How to Survive a Recession

LESSON 17: Seek Credit Protection

At some point in their lives many people or businesses will face a temporary cash crunch that makes them functionally insolvent. Even though you still have the ability to pay a certain amount, there is just not enough to go around. In this case it makes little sense for creditors to force you into bankruptcy.

The good news is creditors never want you to go bankrupt! If you declare bankruptcy your creditors end up collecting only a small fraction of what they are owed, and in many cases nothing. They would much rather have reduced cash coming in, and either have you pay the difference plus penalties later, or sell the account to another lender.

Collection agencies do not want you to go bankrupt either! They would rather collect something rather than nothing.

If you are under pressure from creditors or bill collectors, THEY are the ones with the real problem - not YOU! Your creditors are facing total loss of their money if you go bankrupt. As a result they are usually open to alternative debt reduction solutions. Here is how you go about getting credit protection:

The first step is to contact each of your creditors and tell them you are unable to make payments but you intend to pay them back in full. Tell them you have adequate income to make lower payments if they are willing to work with you. By approaching your creditors directly, you are showing good faith and it should be fairly simple to work out a new repayment schedule appropriate for your situation.

Major credit card and auto financing companies have special programs for this where they shift “late but honest” customers into a pool together with lower interest rates and longer payment cycles. The hope is that these customers might be “rehabilitated” and turned back into reliable profit-generating borrowers.

Mortgage lenders also have these special programs. In fact, mortgage lenders are in the worst of all positions, as it is very difficulat to repossess the homes of borrowers in default due to bankruptcy and consumer protection laws.

Even landlords are willing to negotiate lower or delayed rents when their tenancy rates begin to drop, because they themselves are often borrowers at risk of default if their rental cash flows dry up.

If your creditors are unwilling to work with you, the next step is to contact your local government’s consumer protection agency and determine what types of programs are available to you. Do not respond to advertisers that offer “debt consolidation”, “credit repair”, or “creditor protection”. Many illegitimate businesses pop up during recessions to profit from people in difficult financial situations. Other businesses market themselves as helping you, but really intend to acquire your loans, aggregate them, and resell them for a profit. Even if an organization is legitimate, independent organizations lack the legal clout of government agencies. The government may handle your case directly or refer you to an outside organization with whom they have a relationship. If your community does not have a consumer protection agency, contact the Better Business Bureau or local chamber of commerce for a recommendation.

You want temporary (not permanent) protection from your creditors so that you can get on a secure financial footing with your current income level, make reduced payments in the near term, avoid bankruptcy, and resume normal payments in the future.

The keyis to have some type of regular income sufficient to make it worthwhile for the lender. If you have lost your job and have no income or unlikely prospects of income in the near future, lenders may be less likely to work with you.

Even if you have lost your job or business, always show enthusiasm and intent to pay. Showing enthusiasm for finding a new job or new business prospects puts the lender on your side. You should go out of your way to explain your plan for paying your creditors. This show of character will usually tip the scale in your favor and the lender will give you a reprieve. If asked, some lenders will actually agree to not report you to credit reporting agencies as long as you are true to your word and make regular payments on the new schedule. This is worth a try!