How to Settle A Debt for Less Than You Owe

Posted on September 27, 2011 Written by Leave a Comment

Being in the real estate Short Sale niche over the past 3 years has given me insight to how banks view their customers.  It’s also given me insight to the process involved in settling a debt for less than you owe.

I won’t go into detail about the different types of debts that you can have as most of them fall under the category of consumer debt.  I’ll focus primarily on these debts as they are the ones that are most often settled for less than is owed.  Consumer debt is basically anything that is not a mortgage.  There.  That makes it simple.  So how do we settle for less?

Let’s break it down to a rudimentary example.  You loan me $100.00 and I pledge to pay it back $10.00 at a time for 10 months.  For the first 3 months I pay on time, and you’re happy about that.  In the fourth month, I pay you late, and you extend some grace to me, but that doesn’t last long.  In the fifth month, I simply don’t pay you at all.

Quick recap.  You’ve loaned me $100.00.  I’ve paid you back $40.00.  I still owe you $60.00, but for some reason (and this is where the moral argument can be born), I am not paying you any more.  That reason may be legitimate, or not, but either way, the bottom line is, I owe you $60.00 and I am no longer paying.

It’s at this point that the relationship between the lender and the borrower becomes strained.  Whether you’re a bank, or just a friend lending money, you don’t want to have relationships in your life that become tainted by unfulfilled commitments.  They’re no fun.  Until the original agreement is either fulfilled, or renegotiated and ultimately settled, you’ll have tension.

(On a side note, the difference between a personal loan to a friend and a loan from a bank is that your friend probably cares about you and the value of the friendship isn’t worth the tension that a loan brings to it.  The bank, on the other hand, doesn’t give a crap about you.  They just want their money, and they’ll use every psychological tactic to instill fear in you to get what’s owed them.)

Both have one thing in common, however.  Both will always take less than you owe, if and only if they have come to believe they won’t get anything from you.  That’s the “hands in the air” feeling.

So in this example, I owe you $60.00 and I haven’t paid you in a long while, and it’s starting to affect my life in ways I don’t want.  So, to get the problem solved, I manage to strike a secondary deal with you (second to the original loan) and I offer you $20.00 to call it even.  You may want to know why, but ultimately, it’s been long enough that you no longer care about my hardship, nor do you want any excuses.  You just want some of your investment returned to you so you can go about your life and find better places to put your money.  So, you take it, and you settle the debt forever.

This simple exercise works whether you owe your friend $100, or you owe the bank $200,000.  Lawsuits are expensive, and nobody wants to go through them, so 99 times out of 100, he to whom you owe will take less than you owe when it comes down to it.

 

Filed Under: Tips and Tricks Tagged: , , , ,

The Right Way To Monitor Your Credit Report

Posted on November 24, 2010 Written by 1 Comment

Before I explain how I monitor my own credit report, I’ll fill you in on why I do it at all, and what I think of “credit.”

Your credit score, a name which is a facade for a cancerous mind-set in our culture, is actually a debt score.  It’s a measure of how much you love paying the banks hard earned money.  The only thing you need this magical rating for, which the financial industry can’t even decipher, is to borrow money, and thus, pay interest to someone else.

In the video game world, back in the 80′s, dropping a quarter in the slot added a “credit” which you could exchange for one play, which usually consisted of 3 lives.  At no time did you play the game, then add the quarter.  So, the word “credit” had been mangled to the banks’ advantage.

Is a credit score really important to your future?  Well, if it’s a high score, which is evidence that you borrow money and pay it back, then you can continue to borrow money.  If it’s a low score, you cannot.  If it’s a zero score, you can also borrow money.  Strange you say?  That’s right.  Even if your score is zero, meaning you have never borrowed money and you have no open accounts, you can get a mortgage.

So why is it at all important to know what your credit score is?

Aside from providing you with the illusion that you’re financially successful because of your high score, it is important to know what accounts are open on your report(s) as identity theft has become a very serious problem.  It’s also important to know that certain service providers, such as insurance companies, if you have a lower score (remember, a zero score is not a bad thing, but a middle of the road score is) they may raise your rates.  You may need to put a deposit on your utilities when you have them turned on, or you could run into trouble securing a mobile phone.

Most of these concerns mean nothing to the debt free.  If you manage your money well, you’ll have the money to put the deposits down with your cell phone company, or utility company, and after time, you’ll receive that deposit back.  Most people who cry foul at deposits do so because they don’t have any money, and they don’t have any money because they’re paying it to the banks instead of saving it.

The Right Way to Monitor Your Credit Report

There are companies out there that advertise free services that aren’t actually free.  In fact, they will trap you into memberships that bill you monthly or even annually, so you don’t notice, just to know your credit report.  This is a bad idea.  There is one website that you can go to, where you can order your credit report completely free of charge, one time per year, per credit reporting agency.

The name of that site is Annual Credit Report (www.annualcreditreport.com).  It’s NOT freecreditreport.com (which I will not link to.)  At AnnualCreditReport.com you have access to your credit report from each of the 3 reporting agencies one time per year.  Knowing that, the best way to stay on top of your credit report, to ensure someone hasn’t opened any accounts in your name, is to order one report every 4 months starting on the 1st of the year.

So, on January 1st, you would order your report from one of the reporting agencies, then on May 1st, the second agency, and then September 1st from the 3rd, until you reach January the following year, where you’d order the very first report again.  This ensures that you don’t have a 12 month gap where you may not know what’s going on.  You’ll be minimizing that gap down to 4 month periods instead.  If there is a dispute, it’s going to be easier to handle as less time has passed.

Get started today.  It actually is free.

Filed Under: Personal Finances, Planning and Budgeting Tagged: , , , ,

What is a Debt To Income Ratio (DTI)?

Posted on April 28, 2010 Written by Leave a Comment

You’ll often hear this term used in the mortgage industry to determine whether or not you’ll be able to mortgage your home.  Before anyone loans money to another, it’s important that they know how much of their current gross income is already committed to paying off debt.  The measure of what your monthly obligations are against your income is the Debt to Income Ratio (DTI.)

Here’s an example.  Let’s assume you have a gross income of $50,000 per year, and the only debt you have is your car, which has a monthly payment of $300.00.

Based on this, your monthly gross income is $4,166.00, and your debt obligation is only $300.00.  Since you’re contemplating purchasing a home, and the reason for the DTI calculation is to take a note against your new living arrangements, then we would not include your current monthly housing costs, such as rent, in your monthly obligations, because once you move, they won’t exist anymore.

So, take your monthly debt payments ($300.00) and divide that number by your monthly income ($4,166.00), and you have a Debt to Income ratio of 7.2%.

This is by no means a common scenario, but it’s how the number is calculated.  Most don’t have a clue what this number is, and if you’re someone who intends to save and pay cash for the things in life that you value the most, then DTI won’t mean anything to you, and neither will a credit score.

In the image below, the debt is represented by the 25% housing costs.  In this example, by definition, your Debt to Income ratio would be no higher than 25%, assuming that you have no other debt besides your home mortgage.

Filed Under: Financial Basics Tagged: , , , ,

Prioritize Your Spending

Posted on September 25, 2009 Written by 1 Comment

Creating a budget, or as I prefer to call it, a spending plan, involves prioritizing your expenses, subtracting each expense until you reach a balance of zero from the net take-home pay you started with.

The following is a list of expenses in the order of ‘best practice’ priority that will help you reveal the painful truth of your bad financial habits.
Prioritize

  1. Housing:  Housing comes first.  If you don’t pay your rent or your mortgage, you won’t have a place to live.  This is priority one.
  2. Utilities:  Keep the lights, heat, and A/C on.
  3. Food:  You gotta eat to survive.  So feed yourself first.  And I’m not talking about eating out.  In terms of basic needs, eating out is a luxury that banks don’t like to see in the event that you have to prove financial hardship for a loan modification or short sale approval.
  4. Clothing:  Don’t get caught with your pants down.
  5. Transportation:  If your feet are the only thing you have then great.  Walk.  If not, then you’ve got to keep your transportation paid for, insured, and maintained so you can get to and from work.

Expenses above and beyond these are discretionary.  Yes, even the ones that you believe you MUST have will become discretionary during financial hardship, so come to terms with this in good times so you know what to expect and how to plan for bad times.  Failure to prioritize your spending in this manner can come back to bite you.

Filed Under: Personal Finances Tagged: , , , , ,

The Myth of Tax Deductions

Posted on March 22, 2009 Written by Leave a Comment

Math doesn’t lie. When you add 1 + 1 you get 2. Subtract 1 from 2 and you get 1. Big surprise right? One of the most common things that I hear people mention when it comes to owning real estate is how important tax deductions are to their financial health. If you employ simple mathematics to this myth, you’ll see how ridiculous the logic is that tell you tax deductions make sense, because they don’t.

Let’s say you owe the bank $100,000.00 with an annual interest rate of 5%, and your income is $30,000/year. 5% of $100,000.00 is $5,000.00. That means at the end of the year, when you file your taxes, you’ll be able to reduce your taxable income from $30,000.00 to $25,000.00.

On a $30,000.00 annual income, you fall in the 15% tax bracket. $5,000.00 of your annual income was paid to the bank, and you’ll never see it again. The real savings to you in this example, since your tax bracket is 15%, is 15% of $5,000.00 which is $750.00.

In short, you spent $5000.00 to save $750.00. Your net result is a loss of $4250.00 in real cash. If you think that keeping your home mortgage means that you’ll benefit because you’ll be able to take a write-off, I’d be happy to pay you $750.00 as soon as your check to me for $5000.00 clears the bank.

Filed Under: Stupid Tax Tagged: , , ,