How to survive a financial crisis

Your Money

September 23, 2007|By Gregory Karp | Gregory Karp,MORNING CALL IN ALLENTOWN, PA.

Many people who thought they were buying the American dream of homeownership now realize they bought a heap of money stress. That's especially true if they're among the Americans facing mortgage foreclosure after seeing their adjustable-rate loans spike.

A record number of homes entered the foreclosure process in the second quarter, the third consecutive record-breaking quarter, according to the most recent figures from the Mortgage Bankers Association.

If you have a mortgage you cannot afford, your objective should be to forestall foreclosure so you can get current on payments, refinance or sell the house before foreclosure. To survive the crisis, take a hard look at the two components of finances - money in and money out.

Here are ideas on weathering a financial crisis - be it threat of foreclosure, a job loss or any number of other money setbacks:

Set spending priorities. Develop a bunker mentality with the money you have. And don't become confused about your bill-paying priorities.

During a crisis, the only things you should pay for are food, shelter, utilities and transportation. Clothing is a necessity, but most people have enough to get by for a while. Child care might be an essential expense so you can earn an income, and you should keep your insurance current.

"People will pay the creditors who scream the loudest when they should be paying the person who has the most power over their lives," said Sally Herigstad, author of Help! I Can't Pay My Bills.

"Some people pay bills that are not high priorities because they got phone calls. Then they don't have money to pay the power bill."

Paying attention to these priorities could put you back on solid ground so you live to fight another day.

Lay it out. List household income and expenses. "That's the step everyone wants to skip," Herigstad said. Just seeing the numbers on paper - even if it paints an ugly picture - might relieve some angst because it removes uncertainty and helps you determine a course of action.

Contact creditors. Get in touch with your mortgage company before you miss a payment. Lenders want to avoid foreclosure because it's costly for them, too. Contact the "work-out" department at the bank and try to modify terms of the loan, whether by lowering the interest rate, obtaining an extension for making payments or converting an adjustable rate to a fixed rate. Open mail, answer the phone and avoid denial.

"Don't just tell them a sad story. Tell them, `This is the situation and this is what I intend to do about it and this is when you can expect to get paid.' They respond pretty well to that, usually," Herigstad said.

Stop saving. Temporarily halt all automatic savings, such as children's college savings or 401(k) and other retirement savings.

Delay credit-card payments. Credit-card bills, medical bills, personal loans and other unsecured creditors are low on the payment priority list. Card collectors will likely yell the loudest during confrontational phone calls. Yes, you owe the money.

But don't let them knock you off your priorities. They will have to wait.

By not paying, you will damage your credit rating, but during a crisis that's not a priority either. Card companies also will tack on late fees and raise your interest rate, but if things get really bad, you'll probably be able to negotiate away those extra charges later.

Cancel services. Cable TV? Gone. Gym membership? Gone. Wireless phone service? Gone. The great thing about most services is you can cancel them and immediately start saving.

Student loans. Seek to put student loans on hardship deferral or forbearance. This will buy you time during which you won't have to make payments. Contact your lender for the paperwork.

Sell stuff. It's time to hold a garage sale or place items on such online auction sites as Craigslist.com and eBay.com.

Get what you're owed. Put effort into collecting on any personal loans and child support. And fix your federal tax withholding on Form W-4. If you'll end up with a tax refund of $2,400 for this year, that's an easy $200 a month that could go toward the mortgage now.

Borrow. You can't borrow your way out of debt in the long term, but tapping your home's equity, getting a personal loan from a credit union or even borrowing on credit cards can be the right solution to get you past a temporary crisis. Avoid payday lenders, however.

Vehicles. Your biggest money hog is probably sitting in the driveway. "People freak out about the cost of gas. The cost of gas is nothing," Herigstad said. Instead, it's payments on a vehicle that kill a household budget.

In many cases, you must have transportation to get to work so you can earn money. But that doesn't mean you need to commute in style. Try to trade down temporarily in the quality of vehicles you own or make do with one car instead of two. "Transportation is the biggest expense that's out of control for a lot of people," Herigstad said.

Work more. Second jobs, overtime pay, side businesses and taking in a roommate are all ways to earn extra cash quickly.

Avoid promises of help. There's no magic in debt consolidation and foreclosure-rescue plans. Be wary.

yourmoney@tribune.com

Gregory Karp writes for The Morning Call in Allentown, Pa.

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