When to choose bankruptcy over debt management

By Steve Bucci

Dear Debt Adviser,
I have more debt than I can handle, and I am enrolled in a debt management plan. However, my expenses still amount to more than I bring home, and the debt management agent knew this going in. They calculated my debt payment as $344 with the program, and they never advised as to whether I should file for bankruptcy. Should I have filed for bankruptcy instead? If I file for Chapter 7, would I have to include all of my debt including personal loans? 
-- Shirley

Dear Shirley,
Slow down, Shirley! You have a lot going on here, so let's take things one at a time. First, you should not have been enrolled in a debt management plan if your income level does not allow for the monthly payment. Call the debt management agency as soon as possible, and ask to speak with a supervisor. Have them go over your case from start to finish. If a mistake as big as putting you in an unaffordable plan was made, other issues may have been overlooked as well. Find out if your payment can be lowered to what you can afford. Many agencies can offer a hardship debt management plan titled a "call to action," which lowers the interest rate on your credit card accounts to the lowest possible level. That may decrease your monthly payment enough to make the debt management plan work for you.

A reputable credit counseling agency will not enroll persons in a debt management plan unless the counselor has provided a spending plan that balances income and expenses. If you are having trouble meeting your monthly payment because you are not following the spending plan provided by the agency, then you have a decision to make. Either get back on track and spend only as the plan allows, or increase your income with a part-time job or other income source.

Second, as for bankruptcy advice, I'm not surprised the counselor didn't give you any. Only an attorney can give legal advice, and bankruptcy is a legal process. However, your counselor can and should go over the pros and cons of filing for bankruptcy and whether it would make sense for you to get a legal opinion for your particular situation.

Third, should you find you absolutely cannot afford to make your payment and want to explore bankruptcy, I recommend you contact an attorney who specializes in consumer bankruptcy. To qualify for a Chapter 7 filing (in which your debts are forgiven and not repaid) your income must be below the median income for your state.

You would typically include all your debt in a bankruptcy filing, but you can file a reaffirmation document for a particular debt(s) if you have a good reason for doing so. You and your attorney will have to sign the reaffirmation document that states you can afford to repay the debt and it will not be an undue hardship on your post-bankruptcy budget to continue to pay the debt you would like reaffirmed. Typically, unsecured debts would not be included in a reaffirmation, which would include personal loans. Most reaffirmations would be for car or mortgage loans. I'm not sure why you would want to reaffirm a personal loan, but if you can convince the court and your attorney that it would be in your best interest to do so, you could file a reaffirmation for the debt.

Lastly, you wanted to know if you should have filed instead of going on a debt management plan. My answer is that if the debt management plan can be made to work, you are usually better off. A bankruptcy can stay on your credit report for up to 10 years. A poor credit report may affect your ability to get a decent apartment, home or insurance for years to come. If you have no other way out, then you may have no choice but to file. Just be sure you consider all the potential ramifications before you decide.

Read more: When To Choose Bankruptcy Over Debt Management | Bankrate.com http://www.bankrate.com/finance/debt/choose-bankruptcy-over-debt-management.aspx#ixzz1hOvuZp5p

There are four ways to protect yourself from the current economic turmoil.

Paying for a cult of risk
Anneli Knight
November 23, 2011

Money extremes … governments need to create policies to avert further financial woe. Photo: Reuters

There are four ways to protect yourself from the current economic turmoil.

The former derivatives trader who in 2006 predicted the global credit crisis, Satyajit Das, says the world economy will continue to deteriorate unless international policymakers co-operate. Either way, he says, we're heading for dramatic change and offers a few tips on how to weather the storm.

In his book Extreme Money: The Masters of the Universe and the Cult of Risk, Das has coined the term ''extreme money'' to refer to the ''process of financialisation'' that has underpinned the banking sector and global economics throughout the past 40 years.

''Money was always a medium of exchange, a store of value but, essentially, what happened in the last 40 years is that it changed … and became the driver of economies,'' he says.

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Das says this process made borrowing a key driver of growth. ''You end up with this situation of pure speculation as a way of making money - we like to call it investment.''

His book chronicles the recent history of banking and the way it has shifted from a simple era - in which banks existed to borrow and lend sensible amounts, offer convenient and safe payment mechanisms such as credit cards and help manage risk with products such as insurance - up to the current state of chaos.

''Extreme Money spans this period and tries to turn out every little piece, which on its own looks fine, but when you add them all up it's this horrific tale of how we deluded ourselves for over 30 or 40 years.''

Das says governments are in denial about the huge co-operative effort required to avoid turmoil. ''We've been trying to defy financial gravity; the question is: do we come down in a gentle control glide or do we just crash?''

Proactive and aggressive policies taken by global leaders are required to cushion the landing, Das says, acknowledging the inherent challenge in garnering international agreement on policies that will bring pain.

''There's huge denial because if people want to confront this they'll have to unravel a lot of things they've put in place over the last 30 years, which would mean lower living standards, which, in my view, is inevitable anyway.''

Regardless of the approach world leaders take, Das says, individuals can begin to take steps now to cushion their own financial circumstances.

TAKE CHARGE

Taking the time to understand your investments is crucial, Das says. ''You're the only person who can make a decision about what you're comfortable with,'' he says. ''We've just delegated that to other people - funds managers, advisers - and generally, on average, they've not done a great job. There's also a conflict of interest because that person will always think their product is the best, naturally, even if it's not best for you.

''People have just walked away from trying to understand this, which is crazy because it's a very important part of your life. You have to understand this because otherwise you'll pay for this and you'll pay for this with your hard-earned cash.''

REDUCE DEBT

Das forecasts borrowing costs may increase and it will be more difficult to secure a loan as the debt problems in Europe spread to the US and Japan and make it more difficult for Australian banks to lend from overseas. In a time of higher risk, higher cost and less availability of funds, you should reduce your debt, Das says. ''Essentially, reducing your debt means cutting your mortgage, or, if you have a business, reduce the debt as quickly as possible.''

SAVE MORE

''We're entering a period of lower returns, which means we need to save more,'' Das says.

''Individuals are going to need a lot more savings than they imagined because what Australians have relied on are two things: the value of their houses, which is a complete illusion because your house is not an investment, it is where you live. And the other savings are superannuation but the problem is your retirement savings are not earning enough to give you a reasonable lifestyle at retirement. Retirement savings earnings are pretty abysmal and they're not going to go up - if anything they're going to be lower.''

As the global economy changes to a more realistic situation, Das says the Australian government will be forced to pull back funding for services such as education, health and aged care.

''You are going to need more of your personal resources to pay for all these things than you imagined because governments can't afford to pay.''

SEEK CAPITAL SECURITY

With a forecast of low growth and high risk, Das says investors should seek secure investments with a focus on income rather than capital gain.

''You really need to get investments which provide you with income you can live on,'' he says. ''If you have money to invest, make sure the money you have is protected. That will be very important.''

Key points

Satyajit Das recommends four ways to protect yourself:

❏ Take charge of your own finances.

❏ Reduce your debt.

❏ Save more.

❏ Be concerned with capital security and income rather than capital gain.

Satyajit Das's book Extreme Money: The Masters of the Universe and the Cult of Risk is published by Portfolio (Penguin, $32.95).

Read more: http://www.smh.com.au/money/planning/paying-for-a-cult-of-risk-20111122-1nrfd.html#ixzz1eXknG4Ce

Sources of Shareholder Value

Sources of Shareholder Value

For the equity holder, the source of future cash flows is the earnings of firms.

Earnings create value for shareholders by the :

• Payment of cash dividends
• Repurchase of shares
• Retirement of debt
• Investment in securities, capital projects, or other firms.

If a firm repurchases its shares, it reduces the number of shares outstanding and thus increases future per-share earnings.

If a firm retires its debt, it reduces its interest expense and therefore increases the cash flow available to the shareholders.

Finally, earnings that are not used for dividends, share repurchases, or debt retirement are retained earnings. These may increase future cash flows to shareholders if they are invested productively in securities, capital projects, or other firms.

Which creates more value?

Cash dividends: Some argue that shareholders most value stocks' cash dividends. But this is not necessarily true. In fact, from a tax standpoint, share repurchases are superior to dividends. Cash dividends are taxed at the highest marginal tax rate to the investor; share repurchases, however, generate capital gains that can be realized at the shareholder's discretion and at a lower capital gains tax rate.

Share repurchases: Recently, there have been an increasing number of firms who engage in share repurchases. The shift from dividends to share repurchases is one factor that has raised the valuation of some equities.

Debt repayment: Others might argue that debt repayment lowers shareholder value because the interest saved on the debt retired generally is less than the rate of return earned on equity capital. They also might claim that by retiring debt, they lose the ability to deduct the interest paid as an expense. However, debt entails a fixed commitment that must be met in good or bad times and, as such, increases the volatility of earnings that go to the shareholder. Reducing debt therefore lowers the volatility of future earnings and may not diminish shareholder value.

Reinvestment of earnings: Many investors claim that this is the most important source of value, but this is not always the case. If retained earnings are reinvested profitably, value surely will be created. However, retained earnings may tempt managers to pursue other goals, such as overbidding to acquire other firms or spending on perquisites that do not increase the value to shareholders. Therefore, the market often views the buildup of cash reserves and marketable securities with suspicion and frequently discounts their value.

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Fear of misusing retained earnings

If the fear of misusing retained earnings is particularly strong, it is possible that the market will value the firm at less than the value of its reserves. Great investors, such as Benjamin Graham, made some of their most profitable trades by purchasing shares in such companies and then convincing management (sometimes tactfully, sometimes with a threat of takeover) to disgorge their liquid assets.

Why management would not employ assets in a way to maximise shareholder value, since managers often hold a large equity stake in the firm? The reason is that there may exist a conflict between the goal of the shareholders, and the goals of the management, which may include prestige, control of markets, and other objectives. Economists recognise the conflict between the goals of managers and shareholders as AGENCY COST, and these costs are inherent in every corporate structure where ownership is separated from management.

Payment of cash dividends or committed share repurchases often lowers management's temptation to pursue goals that do not maximise shareholder value.

In recent years, dividend yields have fallen to 1.5%, less than one-third of their historic average. The major reasons for this are the tax disadvantage of dividends and the increase in employee stock options, where capital gains and not dividends figure into option value. Nevertheless, dividends historically have served the function of showing investor that the firms' earnings were indeed real.

Recent concerns about aggressive accounting policies and the integrity of earnings following the Enron debacle may bring back this once-favoured way of delivering investor value.

Ref: Stocks for the Long Run, Jeremy Siegel

How to pay off your debts

Afghan horsemen play Buzkashi on the outskirts of Kabul. Buzkashi is the national sport of Afghanistan, which literally translated means "goat grabbing". A headless carcass is placed in the centre of a circle and surrounded by players of two opposing teams. The object of the game is to get control of the carcass and bring it to the scoring area
(Rafiq Maqbool/AP)

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From Times Online
January 31, 2008

How to pay off your debts
James Charles

We would all like to bury our heads in the sand when it comes to debt, but the stark reality is that the longer you leave it, the worse your situation will become, so act now. There are a number of simple steps that you can take to tackle the problem head on and get back in the black.

Prioritise
Work out which debts you need to address first. Some will be more urgent, while others, such as a student loan, can be cleared over a longer period of time. You could divide them into two groups: priority and non-priority. Mortgage repayments, for example, would be considered priority debts because failing to make your repayments could result in you losing your home.
Whether you want to tackle the smallest, largest, most expensive or cheapest debt first, it is vital that you keep up the minimum repayments on all debts. Not doing so can damage your credit score and reduce the chance of obtaining credit in the future.

Background
How to improve your credit rating
How to choose a credit card
How to pay off your debts
IVAs explained
Student loans explained
Related Links
Store card interest 'extortionate'
1.7m households request debt help
Fight back against rising interest rates

Budget
To help to work out how much spare cash you can devote to repaying debts, it is crucial that you draw up a budget.
You can use a budget calculator online or simply sit down with an old-fashioned pen and paper and list all your income and outgoings. Then try to cut back where you can and keep a lid on costs wherever possible.

Boost
A simple and obvious way to speed the process of clearing your debts is to raise your monthly payments, and there are lots of ways to get the extra money you will need to do it.
The possibilities are almost endless, from renting your driveway to selling your old mobile phone. You could try selling unwanted presents or gadgets on eBay or other auction sites.
It is also worth making sure that you are not due any tax credits or government benefits.
Check that you are on the best deals for your insurance, loans, mortgages and credit cards by using price comparison websites such as Moneyfacts.co.uk or moneysupermarket.com, Also check whether you are paying for loan insurance on your mortgage or other credit and decide whether you really need this cover.

Savings
If you have a pot of savings locked away for emergencies, consider using the money to clear debt. It is likely that the cost of your debts is more than the return on your savings.

Snowballing
Once you have organised your debts, you may want to look at clearing them through a process of snowballing.
This involves making the minimum payments on your debts but using any extra cash to pay off one of them. Once you have finished clearing this first debt, you should then focus on the second debt, using the same extra cash, plus the money that you were using to make the minimum payment on the first debt. Then simply continue this process until all your debts are cleared.

Consolidate
If you are overwhelmed by the number of different debts you have, it may be worth consolidating your debts into one large loan.
The most common way of doing this is to move all your credit card balances to a new card with a 0 per cent rate for balance transfers.
But be careful if you decide to take out a consolidation loan. They can be expensive in the long term and may be secured on your home.

Communicate
Having relatively small amounts of debt is now extremely common. The average UK adult owes £29,500, including mortgages, so you are certainly not alone. However, if you are struggling to make repayments, or you are feeling overwhelmed by your situation, seek help from a debt charity.
Also try speaking to your lender. It may be willing to make an agreement over a new repayment timetable. You could also speak to a debt management company. And if you are really stuck, you could consider an individual voluntary agreement or even, as a very last resort, bankruptcy.

http://www.timesonline.co.uk/tol/money/reader_guides/article3247171.ece