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Ethics and Emotions with Filing Bankruptcy
Not paying a creditor is a difficult decision. Filing a bankruptcy or settling with a creditor can be stressful and emotionally challenging. That said, it’s important to see the difference between defrauding a creditor versus making smart financial decisions. Our office helps clients with the latter.
The underlying question is whether a debt was incurred with the genuine intent to pay it back. In 99% of our cases, this is precisely the scenario. However, the ability to repay the debt becomes impaired through job loss, pay cut, work furlough, and/or increased expenses, including helping other struggling family members. A change in personal circumstances is usually only half the equation.
The other half of the equation is credit card companies charging high interest rates, outrageous financing charges, lowering credit limits after balances of exceeded these new limits, etc. Most Tucson families struggle with debt for years before seeking legal help. Many credit card users make minimum payments each month, yet the balances still go up. In this instances, debtors should seek financial solutions. Otherwise, they will continue with minimum payments on credit debt, at the expense of putting this money towards a home, car, retirement(s), or other investments.
Defrauding creditors, which our office sees infrequently, is debt incurred with the intent of non-repayment. We’ve had interviews with prospective clients that have charged $50K in credit card debt in less than 3 months over multiple cards with no intent to repay, or have purchased vehicles on credit cards on the eve of wanting to file bankruptcy. Our office will not take these cases.
Debt Collections & Debt Relief are Business Decisions
A lender makes a business decision on whether to loan money on an account. When the account defaults, the phone calls and collection letters are business decisions to pursue the debt (though some collection companies make it personal certainly cross ethical boundaries). Creditor lawsuits are also a business decision by the debt holder, as is garnishing wages and levying bank accounts.
Clients filing for bankruptcy or settling debt are using financial tools to get a fresh start. This is not a decision based on emotion or pride, but is rather a business decision – simply, does debt relief make sense? We help clients interpret these numbers and do the analysis necessary to determine the best financial option. If bankruptcy or debt settlement makes sense, embrace it.
An Example of a Business Decision
When Attorney Matthew Foley was counsel to a large credit union and oversaw compliance for “indirect auto-lending”, the goal of this lending area was to get non-performing (delinquent accounts) to 5%. However, the credit union was routinely keeping the default rate at approximately 3%. This would seem like a great number, i.e. keeping default rates low.
In actuality, the credit union wanted more defaults, which meant the credit union was loaning more money to higher risk borrowers, which in turn meant higher interest rates coming into the branches. The maximum profit yield to lending money to high risk borrowers was at a 5% default rate, which meant the credit union was losing money but not issuing enough higher interest rate loans. Imagine if you felt horrible about losing your vehicle to the credit union because of a change in circumstances, and they were happy they finally achieved their 5% default rate. It is very important to recognize consumer debt is a business, as are the decisions that result from it.