Tue | Aug 3, 2021

Oran Hall | Serious debt

Published:Sunday | June 9, 2019 | 12:00 AM
Credit card

QUESTION: We defaulted on significant credit card debt last year (for reasons that, unfortunately, could not be helped). The bank’s attorneys have written to us, informing us that they will take legal action against us if we don’t pay.

We do have a car (which we are trying to sell) that we own outright. We also have a home with no mortgage. Would the credit company be able to put a lien on our home for the debt? If so, what would be the timescale and process? We cannot afford an attorney. If our car is behind a grill, are they able to force their way in to get it? Could they put a lien on our car title without our consent via the tax office?

– Morrison

 

FINANCIAL ADVISER: You have a serious problem and rather than being concerned with how to protect your assets from the bank, you should be trying to find ways to pay your debt – the earlier the better – to limit the accrual of interest.

You are trying to sell your car. That is a good step, and I hope you succeed although I do not know if its sale would yield sufficient funds to liquidate your debt.

You are far more fortunate than many people in that you do not have a mortgage on your house. This means you should have substantial equity in it. Why not use it to solve your problem? Of course, you almost certainly have done some damage to your credit rating, but I am not sure that financial institutions would necessarily refuse to lend to you. Why not try?

It would likely take some time to apply for and get such a loan, and you would incur some expenses. Nevertheless, I strongly suggest that you try it. And you do not have to borrow more than you need. Servicing such a loan should not be very burdensome if you are able to get a reasonable repayment term.

You have not said that you have made any contact with the financial institution. You do not need an attorney-at-law to do that. The truth is, financial institutions – banks, credit unions, for example – want to collect the money they lend. That is reasonable.

They are not going to feel sorry for you and write off the debt, but they will at least listen to you and may make some accommodation. The inconvenient truth is that borrowers must pay their debts.

This leads me to wonder why so many people incur credit card debt so readily. A credit card is a convenient tool – as far as I am concerned. It is not a blank cheque. Credit card debt is expensive. The interest rate is high, and the way interest is computed makes it even more expensive.

Credit card debt, is unsecured debt and banks charge high rates because of the risk they take when they extend the facility to their customers. But far too many people swipe that card without considering how they will pay. It still makes sense to plan carefully how you spend your money and to live within your means.

People who have assets and feel that they must borrow for whatever reason should consider a secure debt facility. A big advantage is that such debt is cheaper than unsecured debt. This makes it easier to reduce the principal steadily compared to credit card debt,which may not result in the principal sum being reduced meaningfully or at all because payments may just be enough to pay the interest.

Perhaps you should consider joining a credit union, for example, so that you will be able to borrow more cheaply – after you have sorted out your current situation. May I suggest also that you make a spending plan and stick to it? This could be painful, but it is necessary.

Not being an attorney-at-law, I am not the best person to say what protection the law gives you, but I hope you can arrive at a solution that will satisfy the bank without it being too burdensome to you. If there is still time, do not let the matter end up in court.

 

- Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. finviserljm@gmail.com