Addressing the three debt challenges!
How to Address the Three Challenges
1. How can you overcome your distaste for the collection process and make a
commitment to resolving as much of your delinquent and charged off debt as
possible?
As a first step, please look around and recognize that there are many folks with your kind of problem. As we have said: “You are NOT alone.”
Secondly, recognize that you are a person of good character with a problem; not a “slacker” or a “deadbeat.”
Thirdly, please do not take what some of the more aggressive collectors say too personally. Some of them are just aggressive by nature and do not know any better.
As a fourth step, you need to gather some facts:
- You need to determine how much equity you have in the assets you own, especially in your house and car(s).
- You also need to determine how much you owe and at what stage you are in the account receivable management process. Are most of your debts just severely delinquent? Or, do you have many debts that have been charged off by the creditor?
- When you are reviewing your outstanding debt, you will also need to determine if any of them are not yours and start the dispute process right now. It is important that you dispute any illegitimate claim intelligently and aggressively, using all the remedies the law allows. It is also important for you to realize that the creditor will place the burden of proof on you.
- And, you need to estimate your cash reserves and take a realistic look at your future income and your disposable income. Disposable income is your net take-home pay, less those living expenses you plan to make. Please, use our forms at the back of this booklet to help you. They will give you some useful guidelines and help you insure that you have tapped all available cash resources.
- Then, sum up your current position: your assets, your liabilities, your cash and your future net disposable income.
- Finally, this information is proprietary to you. Keep it to yourself and do not share it with a collector. What you need to share with the collector is your offer of repayment. Keep his focus on that.
As a fifth step, we recommend that you compare the findings on your current position with your future borrowing plans and place yourself into the most appropriate group. There are two that come to mind:
To which group do you belong?
Either you are in the first group, where your lowest overall cost and most satisfactory option is
to resolve these liabilities as soon as possible.
OR
You are in the second group, where it is NOT in your best interest to resolve these outstanding liabilities.
1. If you have assets and income or plan to borrow aggressively within the next seven years, your overall lowest cost position will most likely be to find a way to negotiate your outstanding liabilities to a minimum level and pay them. This may be far less costly than having liens placed against your assets at the full value of the liabilities, including late fees and accrued interest. And, it is highly likely that this is less expensive than borrowing at excessively high rates on major purchases for the foreseeable future. Plus, with the techniques provided in this booklet, you can resolve those debts for far less than you may have expected.
2. If you do not have assets, if you do not have income and if you have no future borrowing plans for at least seven years, then you may be one of those distinct minorities that can afford to not resolve your liabilities. You can wait until all of the negatives age off your credit report. While in all of our research, we have met very few consumers who can wait seven years or more before buying a new car or incurring some other costly financial service, you may be one of those few. However, before you come to this conclusion, please remember that any charge offs will remain on your credit report for seven years and any bankruptcy will remain for ten years. Although you may be able to handle the situation financially, the emotional turmoil may take its toll during the time before the delinquent debt ages off your credit file.
Who can calculate the true cost of the emotional stress you will be forced to pay?
2. How can you negotiate with the numerous collectors so that you can improve your credit risk profile, while you are resolving your delinquent and defaulted debts?
We have found that the best approach to this challenging question, is to break it down into a series of more focused questions, which we have done below:
- How can you prioritize your liabilities, so that you can use your limited financial resources to your best advantage?
- How can you approach those collectors who are addressing the debts you would like to resolve so that you appear to be different and more reliable than the typical debtor, while you also insure that you are treated with dignity?
- How can you negotiate successfully for a discount?
- How can you insure that any account you resolve will contribute toward improving your credit rating?
How can you prioritize your liabilities, so that you can use your limited
financial resources to your best advantage?
- As a very first step, if you have any delinquent debt that you must cure in order to earn your livelihood, make that account your highest priority. For example, if you need your car to earn a living and that is in delinquency, please cure it as soon as possible.
- As a second step, you need to identify which accounts are just delinquent and which are charged off and make settling the delinquent accounts a higher priority, with the least delinquent the highest priority, if this is at all possible. In credit scoring algorithms charge offs rank as significantly more negative than delinquencies and delinquencies of less than 60 days are much less negative than delinquencies that are 60 days beyond terms. In this manner, it is possible to aggressively keep the delinquencies from reaching the more negative charge off status, which is important in reducing future borrowing costs.
- Thirdly, within each category, such as delinquent or charge off, prioritize from the smallest balance owing to the largest. Many credit-scoring algorithms are more sensitive to the number of delinquencies or charge offs, more so than to the balance involved in each.
How can you approach those collectors who are addressing the debts you would like to resolve so that you appear to be different and more reliable than the typical debtor, while you also insure that you are treated with dignity?
You need to position yourself as a different kind of debtor than collectors are used to seeing, one who is truthful, reliable and responsible. Most collectors expect debtors to respond poorly. They expect debtors to not return calls, to not answer their notices, to outright lie, to make promises they do not keep and to issue checks that do not clear the bank. Your very first step toward a lower cost solution for you is to act the opposite of the typical debtor. That means that you need to initiate contact and keep all of your promises, no matter how trivial. If you tell a collector to expect your call at 9AM on Tuesday, then call precisely at 9AM. Moving with no forwarding address, refusing to return phone calls, denying debts you know you owe and other tactics typical of debtors who owe defaulted debts, will only weaken your future negotiating position.
Secondly, you need to require that all collectors treat you with dignity and courtesy. You have every right to insist that they speak to you courteously, that they refrain from foul language and threats and that they approach you in a calm, reasonable manner. You can accomplish this by stating to the collector that you are willing to resolve all of your debts as soon as possible, but that you are going to decide whom you are going to deal with first based upon how reasonably and courteously you are treated. Should any collector violate those standards, if it suits your needs, make him a very low priority and go onto your next outstanding liability. Keep in mind that you
also have the option of asking to speak to another collector regarding your account should you desire to do so.
3. How can you live an attractive lifestyle, while you are building
your disposable income and reducing your consumption of expensive
financial services?
The real secret to finally mastering this problem is not just resolving debts so you can borrow at reduced rates. While that is an essential part of it, the best overall solution occurs when you begin to curb your consumption of financial services. As we have shown, every financial service generates interest expense to the consumer. And, higher interest expense can have a dramatic impact on overall interest charges incurred by the consumer. The secret here is to make a series of small decisions that will dramatically reduce the interest expense you are incurring in your life, which will have profound impact on your disposable income and upon the quality of your future life.
- For example, let us take the example of Fred, who eats out every day and puts all of those expenses on his credit card. This seems relatively harmless. Just adding $5.00 or $10.00 a day to his charge card. How much could that hurt?
- Let’s take a look. At his current rate of consumption and assuming Fred is only paying the minimum on his credit card, Fred will accumulate at least $1,000 in credit card balance by the 6th or 7th month of this practice. By paying the minimum payment of approximately $20 for every $1,000 of balance, Fred will pay off those lunches in 7 years and 10 months at a total cost of over $1,900 in interest and principal. This analysis does not include late fees ($30
each) and other costs, such as postage and checks.
- Because of a simple decision to charge his lunches, Fred ended up burdened with debt for over 7 years and paid twice as much for lunch, as his buddy Bob who paid cash. So, when Bob was paying $6.00 for a sandwich, Fred was really paying over $11.00 for that same sandwich. Plus, in Fred’s state, he could really use that extra $900 in interest and fees he is going to spend.
- Of course, neither Bob nor Fred is as thrifty as James. James carries his lunch every day. By carrying his lunch, James eats lunch for $3.00 a day, compared to over $7.50 per day on average for Bob and Fred. That saving of $4.50 per day translates into yearly savings for James of almost $950 a year. For someone with gross pay of $35,000 and a take-home pay of $20,000, James just boosted his take home income by 5% while suffering no real hardships.
Add together a number of these “simple” decisions, continue to charge and charge, and you have a huge total expense, with not much to show for it. So, if you love to shop, think about Fred and how much he is really paying.
By riding in a reliable, but lower cost car, by eating out less often, by buying fewer outfits, by buying lower cost toys, you are positioning yourself to generate substantial expense reductions which you can use to your best advantage. By paying down your debts and by saving some of that money, you will be better prepared for the future.
Please remember, at this stage in your financial life, it is in your best interest to accurately discriminate between what you really ‘need’ to buy and what you merely ‘want’ to buy. Determining “needs” verses “wants” can lead to many profitable discoveries and a lot less longterm pain.