Category Archives: Credit Card debt

interest rates, changes of terms, and cost of credit card debt

The Impact of Credit Report Collection Accounts

When applying for a mortgage, everyone knows that your credit report rating is of great importance. If you can lower the interest rate the lender charges you, you can save thousands of dollars each year on hundreds of thousands of dollars borrowed for your home purchase. In addition, as most of us know, the credit report will show your payment history on cars (and other installment loans), and it will also show your credit history on credit cards (and other revolving accounts).

Many do not know that the credit report also picks up the docket from local courts, and reports any judgments that have been filed against you. In addition, one more matter is reported by the Bureau, which is of great significance to those who have borrowed money: their accounts which are in collection.

“In collection” simply means a collection agent is attempting to collect on the alleged debt. This does not mean the debt is owed, or that a judgment has been entered by a court allowing for garnishment of wages. It simply means that the collector is trying to collect money on a debt he says is owed.

You may be “in collections” and not even know it. Nevertheless the rest of the world knows, and the obvious inference is that you’re unwilling or unable to pay your debts. This little known secret of the credit reporting agencies can have great significance when you’re attempting to secure an apartment or job, get a loan, or even get utilities turned on.

Surprisingly, statistics show that 35% of Americans currently have unpaid bills reported to collection agencies, according to an Urban Institute study conducted in the last few months. And it’s not just hospital bills, auto loans, and student loans. Even past due gym membership fees or unpaid cell phone contracts can end up with a collection agency.

And the collectors are always ready. The Federal Reserve Philadelphia bank branch estimate that in 2013 the collections industry employed 140,000 workers, to recover $50 billion of debt that year. Oddly enough, delinquent debt is overwhelmingly concentrated in southern and western states. Texas cities have a large share of their populations reported to collection agencies: Dallas (43%), El Paso (44%), Houston (44%), McAllen (52%), and San Antonio (45%). And the blight is not limited just to Texas. Almost half of Las Vegas residents have debt in collections, and other southern cities a large number of their people facing debt collectors: Orlando, Jacksonville, and Memphis, among others. But some cities fare better, with some demographic populations have low collection rates, just around 20% for Minneapolis, Boston, Honolulu and San Jose (California).

How do these differences come about? Some say this can be blamed on income disparities, and a stagnant economy. US Labor Department statistics show wages have barely kept up with inflation during the five-year recovery starting in 2009, and after-tax income fell for the bottom 20% of earners during that same period.

So what is the morale of the story? The wise consumer will make sure his debts stay out of collection. This practice will reap rich rewards when it comes time to buy a home or car, secure a job or apartment, or secure the lowest loan rates.

Chapter 13 vs Debt Settlement: Which is More Cost-Effective?

 Chapter 13 versus Debt Settlement: Which is More

Cost-effective?

Often  clients are forced with a choice between Chapter 13 bankruptcy or debt settlement, because they cannot qualify for a Chapter 7 bankruptcy. This can happen for several reasons: possession of assets which prohibit them from filing a Chapter 7, or income that is too high to qualify for a Chapter 7 bankruptcy.

Of course, if you have cash assets, creditors prefer debt settlement, as “cash is king”.  Often this method is best in the eyes of both creditors and debtors.

In counseling clients about this dilemma, I like to break it down to one simple question: which is more expensive?  In answering this question we can come up with a simplified understanding of comparative benefit, and decide which approach should be taken.

To begin, it’s useful to understand that debt is always settled as a percentage of a face amount. Whether you owe $5,000 or $15,000, to the creditor it’s all the same: “What percentage can I collect?”  Creditors generally have a huge number of accounts, and their main goal is to see how much of the money owed they will be able to recover.

Generally, a 40% to 60% settlement is quite a good deal for the debtor. A settlement at 80% to 90% of the original debt is often more than the borrower feels he can afford. Obviously a 80% to 90% settlement is optimal for the creditor, preferably paid immediately.

For ease of the discussion, I’ll discuss this in terms of percentages, not dollars. In other words, when we talk about debt settlement versus Chapter 13 bankruptcy the primary question I wish to address for my client is: “what percentage of the debt must be repaid?”

In a Chapter 13 bankruptcy, where the borrower has an annual household income of $80,000-$90,000, it is most likely that he will have to pay back 100% of the debt. Because there are trustee fees and legal fees attached to the proceeding, it is not uncommon that he would pay 115% of the debt. The advantage to filing a Chapter 13 is that you’re given a period of five years to pay off your debts, under a payment plan.

On the other hand, debt settlement may confer a clear advantage, especially if it can be accomplished at 2/3 of the debt (including attorney fees). However, in debt settlement taxes must be considered. Assuming the borrower owes another 13% of the debt in taxes (which will have to be paid within the next year) this means the debt settlement would be the least expensive option. Specifically, that debt settlement would cost the borrower 80% of the original amount owed, after consideration of taxes in calculating the total cost.

In comparing Chapter 13, (which has a total cost of 115%), versus the total cost of debt settlement at 80%, it is clear there is a difference. Specifically, that difference is 35%. In other words, the consumer can often save more than a third of the debt amount, simply by doing debt settlement instead of Chapter 13 bankruptcy.

So looking at the cost-benefit analysis makes it very clear that debt settlement can often be less expensive for the borrower. However, debt settlement is not a good alternative  when the borrower doesn’t have the cash to settle in full at the time the deal is struck. For that reason, Chapter 13 bankruptcy can be an excellent way to arrange over many months the settlement of debt, allowing five years of payments to liquidate the entire debt interest-free, and without the danger of collection lawsuits.

Which one is right for you?  The best advice I can give to you: give us a call at (317) 266-8888. We are happy to answer your questions, and give you sound advice on what can become a very complex matter if not analyzed thoroughly.

Budgeting

BUDGETING
The first step in budgeting is to create a spending plan. Using a spreadsheet program, such as Excel, is an excellent way to plan expenses and spending. It allows “what if” analysis; by simply changing the expense number, we can see immediately the impact on our finances.

Take a good hard look at your “discretionary” expenses. These are the only expenses which can be cut without strong lifestyle changes. The following expenses are easy to adjust: excess tax withholding, life insurance, 401(k) deductions which are not mandatory, clubs and recreational activities, cable TV expense, dining out, gambling, etc…

We must be careful to distinguish needs and wants. We all want many things, but need far less. Keep in mind that Money = Time, and Time = Money. The more you ‘want’, the more you will spend. The more you spend, the more time you must use to acquire, maintain, and pay for possessions.

Impulse buyers have more bills than they can pay, and have to spend more and more time working, just to stay afloat financially. They have little time for themselves or family. Health and relationships break down, just as possessions do if they are not maintained. The impulse buyer ends up tired and broke.

Don’t get distracted from your spending plan by retirement concerns or worries about health, rising expenses, changes in family situations, etc. A good plan is a good plan, no matter whatever else happens.

Realize that a spending plan is ultimately what you want, and what would be best for you and your finances. As we live in an imperfect world, it may take a while to get reality to match your plan. The plan can also be adjusted, as it merely establishes a target rate for spending. When in doubt, estimate income low, and expenses high.

How can we budget for variable expenses such as utilities? Use an average from the last year, and don’t forget to establish an emergency fund with a spending plan that allows a little bit of savings each month.

If you want a free excel budget spreadsheet, please do not hesitate to contact us. Take the time to create a budget…you’ll end up worrying less.

Recently I have posted on my blog a series of 6 videos which address the mechanics of budgeting. Interested? Watch the following: Planning part 1. If you feel that it’s helpful to you, go on to the next: Planning part 2. After, go on to part 3, part 4, part 5, and part 6.

Credit Reports (Part 2)

This is my second post on credit reporting, to explain how it works.  The attached clip explains “how it used to be”, in contrast to the numbers oriented style in vogue for the last 2 decades.  Often we wish:  “Why can’t it be just like it used to be”?  This series will explain how our modern system of credit reporting (and granting loans) started.

In understanding how our system evolved, we have a better understanding of why and how we got to the point where we stand today.

 

 

 

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