An Easily Understandable Explanation of Derivative Markets,
an excellent simplified example:
Please take time to read this one – it will really explain things in the Investment World and what happened to the economy.
Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.She keeps track of the drinksconsumed on a ledger (thereby granting the customers loans). Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively. A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral. At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi. Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers. Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government.
The funds required for this bailout are obtained by ”New Taxes ” levied on employed, middle-class, non-drinkers. Now, do you understand?
Top Financial Tip of the Week
Written by Richard Russell – Dow Theory Letters | Wednesday, 18 February 2009 22:07
MAKING MONEY: The most popular piece I’ve published in 40 years of writing these Letters was entitled, “Rich Man, Poor Man.” I have had dozens of requests to run this piece again or for permission to reprint it for various business organizations.
Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline and desire. I say, “for the great majority of people” because if you’re a Steven Spielberg or a Bill Gates you don’t have to know about the Dow or the markets or about yields or price/earnings ratios. You’re a phenomenon in your own field, and you’re going to make big money as a by-product of your talent and ability. But this kind of genius is rare.
For the average investor, you and me, we’re not geniuses so we have to have a financial plan. In view of this, I offer below a few items that we must be aware of if we are serious about making money.
Rule 1: Compounding: One of the most important lessons for living in the modern world is that to survive you’ve got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation — and money. When I taught my kids about money, the first thing I taught them was the use of the “money bible.” What’s the money bible? Simple, it’s a volume of the compounding interest tables.
Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.
But there are two catches in the compounding process. The first is obvious — compounding may involve sacrifice (you can’t spend it
and still save it). Second, compounding is boring — b-o-r-i-n-g. Or I should say it’s boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!
In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions — he’s finished.
A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).
Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.
This is a study that I suggest you show to your kids. It’s a study I’ve lived by, and I can tell you, “It works.” You can work your compounding with muni-bonds, with a good money market fund, with T-bills or say with five-year T-notes.
Rule 2: DON’T LOSE MONEY: This may sound naive, but believe me it isn’t. If you want to be wealthy, you must not lose money, or I should say must not lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing. Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big time — in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own business.
RULE 3: RICH MAN, POOR MAN: In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN’T NEED THE MARKETS. I can’t begin to tell you what a difference that makes, both in one’s mental attitude and in the way one actually handles one’s money.
The wealthy investor doesn’t need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to “make money” in the market.
The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the “give away” table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.
And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn’t mind waiting months or even years for his next investment (they call that patience).
But what about the little guy? This fellow always feels pressured to “make money.” And in return he’s always pressuring the market to “do something” for him. But sadly, the market isn’t interested. When the little guy isn’t buying stocks offering 1% or 2% yields, he’s off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he’s spending 20 bucks a week on lottery tickets, or he’s “investing” in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).
And because the little guy is trying to force the market to do something for him, he’s a guaranteed loser. The little guy doesn’t understand values so he constantly overpays. He doesn’t comprehend the power of compounding, and he doesn’t understand money. He’s never heard the adage, “He who understands interest — earns it. He who doesn’t understand interest — pays it.” The little guy is the typical American, and he’s deeply in debt.
The little guy is in hock up to his ears. As a result, he’s always sweating — sweating to make payments on his house, his refrigerator, his car or his lawn mower. He’s impatient, and he feels perpetually put upon. He tells himself that he has to make money — fast. And he dreams of those “big, juicy mega-bucks.” In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this “money-nerd” spends his life dashing up the financial down-escalator.
But here’s the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he’d have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.
RULE 4: VALUES: The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. I judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run.
Submitted by Richard Russell – Dow Theory Letters.
Summary of Research and Surveys for the More Money FP Program
April 29, 2011
The amount of the consumer debt in the US currently stands at approximately 2.4 trillion. Based on US census that is approximately $7,800 in debt for every man, woman and child in the US. The size of the total consumer debt grew nearly five times in size from 1980 ($355 billion) to 2001 ($1.7 trillion). Consumer debt in 2010 now stands at $2.4 trillion. (Data from Federal Reserve)
As of Oct 2010, appx 33% of that is revolving debt. Most commonly Credit Cards. The other 67% is in non revolving, ie, student loans, auto loans, and other leisure loans. Average new car loan is 27,600 and the loan value is 87%. Only 17% is actual investment money. The consumer debt statistics above does not contain mortgage debt.
Average American renter spends appx 24.99% of their disposable income on all their debt. Average American home owner spends 15.27% of their disposable income on their debt.
Average of 9 credit cards per American.
A staggering 1 in 177 homes in the U.S. has received at least one foreclosure notice. Canada’s is about 3x less (exact stats not available)
A whopping 61% to 70% of American households live from paycheck-to-paycheck (various surveys and polls), and not surprisingly, they have less than $1,000 in assets. 60% of Canadian households live paycheck-to-paycheck (Stats Canada)
The US national average is $48,800 debt per capita.
The Canadian national average is $43,800 debt per capita.
60% of people making 100,000 a year + are still living paycheck-to-paycheck
Credit Card Debt and Counseling Statistics
From a Georgetown study – credit card debt and related statistics:
Roughly 2.0 to 2.5 million Americans seek the help of a credit counselor each year, mostly to avoid bankruptcy.
From 1990 to 2000, the number of Americans seeking the help of a credit counselor doubled.
In two thirds of the counseling cases, the individual is referred to a household budget counselor, financial advisor or a social worker.
Many individuals experiencing financial difficulties have experienced a job loss, an interruption to their income due to illness, or a divorce / separation.
Nearly 75% of those seeking help from a credit counselor held a credit card.
The average person seeking a credit counselor carries a balance on two credit cards.
The average client seeking the help of a counselor had $43,000 in debt, of which $20,000 was consumer debt and $8,500 was revolving debt.
There are currently over 6,000 debt consolidation companies in the US.
Despite the Fed’s feelings about consumer credit, the bankruptcy law changes that were instituted in the fall of 2005 resulted in a rush of indebted consumers to file for bankruptcy. At that time, personal bankruptcy filings rose to their highest levels on record, with estimates in excess of 2 million filings.
According to Lundquist Consulting, a research company based in California, there were 115,000 bankruptcy filings in November 2010. Year-to-date, there were 9% more bankruptcy filings by November 2010 compared to that same timeframe a year earlier. Nationally, there were roughly 6,000 bankruptcy filings per million individuals, or 1 in every 160 people.
Attitudes and feelings on debt
According to a recent survey conducted by the National Association for Business Economics (www.nabe.com) the combined threat of subprime loan defaults and excessive indebtedness has overtaken terrorism and the Middle East as the biggest short-term threat to the U.S. economy. 32% of the survey participants cited loan defaults and excessive debt as the biggest threat, compared to only 20% citing terrorism as the biggest threat.(source: Dan Seymour, Associated Press)
64% of the people polled who carry debt admitted that debt is a cause of worry for them. In addition, the study found that men worry less than women about the debt they carry.(source: www.bankrate.com , Feb 2008)
Americans have conflicting attitudes about debt. While 91% believe debt can be controlled by disciplined saving and spending, 72% also believe that debt is a part of modern life and difficult to avoid.(source: www.bankrate.com , Feb 2008)
66% of Americans say debt is often the result of unfortunate circumstances beyond a person’s control, while 60% say it is usually the result of bad decisions.(source: www.bankrate.com , Feb 2008)
It’s little wonder that most U.S. consumers have an “I want it now” mentality. They don’t want to save up money to buy that cool smartphone or that antique bedroom set. They want it now. If that requires putting thousands of dollars on their credit cards, that’s what they’ll do. And that’s what the federal government, and most state governments, do, too.
States in Financial Turmoil
A recent news story in Forbes Magazine reported that at least 39 states expect to face a significant budget shortfall in 2011. In other words, more than half of the country’s state governments are broke.
Forbes reports that this total budget shortfall equals more than $180 billion in debt.
Survey done by Perkstreet in January of 2011, 83% of their survey respondents said that their current situations financially are the same or better, but 56% of the survey respondents said they are planning on putting “getting out of debt or saving more money” as their #1 resolution for 2011.
Associated Press Poll Nov 2010 (1000 Participants):
Even with the better overall feelings and spending plans, harsh debt problems are weighing down many people. About 1 in 8 people surveyed expressed worry about ever getting out of debt, 1 in 5 acknowledged brooding about their debts all or most of the time and 1 in 10 predicted his or her debts will be a major problem for the next five years.
In a survey of how people feel about debt the main buttons that came up were:
Just want out of it
Want or Need to figure out how to make “More Money”
50% of them had a “plan” to get out of debt, where the other “50” had no plan and felt “hopeless or depressed” so therefore did not see how a plan would help them. For the people that had debt and a plan, 90% of them “hated the debt” or “were unhappy that they ever got into it”. Of this survey only 1 consumer was debt free out of the 50 talked with. His response to when he got out of debt was that he felt “15lbs lighter” and was ready to “tell everyone and yell from the mountain tops”.
The phrase “More Money” was mentioned on average 3 times per survey
The majority of the focus is the non-confront of the debt and being apathetic about it rather than confronting what is there, starting to really look at all life expenses, cutting them and then focusing on making more money to move away from the debt faster.
Out of the 50% of participants that had a plan, 95% were still interested in a program that could help learn how to better take care of their money to keep them out of debt.
The average these participants were willing to pay for a program was $158.00.
The most common numbers to come up were between $97 and $125 individually
Sadly, many of the solutions in the market (especially the big players) seem to have little to do with helping people get out of debt and save more money, but rather seem more focused on forced upgrades and turning a deaf ear to a large (but largely unsatisfied) userbase. –Chance (budget software surveyor, personalfinancessoftwarereviews.com) 22 Softwares he reviewed.
Get out of debt/budget programs
In a survey of these programs the majority of them work in the same way.
Pushing the button of “Easy”, “Simple” and “Quick” to get out of debt.
Line up all your credit cards and choose the one with the highest interest rate and pay it off with your extra cash and move to the next one doing the same thing.
Put the majority of your “FOCUS on the DEBT”, rather than looking at the debt, figuring where you can cut even common expenses and then beginning to focus on making more money, selling unneeded items and focusing on flourish and prospering.
End of Summary
Here is some useful and important information regarding the nature of the Finance industry, and the options that are available to people attempting to reduce, handle and manage debts.
Options For Handling Debt: Debt Counseling, Credit Counseling, Debt Consolidation
There are several variations: Borrowing enough money from a bank or finance company to pay off all your bills at one time, leaving you with a lower interest rate and a single lower monthly payment. Borrowing against the equity in your home to pay off credit cards and other unsecured debts. Consumer Credit Counseling Services, who work with your creditors to lower your interest rates and help establish a repayment budget.
Bankruptcy under the Chapter 13 procedure
1. Borrowing From A Bank
If a person has enough collateral and near perfect credit this is an option. Those people do not qualify for Debt Negotiation since they
really don’t have any hardship.
2. Borrowing Against Equity In Real Property
This is based on ownership of real estate. If a home is worth more than what has been paid for it, there is equity, and many banks will
gladly lend money against it (assuming the credit report looks good enough). There is little risk to the lender, because if the borrower
defaults, they can force a foreclosure on the property that is used as collateral for the loan and recover their money.
For example, if a person has $25,000 equity in their house, they find a bank willing to loan $25,000 with the house as collateral. This is that is called a “second mortgage” or “equity line of credit.” Then credit cards are paid off. This can be the trickiest point in the program, if the debtor is a very disciplined person financially, and the hardship situation was temporary, they may emerge from the scenario with their credit intact. They still have the same level of debt, but it is structured more comfortably.
Many people, however, find that they end up in worse shape using this approach because they suddenly have $25,000 worth of credit available with new offers for credit cards coming in the daily mail. Then they get busy planning for the holidays, or they just have to buy that awesome home theater system for $3,500. Before they know it, they owe $10,000, $15,000, or even $25,000 again on those pesky credit cards, PLUS they have the second mortgage to keep up. The result is disaster.
There’s also another big problem with borrowing against equity. It is trading unsecured debt for a secured debt. If you default on a credit card balance, the creditor (if you ignore the problem long enough) can sue you and obtain a court judgment. Then they can put a lien against your house, so that if you ever sell the house, you’re forced to hand over the money. But they cannot force the sale of your house. A secured debt is a far more serious matter, because you’ve pledged your house as collateral. If you default on a debt that has been secured by your house, then you risk losing that home.
Why trade unsecured debts for secured debts? For most people, this is not the best move to make. Yet countless individuals fall for this trap year after year.
3. Consumer Credit Counseling Services
When a debtor enrolls into a Consumer Credit Counseling program (Often referred to as CCCS) they meet with a counselor who analyzes their monthly budget. The counselor then makes contact with their creditors and attempts to get lowered interest rates temporarily. The debtor makes one monthly payment to the counseling agency, which then disburses the funds to the various creditors. This approach is the one most often recommended by the banks themselves. The theory here is that the overall payment per month is lower due to the counselor’s success at obtaining lower interest rates and more favorable terms with the credit card banks.
This does not really work. The counseling service, while in theory a non-profit organization, actually receives compensation from the bank the money is owed to. The consumer pays a monthly $20 administrative fee, and the creditor (the original bank) pays 7% of the restructured debt to the CCCS program. The CCCS programs won’t work for a lot of people, largely due to the fact that in many cases people who try this option are really in greater hardship than the program can give relief for, they cannot really keep up the payments required, and end up dropping out or being dropped by the program when they start missing payments.
The following is an example of what one of our clients had to say about her experience with this type of program:
“I am currently with [name withheld]. As a matter of fact I am not real pleased. I have been in this for 14 months now. My debt was a
total of $50,300. I have been paying $543.00 every 2 weeks. The last statement shows where I have paid them almost $15,000. My balances have only dropped $960.00. First of all I think that I could do that on my own, just by talking with the creditors myself and save the $65.00 a month that this company is charging me and secondly this company told me that I would pay for 59 months. Well I have already paid for 14 months and my balances have only dropped $960.00, I do not see how in 45 months my balances are going to be paid for. Does this sound like an error on their part or is this how these programs work? Please respond.”
Additionally, most credit counselors do not know what to do with uncooperative banks. Their solution is often to simply enter the
client into the typical hardship program that they could have easily negotiated for themselves without the extra fees.
Lastly, with a CCCS program, the most frequent complaint fromex-participants is that they have little or no insight into what the
CCCS agency is doing on their behalf, and they have virtually no control over the process. They send in their single monthly payment, with no idea of how much is going to which creditor, and since most counselors are busy people who work based on high volume, getting a return phone call can be difficult.
Obviously not all CCCS organizations are inefficient but like any business, there are good and bad ones out there and finding the good ones can be like looking for a needle in a haystack.
However, they don’t really SOLVE the problem at all. If a debtor were to walk into the office of a credit counselor owing $25,000, they
would still owe $25,000 when they walked out.
What they can do is to GET THE PHONE TO STOP RINGING. This can indeed be a lifesaver if the debtor is already getting collection calls and the banks are starting to make their life miserable. Credit counseling is a helpful approach only for the consumer who knows that their financial hardship is temporary (say six months or less) and simply does not want to deal with the hassle of handling the phone calls in the meantime. Otherwise debt negotiation makes more sense.
CCCS programs also send a code that identifies their clients to the credit reporting agencies. This is a derogatory point on the debtor’s credit rating and will affect their ability to buy on credit.
When trying to sign up someone who is currently on a CCCS program, make sure to ask them to call the CCCS and get them to reverse the derogatory to the credit reporting agencies, as well as cancel with them officially.
4. Chapter 13 Bankruptcy
CHAPTER 13 – The final form of “debt consolidation” is actually not consolidation at all, but rather a form of bankruptcy called “Chapter 13.” We’ll discuss it below under its proper heading. Be forewarned, however, that many (if not most) of the ads you’ll see for “debt relief” or “debt consolidation” are really attorneys advertising to take you through a formal declaration of bankruptcy. Watch out!
Chapter 13 is usually called “consolidation bankruptcy” or “the wage-earner’s plan.” Using Chapter 13 bankruptcy, a person ends up
paying back most of the debts over a three to five year. The majority of people file the Chapter 7 bankruptcy.
5. Chapter 7 Bankruptcy
A declaration of bankruptcy, Chapter 7, forces all commercial creditors to cease and desist from attempting to collect the debts
owed them; it stops wage garnishment, reverses judgments, and generally wipes out the debts, depending on which form of bankruptcy is declared.
For some people bankruptcy is the only realistic option. If they owe $50,000 in debts, and will never earn more than $1,000 per month, they will never get out of debt. More than 1.4 million people filed personal bankruptcy in 1998 alone, and Congress is considering legislation that will make it tougher to take this option. In this form of bankruptcy, certain personal property is treated as
“exempt,” meaning your creditors cannot touch that property in attempting to recover the money you owe them. An automobile, a certain amount of home equity, personal effects like clothing, and some other assets, are usually considered exempt, although the exact details vary from state to state. Any property that is not exempt is liquidated and distributed to the creditors under the supervision of the court. Since most people entering bankruptcy have only exempt property anyway, there’s usually nothing left to distribute, so the creditors typically get nothing.
There are HIDDEN COSTS associated with bankruptcy that make it a very bad solution for most people. (The cost of filing bankruptcy itself is minimal. Depending on what state you live in, and depending on how much your attorney charges to perform the service, you can expect to pay anywhere from $300 on up to $1,500 for the whole process.)
The hidden costs are paying through the nose for important purchases made later in life. The bankruptcy stays on their credit file for ten years. For example if you want to buy a house three or four years after having filed bankruptcy. If you’re in good enough shape at that point to qualify for a mortgage, you’ll be able to buy the house easily enough. The problem is that you’ll pay a higher interest rate
than the average consumer who has never filed bankruptcy.
Assume one wanted to buy a $200,000 house a few years after filing bankruptcy, and put $20,000 down. They may only qualify for a 9.0% interest on the resulting $180,000 mortgage, versus 7% for an individual with clean credit, That extra 2%, over the life of a
30-year mortgage, will increase the monthly payment from $1,198 to $1,448, and the total of payments will be more than $90,000 higher!
And although Chapter 7 bankruptcy is very difficult and can be very expensive, it may indeed be the best solution for someone. But the majority of people who take this option really don’t know what they’re getting themselves into. Some people, especially when they are desperate, can get talked into filing bankruptcy without understanding the hidden costs in their financial future.
To treat as a loss or expense; specifically to deduct as a bad debt (part of the debt is charged off – Code of Federal Regulations).
“Charge-off” is primarily an accounting term used when a creditor eliminates a receivable (the balance due on an account) from the
creditor’s assets. It is sometimes referred to as a “non-performing asset’ or a “write-off.” The creditor for the purpose of fiscal
reports considers an account said to be “charged-off” uncollectable. However, most creditors will continue to pursue collection of the
debt, or may sell or assign the account to a collection agency. In practice, therefore, most creditors, or their assignees, do not
consider the debt uncollectable until the debt has aged considerably; in some cases, collection activity may span a decade or more.
Charged-off accounts are generally reported to the credit bureaus as an “I9″ (Installment Loan #9) or “R9″ (Revolving Account #9). The number 9 is the code for “charge-off.” Credit bureau reports do not reflect the reason for an account being charged-off, for example, whether caused through negligence or misfortune; unless the debtor himself or herself has submitted a brief explanation. The following is a typical annotation on a credit report which has been charged-off. Note, however, that each credit bureaus varies in their terminology.
In short, the credit industry generally regard charge-offs as meaning the debtor failed to meet the terms of the contractual agreement, or subsequent modified terms or offers of settlement, and the account has reached a point beyond the tolerance of the creditor.
Creditors vary widely in the number of days they allow an account to become delinquent before it charges off. Generally, an account will charge-off once it reaches 180 days past due, while some creditors allow 210 days. A few creditors will never consider an account as charged-off providing they are receiving some level of payment periodically. Accounts due-in-full within 30 days of statement receipt will sometimes charge-off after a mere 90 days past due.
Some states may regulate how and when a creditor may consider an account as charged-off. Also, certain types of secured accounts and real estate debts may need to follow certain guidelines before the creditor may consider the account as charged-off. In short, however, the charge-off period for most unsecured debts and financial obligations is arbitrarily set and controlled by the creditor.
Once an account is charged-off, it generally cannot be reversed and is considered derogatory with regards to a credit report. Charge-offs are often cited as a primary reason for being denied credit. The fact that the account has been charged off does not remove the obligation of the debt; in fact, the debt is now considered “due-in-full” due to breach of contract. The account may be sent to the creditor’s internal charge-off department for collection, to a third party collection agency, to an attorney for litigation, or sold to another party. Once a charge-off occurs, continued monthly payments (monthly activity) typically do not get reported to credit bureaus until the account is paid off. Once paid-in-full, the account is typically reported as a “paid profit and loss” account with a zero balance.
A “settlement-in-full” is an alternative to resolving a charge-off. This is a negotiated lump sum payment for less than the full balance;
the creditor accepting such payment as payment-in-full. This is what we do. This is called debt negotiation.
Even though both the debtor and the creditor considers the account “paid-in-full,” it is often reported to the credit bureaus as “settled-in-full” or “settled for less than full balance.”
Impact on Credit Rating
The vast majority of people will end up with BETTER credit after completing this program than they have now! This is mainly because
having extremely high debt in relation to income severely affects credit standing, even with a PERFECT payment history. Many people do not know this, and some will not believe you when you explain it to them, even though ANY honest banker will verify that this is the case.
On completion of our program your credit report will show that you settled on different terms than the original agreement, which is a
negative mark, but will also show that you have fully paid the balances to zero, which is a positive mark in that your income-to-debt
ratio will be excellent.
Thus the possibility is that your credit will become worse during the program but will recover to a large degree by the end of the program. You will be able to obtain secured credit such as a mortgage or a car loan due to your excellent income-to-debt ratio, though the settlements will cause a higher interest rate than you would be able to get if you had a perfect credit rating.
Most of our clients already have a poor credit standing (even if they have maintained a perfect payment history) due to carrying a high level of debt, and will have a better over-all credit standing after finishing our program because their unsecured debts are completely paid off.
If you were to apply for a loan right now, most likely you’d be turned down. Recent surveys in the mortgage industry have shown that
lenders heavily weigh the income-debt ratio when trying to approve loans. This will also be found to be true when applying for a car loan or lease. Many applicants for secured loans are being turned down even with a good payment history because they carry large amounts of unsecured debt. For this reason, most of our clients will be more qualified for home or car loans after completing our program than they are before starting, even if they used to have a perfect payment history. At the end of this program when you have paid off all your debts you’ll be in a much better position credit-wise. You will no longer owe anybody any money and your income to debt ratio will be completely flipped around. You will no longer be a risk and people will want to work with you.”
One thing is important to understand about this subject: Most of our clients learn not to put a lot of importance on the credit bureau reports. The reason people get into financial trouble in the first place is because of too much debt. And they get into too much debt because of a “good” credit report, which encourages banks to send people never-ending offers for credit cards. The correct solution is to use ethical methods to eliminate your debts and then organize your life so that you no longer depend on “credit” to handle financial problems.
By getting out of debt you will be able to enjoy the money you earn. You will have a zero balance on the accounts you have paid off. This is far better than continuing to have a high debt level in relation to your income and relying on credit cards or unsecured loans with high interest to help you “cope” with your financial life.
Also, at the end of your program you will receive written verification that your accounts are settled along with the reports to the credit
bureaus. Your credit report will be verified for correctness, so that you know that what it shows is true and accurate.
Keep in mind that the main function of your credit report is to let creditors know how much debt you are qualified to get into. By
completing our program you will eliminate the need to place a lot of importance on this. Regardless of whatever you may hear or read, the truth is that the people with the best “credit” standing are those who are debt free and refrain from using credit except for emergencies. You can enjoy this kind of freedom only by getting out of debt!
The client will wind up paying out a total of about 65% of the total amount they owe INCLUDING ALL FEES.
1. Establishment Fee: Considerable work is done for the client at the beginning of the program and for several months before we are paid for any settlements. For this reason, the establishment fee is non-refundable. It covers contacting your creditors; handling their
situations and anything they need to know; handlling their phone calls and letters; and also working with you to help with any issues that you run into or any calls that you continue to get from your creditors; and the setting up of the future settlements. It is 5% of your debt total. It is worked into your first payments.
2. Monthly maintenance fee: $40 a month while you are on the program after the establishment fee is paid.
3. Settlement fee: We are paid 25% of the amount we reduce your bills. For example, if you have a $2000.00 balance on an old credit card, we would negotiate a lesser amount as a settlement, and try to make that as low as possible. In this example, if we obtained the creditors agreement to settle at 50%, we are saving you $1000. We would be paid 25% of that amount, or $250.00. Thus in this example you would pay a total of $1250.00, consisting of $1000.00 (50% of $2000.00) to the creditor, plus our fee of $250.00. This means you will have settled this debt fully for around half of the total balance.
What We Do
Following is a description of the actions we take on behalf of clients:
We negotiate with creditors to get them to accept a portion of the money clients owe and agree to clear the debt fully.
Clients could be completely out of debt in 36 months. Every month our clients save money in their own account for the settlement of their credit cards or unsecured loans. When enough money is saved we make an offer to a creditor to settle an account. A copy of a proposed settlement is sent to the client for approval. If the client is happy with the settlement and agrees to the terms, we complete the agreement with the creditor and payments are made to settle the account at the reduced amount. We continue this process until all accounts have been settled. At the end, the creditors report to the credit bureaus that the accounts were settled, and that there is now a zero debt balance remaining with them. Creditors then send a letter confirming settlement, stating that no further money is owed.
Now, the way this works is that rather than continue to pay your creditors, what you would do is start saving the money. You put it
aside in a savings program. One reason for this is that all the payments you are making now – if you are able to make them – are
So, if you were taking that money and setting it aside, you would be telling the banks, “Well, I’m not going to pay you interest
But, more importantly, banks will not negotiate or work with anyone who is continuing to make monthly payments. So, by no longer
paying them you are communicating to them that you are in trouble.
So, what we do as a service is: we make this situation a workable
solution for you.
What happens is: you take this money that we are talking about here, and you put it into savings every month. And it accumulates there toward the eventual settlements of these accounts. Then we negotiate with your lenders to get them to accept a portion of what you originally owed, and to clear the debt fully upon receipt of that payment.
And they’ll do this on the basis of a bulk payoff. So, if you owe $10,000 on one card, for instance, we might get them to accept $4,000 as the settlement. (And that, by the way, is a very typical settlement.) That would mean you’d pay $4,000 to the bank; and they would clear the debt and call it satisfied.
This is legal. It’s a favorable settlement. It’s made on agreeable terms with the bank. This is something banks have been doing as long as there’s ever been banks — quite a bit longer than there’s ever been credit cards or payment histories. And this is a very traditional thing that we are doing.
You could actually do this yourself if you have the stomach for handling angry creditors, and you were willing to hold off and put
money into a savings account long enough to get enough money to pay them.
Most people find it much more advantageous to hire someone like us. We do this professionally; we are very good it; and we are able to get routinely much better settlements than you’d be able to get on your own.
Now, we earn fees for that. So, you don’t get all that money saved. You pay us some of the money that we save you.
So, let me give you an example. Let’s say that it was the $10,000 I mentioned. So, you pay them $4,000. We are going to get paid 25% of what we save you. So that would be of the $6,000 we save you; so we would get 25% of that – which is $1,500.
So, that means you are going to pay them $4,000 and you are going to pay us $1,500. So, that’s $5,500 to settle out and clear a $10,000 balance – which means you save $4,500. Not to mention the thousands of dollars of interest you have saved!
We are experts at this. We have contacts with every major bank. We have a long list of clients with every major bank. They know us. They deal with us every day. And we are able to get settlements as low as 30% fairly routinely on many accounts.
And one particularly aspect of this that’s very important is that: we take over all communication with your creditors. So, from the point
where you start this program, we are going to be taking very aggressive actions to get them to stop contacting you at all – either
in written or verbal correspondence. And they are going to take us as the representative. And that’s for the duration of the program.
So, it gets them off your back so you can go live your life; worry about one monthly payment that’s quite a bit less than what you are
trying to keep up with right now – that lasts for 2-4 years – and all you have to do is assist us occasionally by submitting documents that we ask you for. Occasionally you’ll have to approve a settlement that’s being looked at – and watch your debts go away over time.
Our program is this: 1)We handle the creditors until they are ready to start looking at settlements. 2) We negotiate as low a settlement as we possible can on each individual account.
Our negotiators are professionals. All they do is talk to creditors and negotiate settlements.
We cannot guarantee what the settlements are going to be. But we tend to estimate conservatively in your favor. Chances are your program will be for a shorter period than our quote, because we are hoping to settle your accounts even lower.
Most of our clients prefer that we control the money, because they know that they have pressures and they would like us to deal with it. So, what we’ve done is we’ve set up a special relationship with the local branch of United California Bank here, where our company is located. We set up savings accounts for each client here. It will be in your name — it’s actually your account – but all the savings for this program goes into that account.
We arrange it so that you automatically have the money transferred from your regular account on the day you choose very month. So, you don’t have to worry about it. All you have to do is make sure that you budget your money correctly so the money’s available every month; and it automatically goes without your doing anything.
It is your account, your money. We don’t have access to it. You have to authorize any settlements before we finalize them. You are
the one who is actually going to pay the creditor out of that account.
We simply help you maintain a high level of control over this. We earn our money by making sure that you do.
Credit Central > What a FICO=AE Score Considers > How a Score BreaksDown
These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit long – the importance of these categories may be somewhat different.
35% timely payments
15% length of credit history
10% new accounts
10% types of credit
An R9 is when your debt gets charged off from a bank. When we negotiate the debt, we get the balance to zero and totally turn around their INCOME to DEBT ratio. This puts them in a better situation because all they have now is an income. The R9 does NOT come of their credit report until after the 7-10 years. The R9 is what shows that they did get into trouble, the zero balance shows that they handled it honorably.
Data On Your Credit Score
Below you will find terms, F.I.C.O. credit scoring, F.I.C.O. scoring percentages, true cost of making minimum payments, true savings using Debt Negotiation, an example of a credit report and how to figure your Debt to Income Ratio. This will give you a better understanding and will assist you in making an educated decision.
Insolvent: Unable to pay debts owed (making minimum monthly payments) Solvent: Having assets in excess of liabilities; able to pay one’s debts =
F.I.C.O.: In accordance with the rules or standards in which debts and assets are scored; measure of solvency
Above 730 Excellent credit
700-729 Good credit
670-699 Lender will take a closer look at your file
585-669 High Risk, you will not be eligible for the best rates and
Below 585 Credit option may be limited or not available. Lender will
need to consider other information in your application.
35% Timely payments
30% Debt to income ratio
15% Length of credit history
10% New accounts
10% Types of credit
Something that you might find either interesting or scary. I find it to be a travesty that paying a credit card debt can take up to 48
years. I was working with my credit card debt calculator.
The true cost of making minimum payments on $65000 in credit card debt. It will take you 569 months or over 47 years to be rid of your debt. In that time, you will pay $97,115.40 in interest.
The payment plans of our programs with The Debt Professionals range 6-48 months. The following is based on completing the program in 48 months.
I was looking at the numbers. Figuring on an, 65,000-dollar debt at 18% and minimum payments calculated at 2.5 your minimum payment would be $1625. Per month. This will take you over 47 yrs to pay-off, and you will pay $97,115.40 in interest alone. Totally you will pay $162,115.40
If you get into the program with us your monthly payment ($919.) will be lower than your current monthly minimum credit card payments (aprox 1625). The good news is you will pay approximately $44112. on the same 65000 Dollar debt, and that includes all of our fees. Also, you will be completely out of debt in 48 months, and Financially Solvent!
It will show that you “took control” of your obligation and paid it off in 4 years. NOT 47 years. Hence your credit report will reflect a
zero “0″ balance.
Beginning the program
Date 2002 Company xyz acct #12345678 $65000. Outstanding
END OF PROGRAM
Date 2006 Company xyz acct #12345678 “0″ Balance Paid
The “0 balance” is why most people at the end of the program qualify for a Prime Rate mortgage.
“Debt to Income Ratio” The following is what a mortgage company suggests “prior” to applying for a loan!
Take all of your monthly debts and divide it by your monthly gross income
NOTE credit cards are calculated based on the minimum payment.
If your percentage rate is 36% or below you are Financially Solvent and “ACCEPTABLE” for a loan.
If your percentage rate is 38% and above you are Financially Insolvent and “NON ACCEPTABLE” Limiting how much you can borrow and most likely increasing your interest rate on the loan, EVEN IF YOU NEVER MISSED A PAYMENT IN YOUR LIFE.
Market Buzz – Does Warren Buffet think that Gold is Undervalued?
This week we are going to do something a little different and take a look at a few excerpts from the Annual Letter to Shareholders (http://www.berkshirehathaway.com/letters/2011ltr.pdf) of the world’s greatest investor, Warren Buffet. The subject matter is gold and Buffet applies his quintessentially simplistic approach to valuing the shiny metal. For decades, Buffet’s Annual Report and Letter to Shareholders has been almost required reading for value investors and financial professionals across the globe. This very example provides excellent insight into how Buffet applies the concept of intrinsic value to his investments.
“A major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”
“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at b a rate far inferior to that achieved by pile B.”
Disclaimer | ©2012 KeyStone Financial Publishing Corp.
Canadians’ focus on debt reaches highest point in five years: Manulife Investor Sentiment Index
For Immediate Release
January 11, 2011
Canadians’ focus on debt reaches highest point in five years: Manulife Investor Sentiment Index
WATERLOO- More Canadians say their top priority is to tackle their debts as they head into the New Year, according to the
latest national poll for Manulife Financial, Canada’s leading insurance and wealth management company.
Those who say their top financial priority is to pay down credit cards, lines of credits and mortgages hit a new five-year high in
Manulife’s poll, conducted in mid-December by Research House, an Environics Company.
More than a quarter of Canadians (29 per cent) said their top priority is to pare back their consumer credit, up from a low of 20
per cent heading into 2008. The next most-important priority – paying down the mortgage – was chosen by 14 per cent,
identical to a year ago, but up from 11 per cent the prior year.
The third-ranked priority cited in the poll, to save for retirement, was named by 13 per cent of the 1,000 respondents, up from
11 per cent a year ago.
“Paying down debt is central to a successful financial plan and it’s encouraging that many Canadians are growing more
focused on taming their credit, mortgages and other bills: said Paul Rooney. President and CEO, Manulife Canada. “Given
the recent economic challenges so often in the news, we shouldn’t be too surprised that Canadians are working harder to get
their finances in shape.”
When asked about their overall financial position, almost half (49 per cent) said they are better off than five years ago.
Another 28 per cent say they’re in the same financial spot as in 2005, while less than a quarter (23 per cent) say they are
Manulife provides financial solutions to more than one in five Canadians with a wide range of financial services and products,
he said, and one of our key goals is to help them make better financial decisions.
“We always encourage people to work closely with an advisor and stick to a financial pian,” Mr. Rooney added. “People with
integrated financial plans, working with strong, reliable and trustworthy companies, are generally better prepared for the future,
are more confident about reaching their goals and can deal with the ups and downs in the economy.”
The 48th quarterly Manulife Investor Sentiment Index fell back six points in mid-December mainly driven by less interest in
investment real estate, equities and balanced funds.
The index closed out 2010 at +20, two points ahead of its level a year ago, following some wide swings earlier in 2010-
particularly an eight-point drop in June on the heels of a record leap of 15 points in March, the biggest gain since 1999.
The quarterly index monitors how Canadians say they feel about investing in 11 different categories and vehicles. The index
reflects the percentage of those who say they believe it is a good or very good time to invest minus those who feel the
Since its launch in 1999, the Manulife Investor Sentiment Index has remained in positive territory overall. It peaked at +35 in
early 2000, but fell to +11 in December 2001. During the past several years, the index had generally remained near six-year
highs, above +20. But the index suffered a sharp drop in late 2008, to reach an all-time low of +5.
In the most recent survey, all 11 categories covered in the poll lost some ground. The largest declines in the latest survey were
for Registered Education Savings Plans, segregated funds, investment property, stocks and balanced funds.
Principal residences still remain the most popular investment category – with a wide lead over every other area.
http://www.manulife.comlpublic/printpreview 10.Jang=eneeartld= 146047,00.html