You really shouldn’t rush out and take on debt, but there are times when it actually makes sense not to pay it off. All debt is not alike. Some of the worst kinds, such as unsecured credit card debt, can wreck your budget, but even there, you have cases where it won’t, and it could even work to your advantage. Other kinds of debt might seem imposing with those big red “Past Due” stamps but pose less of a threat to your financial future.
Here’s a guide to handling debt — rather than bemoaning your inability to pay it all off — either by slowing down the payment process or leveraging or reorganizing what you owe in clever ways. These are the nine instances where it might make sense to not pay off debt.
1. Leveraging 0 percent APR Credit Cards
Many percent APR credit cards have hit the market, and the idea behind them is great if you’re part of the credit card industry: Lure customers in with a really low introductory rate and then make money off them when that rate expires and a new high interest rate soars into the double digits. While there are many dangers to treating a 0% APR card properly — from having new store purchases accrue at a high interest rate to overlooking the balance transfer fees — there’s a way to play this game and win.
Many 0 percent offers have 12 months or more of interest-free financing — even 18 months is not uncommon. Keep in mind that if you tap the full amount available, you’ll typically have a 3 percent fee to pay ($300 on $10,000). The idea here is to find a safe investment with a rate of return that will far outpace the transfer fee while taking advantage of the special offer’s time frame. So if you’re lucky enough to find a $10,000 investment with a 10 percent rate of return and can liquidate the investment after a year, you’ll have $1,000 in your pocket against the $300 you paid in transfer fees, and you can still pay off your credit card balance.
The only caveat — and it’s a big one — is to make those minimum payments every month so you don’t lose the 0 percent APR perk. Then, when the promotional rate is finished, cut up the card and go in search of another similar offer.
“If you are responsible and do not have a lot of debt, you can use this feature as a short-term gap to fund something,” said Bijan Golkar, senior advisory and principal at FPC Investment Advisory in Petaluma, Ca. Make those minimum payments every month so as not to lose the 0 percent perk. Golkar cautions: “If you are not disciplined, do not even think about it!”
2. Negotiating Medical Provider Debts
The decision to pay medical debts depends on several factors, including the medical provider, the amount of the debt and whether or not interest charges are applied. In many cases, especially with private practitioners, bills do not accumulate any interest, so it makes no sense to pay them off in full when you might have other high-interest debts sucking at your wallet.
That said, you don’t want collection agencies flagging you down. In March, the three major credit bureaus — Equifax, TransUnion and Experian — also agreed not to report bad medical debts until after a 180-day waiting period. “This provides time for insurance to pay their portion and patients to pay their bills or work out a payment plan to pay them,” said Todd Antonelli, managing director of Berkeley Research Group in Chicago. “When payment plans are devised and agreed to, this debt will not show up on your credit reports, preventing one’s ability to take out a loan, get a credit card, buy a car or a home.”
Negotiate directly with the medical provider whenever possible to get a minimum payment schedule set up and always see whether you can negotiate payment charges on a sliding scale — so that $90 per appointment, for example, is reduced to $70 per appointment. This is common practice in disciplines such as psychology.
3. Fighting the Meter
In America’s cash-strapped cities, a proliferation of red-light cameras and parking meter tickets has created a near epidemic of frustrated, frightened motorists. The sight of a ticket stuck to your window is enough to churn your stomach, but the next time you get one, use your head instead. Dispute every ticket you possibly can because there’s no telling how many will get thrown out by a judge or lost in the bureaucratic maze.
The Expired Meter website, for example. has become a big hit in Chicago, where motorists are taught how to fight back; many of the strategies used there can be used in other cities as well. Every time you fight a ticket, you automatically delay the debt due without accruing a single cent of interest and penalty — and you might just get off the hook.
4. Holding on to Mortgage Debt
Hurry up! Convert that mortgage from a 30-year loan into a 15-year loan! Your mortgage payments will skyrocket, but you’ll pay a lot less in interest charges, and you’ll own your home twice as fast. Sounds smart, right? Not so fast.
Assuming you live in an area where home prices are appreciating rapidly, the opposite strategy is more profitable. If a $300,000 home appreciates to $500,000 in five years, you’ll get a much bigger return on investment per dollar when you actually put less money into paying your mortgage, not more. The uptick in local prices will still create gobs of new equity, and lower mortgage payments will give you breathing room to enjoy your home instead of being a slave to it.
5. Keeping Up Low-Interest Car Payments
In recent years, low interest rates on car loans have been a boon to consumers, with some dealerships still offering 0 percent promotional financing. If your interest rate is low, most of your payments will go directly into paying off the car as opposed to interest. And in this case, the debt is secured, meaning that the car acts as collateral to the loan money. If it’s a long-term loan with low interest — a five-year loan for example, which has an interest rate as low as 2.49 percent APR — then pay off the car slowly to take advantage of the favorable rate.
6. Declaring Bankruptcy
If you find that bankruptcy is the one option you face due to your mounting debt, there’s little sense trying to make a goal line stand. Virtually all of the 910,000 personal bankruptcies that were filed in 2014 were either Chapter 7 or Chapter 13 bankruptcies, according to the United States Courts website. What’s the difference? With a Chapter 7, the debtor’s nonexempt assets are gathered and sold so that the proceeds can be used to pay creditors owed. Certain possessions are exempt, but exemptions vary widely from state to state. It takes three to four months to complete a Chapter 7 bankruptcy and obtain a discharge.
With a Chapter 13 — also known as a “wage earner’s plan” — individuals with regular income repay all or part of their debts. Under this chapter, debtors propose an installment plan to creditors to pay debts over three to five years. This type of bankruptcy also offers individuals an opportunity to save their homes from foreclosure by catching up on delinquent mortgage payments over time. You must make all mortgage payments that come due during the Chapter 13 period on time. But if this bankruptcy succeeds in restructuring your debt for a smaller amount, you could come out paying off less in the end.
7. Using Credit Counseling and Negotiation
If you are looking at $20,000 in credit card debt, for example, making minimum payments at 19.99 percent APR is the equivalent of spinning your wheels. The minimum payment will barely make a dent in the balance due. But nonprofits such as Money Management International can take on such cases and help you negotiate new payment plans with your creditors — and at lower rates.
If you think this is a viable option — especially after having positive conversations with a nonprofit counselor — then you won’t want to keep throwing good money down the drain just to keep up on the high-interest hamster wheel. You might even be able to negotiate a short break period during which you take some time before resuming payments. In the short term, you can also try calling credit card companies directly to negotiate lower interest rates.
8. Borrowing From Parents
Borrowing from your parents can be painful. And the idea here is not to borrow from your parents and stiff them, for hell hath no fury like the Bank of Mom and Dad when it has been scorned. You might, however, find your parents to be strong allies in your attempt to get rid of debt.
If you owe $5,000 on a high-interest credit card, be proactive. Go to your parents with a short review of how you accumulated the debt. Tell them that every penny of their $5,000 loan would go to zapping the high-interest card — not even a slice of pizza or a can of beer would be deducted. Then you might try proposing repayment of only half the loan with the other half taken out in grunt work. Does the house need painting? Can you perform basic home repair tasks or help out with a major family project? The barter system works well in scenarios in which cash is short but the ability and willingness to pay back in other forms is not.
9. Letting Moldy-Oldie Debts Lie
Some debtors will go after you with all the ferocity of a jet-powered hellhound, but even jet engines run out of fuel over time. This strategy is not so much a way to game the system as a way to start afresh. Federal law requires that credit-reporting companies remove most debts from your credit report after seven years from the time they became delinquent. Since the debt has already done its nefarious deed and put a dent in your credit score, by making a payment, you only reaffirm the debt and reset the clock, giving the debt collector more time to go after your cash.
Article via Las Vegas Review-Journal