One of the reasons I have been writing these articles is to shed some light to the industry about settling debt simultaneously, its reliability, and its advantages for consumers.
Our evaluation process at Debt Relief A La Carte is probably more broad than the typical debt settlement approach. So, to help debt relief companies identify simultaneous options and opportunities, this article will be about our evaluation process.
My goal is to show the debt relief industry a more reliable way to help people, in an effort to create a more successfully reliable debt relief environment.
When I speak with a consumer I initially inquire about three things –
- What has their situation been for the last 3 years?
Becoming aware of their situation for the last 3 years helps me determine the nature of their problem and a strategy for their negotiation.
- What is their situation today?
Becoming aware of their present situation helps me calculate a solution to their problem.
- What are their goals and objectives going forward?
Becoming aware of their goals and objectives helps me determine if our solution will be sustainable. It also helps me solve their problem in an effort to stimulate their goals.
Example: If they have desires to make a major purchase in the future and lack the funds to settle all of their debts, I’ll generally recommend settling what they can and to maintain payments on the ones they can’t.
Now that I’m aware of their history, present day situation, and their future goals, I review their monthly finances.
- First, what are their survival expenses?
- Mortgage or rent, utilities, car payments, health and car insurance, food, gas, phone, internet, medications, clothes, and other individual needs.
- How much income will they need every month to cover those survival expenses?
- What are their incidentals?
- Are there any opportunities to lower any of them?
Cheaper cell phone plans, trading cable for Netflix, that kind of thing.
What is their income?
- How is it generated?
- How many sources?
- What are the sources?
- How stable is it?
- Will any of this change?
- If so, when and how?
After becoming aware of this information, I evaluate their assets.
- What are they?
- Do they have an asset they can sell?
- What about an annuity or a loan from family?
- How about a cash-value life insurance policy?
- Do they have a 401k or an IRA?
- Do they have a current loan against their 401k?
- If so, how much?
- Is there a way to expedite it’s payoff?
Generally, a consumer is able to have one 401k loan at a time.
What is/are the value of the asset(s)?
- Is it enough to resolve their problem?
- How much will the payment be to replenish it, if any?
- What will the positive and negative impacts be if they use it?
- How liquid are they?
- Can they generate the funds right away or will it take time to liquidate?
- How much time?
- Is it a reliable source?
- What are the potential costs for using the asset?
- What will their asset base look like after the fact?
- How secure will they be?
Now, I look at their creditors…
- First, what is their overall debt load?
- How much of this debt load is unsecured?
- How much are the unsecured monthly payments?
- What condition are the accounts in?
- Are they pre-charge off?
If they are, the consumer has a lot more flexibility since you could combine the options of re-ages and payment plans into their potential solution.
- Are they already charged off?
If so, the question then becomes – can this consumer resolve all of them?
- If not, how long will it take to settle the remaining ones?
If a consumers goal is to accelerate their time to rehabilitate, payment plans are fairly moot on charged off debts. I say this since the consumers credit won’t begin to fully rehabilitate until the final charge off is satisfied. And, satisfaction can only occur with a paid in full or settled status.
- If the accounts are charged off, which companies are handling the debts?
- Are any local attorney offices?
- How long till they can claim statute of limitations?
If they are close to statutes of limitations, it may make more sense for them to wait it out, rather than settling.
How much do I feel I can settle their debts for?
- When were the accounts originally opened?
- Are there any recent cash advances or balance transfers?
- When was the last time payments were made?
- Are there any creditors that I feel will be difficult or more costly?
- If the accounts were charged off, what were their charge off balances?
- What is the estimated cost to settle with our fee?
Now that I have a complete picture of their finances I can start to put their puzzle together.
As I mentioned earlier, depending on the goal of the consumer, if they would prefer to solve their problem and maintain their good credit, their puzzle is with that objective in mind.
If they’re already behind or if they value a restructured budget more than their credit, the puzzle is to determine their ability to settle their debts right away.
Please keep in mind we do impose a cool-off period of 60 days for anyone who is current. Meaning, we will generally not allow them to enroll into our service until they are 60 days behind. We do this to give the consumer proper time to think about their decision, so they make the right decision. I’m not in this business to talk someone into ruining their credit just for their revenue. I’m not saying everyone is, but with this policy in place, it prevents it from happening.
Playing with the puzzle…
This is when I estimate the potential for taxes on settlements by calculating the liabilities vs. the assets. This is an estimate and they’re advised to get a professional opinion from an accountant. 🙂
- What is their estimated net worth?
You can estimate this by adding all of their assets in one column and all of their liabilities in another. Then, subtract the two totals.
- Does the potential for taxes exist?
- What is that result?
- How much of the debt can they settle without being subjected to taxes?
Example: They have $330,000 in liabilities and $300,000 in assets. This person has an estimated net worth of negative $30,000. Potentially meaning, that they can settle $30,000 of the debt without having to pay any taxes for the settlement of their debts.
- Is it possible to settle as many debts as they can to the point of solvency and remain current or re-age the remaining accounts?
- Will that scenario be comfortably affordable going forward?
- Or, does it make more sense or is it necessary, to settle all the debt and pay the taxes on the settlements in exchange for a bare bone monthly budget going forward?
- What other alternatives exist?
- Have they met with a bankruptcy attorney?
- Can they file chapter 7 bankruptcy?
- Will it make more sense to settle in 12 – 24 months by using a combination of an asset and their income, rather than pure assets?
What is their source of funds?
Generally the source is an IRA, 401k, cash-value life insurance, an annuity, selling an asset, or a loan from a family member.
Will using the available source create a potential tax event?
In pre-charge off situations it doesn’t always make sense to settle debts by acquiring the money from a source that will be taxed or penalized heavily. In these situations, it is to a consumers advantage to determine the reduction in monthly finances that will be necessary to create a comfortably affordable monthly budget going forward. This way, they may minimize their exposure to taxes and penalties by only settling enough debts to create that comfortably, affordable situation. By re-aging their remaining pre-charged off accounts, they will resolve their delinquent situation and begin to rehabilitate.
If the accounts are charged off, then a taxable event such as a withdrawal from a 401k or IRA to settle all of the charged off accounts may make sense. When accounts are charged off, the consumers credit will not begin to fully rehabilitate until their final charge off is satisfied. So, if payments are made on these accounts, there is no real benefit to future credit until the final one is resolved. From my experience, in speaking with my previous clients, years after they completed our services, most indicated that they acquired new unsecured credit within 6 – 18 months of completing our service.
So, a consumer with charged off accounts is left with two options if they want to resolve their delinquent debt quickly and turn their life around. The consumer’s options include bankruptcy or satisfying all of their charged off accounts by either paying them off or settling them.
Now, the reason I say that a consumer may find it logical to use their 401k or IRA, is by doing so, they will on average settle their debts within 78 days of hiring us. That means that according to our previous client experiences, the consumer who uses their 401k or IRA to settle their debts, may begin acquiring new unsecured credit within 9 – 21 months of initially hiring us. The logic being for some, is it may be worth it to pay the taxes in order to rehabilitate their credit and move on. Especially, when they have the alternative to avoid the associated stress, dangers, low success rate, and prolonged exposure to bad credit, when settling their debts over time, the traditional way.
While we’re on the subject, we strongly advocate the use of cash going forward for our clients. The advice we offer our clients is to acquire 3 new tradelines when they become accessible as they rehabilitate. The 3 tradelines are for the purpose of establishing new and current credit to assist them in qualifying for attractive interest rates on major purchases going forward.
- How much debt needs to be settled to create a comfortably, affordable monthly payment going forward?
- Do you feel their available resources will settle all of the problem debts?
- If not, can they comfortably afford payments on the remaining pre-charged off ones?
- And, if they’re already charged off, how long will it take them to settle the remaining ones?
If their resource won’t solve their entire problem, and they can’t settle the remaining accounts within 12 – 24 months, they’re not a good candidate.
- How much exposure is there to taxes on settlements, if any?
- If there is, is there a way to pay it?
- How much tax and penalty exposure is created by acquiring the funds, if any?
- Is there any potential for future tax or penalty expenses?
Such as if they default on a 401k loan. Is there a way to pay that?
- What is the estimated end result?
Add the estimated cost to settle with your fee, estimated taxes for settling (if applicable), and the estimated taxes and penalties derived from the asset (if applicable).
- What is the total?
- Do they have enough to cover it?
- Does it make sense to cover it?
- If they’re using an asset that is required to be paid back, how much is the estimated monthly payment and what are the terms?
- What is the difference between the payments they are required to make now vs. the estimated payment after settling?
- How much will they save on a monthly basis?
- Just how comfortably affordable is it going forward?
- If retirement accounts are used, what is the cost to replace?
- How are they able to do that?
- How long will it take?
- What are the pros and cons of their simultaneous option?
- What are the alternatives?
The ultimate questions…
Does it make sense?
Would I do this?
If your answer is no, advice the consumer that you don’t feel this is an appropriate solution for them.
If the answer is yes, the next step is to send the consumer out to talk with an accountant and their retirement advisor, if they’re using a retirement account to fund their settlements.
At Debt Relief A La Carte, it is very rare that we offer to sign anyone up on our first phone call. For many situations there is necessary information that won’t be known until they speak with an accountant or a retirement advisor. We generally wait to offer our services until these possible costs are known and can be properly factored in.
So, that’s it, this is how you qualify for simultaneous
I may have forgotten a question or two. If you notice any that I have missed, please post them in the comments. I hope this article will become a white board of sorts, in an effort to better the services consumers receive when they seek debt relief.
The simultaneous solution will make sense for some and not for others. There are so many variables in play, that it is impossible to say for whom it will make sense until you get the answers to the above questions. But, these are the things you must ask and consider in order to properly determine if simultaneous is an available and viable option.
If you are in the debt relief industry and have some questions or would like to speak with me further about this approach, please feel free to contact me.
See you guys next week for part 7 of this series. Have a great week.
Debt Relief A La Carte, Inc