Don’t Be an Ostrich***
- barrieabalard
- January 21st, 2010
In the past couple of weeks the media had a small hoo-hah over whether or not people who are underwater in their mortgages can walk away with a clear conscience. Both the New York Times and Howard Lindzon of StockTwits, among others, have penned articles about the question. The Times noted that businesses often do stop paying; “Morgan Stanley recently decided to stop making payments on five San Francisco office buildings.” They also noted that, in business, such an action is not as unusual as we might think.
So, if we are supposed to run our financial lives like a business (an idea I subscribe to), paying off debt and accumulating assets and cash in order to have a higher net worth, the question is this: do we act like Morgan Stanley and walk away from a huge obligation because to continue to pay the debt is, essentially, a bad business decision? Or do we honor all our debts, no matter what? (No intention to slam $MS for doing what they did.)
Personally, I don’t know if I would or could walk away if I had an underwater mortgage—it’s one of those situations where you don’t really know what you’d do because you’ve never been in it. I imagine I might do it if I were so desperate that my financial survival depended on it, so desperate that the resulting black mark on my credit would seem the lesser of two evils.
But one of the points of this post is not to moralize or judge, but to mention that there is a choice, and walking away might be something you’d never considered. I bring it up for anyone who is drowning in his or her home and willing to pay the price of a significant hit to your credit score (e.g., your future ability to borrow), among other consequences. And I certainly do not advocate walking away, because the ramifications are huge.
The main point of this post is, if you are awash in debt and doing the usual human thing of avoiding the pain (not opening dunning notices, not taking phone calls, and in general sticking your head in the sand), and you don’t want to simply walk away, then you must pull your head out of the dirt and start communicating. And I don’t mean just with your creditors.
The first step is to talk with your creditors—bank, credit card entity, what have you. Do it before the situation becomes dire. It’s harder to work things out once overdue debts have been sent to a collection agency or a notice of foreclosure has been issued. In general, banks do not want to own homes—heck, before our credit bust, they didn’t even want to own the mortgages, preferring to bundle and sell them. But banks do want to help you hold on to your home because it is generally in their best interests to do so. They’re not doing it because they like you—be clear about that—though if you are unpleasant with whomever you talk with, not liking you can certainly hurt your chances of enjoying a successful negotiation.
You should also realize the bank/credit entity will be less than receptive if you are still clearly blowing lots of money and running up new debts. Get your act together financially before you negotiate, if for no other reason than you will know exactly what your resources for paying/not paying are. That way, you’ll be able to give the bank firm, clear answers that may pave the way for working it out.
The other talking you should consider doing is this—if you’re in a tight spot, talk to your family and trusted friends. Most of us will talk about our sex lives before we will reveal being financially embarrassed. But the people who care about you can’t help you if they don’t know you need help. Now, I’m not saying you should tell them by asking for a loan. But, if you tell them the situation and what your needs and problems are, solutions that you hadn’t considered might appear. For example, people might bring you casseroles or even leave a bag of groceries on your doorstep (I have done this). Or they might offer gently-used clothing for your growing kids, or for you to wear to a job interview. Maybe they can give you a ride somewhere when your car breaks down—or even loan or sell you one of their old vehicles. People can’t help if you don’t tell them you could use the help. Be specific about your needs so they know how to help you.
Finally, be aware that debt collectors have strict laws as to when and where they can call you about your debt. If the debt collection agency breaks any of the laws, you can and should report them. A few do abuse their right to contact the debtor.
Some useful links, listed alphabetically. No endorsement of any information contained in these articles is implied or expressed. Do your homework!
Bankruptcy basics. This link is for Chapter 13, but Chapter 7 info can be obtained on the same page.
Debt collection practices: when hardball tactics go too far
Foreclosure laws and procedures by state
Foreclosure overview and foreclosure process
When paying old bills can hurt your credit
***Not being an ostrich also applies to looking at your bank and retirement account statements. No good will come of not seeing the “bad” numbers. It is always better to know exactly what your situation is, no matter how painful. If you don't know, you can’t fix it.
Tickers: $MS, bankruptcy, creditor negotiation, debt collectors, foreclosure, talk about money problems
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