Random Thoughts on Debt
Cashing It Out
Some of us have cash assets we can use, to pay off debt right now without a payment plan. Again, the negotiation trick is to pay “at a discount” if you cannot afford the whole amount. Of course, you want to insist that the debt is considered paid in full if the payment is made. These negotiated agreements are called “debt settlement”.
Calling It Quits
Sometimes there is no cash, and even a modest payment plan just is not possible. If you need to “call it quits”, bankruptcy chapter 7 may be right for you, even if assets must be given up to the trustee. The obvious advantage is that the debt goes away.
What To Do?
The obvious answer is to consult with debt management professionals who offer a broad number of choices, and who can tell you from experience how each of them work. Don’t let a mortgage lender talk you into a mortgage, or a bankruptcy lawyer talk you into a bankruptcy. Make sure you ask about all of your options, and have them explained clearly. Ask questions, and make sure the firm has broad experience. If they have 20 years or more of experience, that is reassuring.
The understanding of debt management is complex and confusing, but necessary in modern life. If you have further questions, we are delighted to answer them. As the ancient Chinese said: “The journey of 1,000 miles begins with a single step”. Call any time for a free ½ hour consultation: 317-266-8888.
Payment Plans
Settling debts for less than is claimed to be due, or settling debts “at a discount”, is very common. This reduces the claimed amount, and timing of payment, to a level where finally the borrower can afford to pay. This helps the lender, as he now has a mutually agreed payment he can count on.
Typically, these negotiations show creditors recognize “you can’t squeeze blood out of a turnip”. Smart creditors would much rather get something later than nothing at all. Of course, they prefer getting all of the money right now, if they can get it.
Negotiations proceed on a “pay what you can” basis, arranging payments over time if necessary. The goal is to set up a plan which will entirely settle the debt, considered paid in full if the payment plan is kept. Often, a shrewd lawyer will negotiate for his client payment “at a discount”. This allows the consumer the same advantage collection agencies have when they buy debt paper: the buyer (or borrower/consumer) pays less than the full amount of the debt, and the lender no longer has a claim to be paid. He has sold the “right to be paid” at a discount, to either a buyer or the actual borrower. In either case, the debt is “settled” for less. These payment plans work in bankruptcy or outside of bankruptcy, depending on circumstances.
Taking A New Approach
A new approach to debt involves looking honestly at the mistakes of the past, without dwelling on them. What can be done, right now, to bring finances back into balance? The plan must, in a maximum of five years, bring your financial life to stability.
That plan to pay debt may involve paying over time, cashing it out, or calling it quits. Let’s look at each of the three options in detail, in handling any or all of one’s debts. And let’s talk about the most common practice of shrewd lawyers in debt negotiations: buying and selling debt at a discount.
Does that sound odd to talk about “buying and selling debt”? Think about it: people owed money want their money right now. If they can’t get it, they will sell the “right to collect” to a buyer, for less than is owed. This process is referred to as “selling at a discount”. Some “debt paper” is sold for as little as 2 to 4 cents on the dollar! Of course, this does not affect the amount owed: it stays the same, even though the debt buyer paid only pennies on the dollar. Now comes the twist in logic: if you consider yourself a “buyer of the debt” from the lender when you pay it off, you are entitled to the same discount as other buyers of the debt.
How to Deal With Debt, Part 1
As Old As The Hills
Dealing with debt is a problem as old as the hills. Even the ancient Hebrews knew “the borrower is slave to the lender”. If you have struggled with debt, and paid without an end in sight, perhaps you need a new way of looking at things.
Regardless of how you got into too much debt, there must be a way out, a plan which will bring you financial freedom. Continuing to pay without a plan to eliminate the debt will not solve the problem. You must have a specific plan to pay off debt over a definite time.
Not paying and avoiding the phone calls will not work either. Even negotiating a smaller payment (or less interest) for six months will not work to give long range relief. “Hanging tough” in this mode is like the popular saying about insanity: “I love to hit myself over the head with a hammer, because it feels so good when I stop”. What hasn’t worked won’t start working now, just because we have done it for a few more years. Don’t keep doing the same thing over and over and over again, each time expecting a different result.
Time is Money, Both are Freedom!
Money is derived from time spent, focusing on a task. We make more or less money for more or less time, but how one uses his time will, within certain limits, allow him to make money. Likewise, how one uses his money will, within certain limits, allow more freedom in use of his time.
We want to focus not on making money, but the use of money once we have acquired it. If both of these precious resources are conserved, this gives us more life choices.
In other words: Time determines how much freedom we have with money, and Money determines how much freedom we have with time!
So if we want more freedom and control in our lives, we must be careful in our use of our time, and our use of our money. Since the burden of making money is one of the principal time constraints for most of us, when we have wisely accumulated and saved that resource, we are able to direct and channel our time into the issues which we consider of more importance than the making of money.
Because we use our time to make money, and often feel we are at a loss financially because the time has not been used productively, it is critical to make the connection between profitable use of one’s time, and conserving cash, so that one has more time for pursuits other than purely the making of money.
The prudent use of time and money allows one many benefits, such as
- Maintenance of physical health
- Improving family harmony
- Involvement in community affairs
- The ability to learn on new subjects, for personal benefit or profitable endeavors
- Time for relating to others, and a more enlightened point of view for relating to others, not being pressured by money concerns
- Time for relating to self, without the pressure money concerns
- Time to explore the use of solitude
- Time to cultivate better and innovative personal habits
- Time to exercise stronger self-discipline
- Time to work on one’s marriage
- Time to work on relationships with other people.
In the comments section, please share with me how you use your time more wisely to gain more freedom.
Creating 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 cash.
Consider carefully 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 pay out. The more you pay out, the more time you must use to acquire, maintain, and pay for possessions.
Impulse buyers have more bills than they can pay, and a need to spend more and more time working, so they can pay. 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, et cetera. A good plan is a good plan, no matter whatever else happens.
Realize that a spending plan is what you would like, and what would be best. In an imperfect world, it may take a while to get reality to match the plan. And the plan can 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.