Excerpts from:
http://www.nytimes.com/2008/11/16/business/16consumer.html?pagewanted=1&_r=1&hp"The number of
personal bankruptcy filings jumped nearly 8 percent in October from September
Filings totaled 108,595. That translated to an average of 4,936 bankruptcies filed each business day last monthFilings totaled 108,595
A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001. Their incomes, meanwhile, remained static over those six years.
Some people are trying to
rescue their homes through bankruptcy proceedings, but many are just as relieved to walk away, shedding layers of debt that otherwise would have taken
decades to pay off."
Why does the US think that lending will stave off bankruptcy proceedings. In the first place, is it in fact a healthy business practice to lend money to people who are already drowning in debt and on the verge of bankruptcy? Well, obviously not.
Would it be charitable to do so? Well, yes, of course. So, maybe America should start up some non-profit banks, which make losses every year, and are supported by donations.
In the 2nd place, these guys still don't get it.
Look, sooner or later reality always sets in. Sooner or later, people realise that they have been living outside their means, due to
overoptimism. Sooner or later, the
DEBTS GROW TOO LARGE compared to their incomes.
Decades to pay off? Actually, a lot of people who are going bankrupt have realised something:
those debts they have are NEVER going to be paid off. It's a case of 2 steps forward, 3 steps back. Their debts have been growing larger and larger every year, and their incomes have remained stagnant, or are growing far too slow to ever catch up.
...
It's sad to say this, but some people were just asking for trouble. Let's take the example of the couple quoted in the New York Times:
"Tony and Carrie Forsyth, both 30, chose not to walk away from their house in Florida. The couple said they thought their financial situation would improve in 2006, when Mr. Forsyth accepted a promotion from his employer, a Michigan food distributor, that required them to move to Florida. But they could not sell their home in Ypsilanti, Mich., so they decided to rent it out.
In June 2006, the couple headed south and bought a house for $220,000 in Tamarac, Fla.,
with no money down. Five months later, their tenants in Michigan stopped paying, and the family had to carry two mortgage payments, just as the adjustable-rate mortgage on their Michigan home reset to a higher interest rate. They lost the Michigan home to foreclosure in February 2007. "
...
Hello. Does anyone else see the problem here? This couple were in financial difficulty in 2006. They didn't sell their home when they moved. They claimed they "couldn't". Actually it just means they were
OVEROPTIMISTIC and hoped for a better price.
"no money down". A sign of the very loose credit controls in the market. $220,000? That's a little on the pricey side for people who were in financial trouble just one promotion ago.
Overoptimism at work again.
2 houses. 2 mortages? No no no no no. This is just being silly. It's clear at this point that this couple has no sense of caution at all, and in case you didn't notice, the article made no mention of how much Mr Forsyth's salary was before and after his promotion, or whether his wife had any forms of income or not.
The point is that whoever wrote the article didn't think that such information was important enough to include.
But the fact of the matter is, that when looking at debt, bankruptcy, and paying loans, the level of income is the most important fact of all. NOT how much credit is available. 2nd most important would be interest rates. In fact, total amount of debt sort of comes 3rd place. ... okok, actually, all 3 are important. But basically, ignoring any of the 3 is just stupid, and this is what is happening here, they are ignoring #1: income.
I've always sniffed at financial planners, but I'm starting to realise that there are many people in the world who aren't so intuitively good at balancing their finances. These group of people should go to a financial planner early on in their careers and ask them to plan their finances in great detail, including how much is healthy to spend on their house, how much to borrow, how much to spend on their car, entertainment... in fact, asking your financial planner to advise you on these facts will help much much more than asking them how much to put in Fixed Deposits, how much in unit trust, how much in EPF, etc etc. Ask them how much to spend, as well as how much to save. Cause, let's face it, most people spend more than they save, right?
Summary: It's always best not to be
overoptimistic. Don't borrow more than you can repay COMFORTABLY. (don't borrow the maximum, borrow what is comfortable, there's a huge difference).
Increasing lending liquidity is ridiculous, these people are declaring bankruptcy because they have too much debt, you want to give them even more debt?
Ask your financial planner to plan your SPENDING for you. It's even more important than your SAVINGS plan.
Labels: Bankruptcy, Lending, Overoptimism.
