Oran Hall | What to do when a bailiff shows up
ADVISORY COLUMN: PERSONAL FINANCE
QUESTION: I have a bad debt with a commercial bank due to a mistake I made over nine years ago with two credit cards. I was young and irresponsible at the time when it came to finances and am just now understanding how bad debt can affect a person.
I managed to clear one credit card years ago and discarded it, but lost my job before I was able to clear the other. I got a series of temporary jobs and was able to make very small payments which did not seem to make much of an impact. A series of very unfortunate circumstances happened to me for quite a few years after that and I eventually stopped making those small payments and, to be honest, after a while, I think I pushed it to the back of my mind and neglected my obligations.
I made an attempt about a year ago to contact the bank to find out the status of the debt and was directed to a collections agency. I contacted them and was promised a call back which I did not receive. Roughly a month ago, a bailiff showed up at my mother's house (which is the address I was living at the time). I was not at home but spoke to him over the phone. He took my contact information and subsequently sent me an email that I owe the bank almost $400,000. At the time that I stopped making payments, the balance was approximately $50,000. I know fees would be applied, but so much? I called the bank as the bailiff was not able to tell me why the figure was that high and got nowhere with them. Now I am getting a text message from said bailiff stating that legal actions are pending as I have ignored several attempts made to settle the matter.
I am in a stable job and willing to settle the matter but I am not sure how to proceed. There is no way I am earning enough to clear a balance that high in a short time. What do I do? Should I respond to the bailiff? Visit the bank?
FINANCIAL ADVISER: I decided to present all of your case because it says so much about managing credit card debt. You did some things right but also made some serious missteps and learned that, in life, what can go wrong will go wrong.
On the positive side, you cleared one credit card balance and destroyed the card, you resumed servicing your debt when you began to earn again, called the bank to clarify the balance when the bailiff was not able to provide the information you needed and called the bank to confirm the status of your account. It is a pity you did not follow through.
On the negative side, as you acknowledged, you did not spend responsibly, you stopped making payments, and eventually neglected your obligations. How important it is to understand what we are doing before acting.
It is important to be careful about incurring debt: one never knows how and when unfavourable circumstances will emerge. In your case, you lost your job and other “unfortunate circumstances” visited you, thereby depriving you of your ability to pay.
As you have learned for yourself, making small payments on your credit card account does not generally make a meaningful difference – if any. This is linked to the question you asked the bailiff and the bank regarding the size of the debt. The sum moved from $50,000 to almost $400,000 primarily because of interest, which accumulates as long as the debt remains.
Banks charge a high annual percentage rate on credit card balances in Jamaica, for example, 50.14 per cent and 48.5 per cent. But banks do not charge interest on an annual basis: they charge on a daily basis and apply it to the average daily balance.
By any calculation, interest can sky rocket if balances remain unpaid. The best way to avoid these high interest charges is to pay the balance in full.
The banks charge interest on the average daily balance because the balances fluctuate due to partial payments and new purchases. To determine the interest, they multiply each balance by the number of days it was carried, sum the results and divide the total by the number of days in the billing cycle.
For example, if your credit card is on a 30-day billing cycle and you owed $1,000 at the beginning of the cycle and later made purchases of $2,000 on day 15 of the cycle, your average daily balance would be $2,000.
This figure is arrived at by: multiplying $1,000 by 15 and $3,000 ($1000 plus $2,000) by 15; then adding the result ($15,000 and $45,000); and dividing the total, $60,000, by the number of days, 30, to give an average daily balance of $2,000.
Consider also that interest is calculated, multiplying the daily periodic rate by the average daily balance, and added to the principal balance to determine the payment due at the end of each cycle.
Credit card debt is very serious business. I hope you have already responded to the bailiff and agreed how you will liquidate the debt.
Oran A. Hall, the principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.