So Why Pay Debts Anyway...?

A recent New York Times story by journalist David Streitfeld, in which he describes how banks are allowing borrowers to settle debts for less than the balance owed, apparently struck a chord or nerve, depending on the reader's perspective.

On the one hand, those who have been paying their bills on time are incredulous that others aren't. They see these negotiated deals as unfair deals for irresponsible borrowers. Others are asking, "How do I settle?" Here's a question we received from a reader:

Reader: Quoting the article he says: "In this recession...experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts. "

So, if an agency paid $500 [or less] to purchase a $10,000 debt, why would the agency then pay legal/court fees etc [of perhaps 1 or 2 thousand] to obtain a judgment or to file suit against the debtor?    [If I bought an old 1980 car for $500, I would never then pay 1 or 2 grand for Auto Insurance!]

My response: We need to look at the bigger picture here. First, many creditors first outsource their debts to collection agencies first in an attempt to collect rather than selling them outright. If a debt is sold to a collection agency for 5 cents on the dollar, that will likely occur when the debt is older and attempts to collect have failed. Generally consumers settle debts for more than 5%.

Having said that, creditors/collectors will sue if they believe they can collect on a judgment. In Mr. McClelland's case, he really didn't have any assets or even a steady paycheck. In other cases, though, creditors may be able to get a court judgment and then garnish wages or attach assets, depending on remedies available in that state.

Even if the creditor (or collector) doesn't believe it can collect right away, it may sue if the statute of limitations is going to expire. If the lawsuit doesn't result in payment (many of these cases are settled "on the courtroom steps,") the creditor may still be able to get a judgment against the consumer. Judgments fall under a different statute of limitations, and can often be renewed, which means judgment creditors can often try to collect indefinitely. 

Reader: And now that debtors know this info, why will they pay the agency any more than $500? (Or anything at all?)

My response: My experience is that most people want to pay their debts. When they do default, most people are looking for a way to resolve that debt, even if it means borrowing from another source to pay the debt!

That aside, creditors and collectors have plenty of ways to encourage borrowers to make good on their debts. The threat of a lawsuit often scares people into paying, the creditor or collector may threaten to go after wages, bank accounts, assets etc. Or an unscrupulous debt collector may threaten to call the debtor's neighbor or employer, or even tell the debtor she'll wind up in a jail cell if she doesn't pay up.

Also keep in mind that settling a debt is far from a painless process. The debtor's credit rating will be shot for the time being, and there may be a taxes assessed on the settled debt. Negotiating debt is a viable option for a person who is experiencing financial hardship, and wants to resolve the debt but can't pay the full amount.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

How to Succeed by Not Eating Marshmallows

Researchers at Stanford University ran a test on four-year-old children to study delayed gratification. They gave the kids a marshmallow and told them: "I'm going to leave the room for fifteen minutes. When I return, if you have not eaten the marshmallow, I'll give you another one and then you can eat them both." The researcher set the marshmallow on a table in front of the seated child and left the room.

Most of the kids ate the marshmallow as soon as the researcher left the room. Some were able to hang on longer before eating it. A few were able to resist the temptation, and they were rewarded with a second marshmallow.

This test was run in the late 1960s, and the researchers have been following the kids' progress ever since. (You can read an article about the study in the New Yorker online). It turned out that 100 percent of the children who showed self-control as four-year-olds retained their self-discipline as teenagers and  adults, says Joachim de Posada, who talked about the study at the TED conference held in Long Beach, California earlier this year (see the above video). "They had good grades. They were doing wonderful. They were happy. They had their plans. They had good relationships with the teachers, students. They were doing fine."

What about the kids who gave into temptation? "A great percentage of the kids that ate the marshmallow," says de Posada, "were in trouble. They did not make it to university. They had bad grades. Some of them dropped out. A few were still there with bad grades. A few had good grades."

These findings are great news for kids who have the discipline of an Olympic athlete before they're out of  diapers, but what about us adults who raided the cookie jar every chance we got as toddlers, and watched reruns of Gilligan's Island instead of studying Advanced Placement chemistry in junior high school? Are we cursed forever? Maybe not, says de Posada. He believes children and even adults can be taught to master self control. He's written a book called Don't Eat The Marshmallow...Yet!: The Secret to Sweet Success in Work and Life that can help you learn to resist giving into immediate payoffs that could instead be delayed for bigger jackpots later. I haven't read the book myself (there's too many good programs on TV!) but I'm curious to know if any creditblogger visitors have.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Our Tendency to Believe Confident People Over Cautious People

People prefer advice from an expert who projects confidence over an expert who shows caution, according to a recent study. That's understandable -- after all, it makes sense to follow the opinion of someone who seems sure of what they're talking about instead of someone who hem, haws, and hedges. But the more surprising finding of the study was that people have a statistically significant tendency to prefer the advice of confident advisers even after those advisers demonstrate themselves to be unreliable.

The researcher, Don Moore of Carnegie Mellon University, presented his findings at the Association for Psychological Science Convention in May, in a symposium with the delightful title of "Often in Error, Rarely in Doubt."

In the experiment, volunteers were asked to guess the weight of a person in a photograph. They were allowed to buy advice from volunteer "experts." Some of the experts offered answers as a spread of probabilities for different weight ranges. The more confident experts provided just one weight range. (See table here.) The guessers favored the advice of the confident advisers. After they learned that the confident advisers weren't as accurate as the more cautious advisers, they stopped buying their advice as much as before, but even so, the confident experts were called upon more frequently than they should have been, statistically speaking.

Another interesting finding of the study was that the less confident advisers eventually began to change their advice to be more like that given by the more confident advisers. They made their advice more precise, but not any more accurate.

Unfortunately, cable TV news seems to breed this kind of confident expert who delivers simplistic advice in sound bites. I'm reminded of the pundits who scoffed at Euro Pacific Capital president Peter Schiff when he warned in 2006 and 2007 that our economy was on the verge of collapse.

Here's a bit of expert advice: The next time you see a talking head on TV telling you he is certain about something that's not certain, change the channel.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Being Honest

I think that the number of "criminals" in America is quite small. By criminals I mean those who have committed serious crimes. That would include the 2.3 million people currently incarcerated in federal and state prisons and in local jails. Add to that the people who already committed a criminal act and have been through the criminal justice system, and throw in those who might commit a criminal act if they thought that they could get away with it. Maybe that's twice as many, another 5 million people. All in all that's about 2.5 percent of the U.S. population.

Does that mean that 97.5 percent of people are honest?

Our society today seems to define honesty across a large spectrum -- many people would take home pencils from the office, but most wouldn't think of stealing a car. Maybe they pay their income taxes -- well, all except for undocumented cash transactions. You can see that there is a lot of turf between extremes.

Here's how I see morality: By the time you are a teenager, you know that there is a difference between right and wrong. It makes little difference whether your moral system is dictated by the legal system, religious heritage, some code of conduct like the Boy Scout Oath, or moral lessons your parents teach you. I think honesty is measured by what you would do even if no one could ever find out what you've done. Or put another way, as some wise person once said, "If you won’t tell the family at the dinner table what you did last Saturday night, you shouldn't have done what you did last Saturday night."

You may not always do the right thing, but with a good sense of morality, at least you know when you are transgressing. What worries me is that we seem to have created a culture in which too many people don't even think like that any more. They look at life as a "system" and they think that they can "game the system" with impunity.

There are people who by virtue of job loss or extraordinary health expenses have debt that has become a burden. There is a huge difference between those folks and someone who just doesn't want to pay his bills.

Buying something at a sale for 50 percent off from a merchant who has a reason for selling at that price is still an honorable contract. Buying something at full price and then trying to get your credit card company to settle for 50 cents on the dollar may be identical from a mathematical standpoint, but the latter is dishonorable.

Nonetheless, there has been a lot of press lately about credit card companies settling for 50 cents on the dollar that almost promotes it as a good scheme. The credit card companies may have good reason for offering deals like this to some people, but that doesn't make it honorable to take their offer if you can afford to pay. It isn't honorable and your credit score will reflect that.

My belief is that bad debts – let's call them what they are – are sand in the gears of progress. We know that any business has to have an allowance for uncollectible accounts. The more risk they take, the higher the reserves, and they charge higher interest rate or fees to account for the added risk. Knowing that a business has to write off a certain percentage of accounts does not make it okay for you to be one of the ones they write off.

We have had flakes in all cultures since the dawn of time. When we all lived in small towns, however, people couldn’t get away with this for long because everyone knew everyone else.

It’s different in our large anonymous culture where we usually deal with strangers. It creates a false impression that just because you can’t see the company whose bill you don’t pay, it somehow isn’t dishonorable or your action hasn’t created pain somewhere else in the economy.

That's all the more reason for you to become educated, smart, and to be one of those stand-up people who act honestly and honorably all the time.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Beware of the Bad Debt Collectors

The Los Angeles Better Business Bureau (BBB) has been flooded with complaints about a debt collection agency they rate as an "F," according to a recent article in the Ventura County Star. The company, Commercial Investigations Inc., is located in Van Nuys, CA.

Reviews of the company posted on the BBB website from business owners who hired (or considered hiring) this company to collect debts for them suggest that the company needs some major customer service/business management training. 

Complaints from consumers posted on the site include reports of the collection agency calling repeatedly after they were told to cease contact, foul language, and sending unsecure faxes about a debt to a debtor at work. This type of conduct is prohibited under the federal Fair Debt Collection Practices Act, and some state laws as well. All in all, the BBB lists 177 complaints, 78 of them unanswered.

In other news, New York Attorney General Attorney General Andrew M. Cuomo finally shut down a New York collection operation that consisted of at least nine debt collection companies across Western New York, run by Buffalo resident Tobias Boyland. Several months ago, the firm was the subject of a Dateline NBC exposé in which victims were threatened with immediate incarceration if they didn't pay. Boyland's staff impersonated police officers and used heavy'handed tactics to scare debtors into paying.

This begs the question, "What took them so long??"

Have you been harassed by a debt collector? Do you have a debt collection question? If so, we want to hear from you! You can visit Credit.com's community forum to ask questions and share your story!

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

Silverfield Financial Group: Loan Scam Alert!

We've received a number of emails alerting us to another advanced fee loan scam! Fortunately, we were able to stop several near victims before they wired money to these scammers. 

The latest loan scammer goes by the name of Silverfield Financial Group. All of our near victims were offered a $5,000 guaranteed loan. The catch? They wanted the first 8 months payments up front -- wired via Western Union, of course. Here are the details:

Fake lender name:  Silverfield Financial Group
Fake lender website: www.silverfieldfinancial.com
Fake lender phone number: 1-800-627-6189
Fake loan amount:  Minimum of $5,000
Guarantee Deposit: 8 months payments up front via wire transfer

Although these guys claim to have been around for 14 years, their site was just registered a couple of weeks ago:

Registrant:
silverfield admin@SILVERFIELDFINANCIAL.COM +1.3153629010
silverfield
1 South Washington St
Rochester,NY,US 14614

Domain Name: silverfieldfinancial.com
Record last updated at 2009-05-26 14:16:39
Record created on 2009/5/26
Record expired on 2010/5/26

These scammers can be very convincing, but don't be fooled! A legitimate lender would NEVER ask you to wire transfer a deposit or payment before granting a loan. If you come across one of these offers, DO NOT SEND THEM YOUR MONEY!!

People Are Easily Manipulated by Price of Goods... Except When They're Not

The old adage "you get what you pay for" is meant to be a warning against the folly of trying to save money by buying low-quality products. It's good advice. I'm reminded of a fellow I worked with many years ago who always bought the lowest-priced item whenever he had a choice.

One winter day when his car battery died, I drove him to a nearby auto parts shop. He bought the cheapest pair of jumper cables in the store. I'd never seen such flimsy cables. When we attached the cables from my car battery to his car battery, the insulation on one of the clamps slipped down and he received a painful (but harmless shock) when his hand came into contact with the bare wire. You might think this blunt lesson would have taught my friend about the cost of being a miser, but it didn't. He continued to buy the cheapest stuff he could find, and the quality of his life, in my opinion, was poorer because of it.

But there's a flip side to this adage that's equally foolish: Equating high price with high value. High quality goods cost more, but expensive goods aren't necessarily high quality. Unfortunately, people are conditioned to believe that high cost equals high value, at least some of the time. John Tierney's New York Times article "Calculating Consumer Happiness at Any Price" provides several examples of this kind of faulty logic. When people are told that a $10 bottle of wine costs $90, they'll report that it tastes better. When they're told a painkiller (actually a placebo) costs $2.50 per pill, they'll report less pain from electrical shocks than people who are given the same placebo but are told it costs ten cents. (I wonder what my cheap-jumper-cable-buying co-worker, who chose shocks over paying more for better quality products, would do in such a situation?)

However, this isn't always the case. Tierney's article goes on to detail an experiment that holds hope that people aren't always the simple-minded dupes that so many laboratory experiments make them out to be. Economists Ori Heffetz of Cornell University and Moses Shayo of the Hebrew University of Jerusalem ran a study in a real restaurant, manipulating menus to see how it might influence what people ordered. What they discovered was that people are less easily swayed by changes to the assigned value of menu items than lab-controlled experiments might suggest. Dr. Shayo said of the results, “Maybe when it comes to food, people do have reasonably stable preferences. Some people like shrimp and some don’t, even if it’s worth a lot of money.”

I'll drink (from a $10 bottle of wine) to that!

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Alarming Dashboard View of U.S. Debt

Here's a money-saving tip: Instead of forking over a couple of bucks for your morning coffee, load up  The U.S. Debt Clock instead. The neck-breaking speed at which our country is careening towards financial ruin will snap you out of your early-morning grogginess far more effectively than a triple-shot of espresso with a Red Bull chaser. Watching the U.S. national debt, credit card debt, medical debt, and various entitlement liabilities skyrocket, I envisioned Uncle Sam at the gas pump, pouring greenbacks into a tank that we'll never be able to pay for when the bill comes.(via The Agitator)

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Fun Activities for the Penny-Pinching Parent

Families are saving money wherever they can, with more of them pulling their children out of daycare and skipping expensive summer classes and camps. That can leave parents with many more hours to fill to keep kids entertained and engaged.

We have a 3-year-old daughter who, fortunately, doesn't notice that we're in a recession, and is obliviously happy living on the cheap. Here are some of the fun activities we take part in for nothing, or next to nothing:

• The library. They offer much more than books. The San Jose branches hold story times in different languages, such as a Vietnamese-English session, as well as music, puppeteers, and crafts. Others have family movie nights, as well as websites with links to museums, cultural centers, and zoos.

• Museum trips. Plan your visits strategically: Wait for free days or discounted hours. We go to our great local children's museum promptly at 4, when admission is cut from $8 each to $4. It closes at 5, but you can cover the place in an hour. 

• The Great Outdoors! Few things are as entertaining for a child as a hollow log or a creek or a tree with squirrels chasing each other up and down it. County and state parks may have parking fees, but some have a pay-what-you-can donation box. For ideas on what to do with a kid outdoors, check out the book I Love Dirt!

• Water holes. Kids are fascinated with the properties of water, and instead of going to water parks, we've scoped out all the parks, plazas, and malls that have fountains or water-spray features. One day we killed half an hour at a tiny outdoor mall by dangling our feet in a fountain, and my daughter wasn't even embarrassed when I scooped up coins from the bottom for her to toss in. Even wishes are recyclable.

• The mall. This one may seem counter-intuitive, but the mall itself can be a cheapskate's haven, if you can refrain from buying anything. Ditto for Ikea, with its supervised play areas. Stick to window shopping!

My colleague Mark Frauenfelder wrote a couple weeks back about "becoming more involved with the production of our food." While I'm not likely to raise my own chickens anytime soon, he's onto something, and you can help your child learn more about where food comes from by simply taking him or her along shopping at the supermarket, especially ethnic markets, which have an incredible variety of items (including fish with heads!). We took our daughter to a you-pick strawberry farm, where we all learned how organic vegetables and fruits are grown –– and got a small, 15-minute glimpse of how back-breaking and hard it must be to pick fruit for a living. Here's a national guide.

On a rainy day, you can even combine a hands-on activity with your efforts to rehabilitate your credit rating, as this blog shows, in a tongue-in-cheek way.

Landon Hall – A freelance writer in Silicon Valley, Landon was a reporter, sports writer and editor at The Associated Press in Portland and New York City from 1997-2006.

Robo-call Rip-Offs

The Better Business Bureau (BBB) is warning people to steer clear of companies that are robo-calling people across the country with offers to reduce their credit card interest rates, reports MSNBC. It calls out three companies by name -- CSTR Solutions, Genesis Capital Management, and Mutual Consolidated Savings -- all of which have earned an “F” rating by the BBB.

According to the BBB, the robo-call messages appear as if they're coming from the credit card companies themselves, and they have a tone of urgency. They offer a better interest rate for a fee. But negotiating a better rate with your card issuer is something you can do yourself for free. (Check out various other do-it-yourself credit card tips at Credit.com.)

The article offers an example of what one might expect from one of these rip-off companies: Patricia Poole of Mineral City, Ohio paid $695 to Mutual Consolidated Savings, which promised to "work with Poole’s creditors to get her interest rates lowered or eliminated." But after she paid the money, Poole says she never heard from anyone at Mutual Consolidated Savings. She finally asked for her money-back (as per the guarantee she was given) and was able to wrangle just $200 back, but not the entire amount.

MSNBC's good advice to anyone getting a robo-call like this is simple: 1) Don't offer any personal information whatsover. 2) Collect all of the information about the call that you can (caller ID, company name, time & date of call). 3) File a complaint with the Federal Trade Commission.

If enough people do this, robo-callers will be put out of business.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.