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.