How To Spend My Tax Return – Anna Answered

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In debt but receiving a tax refund

DFA reader Anna wrote:

I am a divorced single mother of two young children. Due to the irresponsible financial behavior of my ex-husband (an addict), and my ignorance–my credit and financial picture is ruined. I have several stafford loans that are in default because I couldn’t pay them and was ashamed to call to work out arrangements (stupid, I know now). I can’t finish my degree (I only have one semester left!) until they are paid because I can’t afford to pay for it on my own.

I have two bank accounts that have been charged off that my ex-husband overdrew (in my name only) without my knowledge until it was too late (I know I should’ve paid closer attention, but I trusted my spouse at the time). I have a credit card with 24% interest that was charged off a few years ago but reinstated and I’m on an automatic payment plan to pay it off. The card is in good standing but after it’s paid off the account will be closed. I got laid off from my job and am struggling to make ends meet. My wonderful parents are helping out as I am frantically looking for employment (I feel horrible about this as they are retired and don’t deserve helping me). I live in a house my parents own so I do not have rent or mortgage. I will receive a $9600 refund and would like to use it to regain some financial footing. Before I was married, I had a $30,000 nest egg, retirement, and good credit. I feel like I’m in a hole too deep to climb out of and am very embarrassed. I am 35 and have to support two kids on my own. I want to be able to send them to college, own a home, and retire before I’m 90. I have paid off everything on my credit report that was negative except my school loans and bank accts. Once that happens I will effectively have ”no” credit.


  • 0 (hopefully will change soon)
  • No child support (not an option)

Expenses per month

  • Mortgage/Rent: 0 (for another year then I have to find a place of my own)
  • Credit card with 24% int: $150/mo repay plan balance: 4200.00
  • Utilities: $160/mo
  • Gas: $ 200/mo (I drive 30 miles ea way to take kids to school, this changes next fall)
  • Medical/dental Insurance: none
  • Groceries: $250.00
  • Cell phone: $65.00 (no land line)
  • No cable (we play games/read, etc)
  • Internet: $60.00


  • 24% int credit card: bal $4200
  • Stafford loans: 7,500
  • Bank Accts charged off: $2000

Note: I no longer have a bank account because I’m in cheksystems. I refuse to get a ”second chance” account with high fees and no interest. I want to pay the charged off accounts, get out of cheksystems, & have a real account again.

I know one of the first steps is finding employment. I’m working tirelessly on that. I can’t change anything without income. How do I even begin to rectify this mess? How can I put the refund good use? I know I need to create a nest egg, but what is a good split of the money? I was thinking about putting some in a high interest CD for a year or two. Any help would be much appreciated! I’m so close to it and emotional about it that I’m frozen in fear about what to do next. Thank-you!!!!

How to spend the tax return – and other advice

Hi Anna.  First let me say that I feel for you, carrying a debt burden is hard enough, adding unemployment and children into the mix must make it nearly unbearable.  Here is my advice on how to spend your $9,600 tax return along with a few other pointers.

1. File for unemployment insurance and/or state assistance

This may be a hit to your pride, but the systems exist to provide temporary assistance to people in bad situations – you are in a bad situation.  Just be sure you do not treat any relief as entitlement… continue seeking employment, eventually you will find it and can cancel the aid.

Your expenses add up to $735/month and state aid will give you enough to cover this, and then some, until you find employment.

2. Pay off the charged off bank accounts

Use $2,000 of your $9,600 tax return to bring current the charged off bank accounts.  This may not be how you want to spend the money, but because of past circumstances and decisions, it is a necessary step.  $9,600 – $2,000 = $7,600 left.

3. Settle the credit card account for less than what you owe

Call the credit card company (or collection agency) that now owns the $4,200 debt and settle with them.  Tell them you want to settle for 40% of the debt and that you can pay the balance of the settlement off ASAP.  They many not do 40% but they will certainly settle for less than what you owe.  Once you reach a settlement amount, pay it off.  Let’s just assume they will settle for a cash payment of half of the balance at $2,100.  $7,600 – $2,100 = $5,500 left.

This will also reduce your monthly expenses by $150, which you can now put toward a payment plan for your Stafford loans (see next step.)

4. Bring your Stafford loans current and get on a payment plan

Call your Stafford lender to bring your account current with a $1,500 payment for a new loan balance of $6,000 and tell them you are ready to be set up on a regular payment plan of around $150 using the $150 you freed up by settling your credit card debt.  $5,500 – $1,500 = $4,000.

5. Use the remaining $4,000 to establish an emergency fund

Open an Capital One 360 savings account and deposit the $4,000 to establish your emergency fund (use this link for an Capital One 360 savings with a $25 bonus.) Do not spend this money unless it is a true emergency… this account now replaces your credit card as the account you turn to for emergencies.

Any more advice for Anna?

If you have more advice for Anna that I missed, do her a favor and leave it in the comments.

Betterment is one of my two favorite ways to earn interest on my savings! They have an awesome program for the Average Joe to save and invest simply and effectively. There are no minimum balance requirements and no transaction fees. Read my Betterment Review or open an account to get started earning now.

1 Peter

The only thing I might have done a bit differently is to save slightly less in that emergency fund (closer to $2500-3000), and use the extra to put towards the school loan. But honestly, your advice sounds very sound to me.

2 Jane Deneault

My only advice to Anna would besides what you have said is to find cheaper internet service, downgrade or something. That is too high considering her circumstances. Best to you Anna, I have been there and done that. You can make it through this. There will be a better time for reflection after you aren’t treading water so to speak.

3 Olivia

Matt’s covered the biggies and if you can do them that would take such a weight off.

I’m not sure if this would be available to you Anna, but we were able to reduce our DSL by calling the company and asking for the same deal they give new subscribers. They didn’t go quite that low but they did drop it and it adds up to about $50 savings over a year’s time. Also I’d check out other food sources. $250 for groceries isn’t bad at all. But you might be able to skim more off the top to stash away. Try food coops, Angel Food ministry sites, bump and dent grocers, day old bread places, ethnic grocery stores, a place that sells flour, and grains in bulk out of bins. Since you’re driving the kids to school anyway check for places along the route.

I hope things turn around for you soon.

4 Matt Jabs

Anna… I agree with Jane and Olivia on the Internet service. Comcast tries to charge me $64/month – to combat this, I just call them once every 6 months and tell them I’ll switch to AT&T if they don’t match the price… so they lower it to $30/month 6 months at a time. Give it a shot.

@ Peter – I know $4,000 is more than the Dave Ramsey suggested EF savings amount, but considering the volatility of Anna’s situation I think saving as much as possible would be wise. That said, any savings is better than none and paying the Stafford loans down further is definitely another option.

5 Jane Deneault

I do agree that amount of savings is wise due to the circumstances. This is a situation that is going to require a lot of slashing any bill that can be and being as extremely frugal as possible.

When we were with our backs against a wall, I contacted our internet provider (Qwest) and told them I was going to disconnect it. They were gracious enough to return the monthly service cost to the introductory fee. A savings of $35.00 per month for 6 months. We still bundle our land line with our internet and currently pay $60 for phone and fast internet service. It is the best price I am able to find in our location. It might pay to keep searching for a better deal in the area she is in. You never know.

6 Fred @ One Project Closer

Anna, when I read your story it made my heart sink. There is no question that you are in a tough, tough situation. I like Matt’s advice and think it is very solid.

I know that building an emergency fund in your situation can be very difficult. For example, you are living off of your parents generosity right now. You might feel that you cannot set up an emergency fund (a.k.a. “savings”) but rather you should give this money to them. I have seen this psychology happen to people in your situation. They feel like if they can “afford” to have an emergency fund, they should instead use the money to rent an apartment, or to pay their pay their parents rent.

I would resist that temptation and try to actually get an emergency fund set up. Hopefully your parents will be supportive of that. Then, obviously what you’re doing–working to find a job–is critical. You will be forced to rob that emergency fund every month until you have a job.

You said you are driving your kids to school. Is there no public transportation (bus?). It would seem like having a driving responsibility to/from school could preclude you from getting a regular-hours job. I know this is the plight of single parents in many cases, but I would also say if you can find a carpool to help (having one in waiting, at least) so that if you do land a job you can take it, would be important.

7 Matt Jabs

Your advice is excellent Fred… my sister recently went through a tough financial situation where she had to borrow from our father. Rather than create a buffer savings account she wanted to repay our father first… I argued and eventually convinced her, but this mindset is very real.

Anna, make SURE you create an emergency savings before repaying your parents, and like Fred says, continue to take their assistance until you find employment… despite the fact that you have your emergency savings.

Thanks Fred.

8 Jenna

I would definitely ditch the internet. Libraries offer free internet services and there are other places like coffee shops too. Best of luck! I hope you keep Matt posted on your future success!

9 Chad

Assuming you are able to get unemployment, find out how long it will last. If you can get several months worth, it may be worthwhile to use some of the money to finish that last semester of school and get the degree. At that point you’d have a better chance of finding a job.

10 Paul


I think all the advice here is spot on, and if you follow it you will be well on your way to turning things around.
I don’t have anything to add, except to say that there is no shame in accepting support from others, and to keep up the efforts you are making to improve your situation. Eliminating those two debts will make a big impact not only on paper, but psychologically as well.
Know that there are people praying for you, thinking of you and rooting for you. I have a feeling in the future, Matt will be publishing a letter from you entitled ‘Success Story’
Best of luck.

11 Matt

I am also in the Chex systems. I know you mentioned that you won’t do 2nd chance accounts, but wells fargo has a good one, I think. You might also want consider a Visa debit card that you can reload. Wal-Mart offers some good ones. I have a friend at work that doesn’t have a bank account either, and that’s what he uses.
I feel you on the student loans. I am a little behind on my own (MBA in Accounting/Finance). Once you get out of default, consider applying for IBR (income based repayment). You can’t apply if you’re in default. IBR will set your monthly rate based on your current finances, so that they are not too high and fluctuates with your income. If you lose your income, you loans are put on hold and you’re not penalized like you have been.
I have FAR more credit card debt than you (Thanks to ex-wife). I have settled for less than I owe on several cards. However, BE AWARE that you WILL pay taxes on them. I had to amend my taxes to include this “additional income” in the form of canceled debt. I lost my entire state refund and then some, and nearly half of my federal. I only had 2k of canceled debt. The accountant in me suggests you pay off as much of your credit card debt as you can and keep $1,000 for an emergency fund, not $4k.. 80/20 rule – 80% of your “emergencies” will be under $1,000. Only when the dust settles do you build your nest egg to 3-6 months of expenses.
I felt as hopeless as you. At rock bottom, I had $42k of credit card and about the same in student loans, plus a car loan. (I am 33 – also have to move back home after 15 years of being on my own. That SUCKS!). Through Debt Resolution Bailout, I am settling 40% of credit debt without the tax penalty. Been working with them for 7 months now. I’m hoping to be out of credit card debt in 8 months! Student loans will be caught up in a paycheck or 2. I know I have an MBA, but I only make about $15/hour. I’m working on the job thing myself. You might want to use a little ($100 or less) on Through them you can fax your resume to a lot of different companies and maybe find a job fast. I’ve got a lot more tricks up my sleeve, but I don’t want my comment to be longer than Matt’s post! Please keep him posted. Others, including myself, are interested in how you are doing. There is hope still!

12 Matt Jabs

Keep up the good work Matt, sometimes debt reduction goes slow… but keeping at it is the only way any of us will be free.

13 Rodney Bashore

Wonderful advice Matt. I would just like to add a couple of thoughts when dealing with any debt companies during settlement negotiations. The first thought I have is to never give them your personal bank information. They will ask for it, but refuse. If you give them any information they will drain your account at the first chance they can get. My second thought is to always get the agreement in writing, stating paid in full, before you give them any money. Keep this agreement for life some place safe. They will conveniently forget about the agreement down the road and you will have to prove the agreement took place. The last thought that I would like to add is; send them a cashiers check after you have received your paid in full agreement. A cashiers check will allow you to track it, and you will know when they have cashed it. Then staple your tear off from the check and attach it to your agreement. Anna, Asking for advice instead of repeating the same mistakes reflects well of you. You are ready for change and will have it. Matt stated that your emergency fund is for emergencies only, Never forget that. It’s hard to dig yourself out of a hole, but if you can do it!

14 Tamara

Your advice to Anna is only genius. To be able to straighten out so many financial problems with such a small amount of money is very smart.

I will be looking for you next blog post.


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