Experts say 25% of otherwise viable small businesses will fail as a result of the coronavirus economic implications. Layoffs have reached record levels. Unemployment is expected to hit depression levels.
In the 25+ years I’ve spent doing bankruptcies, I’ve seen a few recurring issues. This article is not about bankruptcy. It is about dealing with the financial fallout that will come from the coronavirus. These are the things I wished people knew when things started going downhill.
Regardless of how you feel about the virus, the economic reaction is going to be like a tsunami. If you have to file for bankruptcy–whether a re-organization or liquidation–it is not a personal failing…so don’t blame yourself this time around.
It is your responsibility to deal with the results of this catastrophe. You can’t sit by and let the predators of the credit world take apart your lifetime of work.
Prioritize your bills. All bills are not equal. A tendency people have is to pay something on everything. That is not the best approach. It usually makes the situation worse, possibly leading to a car repo or a home foreclosure.
Always pay the most important obligations first. That means pay your house note, followed by your car note. Unsecured debt like credit cards should come in a very distant third, if at all.
It may sound obvious, but it is very hard to earn a living if you are homeless or do not have transportation. If you let your car or home get taken away, you may find yourself depending on the good graces of friends and relatives… and you might not be able to drive anywhere to look for work.
Charged off and repo loans are not forgiven. I can’t tell you how many people come to my office, saying something like, “My debt is charged off.” That is great, but charged off debt is not forgiven debt. What “charged off” really means is that the original creditor stopped its collecting efforts.
The creditor then sells the debt to a third-party debt buyer. This is a company that buys other people’s bad debt and tries to collect on it for full value. It doesn’t matter what they spent to get the account. Their goal is to harvest as much as possible.
The same thing happens with home and vehicle repossessions. In almost all states, the creditor can come after you for the balance or sell the account to someone who will. The media has spread the myth that giving back a house or a car has no repercussions.
For most of the nation, it just isn’t true. I suspect part of that idea comes from much of the media from California–a non-recourse mortgage state.
The following are the list of so-called non-recourse mortgage states:
Even if you live in one of those twelve states, I highly recommend you meet with an attorney to find out the details. Just because the state is generally non-recourse for mortgages, it does not mean you will have a total forgiveness. My 25 years in the legal business has taught me —certain exceptions apply.
A Quick Word About Debt Buyers
I have successfully defended against most of their collection efforts. If you get sued, get with an attorney immediately. The way these transfers happen is in bulk. That means the buyer is usually getting your account, along with several others in million-dollar packages and without supporting paperwork – like the loan document. They usually cannot beat a good defense, but that usually takes the help of your lawyer.
If it’s not in writing, it’s a rumor. People make all kinds of unwritten deals with debt collectors and finance companies. Sometimes the guy on the other end of the line has the ability to cut a deal. Most of the time, he doesn’t. Get the deal in writing. Make him send you an email or something to show you have an agreement. If the deal is not in writing, it is not going to be enforceable.
Who ARE These People?
The kind of people who work at a debt collection office come and go from their jobs. They are often paid on commission. They’re more worried about their next commission check, than helping you work out a good resolution. In other words, these guys are not to be trusted. They will tell you whatever you want to hear, to get you to send in check or authorize a draft of your bank account. They may try to bully you into taking a deal without a confirmation. They may say also say you are on a recorded line, and the deal is a deal.
I have had lots of people come to my office, telling me they worked it out with a collection agency—only to find that what they really did was authorize their bank account to be drained.
If you are going do business with them, demand the terms in writing.
Garnishments are real. Some states do not allow garnishments. Most do. With the exception of Pennsylvania, North Carolina, South Carolina, and Texas, garnishment is pretty much a nationwide thing. The amounts vary slightly from state to state. On the average, most states will let a judgment creditor take up to 25% of your net pay until the debt is paid, plus interest and costs.
For many states, it gets even worse. Creditors may be able to garnish your spouse for your debt. That means an obligation your husband or wife had nothing to do with, could come right out of their paycheck and without their consent. This is a particularly dirty trick creditors use. Nothing creates more marital hostility than getting garnished for the other spouse’s bills.
Many of my clients thought garnishment was a joke, until it happened to them. They thought all they had to do was tell the payroll department they did not want to pay it, and that would be that. Even if you change jobs, they may pursue you to the next one and continue the garnishment.
Bankruptcy is not failure. People have the perception that bankruptcy is a personal failure. No one asked for the coronavirus or the fallout it will have in the economy. Bankruptcy is a way to minimize your debt or restructure the important items that remain, so you don’t pay over the next decade or longer for events you did not create.
There is a big difference between the kinds of bankruptcy. For consumers, the two choices are usually Chapter 7 or Chapter 13. They are very different. With a chapter 7, you have a forgiveness of the unsecured debt, like credit cards and most finance companies. That means you get to walk away from unsecured debt without much– if any damage. You usually get to keep your house and car without any issues.
Chapter 13 is about re-organization. It involves a repayment plan lasting between three and five years (usually five years). I can’t tell you how many people would have been a great fit for a Chapter 7 debt forgiveness. But they follow the mantra of paying something on everything, rather than prioritizing. The result was a foreclosure or repo, requiring a five-year repayment plan instead of an easy Chapter 7.
A Final Word About Bankruptcy
Bankruptcy usually improves your credit standing. I am not recommending filing bankruptcy if you don’t need it. I am just saying that for most people, a bankruptcy filing boosts credit scores. That is because you are getting rid of a bunch of bills you could not otherwise pay.
Written by Greg Gouner