percent interest on average, and twice that in some cases. No retirement nest egg can guarantee that kind of growth."

Leaving the workforce might help you cut costs in some areas -- for example, your pricey commute to the office -- but you can never underestimate the cost of aging.

"Many studies show that some retirees even spend more in retirement than they did when they were working," says Susan Garland, editor of Kiplinger's Retirement Report.

 "In the early years, you may be embarking on long-delayed travel and hobbies. And as the years go by, your health care costs are sure to rise. House-related maintenance costs, insurance and property taxes are sure to be on the upswing as well."

A 65-year-old couple retiring in 2012 is estimated to need $240,000 to cover medical expenses throughout retirement.

"More and more Americans say they plan to pay for retirement by working longer, but in reality, many retirees end up quitting sooner than planned," says Greg Burrows, senior vice president for retirement and investor services at The Principal.


One third of American workers said they plan on working past age 65 in a recent survey by the Employee Benefit Research Institute, but more than 70 percent of retirees said they actually quit before that milestone.


Then there's the job market to consider, which doesn't take kindly to workers who are past their prime. In 2011, the median length of unemployment for people 55 and older was 35 weeks, up from 10 weeks before the recession, according to the Government Accountability Office.

Medicare is an excellent resource for retirees needing health care support, but here's a wake up call: It doesn't cover all long-term care.


Medicare coverage excludes extended nursing home stays, custodial care, or an in-home nurse to help out if you're unable to dress, feed or bathe yourself.


"Medicare pays for limited nursing-home and home-health care for short periods to provide continuing care after a hospital stay," Garland says. "For example, skilled care in a facility is limited to 100 days. It may be wise to consider long-term care insurance to cover those costs."

Never underestimate the crippling power inflation has over your retirement savings.

"Too many people have the illusion that money is safe as long as the balance doesn't go down, but the reality is that inflation will eat into your purchasing power unless you learn how to properly manage and invest your wealth," writes David Ning of MoneyNing.com.

"Those who put all their money in a savings account may not experience the volatility that comes with different investments, but they are sure to be able to afford less and less as years go by, which is a real threat too."

Contrary to popular belief, investing savvy isn't something only the rich are born with.

But if you want to invest wisely, do yourself a favor and leave the stock picking and day trading to the professionals.

"Stick to the boring but effective strategy of saving early and often, watch investing fees, and picking an asset allocation plan where you can stay the course when the market inevitably takes a dive," says Ning.

And start as early as possible. According to personal finance expert Kimberly Palmer, someone who begins investing at age 25 will only have to save $4,830 annually to reach $1 million by age 65, accounting for an annual return of 7 percent after fees.

That figure triples to $15,240 if you wait until your 40s.

At some time (and for a lot of you, many times), life eventually will get in the way and you'll find yourself on the wrong side of your bank or, worse, a debt collector.

Stand your ground and watch them like a hawk. That means reading the fine print before signing up for a high-interest, high-fee credit card and taking a proactive approach to lower your interest rates on credit and mortgage loans. Sometimes, all it takes is a phone call and a little math work to figure out you could be getting a better deal elsewhere.

When in doubt, think about Kenny Golde, a 40-something producer we spoke with last year. He managed to negotiate $220,000 worth of debt down to $70,000 on his own.
It turns out one in four workers resorts to taking out 401(k) loans each year, to the tune of $70 billion, nationally.

"You might be cheating your future self," says Catherine Golladay, VP of 401(k) Participant Services at Charles Schwab. "While paying back a 401(k) loan, many people stop saving in their 401(k) plan, which can really derail retirement savings."

And don't forget about the fees. Workers under age 59 1/2 who dip into retirement funds must generally pay back their loan quickly, between 30 to 90 days in most cases. Otherwise, you could wind up paying income taxes on whatever you've taken out, along with a 10 percent early withdrawal penalty. And you still have to pay back the loan with interest -- and with after-tax money, which then gets taxed again when you withdraw it in retirement.

We'll never tire of the Roth vs. Traditional 401(k) debate. With a Roth 401(k) or Roth IRA, all of your contributions are taxed immediately according to whatever tax bracket you fall into today. Traditional IRAs are tax-deferred until retirement.

The general consensus is that it's better to convert to or start a Roth now, since it's likely that you will wind up retiring in a higher tax bracket than you occupy now, in which case you'll pay significantly more in taxes later than you would today.

But investors who've already built a substantial IRA or 401(k) often can't stomach the thought of paying taxes on everything at once if they make the switch.

"Sometimes it just takes a lot of handholding because investors don't like to write that check," says Janet Briaud, chief investment officer of Briaud Financial Advisors. "There is sticker shock, but in the long-term, our clients really get it. They're really happy."

Ultimately, that money will be taxed one way or the other, either starting at age 70 1/2 when required minimum distributions take effect, or during the life expectancy of the beneficiaries, she argues. And if you leave a Roth IRA to your loved ones, you'll have the peace of mind of knowing they won't have to pay taxes on the money they withdraw.

To help ease the blow, speak with your advisor and try a partial conversion by moving just part of your savings to a Roth each year.

Many advisors base their calculations of your future needs on your current income. Nickel, the anonymous blogger behind Five Cent Nickel, takes a slightly different approach:

"Start by estimating your post-retirement expenses. Average it out across a year. From there, estimate what sort of investment returns you'll be able to generate -- yes, you'll need a crystal ball for this.

"From there, divide that rate (as a decimal) into one to find your multiplier. So, for example, if you think you can generate 4% real returns (i.e., 4% returns after accounts for inflation, so more like 7% nominal returns) then you'll need 25x your annual expenses (1 / 0.04 = 25). If you think you'll only be able to generate 3% real returns, then you'll need 33x your expenses. And so on."

The benefit of saving for your children's college education early (ideally via a 529 plan) is that you limit your saving burden by spreading it out over time.

But even if you come up short of tuition costs, don't immediately dip into you retirement savings to make up the difference.

"You can always fall back on financial aid. Grants, scholarships and student loans can help pay your child's way," writes Learnvest's Laura Shin. "When it comes to your retirement, however, there are no loans."
Of course, few people have the benefit of unlimited cash flow without putting in a little leg work first. But there are higher priorities in life than working overtime and depriving yourself of a few pleasures today just to save a buck or two.

"People spend most of their time planning their finances for old age, but not their fulfillment" along the way, says Ken Budd, executive editor of AARP The Magazine.

"We once profiled a man who decided that for the first year of retirement he would do whatever he wanted. So he went for long walks, he skimmed the newspaper online, he sat in Starbucks and read Grisham novels. But after that, he [felt so bored] he decided to become a chaplain."

In a 2011 study by RocketLaywer.com, more than half of Americans admitted they hadn't written a will yet -- including 44 percent of those aged 45-64.

Without a plan in place, you could leave your estate's future in the hands of squabbling family members or your state, which would appoint an administrator to handle everything.

"[A will] enables you to start thinking about issues like whether you have the right insurance coverage, life insurance, and ways of replacing your lost income," RocketLawyer founder Charley Moore says.

This is doubly important for gay spouses, as states that don't recognize gay marriages would pass over same-sex spouses in favor of next of kin.

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