Debt Management

As the new director of the Office for Financial Success I want to take this opportunity to quickly introduce myself to you.

I graduated from Utah State University where I received a Family Finance Degree.  After spending several years in the industry (insurance, banking and financial planning) I decided it was time for me to return to school.  I enrolled in the Personal Financial Planning program at Texas Tech University and graduated in December of 2009.

I am excited to be here at the University of Missouri – the support of the department and community is outstanding.  For me, financial counseling is not just a job or a career, but a calling and my passion.  There is no greater feeling than sitting across from someone and seeing hope enter their eyes.  That is why I love this work.  Thank you for your welcome and support.

One quick note before we jump into today’s topic – this is YOUR Financial Tip of the Week!  If you would like to see a specific topic covered or have a question you would like answered, we would love to receive those!  Just send an e-mail with your question or suggestion and we will utilize those as we write future tips.

Debt Management

The National Foundation for Credit Counseling (NFCC) just released a report of a survey that asked consumers what they would do if they find themselves in financial distress.

The question asked was:

“If I were in debt beyond what I could manage on my own, my first point of action would be to:”

Here are the responses and percentages:

Seek help from a legitimate credit counseling agency	38%
Talk directly to my creditor(s) about debt settlement	33%
Consider debt settlement through a debt settlement company	14%
File for bankruptcy	5%
Ignore the debt since I can’t pay it	10%

 

As a financial counselor I was happy to see that over 70% of respondents said they would seek help from a legitimate credit counseling agency or talk directly with their creditors.

I would like to discuss each of these options briefly in today’s tip.

Seek Help from a Legitimate Credit Counseling Agency

There is a great book about debt published by The National Consumer Law Center titled Guide to Surviving Debt (ISBN: 978-1-60248-027-8).  In this book a legitimate credit counseling agency is defined as an “agency that offers a range of services from basic budget counseling to education courses about finances to debt repayment plans” (p. 58).  A credit counseling agency will not only help you work through your situation, but will also educate you so can avoid the problem in the future.

Talk Directly to my Creditor(s) About Debt Settlement

It is important to communicate with your creditor(s) when you are facing a financial crisis.  You should call them and tell them that you are facing financial problems right now and cannot pay but that you will pay the debt as soon as possible.  They may also be willing to work out some kind of re-payment plan that fits your budget better.  They are usually much more willing to work with you if you are honest and upfront with them before the situation gets bad.

Consider Debt Settlement through a Debt Settlement Company

It didn’t surprise me that more than 10% of respondents selected this.  Debt Settlement Companies advertise very heavily on TV and radio.  You hear claims that someone who owed $41,000 settled for $8200.  What is a Debt Settlement Company?  They will collect information about your debts then you will send a payment to them that they maintain in an account.  They do not send the money to the company you are in debt with.  When they believe there is enough money in the account they will call the company to try to settle the debt with them.  In the meantime, you aren’t making payments, so you will likely be facing pressure to pay, be sued for collection, have your debt turned over to a collection agency and have your credit score destroyed.  You also often pay very high fees to these companies.  While debt settlement can work, it can be a long and expensive process, and finding a legitimate company can be difficult.

File for Bankruptcy

While only 5% of respondents selected this option it is important to address it.  Filing bankruptcy is a very serious decision that needs to be made with care.  Bankruptcy is a legitimate means of getting a fresh start, but it will drop your credit score and stay on your credit report for 10 years.  You may have difficulty getting loans after that.  It is important to work with a legitimate credit counseling agency to explore all options before declaring bankruptcy.

Ignore the Debt Since I Can’t Pay It

If you ignore the problem it eventually goes away, right?  WRONG.  Ignoring the debt is not a good decision.  Late fees will pile on, you may get sent to collections or be sued, your assets may be repossessed, and your credit score will start to drop.

If you are facing financial problems set up an appointment with a legitimate counseling agency and be up-front with your creditors.  Taking these pro-active steps are the best things you can do.

If you need help with your debt situation be sure to contact The Office for Financial Success at http://financialsuccess@missouri.edu.

Are You Middle-Class?

The other day, while driving, I listened to one of America’s more talked about radio talk-show host claim that our President is stirring up a “class-war”.  He wanted the listeners to count the number of times President Obama used the phrase “working-class”, as it is, in his words, the “code word for class warfare”.  I was going to watch the State of the Union Address, by President Obama, on Wednesday night, regardless, so I decided to do what I was asked and “count”.  (My first conclusion is that, regardless of which political party you belong to or believe in, there is no denying that President Obama can speak to an audience.)  By my count, he mentioned the phrase “working families” three times, the phrase “middle-class” five times, “working” eight times, and “job” either twenty-two or twenty-three times.  Clearly, the emphasis was on jobs, not class warfare.  

 

This morning, while watching CNBC, I saw an interview with Indra Nooyi, Chairman and CEO of Pepsico, where she discussed what Pepsico’s research is telling them about the US consumer.  It is clear to Pepsico that those that work in labor-oriented jobs, those with less education, are those that are being hit the hardest by unemployment.  Moreover, she indicates that consumers are spending less, regardless of the unemployment rates in their communities.  That is, they are being more cautious, regardless of their personal situation.  It is an insightful interview that concludes that we need more jobs and a well-educated workforce. 

 

This all led me to wonder, do people know what “class” they are in?   Do they care?  So, here are the statistics from the US Department of Labor’s Consumer Expenditure Survey from 2008 (the most recent on their website).  What the table below shows is, simply, how each quintile (five equal size groups), defined by income, makes and spends their money as a percentage of their income.  If we define “class” by income then these would be lower-, lower-middle-, middle-, upper-middle, and upper-class.  I will put a column for the national average, as well.  So, are you middle class – the quintile in the third 20 percent (quintile)?

 

Item	All Consumer Units	Lowest 20%	Second 20%	Middle 20%	Fourth 20%	Highest 20%
Income/Expenditures
After-tax Income	$61,744	$10,608	$27,843	$46,936	$72,628	$150,692
Average Annual Expenditures	$50,486	$22,304	$31,751	$42,659	$58,632	$97,003
Sources of Income
Wages	80.2%	42.4%	62.4%	76.8%	84.1%	85.0%
Social Security, Unemployment and Public Assistance	11.3%	59.0%	31.7%	16.8%	9.2%	4.0%
Interest, Dividends, & Property Income	2.4%	1.9%	1.9%	1.9%	1.9%	2.9%
Demographics
Average Age	49.1	51.6	51.6	47.9	46.9	47.4
Earners	1.3	0.5	0.9	1.4	1.7	2.0
Homeowner%	66%	39%	56%	67%	79%	91%
White Race%	88%	81%	85%	88%	91%	94%
College Educated%	60%	44%	46%	58%	68%	84%
Expenditure Category%
Food%	12.8%	15.6%	14.4%	13.1%	12.9%	11.3%
Alcoholic Beverages%	0.9%	0.8%	0.9%	0.8%	0.9%	0.9%
Housing%	33.9%	39.9%	36.5%	35.0%	33.0%	31.7%
Apparel%	3.6%	4.3%	3.6%	3.2%	3.5%	3.6%
Transportation%	17.0%	15.4%	17.8%	18.4%	17.9%	16.1%
Healthcare%	5.9%	7.3%	7.7%	6.8%	6.0%	4.5%
Entertainment%	5.6%	4.9%	5.4%	5.7%	5.6%	5.8%
Personal Care%	1.2%	1.4%	1.3%	1.2%	1.2%	1.2%
Reading%	0.2%	0.2%	0.2%	0.2%	0.2%	0.2%
Education%	2.1%	2.8%	1.1%	1.2%	1.4%	3.0%
Tobacco%	0.6%	1.2%	1.0%	0.8%	0.7%	0.3%
Miscellaneous%	1.7%	1.3%	1.6%	1.8%	1.6%	1.7%
Personal Taxes%	2.8%	-3.4%	-1.5%	0.6%	2.0%	5.0%

 

Clearly, this can create a lot of questions, as well as provide a few answers.  I contend that your financial success has little to do with your income and more to do with how you save your income, spend your income, and act about your income.  Economists often define the “classes” based on an economic resource definition, such as income.  Sociologist and political philosophers define “class” based on who is “powerful” and who is “powerless”.  Seems to me that a person, particularly a young person, has control over their income, through educational attainment and hard work, and, thus, they have power.  Moreover, we can always save our money in order to create, over time, a greater resource base.  What I’m saying is that your class has more to do with your “power” over your attitude and aspirations than it does about your money.

 

So, are you middle-class?