Unsecured debts - Home equity loans and Credit Cards

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Sam

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Not wanting to hijack the recent CNN foreclosure thread where discussions diverted to home equity loans that are dismissed when the home is foreclosed, since the collateral no longer exists.

Financial institutions set themselves up for failure not only by promoting subprime mortgages, but also by issuing credit cards indiscriminately.

Almost anyone can accumulate a sizeable CC debt, sometime exceeding 100K, and simply walks away from them. Sure, their credit rating will go down the drain, but those debts never have to be paid, and they don't even have to bother filing for bankruptcy.

Why do banks do this? They are well aware of the risks, yet ...
 
Sam said:
Not wanting to hijack the recent CNN foreclosure thread where discussions diverted to home equity loans that are dismissed when the home is foreclosed, since the collateral no longer exists.

Financial institutions set themselves up for failure not only by promoting subprime mortgages, but also by issuing credit cards indiscriminately.

Almost anyone can accumulate a sizeable CC debt, sometime exceeding 100K, and simply walks away from them. Sure, their credit rating will go down the drain, but those debts never have to be paid, and they don't even have to bother filing for bankruptcy.

Why do banks do this? They are well aware of the risks, yet ...
Click to expand...

The only thing I can think of is that banks recover their losses from their honest customers. By that, I mean that that many companies have a "universal default policy." That is, if a bad mark shows up on your credit report, they raise your interest to astronomical levels, even though it had nothing to do with the bank that you hold your credit card with. Many people feel a certain sense of responsibility, even those that have been clearly jerked around by the bank and continue making the payments, even at the interest rate that perhaps might be as high as 26%. But, this in part is how the banks recover their losses from deadbeats. Congress recently did an investigation of this practice, and already two major banks have ceased using the "universal default policy."

IMHO, the days of "easy credit" are rapidly coming to an end. Too many people who are in foreclosure are now maxing out their credit cards with no intention of repaying the banks. They are in despair and really just don't care anymore. The default rate on Visa and MC is sky high right now and is going even higher. When more banks follow the lead of these two major banks and eliminate their "universal default policy", they will have to get their money from somewhere else to pay for the accounts that are never repaid. I think we'll eventually see fewer credit card offers in the mail each day. Lenders will have to become more discriminatory as to who they choose to lend their money to.
 
Sam said:
Almost anyone can accumulate a sizeable CC debt, sometime exceeding 100K, and simply walks away from them. Sure, their credit rating will go down the drain, but those debts never have to be paid, and they don't even have to bother filing for bankruptcy.
Click to expand...

That's my plan. When I'm about 84ish and/or I know I'm going to die. I'm going to take out cash advances and buy things to give it to charity. I'm hoping I can get the debt into the millions. Then let them try to collect it from an old or dead person. I may finally get my name an picture in the newspaper - then again no one will know what a newspaper is or know how to read by then.

Imagine if this began a movement?
 
brewer12345 said:
Unlike most Merkins, illegals typically save a large portion of their income and have wads of cash around. Sounds like a reasonable credit risk to me.
Click to expand...

Sorry, I meant that easy credit might still be a possibility. Just try and exploit the new credit source. Forge some papers, don't offer up an SSN, it might work.

On the actual topic of the article, I agree that it's probably not that high of a risk.
 
dex said:
That's my plan. When I'm about 84ish and/or I know I'm going to die. I'm going to take out cash advances...
Click to expand...

Why wait? You can do it right now. Credit rating is totally meaningless when you have no plan to borrow in the near future. They can't go after your nest egg, no matter how small or large.
 
Even the HELOC's were pretty darn loose back in the 03-04 time frame.

My wife applied for one on her old house because ING was offering a nice cash payout for opening one, and it was no costs/no fees to open. I think she got $250 for signing the papers in her living room.

She only took a 40k line of credit on the house, and ING said they wouldnt require any sort of appraisal and would "maybe just have someone do a drive-by". Later when the paperwork was in I asked if they'd done it and they said "No, we dont really have anyone in the area so we didnt. Not a big deal".

It could have been a demolished house, burned down, anything.
 
Are you telling me that if you default on your credit card payments, they can't touch your retirement accounts?.......if so, this is risky on their parts. We may yet have ourself another growing bubble...the credit card bubble.
 
Nanita8140 said:
Are you telling me that if you default on your credit card payments, they can't touch your retirement accounts?
Click to expand...

Yes, as far as I understand.

Even if you have a job, they still can't make you pay. I think that's the idea behind UNsecured debts.
 
Sam said:
Financial institutions set themselves up for failure not only by promoting subprime mortgages, but also by issuing credit cards indiscriminately.


Why do banks do this? They are well aware of the risks, yet ...
Click to expand...

yeahbut,,its not the Financial Institutions that actually face the risk in the aggregate. Many individual accounts will fail and the banks understand this quite well. When consumers are hooked on spending and willingly pay 15-18% rates and humongous FEES, the banks risks are offset. You're starting to see cheerleading for consumers to spend thier stimulus checks NOW...'put it on a credit card until you get your check' and many will overspend what they expect to recieve plus interest and FEES
 
I thought the bankruptcy laws changed the walking away from credit card debts. I believe if you make more than the median in your area you may have to pay a portion of your CC debts even after Chapter 13 bankruptcy.
 
But why even bother with bankruptcy if you only have Credit Card debts.
 
Nanita8140 said:
Are you telling me that if you default on your credit card payments, they can't touch your retirement accounts?.......if so, this is risky on their parts. We may yet have ourself another growing bubble...the credit card bubble.
Click to expand...

Check with your lawyer / clergy before committing any crimes / fraud. However, AFIAK (IANAL) accounts that fall under federal ERISA status are protected in bankrupcy and lawsuits. I believe this would generally cover 401(k)s, 403(b)s, pensions and IRAs funded by rollover (possibly regular IRAs as well). I'm not sure of the status of SEPs and SIMPLE IRAs.

As far as risk... we'll see, but there's a reason that your mortgage is 6%, your car is 7%, and your credit card will jump to 29% if you miss a payment. The first two are secured and so, theoretically, carry less risk for the lender since they can go after the assets if the loan defaults.
 
Sam said:
Yes, as far as I understand.

Even if you have a job, they still can't make you pay. I think that's the idea behind UNsecured debts.
Click to expand...

My understanding is that they can sue in civil court if the value makes it worthwhile. All that does is create an outstanding civil judgment to go on the already-bad credit report. Someone with no assets will remain unconcerned.
 
True. But few, if any, Credit Card companies would go through the trouble of sueing, knowing full well that their chances of winning and collecting are miniscule. It's all about money, and sueing is a losing proposition for them.

Does anyone know first hand of a case where a CC company sued and won and collected?
 
Nanita8140 said:
Are you telling me that if you default on your credit card payments, they can't touch your retirement accounts?.......if so, this is risky on their parts. We may yet have ourself another growing bubble...the credit card bubble.
Click to expand...

The bubble were are in now is a credit bubble. Wait, I think that bubble popped around 6 months ago (a year ago?) and is still popping. If you didn't hear it, go outside and listen. Maybe take a walk around the block and see how many homes are for sale in your neighborhood.

The sub prime mess is just a small fraction of the credit bubble and people spending more than they could afford.
 
Homes are better than cars as unsecured risks by the lender. I remember when I was young I went with a acquaintance to get a new car. His credit was not that great but he was able to buy a small older home, and thought that would help get a car.

The finance manager told him there was no lender that wanted him. When my friend asked why, he said:

"Because you can LIVE in your CAR, but you can't DRIVE your HOUSE"...........:)
 
I guess this means we should, as a country, be proactive and begin working on a bail out plan for folks who have lousy credit ratings due to walking away from mortgages or credit card debt. When millions have no ability to borrow due to stinky credit reports, it will hurt the economy and make their lives tough. We'll need to help, to restore their credit to AAA and give them a fresh start. And at tax payers expense, of course!
 
youbet said:
I guess this means we should, as a country, be proactive and begin working on a bail out plan for folks who have lousy credit ratings due to walking away from mortgages or credit card debt. When millions have no ability to borrow due to stinky credit reports, it will hurt the economy and make their lives tough. We'll need to help, to restore their credit to AAA and give them a fresh start. And at tax payers expense, of course!
Click to expand...

Aren't we already doing that??
 
FinanceDude said:
Aren't we already doing that??
Click to expand...

Not as far as I know. I think that currently if you create a crappy credit report for yourself, you have to live with it. Is there something I'm missing?
 
jIMOh said:
The bubble were are in now is a credit bubble. Wait, I think that bubble popped around 6 months ago (a year ago?) and is still popping. If you didn't hear it, go outside and listen. Maybe take a walk around the block and see how many homes are for sale in your neighborhood.

The sub prime mess is just a small fraction of the credit bubble and people spending more than they could afford.
Click to expand...

There is a distinction between credit card debt and a mortgage debt. One being unsecured and the other secured. The mortgage crisis has nothing to do with what another bubble "Many" are now talking and writing about which is an UNSECURE CREDIT CARD BUBBLE. When you enter into a contract for a mortgage, you can legally walk away as the bank is left with the house. People now no longer have "equity" to continue their spending spree so they are now taking out their credit cards to keep the party going. Do some research....google it.
 
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