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Tuesday, August 23, 2011

Bad Financial Advice: Just Default

I believe I once started a feature on "Bad Financial Advice." I don't know if this is a revival, but a thread on imamother about getting out of credit card debt bring me back to the theme. A poster advises someone seeking advice on her credit card debt to default on the payments. She claims it isn't so bad and, in this economic environment, you can even get credit again. Yippee. In this case, the mother looking for advise has $4000 of credit card debt, perfectly surmountable.

Ruining your credit isn't just a matter of getting credit and the dollars and cents of interest rates. Bad credit hurt those seeking employment opportunities. It can cost you a security clearance. It can even cost you your current job. (link)

Bottom line: employers use credit history as an indicator regarding responsibility, character, and trust. Bad credit is a risk factor, especially if you are dealing with money. Best to deal with the $4000 than seek an "easy" way out. That easy way out may cost you much more in the unforeseen future.

20 comments:

miriamp said...

But besides the obvious financial ramifications, it's not yashrus (is that the word I'm looking for?) You borrowed the money, you spent the money, you get to pay back the money. Anything else would be dishonest.

sima said...

I just read the thread, and it seems as though only one of the posters recommended default. The others gave far more sensible suggestions, such as cutting everywhere in order to pay it off (b/c it's a relatively small amount), trying to make a deal with the credit card company, etc.
All is not lost, orthonomics blogger -- sensible people still exist!

Orthonomics said...

sima-Absolutely. Nonetheless, I've seen this advice many times from posters at imamother and many Americans are planning defaults. I've yet to see a mention about default/bankruptcy and the ability to gain/keep employment. This is a serious issue and one to be aware of. . . hence the post.

(No time to sign in, apologizes)

Mark said...

I had a discussion with the car service driver that brought me home from the airport a few weeks ago. He was talking about why he moved here (to be close to his 7 YO daughter), and about job opportunities. He worked for TSA (a great and secure job for those with limited education and/or skills) when he lived up north. He defaulted on his credit cards, then his car needed repairs, but he had no cash and no credit, so he was late for work almost everyday (unless he got a ride) because the earliest bus to the airport where he worked only arrived 25 minutes after his shift started. So he lost that job pretty quickly. Then he moved and applied for a transfer to TSA at one of the airports here. They refused to hire him because of the credit default on his record.

So this guy is now working as a driver instead of at the TSA with its great benefits, security, pension, good working conditions, etc. And why? All because he defaulted on his credit cards.

As an aside, he also mentioned that he goes to the local casinos at least once a week with his mom who is unemployed.

Zach Kessin said...

Really only default if there is no other choice. Though if the choice is pay the rent of the credit cards, pay the rent!

As for how to get rid of them, how about this: get a 2nd job work like crazy, dial back your lifestyle and pay the bill?

Shaindy said...

So glad you commented on this poor advice. I've also seen it pop up on numerous threads. Makes me wonder if some people will every take responsibility for their actions. It's horrible advice to default on purpose and it disturbs me that there are people out there who find nothing wrong with it.

anon426 said...

Dave Ramsey himself sometimes recommends defaulting the credit cards as a precursor to negotiating with them.

They won't negotiate with you unless you are several months behind. In fact, once you are several months behind, they call you and beg *you* to negotiate because getting half of what you owe them is better than getting nothing. And frequently default is a precursor to bankruptcy.

I'm not saying whether it's right or wrong, but it's worth pointing out that one well-respected leader in personal finance does advocate this strategy at times.

If the credit card company was so reckless as to lend monety to someone who obviously has no means to pay it back, as they have a history of doing, they do bear some responsibility for the default.

Miami Al said...

Anon426,

The banks have a team of actuaries, MBAs, lawyers, and lobbyists to make sure their money is protected. I don't think that anyone is worried about the banks.

The concern is that these problems is the ramifications for the person who defaulted.

If you CAN pay it, but don't want to because you don't want to make the sacrifices, you're kind of stealing the money, no?

I know that my personal integrity is worth way more than $4000.

JS said...

If you have the means to pay it back (even if those means are uncomfortable), a judge is going to make you pay it back if you tried to discharge the debt in bankruptcy. You're likely to get the same or similar terms to what you would get if you tried to negotiate with the credit card company yourself (or through a lawyer).

Regardless, having bad credit (bad FICO scores) can be devastating for many reasons. It's increasingly used for many non-credit related things such as employment, insurance, and finding a place to live (renting an apartment). Additionally, you miss out on a lot of opportunities and may be flat out denied from others (low borrowing rates, ability to lease a car or buy a house, etc).

Anonymous said...

A good credit score just helped us refinance our mortgage to a 15 year fixed at 3.375%!

Zach Kessin said...

Dave Ramsey never recommends defaulting if you can pay them. But if you can't pay everything or if you are already behind then he will give you advice on how to settle with them.

That being said if you *CAN* pay the bill you should. If you don't like credit card bills cut the damn things up and never borrow money again.

Shoshana Z. said...

We are iy'H buying a condo soon. We are participating in a first-time homebuyers' program that provides the downpayment as a second mortgage. It is an amazing program and we are so happy to be part of it. In order to participate, my husband and I had to attend a first-time homebuyers' class. They went over all the nuts and bolts of credit, scores, borrowing, mortgages etc. I knew a lot coming in but still learned a lot. Getting back to the original post, my point is that anyone who wants to get good loans, buy houses or cars, have a job, etc. needs to learn these financial basics and not believe that they can just live the life and then bail out when it catches up with them.

Shoshana Z. said...

And people have to realize that moment when they are starting to go over the cliff and not talk themselves into it by rationalizing the necessity of purchases and expenditures. Needs v wants is an important lesson to learn. Air, water, food, shelter and clothing are needs. Of course we all want to live on a more comfortable level than basic necessities, but the frum world will tell you that there are so many more "must-haves" out there in order to fit in to the klal. But it's not true. I could go on and on about this topic.

Mr. Cohen said...

How can deliberately defaulting on loan payments be an option when our Torah teaches:
THE WICKED BORROW AND DO NOT REPAY (Tehillim, chapter 37)?

ספר תהילים פרק לז
לֹוֶה רָשָׁע וְלֹא יְשַׁלֵּם

Miami Al said...

I find it interesting that a suggestion on Imamother that the woman stop keeping Kosher to repay her bills would be beyond the pale, or picking up a retail job on Saturdays and dedicating it to debt repayment, but defaulting and not paying the loan is acceptable.

We're all Reform Jews, it's just picking and choosing which Mitzvot matter.

And we've used the philosophical concept of income being set on Rosh Hashana-Yom Kippur, instead of focusing on our prayers, charity, and repentance, into an excuse to not work or take responsibility for bad financial decisions.

Dave said...

That's not fair, Al.

Reform Jews are honest about selecting which Mitzvot matter.

Anonymous said...

Hey guys I thought this was an Orthodox Jewish blog!

Miami Al, I would ask my LOR what to do if I had to make that choice since there is no room for Am Haratzus here.

Dave , the Reform movement was and is dishonest by calling their movement Judaism. Once it is reformed it isn't what it was ie Judaism. Yes they are still Jew and are Jewish - but they don't practice Judaism

Miami Al said...

Anonymous 10:17,

Absolutely, the concept that stealing would be wrong is a hugely advanced concept that requires years of extensive training, no room for a common Jew to suggest that stealing is wrong.

When did we become Catholic?

Anonymous said...

Miami Al

You're not even addressing the point I made! Cynicism is the curse of our generation.(Unless you're being sarcastic- then I apologize)

Your point was kashrus vs default to which I stated as an orthodox Jew I would ask my Rabbi.

For example, if I had a good job paying 200k for the last 15 years and took out a mortgage commensurate to my income and I lost my income due to disability and I didn't have disability insurance and couldn't sell my house since it was financially underwater, whould my rabbi say that the Torah permits me to eat non kosher or to desecrate the shabbos or whatever positive or negative commandment I (supposedly) would need to violate in order to earn income top pay debt?
That would be the question. Remember, we were put here to be Jews and not all answers are obvious to us ba'albatim!

Miami Al said...

Anon 12:10,

Plenty of sarcasm. I wasn't commenting on the Halacha (when I ran out of money, before defaulting, I "financially stopped keeping Kosher" -- I didn't start eating non-Kosher products, I simply switched to a nearly all vegetable diet from a cheap produce place), I was commenting on the social moores of imamother.

Telling someone to default vs. stop keeping Kosher are both telling people to sin. You are correct that when weighing them, one should consult a Rav. However, the former seemed to be suggested on Imamother.com as a perfectly reasonable course of action, while the latter would be seen as "not-Frum."

Your question is a perfectly legitimate question to consult a Rav on, but that's not the issue I'm raising.

In the "frum" forum, one can suggest all manners of financial crimes without social recrimination, but the suggestion of being less "frum" results in the defenders of frumkeit.

That's a problem.

Do Not Steal is a pretty important part of Torah....