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Debt Consolidation and Bankruptcy: What happens when you can't meet your loan repayments?; Have you any chance of saving the house?
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Topic Started: 29 Oct 2011, 07:36 AM (1,947 Views)
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peter fraser
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29 Oct 2011, 07:36 AM
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This was an interesting question, so I thought that I would make it a seperate thread. Due to the pressures of unpayable debts, it's usually the case that homeowners sell to repay debts, or simply lose everything, but not in all cases. Here are a couple of scenarios that I have seen play out, and that information may help someone who finds themselves in a tough situation, and that can happen to anybody.
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jrsnr28 Oct 2011, 05:22 PM
I had a question on debt consolidation. Is this always the best alternative? I ask this with respect to the fact that a mortgage is a secured debt and credit cards, and typically personal loans, are unsecured debt. I know that there is obviously going to be a significant advantage for people who intend to pay off their debts, i.e. consolidate into one loan with a lower interest rate. But say for someone who might be so over their head that consolidation would only delay an inevitable default. For such a person is it possible that they would be better to remain focused on their mortgage and tell their credit card company or personal loan lender to take a hike?
I know that you are likely to be talking about the majority, i.e. in general it is best to consolidate. I'm just interested in knowing what considerations might be available for the minority that may be in a near no win situation as such.
I guess it is probably also worth assuming that a wamba who gets so far in over their head is unlikely to consider consolidation on their own anyway!
That is a very interesting question. Mostly it is better to consolidate onto the home loan. For example credit cards debts of $!00,000 would be costing a minimum of $2000 per month in interest only, but tacked onto a home loan at 7% that would be $7000 per annum or just under $600 per month, so a reduction of around $1400 plus per month may be enough to save the situation for most people.
But your question is really about someone who has a home loan but can't consolidate their debts. That is not such a rare occurence. Typically if a home owner has excessive debts where payments are just beyond them, they leave it until it is too late, and they are making their home loan payments late, and are possibly in default with they credit cards debts, rates payments, car loan, phone bill etc etc.
If they are disorganised they get behind on all debts, and then it is just a matter of time as to when one of the creditors takes legal action to sell their assets. then all of the creditors will move to get what they can out of whatever is left. The secured credtor who has a mortgage over the house will be ok, but as far as I'm aware the ATO always rank first, with the local council next for rates arrears. All of the unsecured creditors are just a gaggle of hopefuls behind the ATO, the council and the bank.
But if a borrower is organised here is what they should do. Remember this becomes an exercise not in what someone wants to do, but what they have to do to survive, so they need to be smart and a little bit of an arsehole as well.
The ATO have ultimate power. They will negotiate a debt downward if you play ball with them, but that depends on circumstances. They don't like writing down a tax debt, but they will write off the late fees and interest if you throw yourself on their mercy. Actually they aren't too bad really. But you will have to pay them whatever you negotiate with them. They will take you to court if you piss them around, and they will win in court, you will not beat them.
The local council want their rates, you have to pay them or they wlll take legal action, and they will sell you up. So I would pay them.
I would also pay the bank so that they don't start tossing you out of the house, it is probably the one asset you have at this point.
I would then prioritise the rest of the debts. If your income is dependant on owning a car, then the car loan might be the next priority - if not let them repossess the vehicle and take the bus to work.
Then you will be left with credit card debts, and I'm assuming that this mythical person we have created can't meet these payments on top of all of the others. Under $10,000 they will probably put extreme pressure on you and make many threats, but it's not really worth their while to take legal action. They will record a default, and sell the debt to some group such as Lion Finance who buy the debts at a discount, and try to collect. This group are professional debt collectors, and they are good at their work.
These guys will write off a large portion of the debt if you play hardball, and don't make any payments. Keep talking to them, otherwise they record you as a "clearout" which stays on your credit file an extra 2 years. Eventually if you have cash, they will take a settlement of 50% or whatever they can get and still make a profit on whatever they paid for the debt.
If by not making credit card payments you are able to save (in cash only - not in a bank account) then you would be able to negotiate settlements on these debts one by one over time and get them settled. They don't care where you get the money from, they just want a settlement that gives them something and closes the file. Always get receipts and any agreement on a settlement amount must be obtained in writing - an email is ok, but you need paper documentation to prove that you have paid them the agreed settlement amount. You also need to follow that up, and get an acknowledgement in writing that you have paid, and that they will note your credit file as being settled. Sometimes they conveniently forget to note credit files, but Veda will sort it out if you have evidence, so it is important.
Note that for large unsecured debts, there is an unknown element. You never know what they will do. If you really piss them off, they might take you through the courts just because you have pissed them off. It's best to be a little humble, and act as though you would pay if you could pay.
The other scenario that may interest you is going into bankruptcy, and still keeping the family home. Amazingly that can be done as well. Obviously as in the above scenario, you still need to meet your home loan payments, and look after the ATO and the local council.
You could then go into bankruptcy and have all unsecured debts wiped. It is in your best interests if you don't have a lot of equity in your house, so get a written market assessment from a real estate agent, and get the lowest possible market estimate possible. Give that to your trustee, who will provide it to creditors. If they can see that you have little equity in your house, they know that if they do take action on the house, they will get nothing for their trouble because a forced sale always brings out bottom of the market bids at auction, so for a creditor it becomes a question of whether they want to throw good money after bad.
It is surprising what can be achieved under extraordinary circumstances. Note that this is still a dangerous tactic, and any result is possible, but desperate times demand desperate measures. Some of the most sucessful people have had financial problems or bankruptcies in their past. Smart people learn from those experiences.
It's also a high pressure situation that will reduce strong men to tears, and ruin marriages, so don't attempt it just for the fun of it.
Does that cover your question? BTW what is a wamba?
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zaph
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29 Oct 2011, 08:06 AM
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- peter fraser
- 29 Oct 2011, 07:36 AM
This was an interesting question, so I thought that I would make it a seperate thread. Due to the pressures of unpayable debts, it's usually the case that homeowners sell to repay debts, or simply lose everything, but not in all cases. Here are a couple of scenarios that I have seen play out, and that information may help someone who finds themselves in a tough situation, and that can happen to anybody.
an interesting read, thanks Peter.
would you be able to comment on debt repayment agreements (i think that's what they're called, not bankruptcy but where creditors take a hair cut), how they work etc? i guess they're only for unsecured debt?
Edited by zaph, 29 Oct 2011, 08:06 AM. |
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georgie
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29 Oct 2011, 08:32 AM
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Can't remember where i saw this but the average person will take 3 years before they go into default on a mortgage. I think it was the banks who came up with this figure. From their research they found that it takes 3 years to exhaust all avenues of being able to pay a mortgage before actually defaulting on the mortgage. Will be interesting if in 2012 property prices keep stagnating, all those people who leveraged in 2009 will most certainly be in negative equity if they purchased with the standard 10% deposit. Even a 20% deposit won't have much equity left in it.
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peter fraser
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29 Oct 2011, 09:02 AM
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- zaph
- 29 Oct 2011, 08:06 AM
- peter fraser
- 29 Oct 2011, 07:36 AM
This was an interesting question, so I thought that I would make it a seperate thread. Due to the pressures of unpayable debts, it's usually the case that homeowners sell to repay debts, or simply lose everything, but not in all cases. Here are a couple of scenarios that I have seen play out, and that information may help someone who finds themselves in a tough situation, and that can happen to anybody.
an interesting read, thanks Peter. would you be able to comment on debt repayment agreements (i think that's what they're called, not bankruptcy but where creditors take a hair cut), how they work etc? i guess they're only for unsecured debt?
Any debt can be renegotiated (look at Greece) even if it is secured, however if the creditor holds a mortgage over your house, then they have you by the short and curlies. If you don't pay they sell the asset securing the loan, that is it, simple and clean. Any residual debt may be chased by the creditor, or perhaps the mortgage insurer.
If you have ever had a bad debt with a mortgage insurer, you will NEVER be approved by them for a home loan. That will stay on their file for eternity, and they always check past records, at least as far back as their computerised records go.
All unsecured lenders know that a percentage of their loans will go wrong, they take a higher risk, and charge a higher rate to offset that higher risk.
It is a much better outcome for them to have a borrower say that they can no longer pay the contract amount, but will manage what they can, as opposed to a borrower who pays nothing and the whole debt has to be written off.
There are no set rules to what can be negotiated, but I recommend that borrowers get all agreements in writing - yes emails are ok, and having made an agreement, they must stick to it otherwise they are breaking their own contract. Most debt agreements that I have seen are informal, and not under any bankruptcy provisions. Some bankruptcies are under different chapters which can include repayment or partial repayment of debts, under formal agreements negotiated by the trustee - I don't know much about those agreements.
I would also suggest that borrowers insist on an interest moratorium, otherwise they will have a debt that will never be repaid.
I actually enjoy negotiating debts for clients, if the clients are genuine. I have refused people who can pay but just don't want to, and borrowed with no intention of repaying. Negotiating someone elses debts is easy, there is no pressure and negotiations are professional and good natured, but that isn't the case when the debts are yours, the pressure is intense and not everyone can manage it.
The general rule is "the more dire the financial circumstance, the easier the negotiations are" The debt collectors are not stupid, they have heard every excuse ever used and won't be taken in by bullshit, but they are still human. They know the difference between someone trying to be clever and a genuine case of hardship, there are little signs that they are trained to read.
If anyone has ballooning debts that they can't handle, they need to act quickly, and never give up, many situations can be saved although some loss is inevitable. Ignoring letters and phone calls from creditors, is not a good tactic, they automatically consider the use of legal action if they can't discuss the issue with you.
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Alex Barton
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21 Nov 2011, 02:44 PM
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A stronger hand needed to stop debt trapsAnnette Sampson November 19, 2011 If there was ever any doubt that a big regulatory stick needs to be taken to the pay-day lending industry, it was well and truly quelched by a recent landmark decision in the Queensland Civil and Administrative Tribunal. With Federal Parliament's joint committee on corporations and financial services due to report next week on its inquiry into consumer credit, the decision sends a reminder not only of the need for consumer protection from these lenders but also the difficulty in making the protections work. The Queensland case involved a couple, Rachael Carter and Michael Sinclair, who had two children and had fallen substantially behind with their rent. In 2009, they approached Fast Access Finance (Beaudesert) to borrow $1000 using their car (valued at $2000) as security. They signed an agreement that resulted in $1000 being deposited to their bank account and in return they were required to repay $2000 at $98 a week for about five months. The lawyer who acted for Rachael Carter, Bridget Burton of the Caxton Legal Centre, says the charge of more than 300 per cent was well in excess of the 48 per cent interest rate cap imposed by the Queensland government. A month after getting the $1000, Sinclair lost his job and Carter again had trouble meeting rental payments. She eventually broke her lease and incurred a $3000 debt to the real estate agent and was forced to move in with relatives while she tried to get on top of her debts. Read more: http://www.smh.com.au/money/a-stronger-hand-needed-to-stop-debt-traps-20111118-1nmt1.html#ixzz1eJOnUcA0
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Alex Barton
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3 Jan 2012, 08:33 AM
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Emerge from the spend cycleBina Brown January 1, 2012 If you're consumed by constant urges to buy, it's time to stop, think and put the plastic away before your budget's blown. In a world where possessions and instant gratification are part of life, it is easy to see how people often spend more than they should. Computers and credit cards have made it easier to splash some cash, especially if you just have to have something now. If most of what you buy or do is going on the credit card and that card is not being paid off in full at the end of each month, it is a sign you may be living beyond your means. An even surer sign you may be heading for a debt spiral is if you have multiple credit cards to satisfy the spending urge and none of the cards are being paid off. Pretty soon it won't be just the credit card bill that can't be paid. Utility companies, landlords and possibly even friends or family will be looking for the money you owe. Basically, it is time to take stock before things get really out of control. Here are some of the signs you may be spending more than you earn - and some solutions to the problem. Read more: http://www.smh.com.au/money/emerge-from-the-spend-cycle-20111231-1pg7x.html#ixzz1iLJsfcag
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Alex Barton
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11 Jan 2013, 07:57 PM
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Debt agreements rise to avoid bankruptcyJanuary 11, 2013 - 12:21PM More Australians are using debt agreements to avoid bankruptcy. Nearly 50,000 people have used the agreements during the past five years, resulting in a 20 per cent decline in bankruptcies, according to new figures. Debt agreements are principally aimed at consumer debtors. They provide the protections of bankruptcy, such as staying enforcement action against provable debts and relief from harassment. They also release debts that would be provable in a bankruptcy if the debtor satisfies all the obligations under the agreement. As well, the debtor needs to have to all creditors agree to an agreement proposal, unlike an informal arrangement to settle debts. The agreements also help debtors keep their house. Read more: http://www.smh.com.au/money/borrowing/debt-agreements-rise-to-avoid-bankruptcy-20130111-2ck5o.html
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peter fraser
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11 Jan 2013, 08:30 PM
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A Part 9 debt agreement is a type of bankruptcy, although they will tell you otherwise.
Here is an unfortunate scenario that someone suffered. http://forums.whirlpool.net.au/archive/1198270
Be very careful if you take this option.
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Alex Barton
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10 Apr 2013, 10:18 PM
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Bankruptcies lowest since 1996The number of bankruptcies in the March quarter of 2013 was the lowest level recorded in a quarter since 1996, according to the latest data from the Insolvency and Trustee Service Australia. The data indicated that total personal insolvency activity was at its lowest quarterly level in seven years, with 18 per cent of all debtors entering a business-related personal insolvency during the quarter. All states and territories, with the exception of the Northern Territory, experienced drops in total personal insolvency activity over the past 12 months. Of those debtors entering business-related personal insolvency administration, the most commonly cited cause was the economy followed by unknown reasons and ill health. For non-business related personal insolvency, unemployment was cited as the main reason as well as excessive use of credit and domestic discord. Read more: http://www.dnbsmallbusiness.com.au/News/Bankruptcies_lowest_since_1996/indexdl_9956.aspx
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peter fraser
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10 Apr 2013, 10:47 PM
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- Alex Barton
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Bankruptcies lowest since 1996The number of bankruptcies in the March quarter of 2013 was the lowest level recorded in a quarter since 1996, according to the latest data from the Insolvency and Trustee Service Australia. The data indicated that total personal insolvency activity was at its lowest quarterly level in seven years, with 18 per cent of all debtors entering a business-related personal insolvency during the quarter. All states and territories, with the exception of the Northern Territory, experienced drops in total personal insolvency activity over the past 12 months. Of those debtors entering business-related personal insolvency administration, the most commonly cited cause was the economy followed by unknown reasons and ill health. For non-business related personal insolvency, unemployment was cited as the main reason as well as excessive use of credit and domestic discord. Read more: http://www.dnbsmallbusiness.com.au/News/Bankruptcies_lowest_since_1996/indexdl_9956.aspx
There is no doubt that the mood has lifted in 2013 and people are more bouyant, especially in small business. I'm not seeing that in the numbers, but it is there.
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frankrider
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11 Apr 2013, 06:26 AM
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- peter fraser
- 29 Oct 2011, 07:36 AM
This was an interesting question, so I thought that I would make it a seperate thread. Due to the pressures of unpayable debts, it's usually the case that homeowners sell to repay debts, or simply lose everything, but not in all cases. Here are a couple of scenarios that I have seen play out, and that information may help someone who finds themselves in a tough situation, and that can happen to anybody.
Good post Peter! And about time the bulls had a real hard look at the flipside and did some future planning instead of just rehashing of mantras from the last decade. I have no debt myself so I wont stick around, but once again, good work peter!
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Negative gearing is a form of leveraged speculation in which a speculator borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan
A negative gearing strategy can only make a profit if the asset rises so much in price that the capital gain is more than the sum of the ongoing losses over the life of the speculation. http://en.wikipedia.org/wiki/Negative_gearing
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1:37 AM May 19