How to Get Out of Debt, Stay Out of Debt, and Live Prosperously* : Based on the Proven Principles and Techniques of Debtors Anonymous
A simple, proven-effective formula for freeing yourself from debt--and staying that way Revised and updated, with a new Preface by the author
"A must-read for anyone wanting to get their head above water."--The Wall Street Journal
THE CLASSIC GUIDE, REVISED WITH UP-TO-THE-MINUTE INFORMATION
OUT OF THE RED
* Do this month's bills pile up before you've paid last month's?
* Do you regularly receive past-due notices?
*Do you get letters threatening legal action if immediate payment is not made?
* Do the total amounts of your revolving charge accounts keep rising?
INTO THE BLACK
Whether you are currently in debt or fear you're falling into debt, you are not alone. Sixty million Americans--from doctors to secretaries, from executives to the unemployed--face the same problem and live under the same daily stress. Based on the proven techniques of the national Debtors Anonymous program, here is the first complete, step-by-step guide to getting out of debt once and for all. You'll learn
* how to recognize the warning signs of serious debt
*how to negotiate with angry creditors, collection agencies, and the IRS
* how to design a realistic and painless payback schedule
* how to identify your spending blind spots
* how to cope with the anxiety and daily pressures of owing money
*plus the three cardinal rules for staying out of debt forever, and much more!
This book is neither sponsored nor endorsed by Debtors Anonymous. A recovered debtor, the author is intimately familiar with the success of the Debtors Anonymous program.
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January 01, 2003
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Excerpt from How to Get Out of Debt, Stay Out of Debt, and Live Prosperously* by Jerrold Mundis
What Is Debt?
In its simplest definition, you are in debt when you owe some person or institution money. We need a refinement though. For our purposes, a secured loan is not a debt, even though money has been loaned to you.
The Secured Loan
To secure something is to make it safe. When you secure a loan, you free the lender from any risk of losing his money. That's why he's willing to lend it to you, he has no fear of loss.
Your word, your good faith, even your unfailing history of repayment do not secure a loan. What happens if you have medical emergencies, lose your job, or simply go bonkers and run off to Brazil? If, for any reason, you just don't have the money to pay the loan back? The lender loses his money, that's what.
Collateral, in its primary definition, is something that runs side by side with something else. In financial terms, collateral is property you pledge to the lender or actually give to him to hold during the course of the loan. That property is security, it's what makes the lender's money safe or secured. When you pay him back, he returns it to you.
A loan from a pawnshop is a classic example. You bring your camera to the pawnbroker. He loans you $75. When you repay him the $75 (plus interest, of course), he gives your camera back to you. If you don't repay him, he keeps your camera. You don't own your camera anymore, but you don't owe him $75 either. The loan is over.
Fine, you say, but you're not interested in hockshops and cameras. You're talking big money, $5,000, $50,000, more.
The Numbers Don't Make Any Difference.
A loan is a loan, whether it's for $5, $500, or $50,000. And collateral is collateral, whether it's a television set or a television station.
One of the most common forms of secured loan is a mortgage. Let's say I'm buying a house for $150,000. I've saved $30,000, which I use for the down payment. The bank likes my job history, my salary, and my credit record. They have confidence in me. But that confidence alone isn't enough to persuade them to lend me the additional $120,000 I need, not without strings attached. Life's too unpredictable for that. So they require me to give them a mortgage on my house, a document that generally grants them all legal rights to it if I default, that is, if I fail to make my loan payments for a specified period of time, usually about four months. The bank then has the right to foreclose the mortgage, to take possession of my house in lieu of what I owe them, sell it, and keep the proceeds or the bulk of the proceeds for themselves, thus recouping their $120,000. I've secured the loan by pledging my house as collateral. I've eliminated the risk that the bank will lose their money if they lend it to me.
Car loans work the same way. I buy a new Chevy for $24,000. I put $5,000 of my own money down and borrow the balance, $19,000, from a bank or from General Motors. To get the financing, I sign a document that gives the lender all rights and title to the car if I don't pay the loan back.
If I default in either of these cases, I lose my house or my car. That would be painful, but I would not owe money to anyone. I would not go into debt, provided I had made a large enough down payment. That is an important provision. Normally what happens in the case of a house or a car walked away from, foreclosed upon, repossessed or otherwise reclaimed by the lender, is that the lender sells off the property, deducts the amount received from the outstanding balance, and arrives at a new balance owed: the old one minus the proceeds of the sale.
Let's say that Frank, who still owes $9,000 on his Honda, is moving to another state and a new job where, among other benefits, he will have the use of a car. He's broke and under time pressure. So he turns the car over to the creditor (almost always a bank), and says, "Here, it's all yours. The loan is over." But it's not. The bank now has Frank's car, the collateral for the loan, but the loan is still in effect. The bank, which is a business, not a social welfare agency, wants to clear this loan quickly and with minimal effort. So it wholesales the Honda out, getting $5,000 for it. Frank still owes the creditor $4,000 on the loan and has all the legal obligations and liabilities that any debtor does. He is still as vulnerable to the creditor if he defaults as he is to any other creditor.
The same scenario is true with a house. But there the bank will usually have required a large enough down payment so that the house can be turned over for the amount still owed, unless there has been a major decline in the real estate market.
The key, then, in these situations, is to put enough money down on a car or house so that you have sufficient equity in it, should you need to liquidate it, that you can do so for at least the amount you still owe on it. Selling a car or house yourself and paying off the creditor is always better than turning it back to the creditor, even if the creditor could liquidate it for the balance you still owe. This is for reasons relating to your credit history, which we'll discuss in a later chapter.