Help Eric improve his debt-income ratio....PLEASE!!!!!

[Eric H.]

Greetings BP Fam,

I have over 250k in debt (credit cards, mortgage, school loan, car loan) and I'm only bringing in about $400/month. I haven't had W2 income in over a year and my wife is working part time. My LLC is approaching its 1st birthday. I’m surviving somehow but of course I look horrible to lending institutions. What is the 1st step you would take to fix this???? Debt settlement agency called suggesting I cancel all of my credit cards and I might be able to get a lower interest rate and/or reduction in principal. Not really sure I believe that. If someone has done it, please chime in. I was thinking I don’t want to lose the credit history associated with those cards. What is worse? Large amounts of unsecured debt or short credit history? In two years will come better tax returns from business and my wife will be settled into her new career. I want to get conventional financing for max 25k. I have the 25% down payment needed. Should I just be patient or can I find a solution within the next six months? Not looking for creative financing options here. Just a way to look better to the banks.

Thanks in advance.

Sincerely,

E. Harris

[Makenzie Kelly]

@Eric H.

Ugh, that must feel very heavy! I think that before you should even think about a bank loan, you may consider cleaning up the mess a little bit. (I say that lovingly...read on)  I would highly recommend listening to Dave Ramsey.  I am not even sure how you are making ends meet with $250K in debt you poor thing!  Dave makes the idea of getting out of debt very simple.  

Baby steps.  1. $1,000 emergency fund, 2. pay off debts smallest to largest (debt snowball) and then 3. Save 3-6 months of living expenses as an emergency fund.  There is more but this gets you started.

Dave recommends getting fully out of debt, paying off your mortgage (eventually), however that is where many investors and Dave part ways.  I will guarantee that many successful investors do not carry heavy loads of personal debt such as CC and car loans, it doesn't make sense. 

If your personal finances are not cleaned up, you are risking bankruptcy by investing in real estate (student loans are not bankrupt-able either).  Do you have any cushion? How will you manage vacancy, emergency repairs etc with no savings/heavy debt load?  I am SO passionate about this subject because I lost 2 houses at the dive of the economy, almost lost my primary and over $100K that I had invested in the properties.   I couldn't work because I was taking care of my husband who was on disability due to an on-duty accident. Life happened to us and  I HATE seeing anyone walking toward that same path.  Can I push you out of the way of the freight train?  I hope so.  

You may find value reading Dave's book "Total Money Makeover" --Heck, I'll buy it and send it to you, just message me your address.  :-)

Also read: "The Millionaire Mind" by Thomas J Stanley... talks about how Millionaires handle money. Little to no personal debt, business debt okay.