Get On The Front Foot With People You Owe Money To

Remember this saying: “The creditor will always have a better memory than the debtor”. To sum up, the people you owe money to are not going away. A couple I recently spoke to learned this the hard way. They were living on two wages, earning decent money. He was on $75,000 a year and she was on $45,000 a year. And while they had never done a budget or saved anything for a standby fund, up to this point they were doing quite well.

That is, until the day they now call “the big change”. Quite out of the blue life struck them with a curveball right when they did not need it. The husband was let go with one day’s notice (talk about trying times). In fact his work was not even going to pay him out his last month’s wage. As you can imagine, panic set in pretty quickly.

Now while this couple had never had any problems paying their bills prior to this day of change, they had always lived right up to their combined wage of $120,000. All their debts relied on the assumption that their wage would continue like this for years to come. They used to clear $8,077 per month. Out of this payment they would have to payback:

• $4240 minimum home loan repayment
• $790 car loan repayment
• $240 credit card repayment on card one
• $100 credit card repayment on card two, and
• $166 interest free repayment for a television

After all the repayments were made they would have $2,541 to live on, still plenty of money to survive. The banks had loaned them this money because they assumed their good wages would continue.

Now just on the wife’s wage they were going to clear $3,163 per month. So they would be $2,373 short prior to having to pay for food, electricity, petrol and all the other good things life offers. When over 100% of your pay is already spoken for prior to having to buy food, this is a very bad situation.

So before we get to what this couple should do next, let’s diagnose the problem leading up to “the big change”. Both partners never really thought about a budget, or thought about how much money they had actually committed each month out of their pay packet. In fact just about everything they owed money for was either overpriced or not needed.

Home loan: They borrowed $600,000 over 25 years. While they were three years into paying this house off they were spending around 52 cents in each dollar out of their pay check each month. This is a very high amount to spend on one payment. In fact had they had zero other debt (e.g. credit cards, car loan etc.), and just the home loan, they would have struggled had “the big change” happened.

Car loan: Why is a couple who earns $120,000 considering purchasing a car on a loan? They could have purchased a car just by saving up the money. And had the “the big change” happened prior to purchasing the car, they could have at least had some savings to help them through.

Credit cards: Both cards have balances which they do not pay off each month. In fact they only pay the minimum payments. This is almost mind blowing. How can a couple with an extremely high amount of disposable cash need to even use a credit card in the first place? And if they did need a credit card, why are they not just using them for the loyalty points and paying them off each month?

Interest-free television: Again there is no need to get an interest free loan to purchase something which would have taken a few months to save for.

The bottom line is this couple just could not budget. They assumed the good times would never stop and they lived right up to (or maybe even over) their great salary. One misstep would have them in a world of pain financially and potentially they might lose their house. Nor did they save any money to help smooth things over if it became a bit prickly. But as we can only go forward in time and not backwards, what is this couple’s first step?

They need to write a letter to all their creditors. It cannot be an email or a phone call; it must be a registered post letter. And it should read something like this:

Excel Car Loans 15 Martin Street Brisbane

Customer Number 123456789

To whom it may concern

I am writing to you to inform you that due to extreme financial problems, I will find it hard to continue to pay my loan each month. Currently my partner and I are working very hard to correct our home budget and money situation. We write this letter because we take all our commitments on debt with the upmost of respect. In time, we fully expect to be able to pay all our debts in full, however right now, we would appreciate you giving us some assistance.

Right now we can afford to pay $________ a month. Additionally we’d like to enquire if you would consider freezing interest on our outstanding debt.

Could you kindly contact us with your response to our question?

Yours Sincerely

[Insert name]

With this letter they are truly putting their position openly and honestly into the creditors’ hands. And by doing it right away, rather than waiting for them to come looking for non payment, you will show you have full intention to work with the creditor rather than against them.

There are two morals of the story in this article. Number one, you must live well below your wage. People who live right up to it – especially if they are taking on debt into the future – are flying very close to the sun. One slip up and they could find themselves in a similar position to the above couple.

Number two, if you have found yourself in the same situation as the above couple, you need to be on the front foot with your creditors. By going to them instead of the other way round, you should find they are much more likely to help you out and work as a team. But you have to be extremely quick and not wait to see if things will get better.