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Sunday, May 24, 2020

What to do if you haven't enough retirement savings

How to Receive More in Social Security Retirement Benefits

Planning on retiring and applying for social security as soon as you are qualified?  Well, maybe you shouldn't, particularly if are in good health, believe you will live for a few decades after you retire, and have little or nothing saved for retirement.  One of the best ways you can make up for not having enough savings in retirement is to delay applying for social security benefits.  If you do this, your monthly check will increase significantly.

Almost half of Americans have little or no savings at retirement age.  There is a way to increase your monthly income, and that is to delay applying for social security as long as you possibly can to increase your earnings.

How much more can you receive in benefits by delaying retirement ?  You can receive about 7 percent more in benefits if you receive your first social security check at the age of 70 rather than 65.

For example, a person retiring at the age of 65 who qualifies to receive $1,613.00 per month in social security benefits would receive $2,214.00 per month if she waited until she was 70 to apply for social security.  That is $601.00 more per month or $7,212.00 per year; however, in her case the financial benefit doesn't come about for 15 years.

Using the numbers from the paragraph above, the table below compares what this hypothetical person would receive in social security benefits if she retired at age 65 and at age 70:

Situation 1:

Retires at 65 and dies at 80 (15 years):  $290,340 (1613 x 180 SS checks)
Retires at 70 and dies at 80 (10 years):  $265,680 (2214 x 120 SS checks)

Difference                            - $  24,660

Result:  This person does NOT benefit by retiring later since she missed out on receiving $24,660 in social security benefits.

Situation 2:

Retires at 65 and dies at 85 (20 years):  $387,120 (1613 x 240 SS checks)
Retires at 70 and dies at 85 (15 years):  $398,120 (2214 x 180 SS checks)

Difference            + $ 11,400

Result:  This person has benefited by retiring later since she has now received $11,400 more in SS benefits by retiring at age 70 rather than age 65

Situation 3:

Retires at 65 and dies at 90 (25 years):  $483,900 (1613 x 300 SS checks)

Retires at 70 and dies at 90 (20 years):  $531,360 (2214 x 240 SS checks)

Difference + $ 47,460

Result:  This person has benefited by retiring later since she has now received $47,460 more in SS benefits by retiring at age 70 rather than age 65

Situation 4:

Retires at 65 and dies at 95 (30 years):  $580,900 (1613 x 360 SS checks)
Retires at 70 and dies at 95 (25 years):  $664,200 (2214 x 300 SS checks)

Difference            + $ 83,520

The above illustration shows how retiring at age 70 rather than at age 65 can make up for the failure to save enough for retirement.  It is estimated that about 70 percent of Americans have little or nothing saved for retirement and will depend heavily on social security during their retirement years. Retiring later could make a significant financial difference.

Consider retiring later if you (1) have no other source of retirement income; (2) have little or nothing saved for retirement; and (3) are in good health and think you will live a long time beyond your age of retirement.

Use the information contained in the statement the Social Security Administration sends you each year to determine if retiring later would be financially beneficial to you.  You can also visit the SSA website at www.ssa.gov.   You can find a calculator at their website that you can use to determine your benefits at different retirement ages. 

We should all do this if we can, since social security is going to be in deep trouble by the 2040's if Congress doesn't take action soon.  Unfortunately, too many Americans are in poor health by the time they reach 62, and many take the early retirement, which results in a monthly check significantly less than if they had waited until 65.

Wednesday, May 20, 2020

Negotiating Credit Card Debt / Getting a Credit Card Company to Settle


Because credit card debt is the most common type of negotiated debt, we have devoted this page to the topic of negotiating with credit card companies.

Credit card companies are not really regulated by federal law, other than they have the duty to disclose the terms and conditions to you when you apply for their card, and they have a duty to investigate and fix any billing errors that occur on your account within 60 days.  But other than this, Congress has given them almost a free hand to do what they please. 

For this reason, you can forget the warm, fuzzy caring sentiment that credit card companies put forth in their advertising.  Think about it -- they often charge people 24% or more in interest -- your local loan shark has more scruples!

How bad do they treat their customers?  Stories in the press tell of interest rate hikes from 7% to 24% for paying late once; refusing to remove late charges when customers pay late because of emergency medical conditions, and so on.  In fact, most credit card companies adopt policies that encourage you to pay late or go over your limit so they can tack on added fees and raise your interest rate.  These fees bring in extra millions each year, making the credit card business one of the most profitable around, so they certainly don't want to negotiate with you to lower them or settle your account for less than what you owe.  Dozens of class action lawsuits have been filed against all of the major credit card companies for their unscrupulous activities.  They have been forced to pay millions in restitution.

Keep in mind who you are dealing with before you begin negotiating with a credit card company.  Your sob stories are only going to fall on deaf ears, so don't waste your time using them as a reason for bargaining.  Remember, as long as you manage to send in your payments on time month after month, they are not interested in settling with you.  You can tell them you and your family now lives in an alley behind a supermarket because you can't pay your rent and make your credit card payments, and they still wouldn't care.  This is not an exaggeration.  Don't let the recent advertisements after the COVID epidemic fool you -- the ads where they wish you and your family well, and some of them are even letting their customers forego monthly payments.  But that forbearance is only going to last so long, and then they're going to want their money.

When you are negotiating with a credit card company, you must remember the golden rule:  An unsecured creditor will always chose the option that brings in the most amount of money with the least amount of risk and cost. 

This means that if you miss a few payments, they have figured out that the best option for them is to lower your interest rates and perhaps the amount you pay each month in order to keep you paying for as long as possible.  If you have fallen behind, chances are they will enroll you in their hardship program if you contact them today.

If you default on the account altogether, whether to sue you or write off the account is purely economic.  They will choose the option that brings them the most money with the least amount of risk and cost.  They are not interested in justice or revenge or what is right and wrong.  For example, thieves who have been captured on store surveillance systems using stolen credit cards are caught and identified by the police.  The credit card companies, from whom these thieves have stolen thousands of dollars, will not prosecute even though they would likely win in court.  Why don't they prosecute? -- Because it costs too much.  A more cost-effective option for them is to write off the theft as a loss and recover their money by raising the interest rates and fees they charge all of their customers.

Some of the big credit card banks automatically write off debt when they receive notice from a bankruptcy court that a customer has filed Chapter 7 bankruptcy.  They don't even bother to put up a fight, even if the amount owed them is rather large, because they know from experience they will likely get nothing since it is unsecured debt.  Again, experience has taught them that the best option for them is to write off the debt as a loss and recover their money by raising the interest rates and fees they charge all of their customers.

A recent trend in the credit card industry is to NOT lower the interest rates of those who have signed-up with a credit counseling service.  Why?  Because they figured out that many of the people who signed up for credit counseling were doing so just to get a lower interest rate.  Now, they often balk at a lower rate or demand proof that the participant proves that he has real debt problems before agreeing to new terms.  In addition, they once allowed credit counseling services to keep 15% of what they collected; however, they decided it was costing them too much, so they lowered it to 8%.  Again, credit card companies have done this because they think it is the most cost-effective option for them.


How do you get a credit card company to settle?                         

If you tell them you're struggling with debt, but you haven't missed a payment and always pay on time, then they will probably not listen to you.  Experience has taught them that people like you always manage to pay them.  Why should they give up such a good deal?  You're a cash cow to them.  They couldn't care less about your child who needs a chemotherapy treatment.  As long as you keep sending in payments, they won't bargain with you.

If you tell them you're struggling with too much debt and you always pay just the minimum, or you have missed a few payments over the past few months, a credit card company might lower your interest rate, but they probably won't settle with you for a reduced amount.  They know from experience that people who just pay the minimums or miss payments are at a very high risk of default and bankruptcy, so they are willing to be more flexible in this situation.

If you want a reduced settlement, you're going to have to use the word "bankruptcy" when you negotiate with them, and you're going to have to convince them that the threat of bankruptcy is real.   If they believe that you do indeed have one foot in the bankruptcy door, they will negotiate.  They would be fools not to.

This doesn't mean that you should contact them right now and state boldly, "If you don't agree to my terms, I'm going to file bankruptcy and you will lose out completely."  That isn't the way to approach them for two reasons: (1) they receive such threats a thousand times a day and know that most of them are bluffs; and (2) creditors don't respond well to threats.

A better approach would be to use logic and reason.  This will require doing some research.  Find out if you can file bankruptcy, and if so, which type can you file.  Also, explore the exemptions available to you under both federal and state laws.  If you don't want to do this, you might be able to take advantage of a free bankruptcy consultation that many attorneys offer to potential clients.  Specifically, you want the bankruptcy attorney to tell you if you are a good candidate for Chapter 7 bankruptcy and whether or not your credit card debt would be completely discharged if you filed Chapter 7.

After you have this information, figure out how much you can afford to pay your unsecured creditors.  Then approach the creditor politely and professionally and say to them, basically: 

"I am in over my head in debt and I can't take it anymore.  I have begun researching the possibility of filing bankruptcy.  I have already consulted a bankruptcy attorney and he has advised me that my best option would be to file under Chapter 7 so that my unsecured debts would be discharged.  Even though I could have my credit card debt discharged, I don't want to file bankruptcy.   I want to find out if I can work out an arrangement with my creditors to pay off my debts in one lump sum with the money I have available. I owe X to creditor 1 and X to creditor 2 [and so on].  I need all of my creditors to agree to this settlement in order for it to work.  I have already liquidated my assets by selling my car and buying an older, used one to use to get to work in.  I also sold other personal property and managed to get $10,000 for it.  The problem is that I have a total of $23,000 in debt, but only have $12,000 in cash. I have nothing left to sell except for the necessities of life.  I want to divide up what I have among all of my creditors, giving each one a proportional share.  If I can't get all of my creditors to agree, I will probably have to file bankruptcy.  I don't want to do this and I know that if I do you will likely get nothing. According to my calculations, if I divided up the $12,000 that I do have among my ten creditors, you would receive X which is _____% of what I owe you.  I could send you a check in a week if I can get everyone to agree to the settlement.  I know I owe you $________ and it isn't right for me to not pay all of it, but I just can't pay it and I'm sorry.  I figured that giving my creditors all that I have is better than giving them nothing, right?  What I need to know from you is whether or not your company would be willing to accept a reduced settlement as payment in full.  If you can, I can send you a certified check once all my creditors agree to the settlement."

Note that the debtor above has politely and passively threatened the creditor by telling him that:  (1) he has already liquidated his non-exempt assets (so there's nothing to seize) except for his wages; (2) this debtor is aware that he can quickly file bankruptcy to stop a wage garnishment if it comes to that, so the creditor would be wasting his time with any plans for a lawsuit; and (3) that he isn't bluffing since he seems to have a general knowledge of bankruptcy laws, exemptions, automatic stays, and has consulted with a bankruptcy attorney.

Most importantly, the debtor managed to state twice that he could get the creditor a check in a week.  Any creditor faced with this situation would want to get his hands on that check as soon as possible. So, this motivates them to agree to the settlement.  To save face, they might say something like, "Yes, we agree to this settlement provided that we receive your certified check in five days."

Negotiating with Debt Collectors


Although it is almost always better to avoid debt collectors in the first place by working out some sort of agreement with the original creditor, you have a negotiation advantage once the debt has been turned over to a collection agency.

Of course, this doesn't mean that a debt collector will not threaten to sue you.  Many debt collectors will say anything to get you to pay your debt, even if it is illegal.  They don't care if you borrow it from a relative, pay them instead of your mortgage, or pawn your wedding ring. They know that the odds are very high that they won't collect anything, so they try to intimidate you with threats and bullying in order to try and scare you into paying the debt as quickly as possible.  But consider the following before letting a debt collector intimidate you:

(1)  If the creditor is willing and able to sue you they will turn your account directly over to a collection attorney and bypass the collection agency altogether.  Turning an account over to an attorney does not mean that they will sue you; it only means that your risk of being sued is higher;

(2)  The fact that the debt was turned over to a debt collector means that there is a good chance you will never be sued over it.  This is particularly true if the amount in question is less than $1,000.  

(3)  Creditors do not sue debtors when they don't think that they can recover what are due them, all collection costs and attorneys fees.

Consider the above when deciding how to negotiate with a debt collector.  Do you have assets that can be seized?  Can your wages be garnished?  If you were the creditor in this situation, would you sue you?

In most situations, when a debt is turned over to a collection agency, you will begin to receive phone calls and collection letters for a two or three month period.  If you haven't persuaded you to pay or work out some sort of agreement by then, a decision will be made as to what to do with your account.  It will either be turned over to a collection attorney or it will be written off by the original creditor as noncollectable.

The best indication that they are about to give up collecting the debt is when you receive a letter offering   to accept 70% of what you owe as payment in full.  This is, by far, your best opportunity to negotiate the debt down to 50% or even as low as 25% since you know that they've given up on collecting the debt and are about to write it off as a complete loss.  At this point, if you offer them 20%, they would likely accept it.

Tips on dealing with debt collectors:


Don't let them scare or intimidate you.  Don't let a debt collector's threats scare you in to missing a mortgage or auto payment in order to send money to the debt collector.  If you can't pay the debt, then you can't pay the debt.  Don't go hungry or forego paying secured debt in order to send the collector money.  If they sue you, then they sue you.  If they get a judgment against you, then you will deal with that when it happens, but don't let them intimidate you into sending them money that you don't have to send them. 

Don't run and hide.  When you are contacted by a collector, face the problem head on.  If you can't pay the debt, then tell the collector that you can't pay and why.  If you can afford to send in X amount each month, then tell the collector that.  Any agreements reached over the phone should be followed up in writing, preferably sent to the collection agency by certified mail, return receipt requested.  Do this in order to protect yourself legally.   You can spend all day stressed out, jumping whenever the phone rings, or you can deal with the problem.  If you deal with it, they will stop phoning you.  They might just sue you!  So face them directly and work out an agreement.

When you are contacted by a debt collector, telephone them and offer to pay them X each month or tell them you can't afford to pay anything or perhaps offer them a reduced lump sum payment. Of course, at first, they will refuse to agree to anything other than 100% payment in full as quickly as possible.  If you can pay it, then do so, but if you can't, you should continue negotiating with them.  Any agreements you reach over the phone should be summarized in writing and sent to them certified mail, return receipt requested.  You need to put the agreement in writing in order to protect your rights. 

Adopt a professional attitude.  Shouting matches with the collector are counter-productive.  Making silly excuses for not paying the debt are also a waste of time.  If you legitimately owe the debt, don't deny that you do or make up excuses.  You didn't pay what you legitimately owe and now it's time to deal with the problem as a mature adult. 

The best way to deal with a collector is to adopt a professional attitude (behave as you would expect an attorney representing you would behave).  Your goal is to work out a resolution, not to insult one another.  Therefore, don't let the collector upset you.  Speak calmly and professionally to the collector and don't let him bait you. No matter what he says to you over the phone, even if you find it insulting or threatening, you will remain calm and businesslike.  For example:

Collector:  "Mrs. Jones, if we don't receive payment from you by the first of next month, this account is going to be turned over to an attorney for litigation.  You are going to be asked to pay thousands in attorney's fees and court costs in addition to the amount you owe.  Is this what you want?" 

Debtor:  "I'm sorry to hear that.  I wish I could pay, but I just can't.  I have cut back my expenses as much as I can and I simply can't find the money to send you a lump sum payment.  Could we work out some sort of payment agreement today?  I can send you $25.00 a month.  A few months from now, I might be able to send you as much as $50.00."

Collector:  "No, Mrs. Jones!  I need payment in full from you by next month or we're going to have to file suit.  Couldn't you borrow it from a relative?"

Debtor: "No, I'm sorry, but I just can't.  I have already borrowed a significant amount of money from my relatives just to pay my rent and living expenses these past six months.  I can't borrow anymore.  In fact, I'm thinking about filing bankruptcy because I just see no other way out.  I'm going to have to discuss my options with a bankruptcy attorney next week, particularly since you have informed me that I might be sued very shortly.  I'm going to have to take steps to protect what few assets I do have.  Are you sure there isn't a way we could reach some sort of agreement today that would make it easier on both of us?  I really don't want to file bankruptcy and I know this creditor doesn't want to go to the expense of filing suit."

Notice how the debtor has remained calm and managed to get in the one word that all collectors (and creditors) don't want to hear -- BANKRUPTCY.  The collector knows that once a debtor files bankruptcy all collection activities are stopped by court order and a suit cannot be filed.  If the debtor is insolvent, the amount due will likely be discharged in the bankruptcy.  Mrs. Jones has calmly threatened him back -- with bankruptcy -- and has put the ball back in the collector's court.  She didn't let him intimidate her.  Now perhaps, he will be willing to work out some sort of payment plan with her, and Mrs. Jones can avoid a lawsuit, possible wage garnishments and property seizures without filing bankruptcy.


Negotiating Your Debt With Unsecured Creditors (Credit Card Companies)


Before considering defaulting on your secured debt, such as credit card debt, you should do the following:                                      

Step 1.  Look at the world from the creditor's point of view.  Suppose your boss came to you on payday and said that he couldn't pay you the $10,000 in sales commissions you had earned because he used the money to buy himself a new yacht.  He asks you to accept this fact, not complain about it, and to forgive him.  Would you accept not getting paid?  Of course not!  You expect to get paid for your labor and you expect to get paid on payday.  You made an agreement with your employer when you began working for him and you expect him to hold up to his end of the agreement.

Suppose your boss continues to refuse to pay you the $10,000 sales commission. You finally get fed up with him and decide to hire an attorney to help you get your money.  The attorney tells you his fee is $2,500 and you must pay it regardless of whether or not you win the suit and are able to recover collection costs from the defendant.  He also tells you that your employer will likely put up a defense and contest owing you money and that this will drag the lawsuit on for at least 16 months.  In any event, your attorney tells you that it will be at least two years before you see a dime, and that's only if you win. 

Are you willing to go ahead with the suit?  Probably so, and not just because you're angry or need the money for living expenses, but because your attorney told you that there is a very high chance that you will win.  You will have to wait a bit for your money, but eventually, you will get justice.  So you tell your attorney to go ahead and file the suit.  Your attorney sues your former employer for the $10,000 sales commission plus all costs of collection.

When your employer receives your petition, he turns it over to the legal department.  The company attorney advises your employer to settle with you because they don't have a leg to stand on.  You will most certainly win the suit if it goes to trial.  So the company attorney cuts you a check and pays your attorney's fees and all court costs.  End of story.

But suppose something else happens when you file suit.  Suppose your employer contacts your attorney and tells him that the company is insolvent and about to file bankruptcy.  He offers you a settlement of $7,500.  Your attorney tells you that the company is filing Chapter 13 bankruptcy and the $10,000 due you will probably never be paid if this happens.  Even if you were to get lucky and get something, at most, it would be about 30% of what is due you and that doesn't include your collection costs.  And if you do collect, it will be two or three years from now. 

Do you accept the deal?  Yes, you do if you're smart.  Of course, you might counter offer with $8,000 or maybe $8,500 to try and get as much as you possibly can from your employer, but if the employer won't budge, you will eventually accept the $7,500 as payment in full and write the loss off on your income taxes.   You would be a tremendous fool not to get what you can at this point in time.

Your creditors think in much the same way that you do despite the fact that they are big organizations that rake in millions every year.  What is the only difference? They aren't interested in revenge or justice.  You borrowed money from them and agreed to pay it back.  They are willing to fight to get the money you owe them in much the same way that you would fight to get the sales commissions that your boss owes to you.

Seeing the situation from the creditor's point of view will allow you to negotiate much more effectively with them. Just as the employer for the example above did, you must present your arguments in terms of what is best FOR THEM and not you.   If there is one thing you must remember when negotiating with creditors, it is the following:   An unsecured creditor will always choose the option that brings in the most amount of money with the least amount of cost and risk. 

Using this rule as a guide, think of what a creditor would due in the following situations:

Situation 1:  Joe Smith owes $1,438.56 on his credit card.  He defaults when he loses his job and is unable to continue paying on the account.  Will the creditor sue?  No. Litigating this matter would cost at least $2,000 because they will have to hire an attorney in Joe Smith's location to sue him.  Sure, they could sue him and get a judgment for the amount due them, plus all costs of filing suit, but that doesn't mean they will ever collect.  A judgment that isn't collectible is a complete waste of time and is too risky, since they have to pay the attorney's fees regardless of the outcome. 

What is the option that brings this credit card company the most amount of money with the least amount of cost and risk in this situation?  Write off this account as noncollectable and get a tax break and simply recover the loss by raising the interest rates and fees across the board for all customers.  Would they negotiate with Joe for a settlement?  Yes.  If they don't, the debt collection agency certainly will.  Chances are this account will eventually be turned over to a collection agency who will try to collect on it for about six months.  When they're about to give up collecting the debt entirely, they will send Joe a letter offering to accept 70% of the debt as payment in full.  Joe doesn't have to pay 70% because they're about to write off the debt.  He can offer to pay them as little as 25% and also demand that they remove any negative information from his credit report.

Situation 2:  Same facts as above except Joe Smith owes $5,000 to a credit card company.  Will they sue?  Probably, unless they know something about you that prevents them from suing, such as that he is absolutely broke, has no assets and is unemployed.  If someone is broke and has no job he is considered to be "judgment proof".  There is nothing that can be seized, garnished or levied.  If Joe suspected a lawsuit was in the works, all he would have to do is start selling off his assets so that by the time the sheriff arrived at his doorstep, there would be nothing or quickly file bankruptcy.  You cannot attach wages if a person doesn't have a job.  A general rule of thumb is that credit card companies don't go after those they believe are broke and have no assets.   

Situation 3:  Joe Smith has an excellent, secure, decent-paying job.  The only problem is that the IRS is after him for back taxes.  They start seizing his property, including his bank accounts and began garnishing his wages.  Consequently, Joe can't make the payments on his new car.  The Acme Auto Finance Company repossesses his car, sells it for what they can, and plans to come after Joe to collect the deficiency in the amount of $2,500.  Will they sue?  No, they won't.  The IRS is the most powerful debt collector in America.  It can seize just about any property it wants and debt owed to it takes precedence over all other kinds of debt.  All creditors know that it's a waste of time to file suit against someone who is being seriously pursued by the IRS.

Situation 4:  Joe Smith had a nice-paying job for 20 years.  It enabled him to buy a respectable $350,000 home, and for he and his wife to always drive late model luxury cars.  In addition, he has accumulated an enormous amount of personal property and household goods over the years that he thinks has a total value of $300,000.  Despite having a nice income, Joe and his wife could never live within their means.  They always wanted more, and so they have 10 credit cards with credit lines of $15,000 or more per card which they used to buy luxuries:  clothing, art, jewelry, vacations.  They always carried too much credit card debt but somehow managed to keep it under control. 

Suddenly, Joe loses his job and he and his wife begin using the cards to pay for basic items like groceries and take cash advances from one card to make the minimum payments on another.  They continue to do this for 10 months while Joe looks for work.  Finally, the cards are maxed out and Joe doesn't know what to do.  If he contacted the credit card companies and asked for relief, would they give it to him?

No!  If you don't understand why, then you need to go back to the top of this page and reread it.  If you still don't understand why, then pretend like you're a credit card company and Joe owes you $20,000.  Would you negotiate with him for a reduced settlement?  No, you would tell him to start selling off his assets so he can pay you. 

If Joe does not pay this debt, his creditors will turn all accounts with significant amounts over to collection attorneys who will file suit and get a judgment so the creditor can go after his house.  Suing Joe is a low risk proposition for a creditor because he has so much to take.  Only a Chapter 13 would protect Joe and his wife from these creditors once they take legal action.   Filing Chapter 7 bankruptcy would result in much of Joe's property being liquidated to pay off creditors. 

When would Joe's unsecured creditors negotiate with him?  After he and his wife have sold all of their property except for those items needed to live day-to-day (clothing, dishes, etc.), and then only if they still didn't have enough to pay all of their creditors in full.  Joe and his wife might hold a massive auction and sell just about everything they own.  They could take the $80,000 net profit from the sale and offer a proportional amount to the ten unsecured creditors that are owed $150,000 as an offer of settlement.  They would be motivated to take it since Joe has liquidated all of his assets and there is now nothing they can recover by suing.


Obstacles to Negotiating with Unsecured Creditors                     

In general, original creditors are always tougher to negotiate with than debt collectors or collection attorneys because --

(1)  They haven't given up on collecting the debt yet.  They also have a reputation to uphold. If word gets out that they gave in to you, then they will be flooded with customers asking for special treatment.  They will negotiate only when they think doing so is the best choice for them.

(2)  Their in-house collection departments have certain quotas that must be met.  If a credit manager doesn't meet the quota, he risks losing his job or doesn't get transferred to the new location of his dreams.

(3)  At least half of all in-house collection departments are headed by females these days.  Contrary to what you might assume, female collectors are often tougher and more stubborn than male collectors because they think they have to be tougher to compete in their field.

(4) The people with whom you speak when you contact a creditor often don't have the authority to negotiate debt with customers.  They are often poorly trained and simply respond to everything you say with a memorized answer.  Their main mission is to get rid of you as quickly as possible, so when you inquire about a new payment plan, they answer with, "I'm sorry, we don't make special payment arrangements."  If you ask to speak to a supervisor (and you should always do this if you aren't getting anywhere), they will lie and claim one isn't available or promise that she will call you back later.

(5) Creditors refuse to adopt policies that are in line with national statistics.  It is always more cost-effective for a creditor to work with debtors in trouble than to let them default and the account go to collection; yet, few of them will adopt policies that keep consumers solvent.  This inflexibility often drives debtors to bankruptcy, where unsecured creditors lose big.  Their policies don't really make any sense.

What If A Creditor Won't Negotiate?                                                  

If this happens, you must either give up trying to get them to negotiate or let the debt go unpaid until it reaches a new phase in the debt collection process, meaning it is turned over to an attorney or debt collection agency for collection.  Of course, this is risky, since you might get sued and have your wages garnished, have to pay collection costs, etc., and doing this will definitely ruin your credit rating. 

For these reasons, one should only utilize this technique if you really are on the verge of filing bankruptcy.  Perhaps a serious illness in your family has caused medical bills to pile up, or you have an unbelievable amount of credit card debt and don't know how long you can continue making just the minimum payments each month.  If you're living paycheck to paycheck, you're in trouble.

If the above is an accurate description of your financial condition, it is only a matter of time before some unforeseen event causes you to fall behind or default on your debts.  Perhaps it might be a good time to go ahead and take the plunge and get it over with.  How do you know if you are ready to stop paying your unsecured debts?  It's simple.  If you are willing and able to file bankruptcy right now, then you are ready to take the plunge.

In my next post, I'll discuss tips on negotiating with debt collectors.

What are Your Options Regarding Debt?

With millions in financial distress these days, many are wondering what their options are regarding debt if they aren't able to pay their bills soon.  Some might not have any choice but to try and negotiate with creditors for better terms, longer repayment times, etc.  In order to develop a plan to get out of debt, you need to learn more about your options before you plunge in to negotiating with your creditors. 

Basically, you have five options:

1.  Do nothing.  You can continue to limp along each month barely getting by and hope that you can pay down your debt someday.  This plan rarely works since a single emergency or unexpected event, such as the loss of a job, drives the household to financial collapse.

Pros -- (1) If you are broke and owe less than $1,000 to each unsecured creditor, there is little chance you will be sued.  Collection efforts will last about six months and then the accounts will be written off as noncollectable.

Cons -- (1) If you have wealth, you risk a lawsuit, a wage garnishment, and property seizures. (2)  Your credit rating will be ruined and you will not be able to get credit for the next 3 to 5 years.  What financing you do qualify for will be at a high interest rate.

2.  Budget your way out of debt.  You can give up certain luxuries, refinance loans, and live more frugally so that you can pay down your debt.  

Pros -- (1) Can get out of debt without bankruptcy, credit counseling or debt negotiation; (2) Your credit rating will not be damaged; it might even be improved.

Cons -- (1) You must change your lifestyle; reduce your expenses in order to have more to pay off your debts.

Recommendation:  This is, by far, the best option for you.  If you could give up extras, cut back on unnecessary expenses, you might find $300 to $600 to pay down your debt without revealing you're having a problem or damaging your credit rating. 

3.  Sign up for credit counseling.  Although these agencies promise in their advertising that they can resolve your debt problems by lowering the interest rates on your credit cards and such, they aren't telling you the whole story. 

Pros-- (1) Traditional counseling services offer free, competent budgeting advice and charge only a small monthly administration fee;
(2)  Some companies can instantly arrange for you to have lower monthly payments and interest rates through their pre-established relationships with major creditors; (3) If you have significant credit card debt, you can get your monthly payments reduced.

Cons-- 

(1) Drop out rate is rather high -- estimates range from 40% to 60%.  Only about 20% of those who sign-up complete the program and a high percentage of those who drop-out go on to file bankruptcy;
(2)  Many people's bills actually increase each month rather than decrease -- if you can't afford a 3% increase in your monthly payments now, then credit counseling probably won't work for you;
(3)  The time schedule to pay off debt is often grossly underestimated.  Many people realize after a year that their debt hasn't reduced at all and it will take them at least 12 years to pay off the debt if they stick to the credit counseling plan;
(4)  Not all creditors participate in credit counseling programs.  Some major credit card companies refuse to participate and others will actually increase your interest rate (For example, Chase Manhattan Bank does this.);
(5)  New age counseling services charge high fees, offer low quality money management advice; often don't pay your creditors on time (which results in added late fees and more negative marks on credit reports); and too many of them pocket your money instead of paying your creditors.  This results in $29 late fees, more negative marks on your credit report and renewed collection efforts;
(6)  Your credit rating will be damaged by notations that you have entered a debt management program.  These notations can stay on your credit report for seven years.  You will not be able to get credit for the next 2 or 3 years and the credit you do obtain will be at a high interest rate.

Recommendations:  If you choose this option, you can look in your local Yellow Pages under counseling or credit counseling for an agency named CCCS or Consumer Credit Counseling Services.  Be aware that credit counseling services work for the credit card industry and will steer anyone contemplating bankruptcy to file a chapter 13 (repayment plan) rather than chapter 11 (credit card debt discharged).


4.  Bankruptcy.  Bankruptcy can wipe out a significant amount of debt in about four months if you file Chapter 7, but it isn't a good idea for those who have substantial property and assets that they want to keep.  Many people think that bankruptcy is always something they can use if they have to, but not everyone qualifies.  If you are in serious financial trouble, it is important to find out more about this option even if you aren't planning to file at this time.  You need to know if it is a viable alternative for you, just in case. 

Pros--
(1)  Can liquidate many unsecured debts, such as credit card and medical debts;
(2)  If your bankruptcy is a simple one, the whole process will be over in about four months;
(3)  Is an excellent solution for those with no property, few assets, and a modest net worth;
(4)  There are federal and state exemptions that allow you to keep many personal assets;
(5)  If you do-it-yourself, the process will cost you less than $400.

Cons--
(1)  It is not a good solution if you've been using your credit cards the past three months to make luxury purchases;
(2)  Might have to sell your home and some of your assets;
(3)  It is not a good alternative for those with a late model expensive car or those who have significant equity in their homes;
(4)  Will have a bankruptcy notation on your credit report for 10 years, which will result in having a hard time getting financing for the next 2 to 3 years, and what financing is obtained will be at a high interest rate.
(5)  If you hire an attorney, it will cost you at least a $1,000 for a simple bankruptcy and $3,000 to $5,000 or even more for a complex one.

Recommendation:  Good choice if you can't cut back on expenses, have a modest net worth and lots of unsecured debt.


5.  Debt Negotiation.  You can negotiate for alternate repayment plans and reduced settlements with unsecured creditors and debt collectors.  If you are successful, you can settle your unsecured debts for less than what you owe, get out of debt quicker, and avoid lawsuits.

Pros -- 
(1) Can get out of paying thousands of dollars in debt; 
(2) Can avoid judgments and wage garnishments;
(3)  Can avoid filing bankruptcy.

Cons -- 
(1) Credit rating will be damaged for next seven years and will have trouble getting financing for the next 2 to 3 years.  What financing is obtained will be at a higher interest rate;
(2) Might have to pay tax on forgiven debt; 
(3) No guarantee it will work; those with assets are taking a chance they will be sued.

Recommendation:  Good choice if bankruptcy and credit counseling won't work for you.


What is your Debt-to-Income Ratio?


The formula for calculating your debt-to-income ratio is simple:  monthly fixed expenses divided by gross monthly income (before taxes and deductions).  If your result is a percentage greater than 36%, your credit score will be negatively affected because you are considered to have too much debt.   This means credit card companies and banks will likely turn down your application. Of course, each lender sets its own policy.  Some might only approve your loan if you have a ratio below 30%, while others will accept a higher one.  But a general rule of thumb is to keep your debt-to-income ratio below 36% if you want to get financing.

Of course, financial experts consider a debt ratio of 36% to be way too high.  The lower it is, the better, but generally, a ratio higher than 20% tells a credit counselor that you have too much debt and might be headed for financial trouble.  Your goal should be to try and reduce your debt so that your debt-to-income ratio is 20% or lower.  Once you do this, your credit score will increase, you will be able to save up an emergency fund with enough money in it to pay all of your living expenses for one year; and you will be able to start saving more for retirement.

How to Calculate Your Debt-to-Income Ratio

To calculate your score, you need to add up your monthly fixed expenses.  Monthly fixed expenses include all debt, such as the following: house payment or lease, credit card and other revolving credit balances; car payments, alimony, child support, etc.  Do not include grocery, telephone, and utility bills or any debt that will be paid off in the next few months.  If your mortgage, car loan or credit card will be paid off two or three months from now, don't include it in the equation.

Sample calculation:

Gross monthly household income:  $5,000

Fixed expenses:  $1,560   [house payment $540.00 + car payment $370.00 + credit cards $250.00 + child support $400.00]

Debt-to-income ratio calculation:

$1,560 (total debts) / $5,000 (total income)  =   31%

The above calculation shows that this person is headed for trouble.  He needs to start paying down his debt rather than accumulating more. 

Ways to Lower Cooling Bills and Save as Much as 75%!!


Air conditioning costs eat up a lot of a family's monthly budget during the winter and summer months when it is either too cold or too hot and heating and cooling become necessary.  There are several steps you can take to lower your air conditioning bill every summer. 

Keep the drapes or blinds closed.  About 33 percent of the summer heat in your house comes through the windows, so keeping all curtains drawn during the hot summer days will reduce your cooling bill.  Cover all of your windows, particularly those facing west and south, with window film to significantly block out the sun.  Doing this can reduce your cooling costs by as much as 50 percent! 

Additional tips to lower your air conditioning bill:

(1) Don’t do laundry during the hottest part of the day in the summer as the humidity from operating the washer and dryer will raise the temperature in your home 5 or more degrees and make you’re A/C unit work harder to keep your house cool;

(2) Plant a bush or tree near your AC condenser unit to shield it from the sun and you can reduce cooling costs by about 10 percent, but trim any trees or shrubs around your outside unit that are compromising air flow to the unit.  If your outside AC unit can’t get air flow because an object is blocking it, it increases energy consumption by about 15 percent;

(3) Clear your air conditioning unit of dust, dirt and debris once a year.  If your A/C unit is outside, turn it off, remove the outer covering and spray the coils and fins with a water hose.  If your unit is located inside, unplug it, remove the grill and dust off the fins and vacuum away any dirt or debris;

(4) Use compact fluorescent bulbs to light your house and lower the room temperature by about five degrees. Traditional light bulbs generate a lot of heat which makes your air conditioner run that much harder;

(5) Install a layer of insulation in the attic to lower your cooling bill by about 25%, plus doing this increases the value of your home;

(6) Seal all cracks in windows and doors with insulation or weather stripping and close the fireplace damper.  Plug air leaks in electrical outlets located on the exterior walls of your home with insulating foam gaskets on the back of the plate (can be purchased at Home Depot or Lowe's);

(7) Use ceiling fans and portable fans in conjunction with your air conditioning.  Fans make the air temperature seem about 7 degrees cooler than it really is.  Ceiling fan blades should be set to run counterclockwise in summer and clockwise in winter;

(8) Install solar film on your windows, particularly those facing south, to block up to 70% of the summer sun and lower your energy bill by about 30%.

(9) If you have a programmable thermostat use it to automatically raise the temperature during the day when the adults are at work and the kids are in school and lower itself about 30 minutes before everyone is due home.  If you don't have a programmable thermostat, the cost of installing one is well worth the amount you will save on your monthly electricity bill all year round.  People often forget to raise and lower the air temperature as they live their lives.  A programmable thermostat will do this for you automatically and save you hundreds ( or even thousands) each year on your heating and cooling costs.

If you do all of the steps above, you can reduce your electric bill by as much as 75 percent!