Archive for August 24th, 2007
Once a debt has been sent to collections, the original creditor writes off the debt and takes an accounting loss. The collection agency earns between 25% and 60% of what it is able to collect but, in order to earn, the agency must collect something. There exists a strong incentive for the collection agency to settle the debt for what it can now and move on. This little known fact opens the door to negotiating with an agency attempting to collect a debt.
While the agency has strong motivation to collect 100% of the debt owed, they will consider almost any reasonable offer. Remember, it is in their best interest to collect something now in order to get paid rather than risk being paid nothing and having the account pulled by the creditor and sent to another agency. Make the offer sweet enough and the agency will settle with you.
Let’s say you owe $750 and you are able to pay half of the amount, or $375, today. Don’t offer the whole amount you are willing to pay simply because if the agent you are dealing with smells a deal they will assume that you are able to pay more than you say you can pay. It is, therefore, to your advantage to offer less than the top figure you are willing to pay. So offer between 60% and 75% of your top dollar figure. In this case you should offer something between $275 and $281. I suggest that you don’t end your initial offer in an increment of $5. Offering $280 or $295 sounds like a best guess at what you are able to pay. Offering $277 or $277 leaves the impression that you have given some thought to what you can actually afford to pay now. By using precise dollar amounts in your offer you are more likely to get a lower counter offer from the agent. But you will get a counter offer–you can go to the bank on that.
Never let the agency know the source of your money. Don’t tell them that you are getting help from your parents, that you have a friend that is willing to help, or that you have just won the lotto. If the agent even smells an external source of funds you are less likely to settle the debt and they will press for the full amount. So don’t tell them anything they do not need to know, they don’t ask, and always try to answer their questions with concise answers.
Once you have reached an agreement over the phone you must send a confirming letter to the agency. The letter should include the following information:
- The creditor has agreed to accept the negotiated lump-sum payment as payment in full for the entire amount owed.
- That cashing the enclosed check in the amount of $327, when cashed, is explicit acknowledgment of payment in full on this account.
- Include the account reference numbers, both the creditor’s numbers and the agency’s numbers.
On the check itself write something like the following in the endorsement space on the back of the check:
This instrument is payment in full of any debt owed by me to the XYZ Corporation pursuant to our agreement of August 23, 2007. Depositing this check represents payment in full for my outstanding debt.
Make payment by cashiers check or money order in order to protect your bank account number from the collection agency. Never pay in cash. Do not pay the original creditor unless the agency instructs you to do so in writing. Keep all paperwork for at least 4 years but no more than 7 years.
So there you have it. You can negotiate with collection agencies but never agree to pay more than you can afford to pay today. Protect yourself by keeping records of all paperwork. You are creating a win-win situation for the collection agency and getting an obligation off your plate.
August 24th, 2007
As a financial advisor, some of the best advice I can give my clients is to pay off high interest loans first in an effort to avoid paying unnecessarily high amounts of interests. This means that you will ultimately be paying less money in interest and more toward your outstanding balance, and paying off your balance means eliminating your debt. Thus, in my professional opinion, one of the best options for individuals to eliminate unwanted debt is to use their home equity to pay off high-interest credit card debt.
The logic behind my advice is that I would prefer my clients pay 6-10% in interest as opposed to 18-30%. The difference in interest paid corresponds to money that can be paid toward the outstanding balance. (Additionally, a number of individuals take advantage of the available funds to negotiate their accounts with credit card companies, which could result in paying 40-60% of the outstanding balance.)
Mathematically, my advice works out very well, but unfortunately, in the real world things do not function so smoothly. The problem that most individuals find after refinancing their home is that they have zero balances on their credit cards, and instead of maintaining those balances, they proceed to run up their credit card bills once again. Only this time, they have no more equity in their house to bail them out of financial trouble, and if things continue in that direction, they are at more of a risk of losing their home. Therefore, the refinance represents a temporarily pause on the road to bankruptcy. The moral of this story is that refinancing your home will help you pay off high-interest credit card balances, but it will not help you acquire good spending habits. Discipline and moderation are the only way to achieve that.
In conclusion, if you are considering a home loan to help relieve financial burden, I would definitely recommend it if it will help you gave money. Just make sure that it is a step to financial freedom, not a path to more debt.
August 24th, 2007
All of Wall Street is up in arms about the mortgage crisis. No one seems to ask why things have gotten to this point. They rightfully blame poor mortgage standards.
While the mortgage business is imploding, everyone is focused on the mortgage companies that are to blame. This is taking the focus off of credit card companies.
The drop in scrutiny on credit card issuers has resulted in higher interest rates, higher penalties and higher balance transfer fees. No one seems to notice that the terms on many of their credit card agreements have worsened over the past year. Such a trend is likely to continue.
One of the main problems with the current credit card problems many people are having is that these problems are spilling over into other areas of concern. It is hard to make a mortgage payment when your credit card minimum payments have gone up 20%. As a result, foreclosures are likely to increase at an even greater rate. Foreclosures in July 2007 increased over 90% from one year earlier.
As credit card debt has gotten out of control, many people have had more trouble making their house and car payments. When money gets tight, something has to give.
People are too quick to rush to file for bankruptcy in order to seek a quick fix to their financial troubles. Many of them could actually repay their debts over three to five years, and do so with lower payments and far lower interest rates. These are the types of assistance that can help distressed debtors get back on track with all of their bills.
Lower interest rates on credit cards are generally available if you can show that your financial situation is troubled. A credit counselor can help you develop a budget and analyze your debt load. They can help you understand your net worth and evaluate options that may be possible based on your own unique situation.
A debt management plan could help lower interest rates on your credit cards and provide you with a much needed break from finance charges. Even your minimum payments could drop substantially.
Find out from a credit counselor what options you have. It can frequently help you avoid going down the wrong path.
August 24th, 2007
