This article first appeared here in Aug 09.
Bankruptcy Option For The Unemployed
Written By: Gilbert Goh
Should one consider bankruptcy when he is unemployed and facing massive financial debts? Unless the retrenched has strong financial reserves or have learn to spend prudently before he goes jobless, this is one option that the unemployed will consider when press against the wall by creditors.
One of the key backlash of unemployment is financial distress. Bills are often left unpaid and non payment of big ticket items like mortgages and credit cards invite adverse legal consequences. There is simply no income coming in when one is jobless and it is not surprising that we see a spike of bankrupt cases during an economic crisis. There are relatively few options to choose from when one owes the bank here.
In Singapore, one can be made bankrupt if his credit debts exceed $10,000. Being a bankrupt here is troublesome as he could not open a savings account and his career options are also limited for certain industries such as in the banking and finance sector. He also has no access to any other bank loans limiting his option for any future housing purchase.
Even though he may later pay off his owed debts during bankruptcy and discharged as a bankrupt, his tarnished record is still locked in with the Credit Bureau for many more years. The Bankruptcy Act kept changing over the years and it may be good to check out with the Credit Bureau to find out any other alternatives besides going the bankruptcy route.
It is easier now for a bankrupt to discharge oneself out of bankruptcy and many have benefitted from new business-related bankruptcy law. In a drive to persuade more Singaporeans to be entreprenurial, banks are encouraged to be more forgiving of debts related to business failure than personal overspending.
More importantly, the Credit Bureau has perform the mediation role remarkably well negotiating between the creditor and the debtor. They will try to iron out a viable option for repayment and many people have benefitted from their service. Simply call out a financial advisor from the bureau and they will do the rest. Moreover, their services are free of charge.
Nevertheless, no one wants to be a bankrupt unless he has no further alternatives. Bankruptcy is often a shameful option that most Singaporeans do not want to associate with. They would rather borrow and owe loan sharks than the banks and be made a bankrupt. On the other hand, I have met bankrupted friends who live life as normal as before. Some also get to travel out of the country after lodging their travel request with the relevant ministry. One I heard even work abroad for close to 2 years as an undischarged bankrupt. To be a bankrupt is not as bad as one thinks. It is not the end of the world.
Overspending and Undersaving
Personally, I am known to be a spendthrift and have never learn to save much when I started to work. The only time that I saved up was when I needed money to get married with my wife. I saved five hundred dollars a month in the now-defunct POSB Save-As-You-Earn (SAYE) account and managed to accumulate close to $15,000 in the savings account. Nevertheless, the habit never took off after my marriage and I spent like there is no tomorrow.
I have two credit facilities – a $5,000 credit card and a $11,000 overdraft facility which I kept to this present day. I guess in Singapore one can never run away from spending beyond one’s means – that is we revolve ourselves around credit facilities. We live in our home using the loan taken from the bank. The same goes for our car, education and holiday. How much loan one takes is very personal and each has their own threshold of comfort in how much they want to owe the bank. Just remember that if you can’t pay the bank consistently, one will get into all sorts of legal trouble which is common knowledge for all by now. In fact, during a recession, more people will pile up their debts as they run into all kids of problems. This not only increase their stress level but the threat of bankruptcy may even loom for some. Most banks will sadly remove their umbrella when the rain storm arrives.
I was nearly made a bankrupt when I ignored my credit card bills for a few months during that period. The situation was so bad that you would not bother whether the banks will made you a bankrupt or not. Apathy sets in and I played a dangerous game of hide-and-seek with the banker. Fortunately, wisdom prevailed before they went to the court to file for bankruptcy proveedings against me and I managed to pay off an agreed amount so that they will let me off. Bankruptcy brings forth a lot of inconveniences to one’s life chief of which concern re-employment as certain industries will not consider bankrupts as their employees. The financial sector is one such industry. Moreover, you will not be able to get any housing loan in future and this may inconvenience you if you want to buy a house when times get better for you.
Spending On Credit
So if possible, pay off your credit card debts entirely or at least the minimal sum monthly so that your credit worthiness is still intact. It is important if you want to buy house and borrow from the bank.
For me, I would pay the minimal sum every month and roll the balances over the next month. I know that this is not ideal but I have no choice as I do not have the money to pay off one lump sum. I believe many people out there belong to this category and trust me this is financially imprudent. The credit card interest of 24% a year is astronomical and can only be surpassed by those illegal loan shark in the open market.
When I was unemployed, those credit facilities landed me in a lot of trouble as I could not handle the monthly repayment without defaulting occasionally. There was the occasional lawyer’s letters to pay up or else. Banks have the usual habit of only seeking legal recourse when a customer defaulted on the repayment schedule which does not help the consumers much. What they can do is to seek a win-win situation when the consumers can pay within his means (paying the interest only) and the bank can still revert back to the usual repayment mode when the person is gainfully employed. I have seen people made bankrupt by payment defaults on credit facilities of less than $10,000 which I think can be avoided. More can be done to minimize bankruptcies as it is not ideal solution for all. It stressed up a lot of people resulting in some having to lose their job due to their industrial requirement that no bankrupt is allowed as employees especially for those in the banking industry.
Financial Over Commitment
Personally, we made the financial mistake of committing ourselves to a private house when we returned from overseas in 2000. I was also not working then. The house that we bought was about ten percent below the prevailing market valuation. We took out a mortgage of around $350,000 payable over 25 years. Repayment was around $2000 but rose to $2,500 when interest rate spiked few years later. We also paid around $300.00 monthly interest to service a $5,000 credit card and another $11,000 for an overdraft loan. Total interest payable per month – $2,400 and per year is $30,000! How financial silly can one get?
Yet tens of thousands of Singaporeans queue up to get that bank loan or credit card. We can actually retire comfortably on the interest payable every year. The morale of the story here is to spend within one’s means and if necessary take a loan that will not be too huge for one to repay. Some may not feel the pinch as many people fork it out from their CPF account but when you sell your house, the interest payable for your loan amount will be either deducted from your cash deposit on the house or your CPF savings.
This actually happened to us as we sold off our private home the same price that we bought it – $660,000 but due to the interest incurred for 5 years on our mortgage loan, our cash deposit of around $140,000, that we paid upfront, was reduced to zero.
When people buy a house, they only want to know whether the loan is approved and how much they have to pay every month. Nothing is enquired on whether there is any pre matured termination charge of the loan when they seek refinancing or when they sell their house. The amount can be a few thousand dollars and if the bank can absorb it you can save the sum for rainy days.
Spending Beyond Our Means
When we started out after coming back from abroad, on the safe side, we decided to set aside about $40,000 in our CPF ordinary account in case the worse scenario happened. The worse scenario did happened and after about 3 ½ years, my CPF was all gone after deduction for the house mortgage loan and the situation was not helped by my low income immediately after 20 months of unemployment. It was fortunate that I have some shares in my CPF Investment account and I have to sell them at a loss to buy the mortgage loan.
I believe that we will be financially better off if we have sticked to a more conservative housing from the HDB resale market. Besides having to pay a sizeable repayment amount monthly to the bank, we also need to pay maintenance of $600 per quarter on top of the annual property tax. It was a big financial mistake on my part and I learned a valuable lesson not to be overly confident about the employment market and my own employability competence.
Later, to add on to a very dicey situation, we also received a letter from the bank’s lawyer after two months of repayment default during one very difficult period. I was also rocked by my ATM bank balance showing a miserly figure of only $20.00. How low can you get?
Pleasant Experience With Banker
I decided to initiate a meeting with the bank to find out more on what can be done to minimize the damage. It will be very messy for all if there was a foreclosure on the house. There is not only the possible hefty loss in a very weak property market but also the effect of shame and loss of esteem for my family.
The lawyer that we met was very understanding and we worked out a repayment scheme for a limited period whereby we only need to pay the loan interest less the principal. It was only then that I realized that for every $2,500 that we paid monthly to the bank, only less than $500 was used to pay off the loan principal! After paying for five years, our loan principal of $350,000 was only reduced by only $30,000 to $320,000. The rest of the money went to pay off the hefty interest! We would have have paid close to $700,000 in total after 25 years on a loan of $350,000. How foolish and financially imprudent can one get?
The bank was at least understanding to our predicament and to this day I am thankful for their endeavour to help us during that dark period. They never remove their umbrella during those rainy days as rumoured by many who had very bad run-in with their bankers. So if the bank’s lawyer letter came, don’t avoid them – seek them out and try to work out a solution. It may even save your home from eventual foreclosure. The limited soft payment period may provide you precious time to tide through those difficult period. So never run away from the banker.
We have since sold off the apartment at exactly the same price that we bought it five years ago. Nevertheless, due to the bank interest, technically we lost close to $150,000 for the apartment. We took it well as it was like a rental that we have to pay for five years of residence there. We have since bought a resale HDB maisonnette fully paid for by our CPF funds without taking a loan from the bank. Five years of nightmarish repayment fattening the bank’s after-tax profits have make us realized that it was financially imprudent to go through the same mistake again.
The lesson to learn here is not to avoid the banker especially if the lawyer’s letter is issued. Face up to the bank’s lawyer and if possible go prepared with a repayment plan that you feel confident that you can work on for a limited period. Banks are not so merciless as alleged and they are equally fearful that the customer will declare bankrupt and they will not get back the full loan anymore. If feasible, they will also want to help the client tide through a difficult period. The umbrella is there only if we want to reach out for it.
Low debts The Solution
Also, learn to keep our debts as low as possible. Too many people are living in too much debts now – they took loans for housing, car, education, holiday, etc that once we are out of work, our debts will collapse on us. Since that very bad experience with our private apartment’s mortgage loan, we have not taken any huge loan yet and prefer to pay off our purchases with cash in our account. Our recent HDB resale flat was also fully paid up with our CPF savings incurring zero debt which we are very proud. This is the first time that we purchase our property without taking out any loan from the bank.
Thus, the decision to choose bankruptcy is frankly a very personal one. Some may decide to go this way as there is no other alternatives. Others will try to avoid it like the plague and fight it. Whichever way you choose to settle your financial debts, bear in mind the consequences and then move on. Never look back and regret what you have decide. Life is too short for regrets.
Living simply and within our means should also be our motto from now on.
The ordinary person takes everything as a blessing or a curse. A warrior takes everything as a challenge. Carlos Casteneda