How To Spend My Tax Return

Feb 07 2011

How To Spend My Tax Return – Anna Answered

Posted by Aaron Cruz in Finance Online

Tags: Anna, Anna Answered | No Comments »

In debt but receiving a tax refund

DFA reader Anna wrote:

Income

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

Debt

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.

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 ING savings account and deposit the $4,000 to establish your emergency fund (use this link for an ING 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.

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