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Options for people in debt

For small business owners, one of the most perplexing situations is a realization that there are now essentially “good banks” and “bad banks”. To make matters worse, it is rarely easy to distinguish between the good and bad ones. For many commercial borrowers, business finance consulting has emerged as a helpful tool to determine which banks are still effective. But overall, the world of banking has changed dramatically for almost everyone, and many business borrowers are angry and confused by a new commercial banking landscape that does not seem to be working very well.

One of the more difficult aspects associated with the “good bank and bad bank” analogy is that there are so many competing explanations as to what constitutes a “good bank”. One popular analysis has focused on how much banks are really worth in view of the toxic assets that are so complicated to evaluate. In this perspective, “bad banks” are those whose assets are estimated to be worth less than their liabilities and as a result have been referred to as “zombie banks” and “dead banks walking”.

Not surprisingly we have not yet experienced a bank which has openly agreed that their liabilities exceed their assets and therefore they should be considered to be a zombie bank. This would be tantamount to describing themselves as a bankrupt bank. If a bank is truly deserving of the bankrupt status (and there are a number which certainly appear to be in this category), the current banking laws do not permit such a bank to go through the kind of bankruptcy process being considered by General Motors and Chrysler.

Instead the Federal Deposit Insurance Corporation (FDIC) is supposedly required by law to assume the operation of the bankrupt bank until a new management and ownership arrangement can be established. For a number of smaller banks, this has in fact occurred during the past few months. What has been missing so far from this legal bank takeover approach by the FDIC has been the inclusion of larger banks which appear to have problems that are much more serious than the smaller banks which have already been liquidated and transferred to new owners by the FDIC.

The reason that the FDIC has not liquidated larger problematic banks has not been made public. It is certainly possible that the FDIC and key public officials feel that the public failure of a major bank would create a crisis of confidence for all banks regardless of their financial health. An equally strong likelihood is that the FDIC simply does not currently have sufficient assets to cover the failure of a big bank. This viewpoint is supported by the recent announcement that the FDIC is in the process of raising fees paid by banks in order to replenish the FDIC insurance funds.

To realistically protect the future financial health of their own business, small business owners need their own evaluation standards to determine what constitutes either a “good bank” or “bad bank”. Business owners should include an assessment that focuses on results as to which banks can provide the needed help for their specific business circumstances involving working capital financing and commercial loan needs. The banks themselves are not likely to be helpful in providing the needed data to produce a candid evaluation of their financial status, even though such information would go a long way toward establishing a good bank-bad bank distinction.

As noted above, it might be possible that there are several bankrupt banks still functioning normally because they have not rushed to advise the public that they are in serious trouble. While most banks have been publicizing during the past few months that they are making SBA loans and small business loans in a normal fashion, in most cases these banks have actually reduced commercial lending dramatically. Some specialized business lending such as commercial construction financing has been frozen altogether in many areas.

In addition to the critical importance of identifying “good banks”, we have published a related report which describes the delicate issue confronting many business owners who might need to fire their banker. There are “good bankers” and “bad bankers” just as we have noted that there are “good banks” and “bad banks”.

Business finance consulting has emerged as an important tool to help small business owners work their way through a complicated commercial banking maze. One of the common questions asked in the Bernie Madoff fiasco concerns the repeated failure of investment advisors to analyze internal operations prior to placing investor funds with the Ponzi scheme constructed by Madoff over a period of many years.

Our candid final point is that the use of a commercial finance consultant should be at least considered by commercial borrowers in their search for new working capital loans and commercial mortgage financing. Businesses now need to act more aggressively than before in order to protect their own financial interests.

From time to time I come across age pensioners whose life is now miserable because they’ve found themselves with what is to them, overwhelming credit card and other debt. On a pension, unless they leave themselves short, they often find that can’t make the repayments.

When talking to me, some of them have broken down and cried when they have realized that, with dignity, bankruptcy can cancel this debt and release them from this dreadful position.

They mostly don’t know that their bankruptcy will last for only 3 years.

They all say that they didn’t know that as a bankrupt, by law they can (each) earn a minimum $758.80 a week net, that’s after tax, that’s weekly spending money, before any of it can be taken off them by their bankruptcy trustee.

Mostly, to a man or woman they tell me that they don’t earn that much anyway. But it’s true, it’s the law, and it changes (upward) every March and September.

A single age pensioner receiving a maximum pension of $537.70 per fortnight, which is $268.80 per week, is way below this $758.80 per week figure.

As a couple they can receive $449.10 age pension per fortnight, so that’s 224.55 each per week, still way below the $758.80 each figure, and keep the lot.

What this means is that if an age pensioner (who rents) goes bankrupt, they can stop paying their debts like credit card and most other loans like that forever, and so keep the full amount of their pension to buy food, and to live on.

If you’ve got property like a house or a car I’ll come to that shortly.

Most however feel that that’s not right, that they were brought up in the era where you had to pay your debts. But that era also required the banks and other lenders to act more responsibly in deciding who to lend money to, and how much, than is the case today.

There seems to be a lack of balance in responsibility now.

If you feel that despite everything you don’t want to go bankrupt, well, bankruptcy law has attempted to provide a solution there too. In reality the solution is generally out of the reach of people living off an age pension, and maybe a few extra dollars too.

In bankruptcy law terms, these solutions are either called a Debt Agreement Proposal, or there’s a Personal Insolvency Agreement. For age pensioners, both could be a bit expensive to set up. They also mostly seem to keep you still saddled with your debt, and a repayment regime spreading over a number of years, and coming out of your pension still.

In addition, with the Personal Insolvency Agreement procedures, (but not a bankruptcy) the fact that you’re attempting to come to some arrangement to pay off your debt like this has to be advertised in both a local and national newspaper.

I can’t see many pensioners, or anybody else for that matter, wanting to be shamed in this way, nor do I think that they should be.

Furthermore, with both of these scenarios, if the wheels fall off again and something pops up which makes it difficult or impossible to keep up the repayments, as they’re more likely to do as we get older, then you’re in trouble again.

If you don’t want to go bankrupt, then with these other two options, there’s then a bit of a routine and procedure that the law sets out to happen, to try and get your repayments frozen again for a while, or reduced. More cost for you, and they don’t go away.

I think that a better answer is for you, after you go bankrupt, is to voluntarily just set aside what you can, and when you can, and then just chip away at the debt, if you want to (but by law you don’t have to), at your own pace, and in your own time. Look at as being a bit like the old saying “a dollar down and a dollar a week”.

Nobody can make you do this though, as bankruptcy cancels the sort of debt that I’m talking about.

In an overwhelmingly majority of cases, bankruptcy lasts for 3 years, and in that time, or at the end of it, by law, you don’t have to pay back this debt again, ever. Some shady debt collectors may tell you that you do (and there’s a few around like that), but that’s not right.

Another great relief for age pensioners is that their bankruptcy is not advertised in the media anywhere. It’s very private. If you bankrupt yourself then you don’t have to go to Court either.

Your bankruptcy is recorded with the commercial credit rating agencies for 7 years though, so you will find it hard, if not impossible, to get credit or a loan again from the normal banking sources in that time.

Bankruptcy will cancel your credit cards, but these days some banks offer Visa debit cards, which can only be used if you have money in your bank account to immediately cover the cost of what you buy when using one, but at least you have a Visa card again.

The government also records your bankruptcy status on a database called the National Insolvency Index, and its there for life, and some information is accessible to the public, for a fee. To pensioners, I can’t see that this would be an issue at all.

Most age pensioners are also very relieved to be told that even though they go bankrupt, they should be able to keep their car.

As a bankrupt you can keep a car where your (net) equity in it is no more than $6,300, and that’s its wholesale value, not its card yard price. Age pensioners who are renters rarely have a late model car, so again, this is mostly never an issue.

If you are paying your car off and there’s a Bill of Sale on it, the $6.300 net equity means it’s the bit that you own as distinct from the bit that the bank or the finance company owns.

To get a guide on this, simply compare what you still owe on the Bill of Sale with what you think that a car dealer would offer you, in cash, not as a trade in, for it if you tried to sell it to them today.

The difference that’s theoretically left after you paid the finance company out, would represent the bit that you own. If it’s $6,300 or less, you should be ok.

If you’re paying your car off like this though, you’ve got to be up to date with the repayments when you go bankrupt, and stay up to date if you want to keep the car.

Also, as a bankrupt, nobody is likely to come to the house to take your household furniture and belongings away. There may be a few exceptions here if the bankruptcy trustee was advised that the bankrupt had something really valuable, like a Mona Lisa hanging on the wall. (That’s a bit of an exaggeration of course).

The government says that it can sell or take off you, during the 3 years of your bankruptcy, things like lottery wins or prizes of value (buy tickets in somebody else’s name), assets left to you in a will in that time, your interest in the family home, land, money in your bank accounts (but not your pension income dealt with earlier), shares etc, antiques or other saleable property which are “of value” (the crucial words here are “of value”).

This is rarely is an issue with people of age pension age who are considering bankruptcy. You’re pretty much left alone.

If the age pensioner owns a house then that’s a bit of a worry, as generally the person’s equity in the house means that they could get a loan to pay off the debts being discussed in this article. I’d try not to go bankrupt if I owned a home.

If you’re in debt in Australia and are considering bankruptcy, then a concern might be the so called ‘Stigma of Bankruptcy’. These days it’s really hardly an issue.

Also, bankruptcy is not a last resort, to be avoided at all costs.

If a person’s got what to them is overwhelming debt, and they’ve tried to get on top of it, but can’t, then declaring themselves bankrupt is a very practicable and sensible step to take. Mostly, it enables a person to get out of debt and so give themselves the chance to start again, to get back on their feet, and so be able to get on with their lives.

The ‘Stigma of Bankruptcy’ is an old fashioned term. It probably was to be avoided at all costs back in days gone by, but its rarely an issue ttoday.

Back in the ‘Stigma of Bankruptcy’ days banks in Australia were strict and conservative with their lending practices. You at least had to have a face to face interview with a Loans Officer.

In those days people who went bankrupt were mostly in business. It was pretty obvious when a business suddenly closed down that something had happened. Everybody knew, people talked, the shame of the ‘Stigma of Bankruptcy’ hung low in the air.

These days the banks have changed things. Loans are made over the internet and telephone. Pre approved offers of loans come in the post. The lenders have simply changed the rules and the risks.

Ordinary people now go bankrupt. In the year ended 30th June 2007 there were 25,242 bankruptcies in Australia, and of that number only 4,821 of them were business related bankruptcies. The rest were ordinary people.

Over the last 5 years to 30th June 2007 111,176 people have gone bankrupt ( www.itsa.gov.au and there click About us, then click Statistics)

Some of these 111,176 people may live in your street. They may sit next to on the bus or tram or train going to work, they may be some of the people that you know at work, and through work. If you knew, you’d be surprised to find who has gone bankrupt.

Chances are that you’d know more than one of them. Did you first suspect that they may have gone bankrupt because you noticed the ‘Stigma of Bankruptcy’?

Also, of these 111,176 who were declared bankrupt in those 5 years, did you read about any of them in the newspapers? Every day now just check the Public Notices section and you’ll see what I mean. Bankruptcy is very private, the newspapers will not be the source of a person’s ‘Stigma of Bankruptcy’ fears.

You wont have seen it on television either, unless it was somebody high profile, and newsworthy.

The people who will know that you’ve gone bankrupt are the people that you owe the money too. Your bankruptcy trustee will tell them, you don’t have to.

Your local bank may not be told. The return address for credit card statements are a GPO box somewhere?

If a person goes bankrupt I think that the real ‘Stigma of Bankruptcy’ is with the people owed the money. It now seems that it’s the banks etc who don’t want to be caught with the stigma of having to report to their shareholders and so to the public at large, including their competitors and peers, that the management has lost some of it’s shareholders’ money by lending it to people who couldn’t pay it back.

If a person goes bankrupt, then unless they’ve got something of value that their bankruptcy trustee would be allowed to sell (and there are some restrictions on a trustee here as there are a lot of things that he can’t touch) then the creditors mostly won’t get paid much, if anything.

If a person goes bankrupt, then for the next 3 years they can earn a minimum weekly net take home pay of $758.80 (current at 1st January 2008) that’s after tax and child support, and if applicable, business expenses, before the trustee can claim any of this income.

The $758.80 base figure increases is adjusted twice a year and is more if the bankrupt has dependants. If the bankrupt earns more than the base amounts, (known as the Threshhold) , then they can keep half of whatever amount goes over the Threshhold amount, as well as the minimum $758.80 or whatever it is that applies to them.

A bankrupt’s weekly allowable income is not likely to cause any stress or stigma during the (usual) 3 years of bankruptcy.

The ‘Stigma of Bankruptcy’ will be felt by a bankrupt’s creditors, the banks and others.

As a person falls behind in paying their loans and credit cards and other debts, after a few months they start to look a bit shaky from a debt collection point of view.

A widespread practice now is that some cases the creditors on-sell these possible bad debts to companies willing to buy them, at a big big discount on what is owed. Its then up to the buyer to collect payment, and as far as I am aware, when they do they keep it all.

In this way it seems that the banks etc don’t have to report the sale of these debts at a loss as bad debts. Saves face, saves a bit of Stigma.

It’s the buyers of these debts, who are now second hand debt salesmen, who have to cope with a loss if they don’t get paid because the debtor goes bankrupt.

So that they don’t lose of their money, and carry the stigma associated with knowing that their gamble has lost, the debt collection tactics of these second hand debt salesmen can be very aggressive.

They wrongly claim that bankruptcy is the last resort, and they seem to rabbit on and on a bit about at the ‘Stigma of Bankruptcy’. But it’s hardly an issue.

A person is generally bankrupt for 3 years, and their credit rating is damaged for 7 years. Overwhelmingly, for most people, going bankrupt does not affect their employment in any way.

Overwhelmingly, being bankrupt does not mean that you cannot travel overseas in the 3 year period of your bankruptcy. You simply have to seek the written permission of your bankruptcy trustee. Again, in modern times, very little stigma is suffered by the bankrupt.

If you’ve tried and tried but for some reason you just can’t pay your debts, then through bankruptcy, the government has given everybody the chance to get out of debt, to start again, to get back on their feet, and so be able to get on with their lives.

The ‘Stigma of Bankruptcy’ is hardly an issue.

You are immediately free from debt and will not be responsible for any of your pre-existing debts. It is a fresh start for you and your family to start again and build yourself up from a position of strength. You are immediately protected from all existing creditors who form part of your bankruptcy. You should understand that it is extremely unlikely that you will be able to borrow money from a high street lender. It is not unusual for a self-employed person to obtain start up or project funding from a private source which is acceptable for an un-discharged bankrupt (providing the lender is aware of your circumstances). Once you are discharged from bankruptcy (usually after 12 months, but sometimes sooner) you will be able to rebuild your credit file.

Bankruptcy restrictions Following bankruptcy certain restrictions are placed on you. These are as follows: * You lose control of your assets (house, savings, expensive car (over £2500) * You cannot obtain credit for over £500 without the declaring that you are bankrupt.. * You cannot take any part in the promotion, formation or management of a limited company (LTD) without the permission of the court. * You cannot trade in any business under any other name unless you inform all persons concerned of the bankruptcy.

Is my occupation affected? If you go bankrupt then you will be automatically excluded from some professions:

For some other professions, dismissal would be at your employer’s discretion. Check your employment contract or consult your HR department or union.

Bankruptcy Pros and Cons