Part 1 Module 2 Chapters 5-8
Review:
Last time we spoke about budgeting/Spending Plans. We didn’t have time to talk about action plans.
· You want a spending plan to do the following:
· Show Income
· List Planned Expenses
· Show the balance of money left over after saving for all periodic expenses
· It should be reviewed and adjusted monthly (teach them to do this on their own)
Use an Action Plan
· An action plan lists the order of task you will work on together to accomplish the financial goals
· Don’t do everything at once.
· List out the clients “homework” or step 1 to be accomplished. Set a due date, and follow up.
· People are more likely to work towards a solution if they were the one that came up with the solution during the counseling session, or at least contributed to it. Remember to ask for their input, how do they want to proceed?
- How are you going to track client progress?
- Is your system capable of doing that?
- Create a paper file. Front sheet should be action plan with notes about progress.
Scenario: Retired Couple
· Living in Palm Desert. Income from trust, and a little from SS.
· Underwater on the house, 80k in cc debt. Cannot file BK due to the trust
· Over budget by 5k, trust will increase by $1900 in Jan, car paid off in Dec = 3k over budget
· Housing costs: Private country club-social and other costs = to mortgage
· After housing costs, social costs, utilities, and health insurance, $ is gone.
o What should they do?????
o Sell home (short sale or help from son), Cut Everywhere, rent, pay cc first (protect trust)
Dealing with Debt
The first step to getting out of debt is to stop creating more debt. Create a budget, maintain positive cash flow, and STOP using credit!
Budget advice should come before creating a debt repayment plan. If you are using credit to pay for normal expenses (and can’t pay the credit off at month’s end) debt will accumulate.
Debt Resolution Strategies:
1. Self Administered Repayment Plan
o Budget, Contact Creditors for help or hardship plans, create a debt snowball
o Do not make promises you cannot keep. If the member cannot afford a payment, they should not commit to the plan offered by the creditor. DON’T LET THEM PRESSURE YOU.
o Do not send post dated checks for payment. Only send payment for funds you currently have and can pay. Post dated checks are a BAD IDEA.
2. Consolidation Loan, Balance Transfer
o Requires good credit
o Discipline – Most people MUST close paid off accounts to avoid charging them back up
o Not the best for credit to move debt, but better than other options. Step 1 is better
3. Debt Management Plan
o Find a licensed/bonded non-profit agency: lower payments, rates, late fees, over limit fees
o Payments are sent in on time for consumer each month, account paid in full (60 months)
o Accts must be closed, comment on credit report, fee for service
o We know the concessions that most creditors offer. A simple review of the members debts (creditor, balance, rate, payment) and I can tell if a DMP would be of benefit
o No commissions or incentive to enroll, only if DMP will help. Counselors are advocates
4. Debt Resolution Plan (Bankruptcy Avoidance)
o AAA is the first to host this type of payment plan (launched by UT leaders)
o 20-99% repayment of debt, credit consequences, tax consequences
o 36 month repayment, fee for service
o Must pass the BK means test to qualify, DMP or BK referral otherwise.
5. Settlement
o Consumers should do this on their own, never pay for services (in my opinion)
o See recent legislation to stop up front fee’s paid to these service providers
o If member negotiates a settlement, make sure to get in on paper before sending any funds.
§ Account number, amount of settlement offer, no further collection, how it will be reported to credit, if 1099 will be sent. Then send a traceable/verifiable payment.
o Credit consequences, tax consequences
6. Bankruptcy
o Ch 13. Ch 7. Must pass a means test.
o Credit consequences, increased insurance rates, employment issues or promotion denials, military/security problems, reduced access to fair lending, public record
o Most consumers will want to avoid this, but some do need to consider it
§ I have had clients get upset for my suggestion, defensive about their finances
o Assets can be liquidated to satisfy debts under a Ch 7, UT has a small homestead
o Many Ch13 drop off, leads to higher BK rates (inflated numbers). Hurt Credit, incomplete BK, still liable for repayment of the debts
o After BK, higher rates/payments. Still may be offered credit (low risk high return for CC Co.)
o May not be eligible to file again for many years
7. Postpone Decision
o Sometimes people cannot make a decision or move forward with a repayment option
o They must first fix the cash flow (of find employment), and then select option 1-6
o Those with un-garnishable income are “judgment proof,” can remain in this state longer
Many individuals will use a combination of the above options to pay their debt down…
Debt Repayment Order:
Highest Rate
Lowest Balance
Creditor(s) threatening legal action
Creditor you dislike the most (collection calls)
Snowball (Power Pay) Approach to Debt Payment
- Review your debts, and list the current minimum payments
- Never pay less than that amount again, even if the minimum payment goes down
- Following your repayment order, budget to send more to the debt at the top of the list
- When the top debt is paid off, roll all that $ over to the next creditor on the list
How are new Credit Card and NSF regulations affecting members?
Hopefully these new changes (especially on the statement) will motivate members to pay off debts
Establishing and Repairing Credit
· It is important to understand that good credit ≠ financial wellness (retired couple)
· What does a credit score predict: Likelihood that a consumer will make on time payments with current debt obligations
· Credit reports were designed for lenders, not consumers. For this reason, it is usually difficult for members to understand how to read them or what they mean. Interest in recent years.
Confusion for members – Who looks at credit but does not report to credit? (unless negative)
· Employers, Insurance, Cell Phone, Utilities, Landlord, Military, Checking/Savings acct. Payday lenders and high interest rent to own companies don’t either (majority). This means that those high interest loans, or anything previously mentioned, does not build your credit.
· What does build your credit then:
o Auto Loan, Mortgage, Personal Loan, Credit Card, Furniture Loan, Student Loan,
How many of you have heard of VantageScore? How many CU’s use it?
Very intuitive, Grade Scale 500-990
Everyone uses the FICO Credit Score, so we will discuss how it is calculated (300-850)
35% - Payment History – Must make payments on time
30% - Capacity/Amount Owed – Utilization Ratios, amount that can still be borrowed
15%- Length of Credit – Average time accounts have been open, longer the better
10%- New Debt – Debts accumulated in the last 12 months
10%- Credit Mix – Different debt types, installment loans are important
It takes credit to get credit. How do you establish credit if you have never had it?
- You qualify and are granted credit (easy on a college campus), usually higher interest
- Co-signer signs for you (although this term just means borrower)
- Secured Credit Card
- Secured Loan (by savings or another financial instrument)
Credit Reports and scores are not the only factors that qualify someone for a loan
· The couple from Palm Desert had a pretty good score, but can’t afford any other debts
· DTI and other ratios
· The 4 C’s
1. Character – credit reliability, stability of housing/field of work, credit requests
2. Capacity – Ability to handle additional debt payments , reliability of income
3. Capital (book says credit) – Net worth, cash flow, Ability to absorb a s/t cash need
4. Collateral – car, home – can something be taken if loan is not paid, condition of property
Consumers should be directed to www.annualcreditreport.com to obtain free CR once a year.
· They can also get a free copy if they have been a victim of identity theft, denied credit, unemployed and looking for a job.
· The member can dispute items they believe are inaccurate on their credit
· If after investigating, the bureau does not remove an item, the member can write a statement of dispute to be included on the CR explaining their side of the story (<100 words)
· Pulling the CR periodically (and a few months before applying for a loan) can help consumers make corrective action to improve credit, or identify ID Theft.
Fraud Alert – Shows up on credit. When you apply (or a thief applies) the lender should scrutinize your/their ID more thoroughly before extending credit.
Credit Freeze – You can pay to have your credit frozen, lenders will not be able to access it unless you already have an existing relationship with them, or for credit offers.
· You are given a password/code to unlock the file when you need to apply for credit (cost)
· This would make it very difficult for an ID thief to be approved for credit
· It can delay credit applications and make it difficult for you when you need a loan
· Good step in the right direction…
To improve credit, it is vital to pay debts down. This is simple advice to give a member, but they need help knowing how to implement a repayment plan. Budget, then select a repayment method with left over cash. THE KEY IS TO HELP THE MEMBER UNDERSTAND, AS YOU DO, THE DAILY TASKS TO PAYING DEBT DOWN. YOU MUST BECOME A TEACHER/COUNSELOR/MOTIVATOR.
Sending post dated checks to any creditor is not a good idea. You are committing to a future payment that you are not sure of. Send the check when you have the money, post dating is a BAD IDEA.