Page 64 - Workbook1E

These negotiations are possible on your own, but it’s usually best to have a third party negotiate for you, such as a Debt Manager, because of the legal aspects. Some settlement options include:
a. Lump Sum Settlement
The Lump Sum Settlement option can be used to pay the total current balance of each debt or you can negotiate to pay a reduced amount of the total balance. This method of debt elimination requires either a cash reserve sufficient to pay off all your debts or the ability to obtain a loan sufficient to pay off all creditors—a consolidation loan.
Cash Reserve—If your cash reserve is enough to pay off all your debts, you need to compare the returns from available investments, against
the interest cost of continuing the debt. If you find your return on investment is less than the cost of continuing the debts, then it would be better for you to pay off the debt. Your comparison should include rate of interest return, tax considerations, and other factors specific to the investment.
Consolidation Loan—The debt consolidation loan option should only be considered if you’re committed to living on a strict budget and incurring no new debts in the future. If you’re able to obtain a loan sufficient to pay off all creditors, the following factors need to be part of your evaluation.
(1) Replacing debt with debt may eliminate the immediate pressure of debt, but it does not eliminate the debt itself. The debt remains, often with a longer time frame than before for paying off the debt.
(2) Beware of low “teaser” interest
rates that usually only last a
few months. You must be an ideal card customer or the penalties can be severe. Often just one late payment
results in a big fee and a drastically higher interest rate. For example
a major credit company may offer 0% interest for the first six months that jumps to 24.99% with only one late payment. Carefully check the fixed rate taking effect after the introductory period to be sure it’s still a good rate. Also be cautious of “transaction fees” charged simply for the privilege of transferring balances.
(3) Terms for repayment of a consolidation loan should be well within your ability to repay so you don’t end up in the same situation.
(4) Consolidation loans can be most advantageous if you can negotiate a reduced payoff with your creditors (called a settlement) usually only if your financial situation is in crisis.
60 Workbook 1: Building a Spending Plan that Works