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Oct

14

What Rights Should Debtors Have?

Bank of America - San Fransisco - CC flickr: ghost 952

Bank of America - San Fransisco - CC photographer ghost592

This week at GetOutOfDebt.org, the Personal Finance Brain Trust was challenged yet again!

The question this week was: When debtors are having problems paying their bills, what rights do you think debtors should have with lenders so that they can avoid foreclosure, repossession and/or bankruptcy?

My answer or the Brain Trust this week was long and I still feel I didn’t cover everything. SO… I’ve extended my response here on my blog. For the abridged version, please visit the full post at Steve’s website.

*****

What a loaded question! I have many feelings about this subject - I am sympathetic to the debtors, but am not too lenient in my solutions. Having been in deep debt myself and having crawled out of that hole solely based on my own efforts (the credit companies sure didn’t do anything to help me), I feel that anyone can overcome their bad financial situations with enough effort.

It’s unfair to say that the lender should take all the burden when he debtor is the one who can’t pay their bills. I agree strongly with WC, who brilliantly answered:

I may sound a little harsh saying this, but I really feel like people that get into products they didn’t a) understand fully or b) can’t afford, should have to suffer the consequences of their actions. Ignorance isn’t an excuse and people should read up on what they were getting into before they signed on the dotted line.

However, I feel the lender should give some help to the debtor because it makes everything go more smoothly. Since we don’t live in a black and white world, I think some different circumstances need to be considered in order to qualify the “rights” of the debtor.

This question boils down to asking: Who should ultimately “win” when a loan situation becomes a struggle - the banks or the consumers? There is no one solution because of the aforementioned circumstances. I think that looking at the debtors’ situations before they took on the debt with this one particular lender is key. Let’s examine two examples…

I feel that if the debtor was not previously in hot water and now is unable to pay some (or all) of their bills, than the fault should lie somewhere closer to the debtor and he/she shouldn’t be granted too much leeway that could ultimately hurt the lender for something that wasn’t the lender’s fault. This is more of a classic lending situation: the bank loans out, the person over-extends themselves, payments aren’t made.

In this situation, the rights of the consumer, in my opinion, should be (at the least) fair and reasonable interest rates on the loan and low, previously-disclosed late-fees when payments don’t come in. Even in the situation where the bank is in the right, they should not abuse their customers by charging outrageous finance charges or dropping hidden late fees out of nowhere. The consumer in this case has every right to fair and legal lending practices, but that’s as far as it goes. I also feel it would be in the bank’s interest to extend some sort of long-term payment plan to the debtor to keep them happy being a debtor, but I don’t feel the bank is under much obligation to do so.

As a side note, it seems - to me - foolish that banks would jump so fast to allowing their customers to fall into bankruptcy or foreclosure because ultimately everyone loses that way. I would think it would be more favorable for the lender to extend the payment plans or lower the minimum payments to keep the debtor paying - after all, interest is where banks make their money. But I guess that’s a whole other issue - one of lenders being aggressive and hard-nosed rather than reasonable. Common sense is lost here…

Now, if the debtor was deeply in debt to begin with and the bank “went after” the debtor, the story has changed completely. If the debtor was clearly targeted as prey in predatory lending practices, than far more leeway should be granted toward the consumer. In this sort of case I feel that lengthy repayment plans, deferred (non-accrued) interest, and possibly lenient settlements are all in order. I think if the debtor is suffering undue abuse from the lender than all actions on the part of the lender should be in the interest of the debtor, not themselves. This is a real gray area, however, since we all know that if some rights are extended to the lesser-fortunate of the debtors, the more-fortunate debtors who dug their own holes will be demanding the same sort of treatment.

Patrick gave a great response which I agree with as well, saying:

I think it is in the best interest of lenders and borrowers to work together in good faith to try and come up with a solution that works for both parties. [...] This kind of thing should be done on a case by case basis, and only after the customer has worked with an approved financial or credit counselor.

On the customer’s end, they need to cut back on expenses wherever possible to meet their obligations - be it a mortgage, car loan, credit card bills, student loans, or anything else. It would not be right for banks to give customers concessions, only to have the customers continue getting deeper into debt. [...] There are obviously a lot of issues on both sides of the fence that need to be addressed.

I honestly can’t see this issue clear-cut, and you’ll find me hard to pin down on this question. I feel that in the end, how the debtor got into the loan initially is a very clear indication of how the loan will end up, and when it’s obvious from the start that the loan will go bad, the loan should not be extended in the first place. That is the responsibility of the lender to determine - and they should not take loans that they know will go bad in such a predatory manner as they do now.

This all goes back to my answer last week - those who should have never been “let” (or more likely, baited) into debt in the first place can’t be faulted for having been extended the loan - that is the lender’s fault. But if the person did it all to themselves, than I say they have to undo it themselves - in a fair environment, with reasonable finance charges and late fees - with everything out in the open.

*****

Thanks for the great thought-provoking question, Steve!

You can read the answers to this question from all the Personal Finance Brain Trust by visiting the original post. You can subscribe to GetOutOfDebt.org to read all the answers every week by clicking here, or subscribe by email by visiting the site.

What are your opinions on the topic? Should banks be more lenient? Is it hypocrytical for banks to be so strict with borrowers when they themselves are now receiving a bail-out from the goverment? Let me know!

Filed Under Brain Trust Questions, Money and Finance | 5 Comments

Oct

7

Costlier Credit and the Credit Cardholders’ Bill of Rights

I was asked last week to join the Personal Finance Bloggers Brain Trust over at GetOutOfDebt.org. I was thrilled - the domain name alone sounded right up my alley. For those of you interested, the Brain Trust will answer questions about personal finance once a week and the answers from all of us (for the same question) are posted together. To get regular updates you can subscribe to them via RSS by clicking here, or you can subscribe by email by visiting the website.

The question this week was regarding the new Credit Cardholders’ Bill of Rights that just passed in the House of Representatives. The American Bankers Association made a statement immediately following the passing of the bill that basically said that this bill would make credit costlier and ultimately hurt small businesses and individuals.

The question posed to us was, in a nutshell: Assuming that this bill really would make debt costlier, should we be afraid of costlier credit if in exchange consumers get greater consumer credit rights and protection against sudden rate changes, elimination of huge fees and clear credit disclosures?

My answer was thus:

There’s no point in being afraid of costlier credit - in the end, it benefits the consumer, even if initially it doesn’t appear that way.

First of all, the “Bill of Rights” that has been put in place is breath of fresh air in what has long been an industry fraught with malicious “small print” and abused and exploited customers. If these laws, which give consumers some safeguard against the tyranny of the credit companies, come with a price, I think we should all be willing to pay it - considering what the protection is worth.

I can’t see why having credit slightly less accessible (because of its cost) is a bad thing anyway. Sub-prime mortgage crisis, anyone? People who don’t qualify for credit shouldn’t be granted it, and I also think that most of those who do qualify really shouldn’t be extended much privilege either. Credit is a dangerous tool that many people abuse and that leads thousands to ruin. By making it costlier, perhaps fewer will try to borrow in the first place - making our businesses and consumers stronger in the end because they are operating on capital and not on credit.

The last thing anyone should want to do during an economic downturn is rely on credit. We would all be a lot more secure during an economic “crisis” if we were financially stable ourselves, and not so indebted every which way. A slow economy doesn’t much touch the man who is financially free. I think the ABA is blowing smoke because they don’t like the laws, period - not because they care at all about the individuals or small businesses.

This is of course my option, which at times tends to be rather extreme - especially when it comes to credit

To read what all the other bloggers had to say (there are some great writers in this bunch!), visit the original post.

What do you think?

Filed Under Brain Trust Questions, Money and Finance, Small Business | 4 Comments

Sep

29

Carnival of Personal Finance!

The Carnival of Personal Finance #172 is up at Debt Kid! My post How to Save Money Every Paycheck was featured in the Savings section. Thanks, debt kid!

If you’re visiting from the carnival, welcome! If you’d like to be a part of the Antishay community, feel free to subscribe to my email updates for free, or sign up for my free RSS feed. Thank you for stopping by!

Filed Under Site News, Etc. | Leave a Comment

Sep

23

How to Save Money Every Paycheck

I’m here today to talk about savings! Yay! One of the questions I’m asked with alarming frequency is, “How do I save money?” It seems like such a simple question with a simple answer (”Just save.”) but it really isn’t. Here I’ll suggest a couple of ideas which, when put into practice, should get you into the mode of saving money regularly.

First things first, you cannot save money if you have a negative cash flow. A negative cash flow is when you have more money going out than you have coming in. This is the desperate situation many people who are in debt find themselves - where I was a year ago. It is, in essence, the definition of debt: owing more than you have.

If you are working with a negative cash flow right now, I suggest you first read another article I wrote entitled How to Save an Emergncy Fund When You Have a Negative Cash Flow. Assuming that you have a positive cash flow, there are three things you can do that will really get you saving money.

Plan Where Your Money is Going

One of the main problems we run into when trying to save, even if we’re living in total financial abundance, is that of actually saving money regularly. It’s so easy to just spend the money that comes in as it comes in, and not give a second thought to where it all went. That is, until we reach the end of the month and ask ourselves, “Where did all my money go?”

Budgeting to zero is a great first step in getting an accurate look at your finances. If you haven’t already figured out where your money is going, it’s a good idea to start there.

A Zero-Budget is a total no-brainer and I’m sure if you’ve ever sat down to do a budget, this is the way you did it. (Please note that if you live on a flexible income, you should budget your expenses based only on the minimum amount of money you will make every month. Everything on top of that is extra.)

The simplified version of a zero-budget is this:

List the money you have coming in each month (all paychecks and other liquid income).
Write down all your expenses each month and total them up - INCLUDING “fun money” that you allow yourself to spend on whatever you want.
Subtract your expenses from your income to get a remainder amount (hopefully this number is positive… if it isn’t, you have a negative cash flow).
Make a plan for the leftover money (for savings, whatever) until there is no more money left over at the end of the month. This means that all your money is budgeted out, down to $0 (hence the name).

Once you’ve done a rough budget in this form, you should have a good idea of what you can save each month. But now, we find ourselves knowing how much we can save, but not actually saving that amount. Here are my suggestions to move you to the next step: actually saving money each month.

Bill Yourself

If you’ve budgeted to zero, you should now have a good idea of how much money you can comfortably save each month. But taking the leap from knowing how much you can save and actually saving that amount is a challenging one.

The first suggestion I have is that you bill yourself. Using myself as an example, I am determined to save (and am capable of saving) $600 per month. (I hope to save more like $800 to $1000, but sometimes I just can’t with unexpected bills and other larger purchases I decide to make. I’m not too worried about it.) So each month when I gather my bills and pay them, I also pay myself $600 into savings - as if it were a bill.

This distinction might not seem important to some of you, but think of it this way: if you intend on savings $600/month, you may or may not do it. If you decide to pay yourself $600 a month toward savings, you must pay it regularly, and with intent - like a bill.

My suggestion would be to treat it like a bill and really put it in your face so you don’t forget. If you pay your bills on paper, or have a collection of paper bills that you work with, put a sticky note on the top of the pile to also pay yourself savings. If you’re like me and do everything electronically, set up a calendar to remind you to pay yourself savings each month. I use iCal, Google Calendar, and Remember the Milk, all for different things. iCal is my bills calendar, and so every month I get an email from my computer’s calendar reminding myself to pay to my savings.

I find this works really well.

Have a Goal in Mind

Here’s where I’m at right now. I pay my savings regularly, but without a goal in mind I have a tendency to make excuses and slowly fritter away my savings. Even though the money is set aside for “savings,” I’ll spend it on more clothes, a night out on the town, or some other thing that I fancy.

I notice, however, that when I was saving for a motorcycle, I never touched the money in my savings account.

So, if you’re still having trouble actually saving up piles of money, I suggest that you make a goal for that money. It doesn’t have to be an object or a purchase, per se, but have a reason why you’re saving. My current goal (since I realized recently that I needed one) is to save up my $5000 emergency fund. And after that, my goal will be to save $1000 to invest in a mutual fund of some kind. And from there, I’ll make more and more goals - so that my savings always has purpose.

If you’re interested in reading several more (awesome) tips on how to save money all the time, take a look at my post How to Save Money, Big and Small, which covers other tips for encouraging yourself into savings, as well as ideas on how to snowflake savings here and there and how to keep your hands off of your savings.

Questions? Leave ‘em in the comments

Photo by Robbie. Thanks!