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I owe someone money and can’t pay it. What are my options?

Posted by admin on June 25, 2008 in Misc.

My regular columnist, Mom2KG, made a request that I blog about how to deal with collection agencies (great topic) but I thought I would take one step back before addressing that issue next week and explore the question of what options a person has if they owe someone money and can’t pay it. By way of background, I use to practice some corporate bankruptcy law where people were bouncing cheques in the tens of thousands monthly so it was like the Simpson’s episodes where Mr. Burns brought his phalanx of lawyers to the bargaining table to make you do as his wished (I was in the phalanx- third to the right in the second row) and, surprisingly, someone did not always get their knee caps metaphorically and legally broken- if they did some of the below.

Whether it be back-taxes, a personal loan, credit-card debt, rent or a mortgage, there are always ways to resolve the issue of owing someone money you can’t pay back without going to court, having your assets seized or the entire ordeal ending in a lot of tears. As a huge caveat, the below are options and best practices and may not apply to you so the best thing to do is to see a lawyer, accountant or debt counseling for help.

1. Be pro-active and tell your lender you are in trouble early. My friends always tell me the same story about their kids and large amusement parks (the details change but the outcome is the same). Little Johnny wants to go on all the rides but has a big can of pop beforehand. Of course, Little Johnny tells his parents he needs to go to the bathroom one ride too late and he wets himself while they all wait in the huge line to the bathroom. Or, he simply wets himself because his parents told him to go to the bathroom after drinking that can of pop and he doesn’t want to admit they were right and tell them he needs to go NOW. The perplexed parents always ask the same question- “why didn’t you tell me sooner?”At risk of linking wetting one’s pants with unpaid debt, the same principal applies. Tell the lender early you are in trouble and you may not wet your financial pants. In some cases, there may be no remedy at hand but, in others, if the lender knows there is trouble far enough ahead, they can minimize damage for all concerned (the one thing to remember is that unless they are a lender of last resort, lenders hate seizing assets- they are not in the repo business, they are lenders so they will take reasonable steps to keep the loan alive).
2. Attitude counts. This is what always gets me about the subprime melt-down. People who put no money down, bought houses they couldn’t afford and then default on the payments take no responsibility for the default. Worse, they want the government to bail them out. Lenders HATE these type of borrowers and will cut them NO slack. If you get to the lender quickly (see above), be honest and propose solutions (I am looking for a second job, I sold my car, I am borrowing money from my parents etc.), lenders are willing to cut some slack and come up with alternative arrangements (stretch out the loan to reduce payments, ask for additional collateral in return for not calling in your loan etc).
3. You have to put some money up. Lenders are lenders and not charitable foundations. You have to offer to make some type of partial payment to your regular payment. It shows you are making an honest effort to resolve the problem (see attitude) and the commercial reality is the lender can rework a loan as long as you make some type of payment (lenders have lenders too and need to pay them something as well).
4. Make sure what you arrange is realistic and not to get the lender off your back. I could call this one “do what you say you are going to do.” Most of us have never had a lender breathing down our neck so, given the novelty and stress of the situation, we panic and say anything to get them off our backs. I use to have the same conversation twice a year with different clients who owed back-taxes: “why would you promise to make a payment if you have no money? Now, they are really going to come after you because you made a promise you can’t keep…” Be realistic in your proposal and don’t say something you want the lender the hear. Its better to keep your word on a modest promise then lie big because the latter is really going to come back to haunt you.
5. Denial gets you nowhere- or to a collection agency. Don’t avoid the problem. Deal with it upfront, honestly and directly. Even if you have no money, tell the lender you have no money. The alternative is that the lender hires a collection agency because you can’t work out a reasonable commercial arrangement and your life gets a whole lot nastier because you were in denial about the entire thing. Worse yet, you become deceitful and try to hide assets. There are laws that can trace your deception and undo it; now you have to pay for lawyer’s fees (both sides fees in these situations) on top of everything else (some of these laws have criminal implications as well).

I am a realist. In some cases, you are done as a borrower if you default on a payment. But, in most cases, there is always room for negotiation no matter what the lender may say at first (unless your lender was a lender of last resort). Above all, seek professional advice; there are professionals who do this for a living and give free consultations on what may or may not work in your situation. Good luck.