Confessions of a Laid-off Lawyer

Just Your Average Joe Blogging Away His Debt—In One Year or Less

Twelfth Day of Accounting

with 5 comments

Total Black: $109.30

Here’s the Breakdown:

Primary Checking: $12.21
Secondary Checking: $80.64
Savings: $5.50
PayPal Account (Personal): $0.00
PayPal Account (Blog): $0.00
Amazon Payments Account: $0.005
Mutual Funds Account: $0.00

FICO Score 513

Total Red: $270,527.19

Here’s the breakdown:

Credit Card Debt:

Master Card: $4,699.50
Visa: $7,651.50
Visa: $4,000.00
American Express: $2,382.10
Raymour & Flanagan Credit Line: $6,340.68
Saks Fifth Avenue Credit Card: -$0.10

Student Loan Debt:

Federal Stafford Loans: $94,504.20
Private Student Loans: $31,610.26

Back Taxes:

IRS (2007): $0.00
IRS (2008): $27,041.05
IRS (2009): $0.00

NY State (2008): $0.00
NY State (2009): $0.00

Other Loans:

My mother: $72,000.00
My sister: $1,800.00
Auto loan: $18,498.00

Well, there it is.  The good, the bad, and the ugly.  All laid out.  And that’s about as “bad” and as “ugly” as it’s gonna get.  But certainly not as good. 

I finally added in the auto loan.  $18,498.00 worth of debt.  No real reason to hold off just that I had initially hoped that my lender would be a somewhat sizable lending agency such that I’d be able to sync with Bank of America’s My Portfolio software.  That’s not currently possible so I had to manually add it and I’ll have to manually update it.

The good news is that I’ve paid off four of the five tax debts.  The largest is still outstanding, however.  And the amount owed was really transferred to my mother.  Thus what I owe my mother has increased correspondingly.  But my mother isn’t going to impose a tax lien on me or garnish my wages.  Something many debt counselors do not speak about is other sources of funding, like a family member with whom you can enter an agreement to borrow money.  The car dealership agent who worked with me was so understanding, and patient, because she too has had financial difficulties and was telling me about a situation she has where her father took out a loan for her in Louisiana and she pays him each month.

My only concern with this scenario is what is expected of me should my mother not follow through on her end.  I’ve mentioned in prior posts, like Venom and Vitriol, that from 2006 – 2008 I reimbursed my mother $17,600.00—about $4,000.00 more than required.  Although I needed every penny back in those days—especially when the firm shipped me overseas for about five months—it was more important to be able to give back to my mother.  An emotional decision, not a financial one.  And the reality was that my mother didn’t use that additional monthly income to pay down the mortgage she took out—whence came those funds I borrowed.  She acknowledges her own shortcomings with that situation.  My point: I’d rather be able to pay the mortgage directly.  But she’s stated a few times that she’d rather I send the money to her.  The reality, of course, is that but for me and me needing this money, she wouldn’t have borrowed it.  And, of course, the amount listed above does not include the 3% interest rate she has on the line of credit loan on her home.  But if she only makes the minimum payment, which may leave a lot left on the principle, am I on the hook for it—even if she refuses to let me pay additional on it?  Let’s assume I pay her $80,000.00—roughly $6,000.00 more than 3% of $72,000.00, which is only $2,160.00.

Damn—$2,160.00.  Am I understanding this math correctly?  My mother has taken out $72,000.00 and will only owe about $2,160.00 more, not counting any fees, once it’s all paid back.  That’s 3% of 72K.  Whereas I just took out $18,498.00 at 18.9% . . . and I’ll be paying . . . $10,231.80 more—according to the contracts in front of me.  No, that’s not correct.  The total amount I will owe after sixty months—assuming I take that long to pay this loan back—is $28,729.80.  That’s $10,231.80 more in interest.  That 10K number is 35% of the 28K number.  So how is my APR only 18.9%.  Truth in Lending Act?  How about a Truth in Calculating Act!  Why is this so complicated to understand?  There’s probably an amount calculated annually (hence the A in APR) that is then totaled, APR-ed (for lack of a better term), and then the total balance is reset for year two.  Same process for years three, four, and five.

At any rate, I’m unclear how much interest my mother will have to pay on a $72,000 loan—actually the total amount of the line of credit is larger than that since PNC Bank required her to pay off a $9,000.00 credit card.  But let’s assume it’s not more than the $6,000.00 I cited above.  And let’s assume she doesn’t act as a funnel of funds from me through her to that credit line but instead siphons a bit off here and there as my payments come through.  Aside: she cashed the check I sent, mentioned back in Supplemental Day of Accounting, though she did not want to at first.  So, what do I do if she doesn’t take all of the money I send and allocate it to the loan?  Does she assume that liability?  Remember I’ve assumed, for purposes of this hypothetical discussion, that I’ve paid her more than required to cover interest.  I’ll feel responsible for it, whether that’s proper or not.

In any business transaction if the borrower pays and the lender doesn’t use the funds to pay down the borrowed amount, that’s on the lender, not the borrower.  But in personal and familial situations, it’s a bit more problematic.  Family members, and probably in rarer cases friends, can truly help each other by being lending resources.  But they really need to not act as the funnel, but instead step out-of-the-way as much as possible—assuming on-time payments are made.  I’d much rather add in the amount of my mother’s line of credit balance into Bank of America’s My Portfolio software and sync it everyday to get an accurate amount.  For my sanity and my mother’s.  An extra line of defense, if you will.  It’s important because after all this time, I’m not even sure how I arrived at the number of $40,000.00—the amount first established back in Day of Accounting.

I may need to get two part-time jobs actually—one during the week and another during the weekends!  I’m no stranger to hard work.  I’d rather get involved in some sort of smarter work rather than harder work, but with limited capital, it’s hard to follow the philosophy of Robert T. Kiyosaki in Rich Dad, Poor Dad.  Kiyosaki notes in his book that the mistake many working class and middle class people make is to assume that one must work harder—work more—in order to increase income.  But what I noticed in his book is that the means of generating cash flow are almost exclusively the province of the rich: real estate, patents, stocks, and so on.  It needn’t be.  I suppose I could start baking some goods and selling them in order to generate additional income.  But that’s a very time-consuming, labor-intensive means.

As the one-year marker approaches it may be time to return to the drawing board and rethink my efforts.  Clearly my mother is one creative means of procuring financing—to pay down my debts.  But that too is a net-loss because it will siphon more away over time.

This is definitely something I need to think further about.  I may have to re-start, and finally finish, Rich Dad, Poor Dad.  That ADHD never allowed me to finish it.  Well . . . that and everything that’s happened over the past few months.

5 Responses

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  1. 1. Why can’t you simply get the information from a payment slip for the Home Equity Loan? It’ll have the payment address, the monthly payment amount, and the account number. You can set up a bill-pay or just mail the payment to the bank yourself and avoid all the other potential problems. I’m sure you can convince your mother that it would be easier for you–that she can then totally disregard that loan, etc.

    2. I’m unclear where you are having problems understanding the total interest owed if you pay the minimum over the life of the loan. APR means Annual Percentage Rate. Usually, if you look at mortgages and other loans, your APR is a bit higher than the normal “advertised rate” due to compounding.

    But, to make it simple, just assume you have a $100 loan and the rate is 5%. 5% of the $100 is $5, which would be the total interest for YEAR ONE if you paid no principal. Because you WOULD be paying some principal, maybe you’d end up only paying a total of $4.50 in interest the first year. Who knows what you balance would be at the beginning of year two, but let’s say it would now be $90 after a) your payments and b) the $4.50 in interest.

    Now you begin again with a 5% loan on $90 for year two and repeat the process… so of course you’re going to pay more than 5% over the life of the loan.

    T

    T-Bag

    July 13, 2010 at 07:51

  2. T: come on, man? How am I going to get a copy of the payment slip when I’m miles away from my mother’s mailbox? And even if I could get it, I’d have to create an online profile—which requires personal data, etc.

    As for the APR . . . yeah. It’s not simple to figure out.

    Laid-off Lawyer

    July 13, 2010 at 10:14

  3. No, I meant just ASK her for the info. Information CAN be transmitted via voice, you know 🙂

    T

    T-Bag

    July 13, 2010 at 12:04

  4. That’s the point though. She doesn’t want to give me that information. Well, I mean she’d tell me the total, of course. But she won’t let me pay it directly.

    Laid-off Lawyer

    July 14, 2010 at 07:23

  5. Oh, you didn’t say she wouldn’t let you pay it directly, just that she’d ‘rather’ you send the money to her.

    In that case, it might be easiest for you to simply take it as a given that you’re going to pay the minimum for the 30 year term and you’re finished at the end of that 30 years, whether she applied the money to that mortgage or not.

    Otherwise, you’d have to keep your own spreadsheet to try to determine when you were “paid in full.”

    By far the easiest thing would be for you to convince her to allow you to pay it directly. However, don’t forget that even if you DID pay it directly, you mom can draw on that line whenever she wants to and the balance, and the monthly payment, would rise (you DID say Home Equity Line of Credit, not Home Equity Loan, right?).

    Another thing you could do is simply take the amount you borrowed and the total amount of interest for the year figured on the total amount at the beginning of the year. At the end of the year you subtract what you paid from that amount and then use that new total as the beginning of the next year * the rate and use that amount for the second year, and on and on. That way, you will be paying a bit more (since you’re not factoring that you’ll be paying the interest on a lesser principal as you progress through the year), but consider that a “little extra” going to your mom for the favor of doing this.

    In other words:

    New Loan $100,000 APR 5% Your Monthly PYMT: $600

    Figure Year one at $105,000 (the 100k * 1.05) – your $7200 in PYMTs and to start Year two you have a figure of $97,800 * 1.05…

    You’d rather overpay her a little than underpay her, wouldn’t you?

    T

    T-Bag

    July 14, 2010 at 12:39


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