Dear Liz: I am having a terrible time with my finances. I am a single woman with no kids, and I work as a teacher at a charter school making $40,000 a year. I am working with a debt management program to pay off my credit cards. But I am constantly late in paying my bills and often bounce checks, which costs me money I don’t have to cover the fees. I can’t even save. I’m actively seeking another job or an additional part-time job, but no luck so far. I am in default on my student loans (they want me to pay $700 a month, but I can’t). I am very depressed and am so tired of this. I have holes in my tennis shoes and I can’t afford new ones. I am on a strict budget, I use coupons, don’t go out much anymore (which makes me more depressed because I am cooped up all the time). I have house problems that I need to deal with but can’t. I hate living like this. I honestly don’t know what to do. Please help.
Answer: The first thing you need to do is opt out of your bank’s bounced-check protection program. You may think you need to borrow money this way to make ends meet, but as you’ve discovered, it’s driving you further into the hole.
Next, rethink your participation in the debt management program. It was honorable of you to try to avoid bankruptcy, but it’s pretty clear you can’t afford to continue with this program if doing so leaves you in default on your student loan obligations. Credit card debts can be erased in Bankruptcy Court; student loan debt can almost never be wiped out that way.
If you have federal student loans, you may be able to qualify for the income-based repayment program, which caps your payment at a reasonable amount and erases any remaining balance after 10 years in a public service job (such as teaching in the public school system). Otherwise, the balance is erased after 25 years of payments. If you have private loans, you have far fewer options for repayment, but wiping out the credit card debt would free up more money to pay these loans back. Talk to your lenders to see what options you may have.
Another factor to consider is how much you’re spending on housing. If you own a home, the mortgage and related home-owning costs may simply be too much for you on your current income. Getting rid of the house in a short sale, or even letting it go into foreclosure, may be a far better option than continuing to cling to a home you can’t afford.
Bankruptcy, short sales and foreclosures are all drastic options. But some financial problems are so great that a drastic solution is the only reasonable choice if you ever want to get back on your financial feet.