Liability Management Continued

Last week, I posted on liability management. How does that work, exactly?

The firm I am most familiar with will suggest to their client that they up another checking account that they call the liability management account. All their debts will be paid out of that account.

The client will then set up another account for their budget items. They’ll take a look a the regular expenses of gas and groceries, for example, finding out what they need on a monthly basis. This analysis is a required first step to ensure that money is consistently being set aside in the budget. This second account is just for those budgeted expenses.

At that point, the liability management company automates the plan using a proprietary software program that prioritizes the payment of the debt.

There are a lot of methods touted as the best method for paying off credit card debt. One is to pay the highest interest rate cards off first. Others suggest paying off the lowest balance cards, first. Another popular way is to calculate your minimum payments into the balances and then prioritize those from lowest to highest - the highest being the easiest ones to pay off. So, there are a lot of different ways that are out there.

The most effective prioritization software program out there was actually developed from a flowchart used during WWII. It was a flowchart of all the tasks that needed to be accomplished in order to build a bomb, or send someone to the moon, or something along those lines.

You may ask why you need such a complex program. The truth is that to find the most effective way to pay off debt rapidly, you need a complex program. As an example, the average household has 7 debts – and most people actually have more than that. There are over 5000 prioritizations that you could come up with only seven debts!

This prioritization software runs the calculations for all the different ways to prioritize your debt and figure out what will really work best for you. While it isn’t the lowest balance method or the highest interest rate method, it does take the minimum payment into consideration.

The most effective liability management firm doesn’t just rely on mathematics to be effective. They need to have built a personal relationship with the client to determine if aspects of the suggested payoff scenario doesn’t work in with their “personality” or if there are some other factors which make another, if not less efficient, plan more viable for that individual. Maybe a client that just hates Citibank, for instance! Maybe, something happened in the past, and there’s a reason they don’t want to have to deal with a certain creditor. Their program has to take that into consideration when they do the prioritizing. Or maybe they have a family member they owe money to and they want to get that taken care of higher up in the priority. Each of these scenarios is possible and needs to be considered in drawing up the plan.