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Personal Finance Brain Trust – What Rights Should Debtors Have?

This weeks brain trust question was:

Question:

Bank of America is proudly telling people about their new loan modification program and how much it will help people. But this program did not materialize until Bank of America was sued by some states over predatory lending.

The real world situation is that the majority of lenders are unresponsive or just not helpful to help people deal with money troubles. Consumers would be surprised that it is actually hard to get banks to accept fair and sustainable payments to help people avoid bankruptcy.

The question for this week is what rights do you think consumers should have in a perfect world in order to be able to deal with lenders, when the debtor is having problems paying their bills, so they can avoid foreclosure, repossession and/or bankruptcy?

WC – A 27-year-old writer living in Chicago and writing about personal finance through The Writer’s Coin.

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’ve read up on what they were getting into before they signed on the dotted line.

On the other hand, when this many people are in a bind, it’s beneficial for both the banks and the consumers to find a middle ground. What that would be I really have no idea. As to avoiding foreclosure and bankruptcy, they should’ve thought about that before they got themselves into this mess. Americans are quick to judge and spew hate towards big corporations for their excess and greed, but everyday citizens are doing the same thing, so we too should suffer the consequences.

Patrick Bryan – Living in Northern Ireland, Patrick helps people in a very different environment and economy but yet, mush is universal and much is the same. Visit Patrick’s Northern Ireland blog on debt.

I believe that more should be done to prevent irresponsible lending by financial institutions before the outcomes of that lending (i.e. bad debt) are tackled. The solution I see to solving the problem of foreclosure/repossession would be to take defaulting borrowers’ property into public ownership through a national home rescue scheme, which would buy the asset off the bank and then rent the property back to the borrower whilst giving them an equity stake, which would provide some security of tenure.

Here in the UK there is already a highly effective way of dealing with unsecured debt – the Individual Voluntary Arrangement (IVA) which enables debtors to enter into a structured debt repayment plan which enforces an interest freeze on their creditors, and the debtor only pay back the proportion of their borrowings they can afford to over a 5 year period. This legislation was seen as a way of providing debtors with important rights however IVA proposals over the past couple of years have been hamstrung by the requirement to get the agreement of 75% of creditors by value, and as many as 20% of IVA proposals are currently turned down for this reason. The banks simply veto arrangements if the required dividend is not met, often without considering what an individual debtor can actually afford to repay or the potentially reduced dividend they will receive in the event of the debtor’s bankruptcy.

Proposed IVA modifications dating back as far as 2005 would allow debtors who owe below £25,000-£30,000 to enter into a simple IVA (SIVA) with no requirement for a creditor vote but the government has not as yet enacted the legislation, despite there being a huge debt problem in the UK and a real need to free up the current system. Perhaps now with the part-nationalisation of some of our biggest lending institutions the government will take a more active part in addressing the problems of debt and will work towards solutions which are equitable on all parties, and do not leave the matter largely up to market forces.

Antisay – This blog is mainly about finance and self-improvement; I am in a constant race to become a better me and this blog is all about that sort of lifestyle. Visit this site.

What a loaded question! … 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. Since we don’t live in a black and white world, however, 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 they 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. I also feel it would be in the bank’s interest to extend some sort of extended 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.

Now, if the debtor was deeply in debt to begin with and the bank “went after” the debtor, the story is changed completely. If the person 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 the themselves.

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 itself has a very clear indication of how the loan will end up. It goes back to my answer last week – those who should have never been “let” (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 – but in a fair environment, with reasonable finance charges and late fees – with everything out in the open.

Patrick – Patrick writes two excellent blogs, Cash Money Life and the Military Finance Network.

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. The state of the economy is such that lenders can’t afford to foreclose on too many houses. In some cases it would be in the best interest of the banks to work to restructure the loans to extend the length of the loan, possibly at a lower fixed interest rate. Yes, that would mean writing off profits and it would affect stock prices, but that would also prevent many foreclosures, which are more expensive. 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.

Gerri Detweiler – She has been helping consumers find solutions to their credit problems for more than twenty years. Her newest book is Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts. She serves as Credit Advisor for Credit.com.

If we want to stop the downward spiral of home values in many parts of the country, the solution that we must enact as quickly as possible is bankruptcy reform: allowing judges to modify home loans for consumers in bankruptcy who have the ability to stay in their homes under different terms. Consumer advocacy groups have been calling for this change for a couple of years now, and every day it makes more and more sense.

Bankruptcy reform is not a bailout. It does not even require taxpayer money. It does require a lender to accept a lower interest rate, and perhaps a reduced amount of principal. Even then, lenders come out ahead by receiving more than they would if they allowed the home to go into foreclosure – and likely be stripped of appliances, fixtures, furnaces and more before the sale.

Those who think bankruptcy reform would be an easy out for consumers who got in over their heads should think again. Bankruptcy has become more difficult for consumers to file and complete, thanks to changes in the law several years ago. Many consumers who would take advantage of this reform would be forced to pay back debts in a five-year court-supervised Chapter 13 bankruptcy plan — hardly a walk in the park.

But they would keep their homes out of foreclosure. Their neighbors would not have to see their home values drop by 10 – 15% or more because of a foreclosed home in the neighborhood. And taxpayers would not have to pay for a risky loan purchased by our government just so the bank could free up more money to lend to someone else.

We’ve been bailing out Wall Street. Now let’s really help Main Street, and enact bankruptcy reform. We can’t afford to wait any longer.

Steve Rhode – A personal finance blogger and founder of the Myvesta Foundation, a global scoial enterprise that helps people find solutions for money troubles. You can ask Steve your debt related question through GetOutOfDebt.org and he’ll help you for free.

It is enormously frustrating for me to talk to good people all over the U.S. and UK who want to repay their debt, the best they can, but creditors refuse to accept their repayment offers. These are people that wind up going bankrupt but who never wanted to.

There is no law or process that allows the consumer to have protection under the law when making a good faith and best effort to repay what then can in a reasonable and sustainable fashion.

The IVA (Individual Voluntary Arrangement) process in the UK is the most fair way for debtors to come to a binding agreement with their creditors to repay their debt over a fixed period of time, have the remaining balance eliminated and stop interest.

In the United States, Myvesta, tried this approach for five years and U.S. creditors fought that approach every step of the way, yet the U.S. based credit card companies like Bank of America and Capital One, participate in the IVA solution in the UK.

The only way to slow down the number of U.S. bankruptcy filings is to give consumers access to a bankruptcy alternative that would be based on their actual available funds each month and that would operate much like a Chapter 13, payment plan, but not be bankruptcy.

Credit counseling or debt management plans are not binding on the creditor, nor do they eliminate any original balance yet unpaid after a period of time.

What U.S. consumers need is some legal right to force creditors to accept reasonable repayments rather than have creditors refuse payments which only drives more consumers to bankruptcy and serves no social purpose other than to remove the stigma of bankruptcy.

Bankruptcy reform is desperately need in the U.S. so we can go back and correct the senseless legislation passed in 2005 that only further damaged consumers while benefiting the banks.

Personal Finance Brain Trust - What Rights Should Debtors Have? by

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://cashmoneylife.com Patrick

    I’ll third the notion. This is an extremely complex topic with no right or wrong answer. It really should be considered on a case by case basis. But I think it is in the best interest of all involved to work together.

    Patricks last blog post..Dollar Cost Averaging vs. Value Averaging

  • http://www.thewriterscoin.com Writer’s Coin

    I second that motion. The quality of responses (and questions) makes us all look pretty smart.

    Writer’s Coins last blog post..Hooking Up Your PC to Your Stereo

  • http://www.antishay.com Shanti @ Antishay

    Great responses from everyone around! Obviously it’s a complex topic which I think we all could have written pages about. Thanks, Steve!

    Every week you really make me think… and force me to attempt to be sparing with my words :P

    Hooray!

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