Should I Settle?

Q:  I have creditors who have offered a settlement of my debt, but they will not provide me a written confirmation of their settlement offer.  Should I settle my debt with them?

A:  Settlement of a debt can be offered as a way to collect on your debts.   Generally, the creditor will agree to accept a lesser amount for the debt in an effort to get funds right away.  A debt settlement is a variance from your contractual commitment to repay that debt in full, so it is reasonable that you should ask for and receive a written confirmation of the arrangement or have the capability of sending your written understanding of the commitment and have them acknowledge by signing it.

Debt settlement can have some negative impact on your credit score as the debt is not fully repaid and the settlement does not necessarily remove the history from your credit report, so it could impact credit decisions in the future.  Some collections agencies may offer to record the payment as being paid in full even though it was settled.

Collections departments often have purchased your debt from another creditor at a huge discount.  It is worthwhile for you to have that company validate that you actually owe them the money.  You can find a template letter at the Consumer Financial Protection Bureau http://files.consumerfinance.gov/f/201307_cfpb_debt-collection-letter-2_more-information.doc.  It would be just terrible to pay someone contacting you only to find out that they don't own the rights to collect on that debt.  Someone collecting a debt must be able to prove that this debt belongs to you.  If they cannot, then the credit reporting agency can remove this from your credit report.

Paying an agent to settle your debts can be a costly venture and can damage your credit score.  At Bank On we encourage personal empowerment to take charge of your financial obligations yourself.

Finally, a word of caution.  If a debt is settled, you will likely receive a 1099 at the end of the year for the difference between what you owed and what they received.  The settled amount is treated as income - as if they had given you that amount of money.

Reducing Payments

1 Q. If I am ½ way through my car loan can I reduce my monthly payment by contacting the bank?

. A.  Yes, and no. There are some options you can try, however, not every bank/credit union offers them.

1.  Hopefully, you are paying your bills on time (and attending your BankOn classes!) so your credit score should be improved. If this is the case, I absolutely recommend you contacting your bank/credit union and ask them to review your loan. Tell the Loan Officer you would like to lower your payment by qualifying for a lower interest rate. Most financial institutions will agree to review your loan – but not all. If your current lien holder cannot, or won’t review your loan, I recommend calling another bank/cu for a quote. Many people don’t realize you CAN refinance your vehicle somewhere else.  

       1.   Sidenotes:

             i.       Do NOT accept an  offer to “cash out” any equity in your vehicle, therefore increasing your loan amount. Vehicles depreciate in value the older they get. Don’t get trapped!

             ii.      Also,  make sure they quote you a payment based on what your existing remaining term is (aka how many months do you have left in the loan). For example, if you have 30 months left of your original 60 month loan, they should quote you an interest rate and payment based on a 30 month loan. Don’t get tricked!

2.   Lowering your payment is NOT always beneficial. Some lenders will agree to lower your payment, but in order to do so, they will extend the term of the loan. This isn’t a strategy we recommend, UNLESS you are in crisis mode and need to find ways to decrease your expenses for a bit. After your crisis is over, we recommend increasing your payment back to where it was, so you don’t pay more in interest. Increasing the term always means increasing the amount of interest you pay back.

3.  As always, talk to your coach before making any major changes in your financial picture. Also use your debt snowball to see what refinancing your auto loan will do to help you become debt free! 

Amy Courtwright, Bank On Partner, Virginia Beach Schools Federal Credit Union

ROTH IRA

Q. If I add money to a ROTH IRA will it help reduce the taxes I pay?

A. The Roth IRA does not provide any tax-reducing benefits now (this year), but it will in the future when the money is withdrawn (in retirement). I think the best way to explain how this works is to compare the types of IRAs. Individual Retirement Arrangements (IRAs) come in two types; Roth and Traditional. The difference between the two is the timing of the taxation.

Traditional IRA. If you qualify, you can put money into a traditional IRA account and take a tax deduction for it in the year the contribution to the Traditional IRA is made. The money going into the Traditional IRA is not taxed, but when you take money out of the account it is taxed as income to you at that time. (Whether or not you qualify depends on your income and if you have access to an employer-sponsored retirement plan (i.e. 401K) where you work.)

Roth IRA. If you qualify you can put money into a Roth IRA. You do not receive a tax deduction for your contribution, but the money can be withdrawn tax free after you reach age 59 ½. The money going into the Roth IRA is taxed, but the money coming out is not taxed. (Whether or not you qualify to put money into a Roth IRA depends on your income.)

This raises the question of which gives the greater lifetime tax benefits; Roth or Traditional. I don’t like to give generic, one-size-fits-all advice because everyone’s financial situation is unique, but in this instance I will go out on that limb. If you are under age 45 you will almost always see a greater lifetime tax benefit by using a Roth IRA. That’s because neither the amount you contributed to the account, nor the investment income that accumulates in the account is taxed when it is withdrawn. If you are young and that money has 15 or more years to grow before you start withdrawing it, you should have a significant amount of tax-free money available to you in retirement.

Many people over age 45 will also receive greater lifetime tax benefits from a Roth IRA. There are a lot of variables that go into determining which type of IRA is best for you. If you need help identifying and navigating those variables I recommend consulting a professional financial planner.

Paul Allen, Bank On Coach, Member of Financial Planning Association of Hampton Roads

Additional Mortgage

Q.  If I add an additional amount to my mortgage payment will it affect my ability to itemize my taxes?

A.  That’s a great question! It correctly identifies that having a mortgage is typically the dividing line between whether itemizing your taxes is more beneficial than taking the standard deduction.  Most people with a home mortgage itemize their tax deductions. Most people without a mortgage use the standard deduction. It is legal to do either each and every year, but you want to do the one that is most advantageous to you as a taxpayer. If you have a mortgage it is usually more advantageous to itemize.

Here’s the short answer to the question: It won’t affect whether itemizing is more advantageous when you first start to make additional payments, but if you plan on keeping your house for a long time it might affect you later down the road.

Here’s why – the part of the mortgage that is deductible from taxes is the interest. The interest is charged on the principle – the amount you borrowed. When you make additional payments above the minimum the bank is required by law to apply those additional payments to reduce the principle. As the principle shrinks the amount the bank can charge in interest on the loan also shrinks. That’s the whole point of making additional payments – to lower the total interest you pay on the loan!

As the amount of interest you are paying on the mortgage shrinks over time, so does your tax deduction for mortgage interest. If you significantly shrink your mortgage interest payments, it might become more advantageous to use the standard deduction. You always have the ability to itemize, but if your deductible interest payments are low you might not want to!

There are other factors in addition to taxes that determine if paying your mortgage off early is the best course of action for you. Do you have an emergency fund established? Do you have other debts at higher interest rates (student loans, car loans, or credit cards)? Do you have access to a retirement plan with matching money from your employer? It’s never a bad idea to get rid of mortgage debt, but be sure it is the best move for you to make at this time. If you aren’t sure, contact a professional financial planner to help you work through all of the details.

Paul Allen, Bank On Coach and member of Financial Planning Association of Hampton Roads

Repair or Replace

Q:  My car needs some repair work that could become costly.  Should I just trade it in for a new car?


A: This type of decision can be difficult. The value of the vehicle, the cost of the repair and your finances factor into the decision. It is important to have a savings fund built up for emergencies including car repairs. With adequate savings for the repair an individual may avoid the need for another vehicle and additional debt. 

1. Review your auto insurance to evaluate your deductibles/premium
2. Experts indicate that used cars are very functional and depreciate less than new cars. A used car can be more cost effective option than buying a new one. An option to consider is buying a 2-3 year old car with a good repair record. Consumer Reports magazine June issue is an excellent source of information on car reliability and should be available through your library.

You can further discuss the options with your coach.
Posted by Gary Katz, Bank On Coach
If feasible obtain estimates from at least 2 mechanics to make sure you have a reliable repair estimate. A general guideline: If your annual repair bills exceed a year’s worth of car payments, then you should consider another vehicle.

Bankruptcy and Bank On

Q:  If I file for bankruptcy, can Bank On help me?


A:  There are a number of our Bank On Hampton Roads participants that are either considering bankruptcy or recovering from bankruptcy when they begin so my message to you is that you are not alone.  Bank On Hampton Roads can be helpful for the overall assessment of your financial situation and help you determine if you have any alternatives to bankruptcy. The Bank On lesson entitled “Crisis Mode” helps you to navigate through situations where income is not sufficient to pay your creditors.  By having a plan in advance to prioritize payments and negotiate with creditors, you may be able to avoid a crisis situation altogether. 

Bankruptcy may provide temporary relief at a cost.  Bank On Hampton Roads will help you develop the capability to break the debt cycle and keep you from building more unnecessary debts.  With the help of your coach, you will examine the underlying causes of your debt, so you know and understand how you ended up in your current financial hardship and build a plan to prevent future problems.

There are a number of legal resources to help you determine if bankruptcy can help you including legal aid if you are eligible and the legal referral hotline (757) 623-0132 if you are not.  If the debts are owed to government as in the case of tax debts and student loans, they may not be eligible for inclusion in bankruptcy.  Another thing to consider is that not all bankruptcies will eliminate your debts.  Most offer a repayment plan that allows you to repay the debt over time. 

Beyond the cost of a lawyer and court costs, there will likely be some lasting costs to your credit.  A bankruptcy will appear on your credit report for a number of years and can make it more difficult to obtain housing, transportation or even buy insurance.  The cost of borrowing will likely increase because of the negative impact bankruptcy has on your credit score.  This negative effect will decrease over time and eventually the record of your bankruptcy will get dropped altogether from the credit report.

Posted by Gary Katz, Bank On Coach