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Debtors Recall Their Path Out of Financial Peril

Money trail shoes
Low credit scores, high levels of debts and a poor financial history can severely limit a consumer’s power in the economy. When negative marks and debts are prevalent, some feel that there is no way out of the mess.

But many previous debtors have escaped the financial perils brought on by poor decisions and now have lower debt balances and positive credit scores. Their path to financial freedom is not always the same, but the end-result and the appreciation for a better financial life almost always is.

These are some of their stories.

Choosing Comedy over Consumerism

Early on, Dan Nainan saw the dark side of the creditor world. When he was in his mid-20’s, he accumulated a mounting amount of credit card debt. Bill collectors used unlawful tactics to get him to pay, such as calling and stating that his parents were in an accident and needed blood.

Nainan said that the creditors were simply doing everything and anything to get payment. He did not know the law, became scared, and eventually ran from his debt collectors. He stayed out of the traditional consumer economy for years. As time went by, many of his debts fell off his credit file. While this allowed him to have a “fresh start,” he wishes he never entered that situation.

Now as a NYC-based comedian, Nainan approaches his credit history “like a hawk.” He has automatic payments set up for nearly every expense in his life.

His younger self, who focused on material possessions and debt, has since transformed. He now focuses on living a more simplistic lifestyle which benefits him and the greater whole.

Debt, he said, is “not only bad for your pocketbook, it’s bad for the environment.”

Although Nainan lives in the expensive borough of Manhattan, he allows the high prices to deter him from unnecessary items such as a car and eating out. His time is now spent in more positive ways like cooking at home and touring the country with his comedy show.

“The more material possessions you have, the more time and money you have to spend on it,” he said.

Past Experiences Fuel Future Careers

Some debtors realize that their intentions and actions do not align. Others build from these mistakes and turn it into a job.

Beverly Harzog knew that she was facing serious issues when her seven credit cards were maxed out at over $20,000 in debt. Despite her profession as a CPA, she admitted that she knew very little about personal finance.

“It just goes to show that this can happen to anyone,” she admitted. “It’s not intuitive.”

Thinking back to that time makes her cringe. Her first symbol of freedom, a department store credit card, was denied buying a pair of jeans. At that moment she realized that her life needed to be straightened out.

“You can’t get out of debt until you recognize there is a big problem and take responsibility for it,” she said.

Harzog, now a credit card expert and author of “Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made,” said it took her two years to pay off her debt. She benefitted from a comfortable salary and paid off any bill that would fit in her budget. Now, she realizes that sticking to a budget creates more autonomy than spending haphazardly ever could.

“When you are making conscious decisions in your life, you have freedom,” she said.

David Bakke also used his rough financial past to steer him toward a career path. Before his current position as a financial expert for Moneycrashers.com, his credit card debts were so extreme that he could no longer make the minimal monthly payments. His card issuers began to close his accounts.

He realized that something drastic needed to happen and halted all personal spending. He also worked in his spare time to increase his monthly income and use it to reduce his overall debts.

The credit repair process takes deliberate and intentional actions. To lift one’s credit score, many start by tackling their looming debt head-on. Reducing one’s overall debt can occur quickly if the borrower has disposable cash or is willing to severely reduce their spending habits such as Bakke.

On the other hand, improving a credit score can be more complicated and long-winded.

Recovery Takes Time

It took Lorra Brown a year and a half to improve her low credit score. The irony of giving out financial advice during her day job as an accountant was growing too large to handle.

“I decided to take a stand and practice what I preached,” she said.

She began by pulling a free credit report and then adding her information to a credit monitoring program. She filled out multiple letters, provided necessary financial statements for each company and made sure to speak to a representative.

Instead of paying the full amount, she found out that many creditors were willing to accept significantly less payment for a debt. Thus began a back-and-forth game. First she would offer 25 percent on the dollar. If the creditor rejected this, Brown would increase it to 35 percent, then up to 50 percent. Even though she only offered up to half what she owed, most creditors accepted these payments. She finalized the work by sending a thank you letter and contacting the credit bureaus to show that each debt was repaid in full. 

Next, she began working on her credit cards and other forms of revolving debt. Her earlier method of offering a lesser amount to satisfy her debts did not work as well on these, so she began to make larger payments to eliminate the debt, even using her tax return. Brown made sure to keep everything organized in separate folders, one for her household budget, another for credit reports and correspondence.

One final method that improved her score was opening up several secured credit cards in order to rebuild her history with positive debt.

“There were times that I didn’t really purchase anything on the card; however I needed to keep building my credit,” Brown said. “I even purchased some items and at the end of the 30 days returned it. This would show the amount paid in full.”

After all of her work, she is now able to boast a high credit score of 810.

Overcoming Stigma and Finding a Way Out

The respondents loans.org spoke with did not utilize all of the means available to debtors. Several extreme measures exist, one of which is bankruptcy. A reason why bankruptcy is defined as the last option, even though it can eliminate most types of debt and give a consumer a fresh start, is because of the negative connotation associated with it.

But few realize how common it is. In 2012 alone, there were 1,181,016 nonbusiness bankruptcy filings in the United States.

Filing for bankruptcy can help debtors, but the numbers of cases are decreasing. In recent years, fewer bankruptcies have been filed since reaching a high of over two million in 2005.

Jeff Phillips, vice president of HP Investments Inc., does not believe the bankruptcy solution is a crutch or an escape plan for most consumers.

“There is usually a story behind a person getting into credit problems,” he said, detailing that poor credit can be caused by situations such as divorces, deaths, or a sudden job loss.

Overcoming a strong cultural stigma is one of the hardest hurdles for debtors. Although Phillips believes the recent financial crisis forced many into credit disasters, there are still incorrect stereotypes held by the public’s eye. One main reason for these long-held stereotypes is due to inaccurate assumption of what the primary cause of bankruptcy is. The majority of bankruptcies are not caused by credit card bills or unpaid mortgages, but rather from medical bills. Almost two million people will file for bankruptcy due to their inability to repay their medical debts.

The fact is: consumer debt is not inherently a bad thing. The majority of the population accepts debt. It’s the amount and how it’s managed that defines whether or not it’s healthy. And apparently, the millennial generation ends up at the bottom on the scale of good versus bad debt. A recent Experian report found that the millennial generation struggle the most with debt management.

Furthermore, when consumers turn to alternative sources for help with finances, they face even more problems. A recent report by the Center for Responsible Lending found that some debtors who use settlement programs end up in worse situations than before they entered.

The debts taken on, whether from medical expenses, personal loans, or missed payment charges, will impact a borrower tremendously. One of the most prominent effects of debt is seen when a borrower is interested in purchasing a home. Lenders will review a borrower’s debt-to-income ratio when presented an application for a home loan.

During the application process for a conventional residential property, lenders confirm that a borrower’s debt-to-income ratio is below the 45 percent maximum, according to Jeff Phillips, vice president of HP Investments Inc.

He offered this example. A borrower who makes $6,000 per month but has $100 in monthly credit card debt payments can purchase a $500,000 home with a 20 percent down payment. Conversely, if the same person had $1,000 in monthly card payments, he or she would only be able to afford a $325,000 home with a similar down payment.

“Debt limits a person’s buying power,” Phillips said.

As shown by Nainan, Harzog, Bakke, and Brown, one’s financial history has an all encompassing impact on life. Consumers can either decide to run from their debts, or face their history and realize that they alone are the biggest part of their solution.