Friday, July 26, 2013

Why $26 Million Won't Keep you From Bankruptcy

Anyone that knows me, knows that I have a voracious appetite for sports generally, and football Vince Young and the judicial order to sell his possessions.  Vince Young, as you may recall was passed over by the top team, dropped to the Tennessee Titans, but still slotted well enough that his rookie contract included a guaranteed provision of $26 million.  The average human will not see that kind of earning power in a life time, much less over the course of 5 years.
specifically.  I not only love the gameplay, but the business side of professional sports has always been a fascination.  This week, Tully Corcoran of Fox Sports posted an article in regard to

Yet, in regard to the article, Mr. Young became indebted and sought a short-term loan during the lock-out year a couple years back.  The loan was there to keep other loans afloat until he could again draw on income as a player.  This is where this story becomes relevant to my clients and shows that income and earning potential are only one part of healthy finances.  Mr. Young, in addition to a huge salary, had a huge amount of credit.  He bought homes, cars, vacations, jewelry, etc. and instead of budgeting this in regard to his income, he used credit to enjoy now that which would be paid for later.

The problem with credit, is not the credit itself, but the over use or over leveraging that takes place. Too many borrowers look at the fact that they have so much income, that they can take on the additional $100 payment here or the extra $50 payment here.  Surely, the one account isn't the problem until the final straw that breaks the proverbial camel's back.

Mr. Young had too much credit and when his playing days were finished, as the article states, he will be allowed, after paying back his creditors by auctioning his possessions, to keep about $60,000 or less than two tenths of one percent of what he was guaranteed in his first contract.

So, we must look at the debt to income ratio and determine if you are fiscally sound, or need to back up a little bit on your consumption.  Your home should not exceed 28% of your gross income, but underwriting will allow up to 31%.  If your fully amortized loan payment, meaning your principal, interest, taxes and insurance payment is greater than 31% of your gross income, you have too much house.

Secondly, you need to look at the total debt ratio.  36% is a reasonable amount that can edge toward 43%.  This does not mean that we are adding the principal home loan amounts to minimum card payments, but payments that would actually pay back the loans that you have.  If you are paying on minimums and are sitting at 36%, you may well be closer to 50%. 

If you find that your ratios are this high, you are an illness, car accident, or lay off away from having a court order you to liquidate.  It is time to seek some professional counseling on your debts and see what you can do to not end up like Vince Young.

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