Your Questions About Lower Debt To Equity

Sandy asks…

I have a rather large home equity line of credit debt.?

We used 98 thousand out of 120 thousand line of credit to do major home improvements. We are very happy with the improvemnts but now have about 700 dollars per month in interest only payments. My husband wants us to also have a savings account filled up with funds in case of emergency. I think we should dump any extra money into the home equity debt which will SLOWLY lower our debt and payment amount. Then, if we ever have an emergency we could draw from the home equity loan. What do you think we should do?

richmama answers:

I agree that it makes little sense to be paying 8% on your line of credit, while earning 2% in your savings account. That being said, as long as you are certain the line of credit can’t get closed on you for some reason, you should pay down the line of credit. You will save money in interest, and hopefully be able to start paying down your line of credit.

Interest rates have dropped lately, it might even make sense to refinance and roll that line of credit into a new first mortgage. I’d assume that even if your rate is Prime + 0%, you’re still at 8.25%. First mortgage rates are about 2.5% less than that right now.

Thomas asks…

Is there any option for debt consolidation if you are NOT in default with good credit but no equity?

Are there less risky unsecured financing options for those with good credit outside local banks who want secured credit? We want to pay off debt at lower interest than credit cards currenly held. Any options out there besides all the scary ones?

richmama answers:

Since you are not in default you can call the credit card company and ask to have your interest rate lowered. If they won’t lower it, you can open a new 0% interest rate card and transfer your balance. The 0% introductory rate usually last 6-12 months and you could pay off your credit card in that time period. If you have more than one high interest rate card, transfer as much as you can to the new 0% card from your highest interest rate cards. With luck you can transfer ALL of your high interest rate credit card debt to low or 0% cards. After you get your transfers done follow this system:

Pay the minimum due on all of them and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on card #1 (the minimum payment and the extra payment) towards card #2. That will pay card #2 off faster. When that is paid off, you put all three payments towards card #3 and that one will be paid off pretty quickly. As an example:

To start :
Card #1 (highest interest): minimum payment+ extra payment
Card #2 (middle interest): minimum payment
Card #3(lowest interest): minimum payment

Card #1: paid off
Card #2: minimum payment from Card #1+ Minimum payment from Card #2 +extra payment
Card #3: minimum payment

Card #1: paid off
Card #2: paid off
Card #3:Mimimum payment from card #1+ minimum payment from Card #2+ minimum payment from Card #3+ extra payment.

That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late payments. This works no matter how many different debts you may have.

Donna asks…

How is Bad debt accounted in the Balance Sheet?

My understanding is that bad debt is charged as an expense in the income statement and also remove the amount of bad debt from the asset side of the balance sheet.

if net assets = equity, then if asset is lower due to bad debt, then equity must reduce to balance the balance sheet. But, what is deducted in the equity side?

Thanks

richmama answers:

My understanding is that bad debt is charged as an expense in the income statement and also remove the amount of bad debt from the asset side of the balance sheet.
– Your understanding is correct.

What is deducted in the equity side?
When bad debt is charged as an expense in the income statement, that will ultimately go to reduce equity via reduced profit which leads to reduced retained earnings.

Carol asks…

Reliable Gearing currently is all-equity-financed. ?

It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200,000 with the proceeds used to buy back stock. The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10 percent. The firm pays no taxes.

richmama answers:

This is NOT a question. If the firm pays not taxes, SELL ASAP. They are either not profitable, or are committing tax fraud.

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