Living Through the Real Estate Crash and Bankruptcy, by Brad C.

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My experience with a tax audit, real estate crash, rental house woes, foreclosures, layoff and bankruptcy:  

In a nutshell, we went from a 4,000 square foot home, worth more than $1 million, a vacation home, new RV, Mercedes convertible, Jeep, $50,000 SUV, 20 rental properties, a property management company and a great full time job...   To living in a modest rental house in the middle of nowhere.

Beginnings

I am a computer guy, have been since 1991. I bounced around a few companies gaining positions and knowledge.  Eventually I rode the dot com wave as a security and infrastructure consultant.

In 2000-2001 I had been working for a dot-com company, and at one point had enough stock options to retire at 35 years old, just needed to have the stock vest.  But, just before my stock vested, the bubble burst and I went from looking at retiring to looking for a job.  I had put all my extra cash into the stock of the company I worked for.  So, in addition to losing my job, my stock options, my retirement and my savings,  I also lost my drive for working hard at the “company” and going whole hog as an employee/leader.  I was very discouraged.

After finding another job, I decided that I had to try my own way to build a future for my family.

I started buying rental houses in 2002

The first one was very easy.  I found a house for $70,000 in a Tacoma, Washington hill top area.  I put $2,000 into the house, carpet, paint, flooring, bath fixtures, and a cheap fridge and oven.  I was able to refinance it for $100,000 and rent it our for $300 more than the payment.  This netted me $27,000 in a little over eight weeks with a $300 per month positive cash flow. I did this same thing about 10 times over the next two years, while still working full time as a computer guy.

As a result this developed into the following activity.
1. Started to sell real estate part time as an agent.
2. Started my own property management company.
3. I "biggered" everything (house, cars, trucks, boats, vacation home, you name it..)
4. Started to slack on my job, did not take opportunities that were offered to me.
5. Started counting the days until I could retire.... again.

By 2006 I was in deep debt, but had a $1 million plus in equity in the homes we owned.  It was around this time that real estate sales started to drop off in Washington which was late to the crash.  I figured what a great deal everyone else is missing out on.  I can surely refinance and pull out more cash like I have been doing for several years.  So I purchased three more homes in the beginning of this year.  They were not cheap, I was paying $150,000 for a home that was $100,000 just three or four years before.
Another huge thing that happened to us was an IRS tax audit.  They found a $500 dollar expense that was supposed to be a loss.  This was not a big deal but they opened both 2004 and 2005 taxes to audit.  As a result, a $500 dollar mistake turned into a $120,000 fine and back taxes owed.

We battled it out for several months but eventually I had to hire an attorney and we settled for about $57,000 cash.  

And yet another thing that happened in 2006 is the re-opening of a  low income housing to Section Eight ("Sec8") recipients.  this category, mostly for single moms, Sec8 was the bread and butter of rent in Tacoma.  They paid high rent and 70% of the rent was paid by the local Housing Authority.

The HA did not get enough interest in clients renting out the new HA homes so, in order to push Sec8 renters into the new homes, the HA started failing my houses on the safety inspection.  Which costs me thousands of dollars per house to fix.  Then after paying for the repairs, they told the tenant they can move into the new HA homes without any up front expense and would provide new furniture for them, and that they had no requirement to give notice to the current land lord.  I had 4 families move out without notice.  They left the homes trashed. I decided to get out of real-estate.

We sold about three of the homes and was surprised at the outcome.  My tax hit was a bit more, my fees were a bit more and as a result I felt as though I gave the house away.  It was not a good feeling after putting in so many hours to fix them up.  I certainly did not get any money in my pocket by selling them.  
At some point, I learned about renting houses out in the “Clean and Sober” model. I started a clean and sober housing company and rented beds rather than the house.  My main client was the Department of Corrections.  They provided tenants recently released and on probation for drug convictions.  This required me to cover all utilities and furnish the houses.  I also had to put coin op laundry machines in all the houses.  In return I received $315 dollars per month per tenant.  A five bedroom house could house ten tenants if at full capacity.  However, this never happened, they were always about 60% full.

I was still cash poor.  In 2007 I refinanced most of the rental home in order to pay off the IRS, repair damages to many of the houses, buy coin op laundry for all the houses, pay for the expenses of the new company until the homes were furnished and occupied by new "clean and sober" tenants.

2008

At this point, house values have fallen so much that selling these homes was impossible.  I had refinanced them and did not have the equity to sell and pay the fees and taxes.
The clean and sober renting scheme never quite paid for the payments of the homes.  If I had not refinanced them in the “third” place, the payment would not have been as high.
I was running out of cash very fast.  The only income I truly had at this point was my job, but just my monthly take home pay would not even cover the house payment and utilities of my primary residence.  I still had two car payments, RV payment, vacation home expenses and food.  But above these, the expenses for 18 investment properties that were not performing.

I decided to take out a second mortgage on one of my rental houses.
With the new cash, I was good for another year and tried my hand at flipping houses.  Which turned out to be a horrible mess.  I had done a few in 2003 and 2004, and they had made me some quick cash. But this next one destroyed me.  The details are another story in just itself, but to sum it up.  I paid way too much for a home.  It had huge issues that I was not aware of, and I signed away my rights to find out this information.  The worst part is, that I used a business partner who had become a friend of mine.  I ended up taking out a second mortgage on each of my four best houses.

The flip house got red tagged while working on a foundation repair.  While going through the violations and getting a permit, they decided that since I was adding over 50% more value to the current zero value of the structure I must bring everything up to code. For a 1920s home, this means wiring, windows, plumbing and worst of all septic.  The septic was over $30,000 alone.

Midway through 2008 I was out of cash again and mo more capacity for more loans on the rentals.
Then the mother of all problems happened.  A contractor who had been developing a small tract of homes in the Tacoma area was not able to sell them or rent them.  So, he went to my clean and sober homes and invited them to move into his new clean house.  No rules, no drug screening and half the rent payment.  So most of them took him up on it.  I had four houses empty of all but one tenant in the same day.   This is a direct violation of their probation, so all of them ended up back in jail within 48 hours, however this ruined my cash flow and buried me again.
I was really in deep now.

My last ditch effort was to refinance my primary home. I used a different money guy because I was so embarrassed of the mess I was in and I was afraid that my flip partner would want all the cash out of the re-fi to get back some of what he had put in. My intention was to complete the flip, sell it and fix the mess.

At the last minute signing the re-fi, again had a poison pill.  The truth in lending (TIL) report, showed that my payment went up a little from what the loan man had told me, but the interest rate was up much higher.  They tried to hide it by not including the taxes and insurance.  (My property taxes were over $1,000 per month.)  Also, the fees were bigger. And it went from a five year ARM to a three year term. I thought I would get $30,000 back but only got $26,000.  I didn’t want this deal, it was pure bait and switch predatory lending. But, I had no choice, I needed the money now, So I signed the deal.

At this point, my fate was sealed.
There was not enough money to complete the flip house and it was later condemned.  The county not only condemned it, but forced my partner to pay for the removal of the home.  He ended up with a worthless un-buildable vacant lot that he paid more than $200,000 for.  I do and always will feel horrible about this.
We were at the point where we had to stop paying on something.  We decided to consider which homes we would keep and which homes we would let go.
The rental houses and apartments would not work, they were all in Tacoma in areas.  The only one that would work is our vacation home.  Which was 100 miles to the east and only accessible by snowmobile 4-5 months out of the year, but the payment was manageable and the home still had some equity left.  Also, we would not have to face the people we knew who would watch my life go from riches to rags.  So, we decided to move to the cabin.

We didn’t know anything about foreclosures or time frame of what happens so we planed to move ASAP.  We made one house payment on the new re-fi.  That was all.  

We moved

My commute went from 45 minutes to 90 minutes, but I was okay with that.  We loved the cabin.  With working 2-3 jobs since 2002, we rarely went on vacation or took time to do anything as a family.  When we purchased the cabin as a vacation home in 2005 we started to become a close family. So we looked at this as another adventure.  We started to prepare for the events that were about to happen.

As we moved we had the primary house up for sale.  After a few weeks I called the bank and found they would not talk with me unless I was 90 days late.
Once that 90 days hit, they started calling me.  The person on the other end of the phone was not a knowledgeable person, yet they said they were the decision maker on my loan restructure.  I realized they were just pumping me for information.  I thought it was strange that I must fill out all this stuff, when I had already gave them when I got the loan in the first place.

Through all this, I had no one to talk with.  Apparently I was the first person in my circle to go through this.  I felt about 3f tall and went rather recluse and sad all the time.  
Moving was a chore.  Saying good by to neighbors was hard and embarrassing.  Lots of unspoken questions.  How could a young guy go from being on top of the world, to nothing in just a few months.  At first we did not tell anyone what was going on, but after a few awkward conversions, I started to tell the whole story, or at least what the story has been up to that time.

Lessons Learned:
 We went from a 4 car garage, 4,000 sq. ft. home to 2,000 sq. ft., no garage.  We had so much stuff it was crazy.  We did not have a garage sale because we were embarrassed about our situation.  I ended up giving away stainless steel appliances, riding lawn mowers, patio furniture and lots of house hold furnishings.  We just wanted the house empty. We certainly should have had a garage sale, we gave away thousands of dollars worth of stuff.

We also had to figure out how to manage living in a snow country a home in winter.  We would be snowed in 4 to 5 months every year.  We needed to stock up on food and supplies or end up making multiple trips up and down the steep one mile road on a snowmobile loaded with groceries.  After having the home as a vacation cabin for a few years prior, we knew what was coming and decided to stock up and be ready,  We also had to add a wood stove, a propane stove and cut several chords of wood.  We also wired in a generator and a way to store extra gas for it.  We basically took care of our family needs first and would figure the bank stuff later.
As it turned out it was an adventure.

After moving and living there for five months, the winter set in and we were snowed in. Then, I received a layoff notice.  The last few years of playing real-estate mogul had caught up to me.  When they looked at the entire group, I had gone from a leader, to a loser.  I was now the weakest person. I did not tell anyone what was going on us now. Sure, I was a big mouth when times were good, bragging about retiring early, telling them I live in a house next door to the vice president of the company (which I really did).  “Pride cometh before a fall” and it was a big fall.  I had just eight weeks before I would be canned.

Lessons Learned:
 Now up till this point we were still running our rental homes. With hind sight, we should have stopped paying the rental house payments when we stopped paying the primary house payments.

Enter the lawyers

I already knew that we were going to lose our McMansion to foreclosure, and now I was going to lose the 18 rentals to foreclosure as well.  I also knew I would have a few months of “free” money while I was waiting for the foreclosures to take place. I figured I would still collect the rent and not make the rental house payments. Since I was going to get canned at work I had to be sure that I made this one time free cash go to good use.  I also made an appointment with a bankruptcy attorney.

Lessons Learned:
Be careful how much you tell your attorney up front.  They write everything down and never forget what you tell them, so you really need to ask them questions and not have them ask you.  As a result, I would have liked to use the first attorney I talked with, but felt that I had to have time to “prepare” for bankruptcy.  I needed answers, not the kick off to starting the process.

Disclaimer:
 All of this is my experience, from my view point, check the laws and rules in your area for the facts.  Also, keep in mind that I have not lied or tried to “get away” with anything, I simply needed to know the rules so I can stay within the rules.  Some say I take advantage of the situation, and I must say I have.  Only a fool would not try to make the best out of a bad thing.

Lessons Learned:
I have found that the attorney will just tell you what you need to know and not much more, after all they get paid by the hour and they can’t read your mind.  They are the professional in the room and you are not, and up until a year or two ago, most of their clients were plain idiots.  The best thing that worked for me was to study the heck out of my situation then ask the attorney if what I understand was correct.

Initial questions

1. Can I collect rent even though I am not paying the mortgage?  YES.  The house was still mine, I was just not up to date with the payments.
2. Do I need to tell the tenants what is going on? NO. They are renting from you on a month to month basis, either party has only a 20 day notice to terminate the agreement.  If it’s a lease, the lease is null and void when the house changes ownership.

Lessons Learned: 
The attorney didn’t understand these questions.  They think that you would not receive any money from rent and if you did get any money you would pay what bills you can.  Understand the goal of the bankruptcy laws.  The goal is to have you pay off as much as you can.  Only if it’s near impossible do they let you off the hook.

3. When can I declare bankruptcy?  After your rental houses are foreclosed on, you cant keep any investment real estate.
4. Can I keep my house?  YES, maybe...

Lessons Learned:
  Again, most people are down to the nub with no income.  So, some of these questions are new for the attorney.
YES, but do you want to? if its underwater, it will not come back for 10+ years.  If you have more than 30,000 in equity, no you can’t keep it.  If the payment is significantly higher than the going average housing expense for your area, then no you can’t keep it.

5. can I keep my cars? YES/NO  you may keep two, the value must be under $3,000 each.  However if you are going chapter 11, you can keep a more expensive car if you have no equity in it and the payments are low.  
Lessons Learned:   The task is to have you pay off as much as you can, if its better in the long run (5 years) to have you keep the car you have, and make the payments rather than save up for another $3,000 car, then OK.

6. Wedding rings, furniture, TV, stereos ,and stuff?  There is a dollar amount you are allowed to keep. if you have valuables, extra cars, boats, rvs, motorcycles..  you need to get rid of them ASAP.  

7. What is the time frame of looking at my finances?  The court will want six months worth, but your attorney wants six months worth from when you start talking with them. So in our case, it was over a years worth of history. This is why you need time to clean up your history.  This is why we needed to understand the rules.

Lessons Learned: 
 The attorney is putting their job on the line when they represent you.  So they will not lie or even allow anything that may be slightly under the table.  They will need all the information and they will not hide anything from the judge.  I know we hear attorney/client privilege on TV, and yes, that does exist, but they will rather just quit and not represent you.  You are just another client, you are no O.J. Simpson.  Also keep in mind, you are going to the courts on your initiative, nobody has asked you to show up and go bankrupt, you are asking the court for bankruptcy protection from your creditors.

8. Can I give stuff to my family to hold until I am through BR? NO, this is fraud.  You need to sell the items and use the money for the good of your situation. (Costco, shoes,
gasoline, car repairs, tires, cash to spend because all of the above no longer takes your checks.)

9. Should I pay a little on each bill? NO, if you are planning on having that debt dismissed, pay nothing at all.

10. Can I pay my grandpa back the $10,000 he gave me to learn how to weave baskets? NO, that is called favoritism, if you do this, it’s big trouble.  They can go after grandpa and that may be worse. Pay grandpa back by showing him you have learned your lesson.

11. My stuff (wedding ring, gun, silverware, etc) has been handed down to me from my Mom.  I simply cant let it go?  NO, give it back to Mom and get yourself a little ring with a diamond chip in it from the pawn shop.  Or, keep it, list it as your property, and keep it within the limits set. You are allowed to keep a certain dollar amount of your stuff, use it wisely.

12. When should I stop paying credit cards.?  When you are done using them.  Most people have them maxed out for a year before they go bankrupt.  So use them, evenly and at some point they will all be full, then stop using them.  Some people live off the credit cards when there is no alternative, this is common. [JWR Adds: Continuing to borrow when you have no intention of paying the money back is theft, plain and simple. Resist the urge to do so, just because you can get away with it.]

13. What happens to a second Mortgage on my houses?  They will not foreclose on you.  They will continue to go after you like a credit card, and when your house sells, they will get any little bit that is left over after the first and taxes are paid off.

14. I am supposed to give my attorney a list of everything I have bought and sold for the last two years? YES, you need to make a list of everything you bought and sold that is over $100 for the last two years.  Everyone's name and contact information, the amount of the transactions and detail description of what it is.

Lessons Learned:
 This is why you need time to sort all this out.  Don’t worry about the bill collectors, they will keep, just string them along.  I recall I sold a couple of things on Craigslist, didn’t get the detail info on who they were.  I recall I went to the casino and blew a few hundred bucks.  It’s not illegal to be stupid, just stupid.

15. When my house is foreclosed on, can they come after me for the difference?  Not usually.   In a foreclosure the contract spells out that if you default, they take the house.  This is on the first loan typically.  If you have a second, that gets detached and follows you around just like a credit card.  The only way for the banks to come after you for the balance of a first mortgage is to execute a judicial foreclosure.  This is rarely done because it requires significantly more time in the court systems and more complex than the robo signers can handle.  So to get around this, the banks offers to split up your debt, this helping them and screwing you. Many people got screwed with a “fix” to their loan problem by taking what they owed and splitting it into two parts.  Little did they know that it just increases the liability on the owner and lessens the liability on the banks.  All done under the disguise of “helping the owner”.

16. What about taxes? If you owe taxes already, that's it, you owe it.  But if you file for BR before you owe the taxes you may be able to declare insolvency.  With so many houses going back to the bank, they each sent me a 1098 form.  This form tells the IRS that the bank has forgiven you the difference of what you owe and what they consider the home worth.  So that can mean huge reported income.  However, if you can prove insolvency, the debt goes away.

Lessons Learned:
You also need a tax attorney, the bankruptcy attorney will not touch taxes.

Questions about owning a rental house.
(and this also includes any house)

1. Should I short sell?  or Foreclose? Foreclose!  A short sale you have the sign up, everyone knows your business, everyone knows your on hard times, you will not get anything for your efforts. You will need to leave the place perfect and clean up after the fact.  You will still be liable for anything you did not disclose.  Most of the short sales fail now because the banks are getting a full bailout for the total debt plus expenses.  Then they get to keep the house in the shadow inventory off market so the surrounding homes do not go down in price.

2. How long till they take the house?  1 year or more, they will say an auction will take place at ...this or that date...   but usually it gets canceled, and if you want to make it longer you can.  but even after the foreclosure you will have several days/weeks to move out.

3. What do I do when the bank posts a notice on the door of the rental house and the tenants freak out? Tell them you are restructuring your finances and they will be fine.  Tell them to just throw away any notices, you already receive them in the mail.

4. What about insurance and taxes? The bank will pay it to protect the house, and after the house is taken, you should call the insurance company and get a refund.  yes, they paid the insurance, but they charged you for it and took your house, it’s your left over money.  

5.  Its been four months, the tenants are getting notices every week and they are starting to get upset. Okay, I talked with mine, said “look, sorry, stay in the house and I’ll give you $100 off rent.  This takes time and the bank is being a jerk.”

Thank you Jesus!
 
My work situation changed,  two days before my date with the executioner, they reinstated me.  I have worked from home ever since.  I have been very appreciative of a good job.  This still did not fix our situation, but at least we would be able to cover basic expenses.

Repo cars, trucks and
RVs
We stopped making the payments on the RV. Before we let it go, we took a few road trips that we had been meaning to do.  Vehicles get Repo’d in just a few weeks.  If you miss two payments, its gone.

Then my wife's car had to go, it was a new Chrysler Aspen.  Very nice plush car, but about $10,000 underwater.  So with the cash we have been saving by not paying the rental house payments, I bough a 1998 Lincoln navigator.

Lessons learned:
You need to do this changing of cars early, there needs to be some maturing of this transaction.  “Yes I paid $5,000 for this car, but I got shafted, it’s only worth $2,500 book value and even less auction value. “

Waiting for the banks.

Still waiting for the foreclosures to take place.  With the cash we were able to save by not making any payments (except the cabin) we put new tires on all the vehicles as well as a set of studded snow tires.  All the little things that may have gone wrong were address and replaced.
We used this “quiet time” to buy and do things that were needed and may not have the money in the future.  Snow gear for the family, shoes, clothes, new mattresses.  Extra oil and filters for the cars, extra gas cans, extra gas, extra food, shelves to put the food on. Crowns on my teeth that had been put off.  Chiropractor visits that I would have never done.  A couple of family trips to Front Sight in Las Vegas to teach the family about guns.

Keep in mind that at this point all I have done is “learned” about bankruptcy and stopped paying on 20 homes.  I figured we were about three months before the foreclosure of the first house.  The phones were ringing with collection agencies. Then they would make offers.  “We can remove your 10,000 debt if you pay us 7,000 right now.”  It got to a point where they were offering 20 cents to the dollar.  

Lessons Learned:
Beware, if you take part in this, you are showing that you have a stock pile of cash and are playing debt games.  This is OK if you do not plan to file for bankruptcy.  But if you are planning to go bankrupt, stay away from making these deals.

Foreclosures finally

It took 11 months for the bank to foreclose on our McMansion.  However, the rental houses have at least another four or five months.
We had several tenants move out and trash the houses again.  Rather than fix them I just locked them up.  Eventually the bank will drop by and see the house is abandoned and they will board up the house.  If there are still renters in there, they will just keep posting notices.

Lessons Learned:
 Tenants think you are a millionaire, they wont understand the situation.  The further you are removed from them the better.  Don’t tell them anything. If you feel compassion for them, help them anonymously.   Also, collect the rent until the last day. FYI: All leases are terminated when the home changes owners, at least in Washington state.

12/12/2009

The last foreclosure, finally our plate was clean.  No more tenant calls, ad running, credit screening, evictions, clean up, police reports, health department violations, housing authority inspections.  My rental house empire was gone.  

Lawyer up again.

Now with all the homes gone, the cars in place, and all the consumables stocked and placed, we were ready to talk to another attorney.  We went over everything from start to finish.  I recall one thing that we went over just about every two weeks was a check list of stuff in my house.  He always started with fur coats, which made me laugh every time.  I told him if I had any I would wear it to our next meeting.  Even though we went over the list a couple of times a month, he wanted to go over it again to be sure I was not changing my story.  Again, he is placing himself on the line as well as you. So give him what he needs.  Confidence and the truth about your situation.  He is building a story of you in the document.

Lessons Learned
: 401k’s are exempt from this. You get to keep what you have in there, so don’t dip into it until after you are complete.  If you touch it, it can be taken. Wait till everything is over before you dip into this and then maybe wait another six months.  Be sure to disclose all the detail about it to your attorney.

Our Day in Court

We had listed all the debt with all the contacts. All had been notified and we waited for them to come back with any questions or contested debts.  Our court date was set and we drove that morning to the court in Yakima.

Our attorney took us aside.  Said, “I didn’t tell you this because I didn’t want you to worry.” (Recall, they think all of us chapter 7s are idiots) “the judge will ask you questions, I have no idea what the questions will be, and you can refer to the document he is looking at.  He wants a clear picture of your financial life.  So be ready with your story.  In two minutes, be able to tell him what happed to you, how you ended up here today.”
We went into the court room.  There were about 25 people in the room, and only 3 men in suits.  The way courts run, the judge will usually take the attorney with fewest clients first.  Judges and Lawyers are the same type of guys.  So they  respect one another, they were very cordial and polite to one another.  So, since my attorney had just us, we went first.

We were sworn in after recording our ID, asked us a few questions.  He had me give my two minute speech.  Asked if anyone owed me money. Asked if I was planning to get any big money ($1,000 or more) in the future.  After saying no, he looked over the document again and then we were dismissed.
In the lobby, my attorney thanked us for the business, said hopefully we never have to talk again.

What now?

He said in a week or so we should get notification that we passed or failed.  If we failed we start over.  If we passed it was almost over.  He warned us, not to do anything for six months.  Don’t sell your cabin, don’t win the lottery don’t receive an inheritance, because the file will be on the auditors desk for up to six months, and they will review it. If they open it back up and find you are better off financially, they will rescind the discharge and have us start all over again.

Six Months later:

We put the cabin up for sale.
Three months after that we sold the cabin.  Moved a mile closer to town off of the hill and are now renting a house.  We were able to get a little cash out of the cabin, but not enough to change our lives.

We have since purchased a boat and an RV, all with cash we save up after the discharge.  They are old and have problems, but they are paid off.  (Yes, we are storing food and survival stuff as well.)

We live without credit cards.  We save for things we need and use a calendar to mark what gets paid and when.  We have checked out buying better cars, but just cant justify a payment.

Here are some details I have found that may be helpful.

  •  After two years from bankruptcy you can buy a house via FHA.
  • After three years from foreclosure you can buy a house via FHA
  • In King County, Washington, the max loan amount via FHA is $525,000 (40 miles away)
  • In Kittitas County Washington, the max loan amount via FHA is 271,000 (where I am)
  • There are tests to verify if you can go Chapter 7. These are: 1.) More than 50% of the debt you have is due to a failed business (not consumer debt)    -or 2.) The total amount you owe after liquidation is divided by 60 payments.  If you cannot pay even just 20% of that monthly payment you will fail the means test an can go Chapter 7.
  •  If your wife is out of work, have her hold off getting a job until this mess is done, its a good time to read up and gain some education.

You are not dishonest, you are in business, the business of doing what is best for your family.
I had to get my brain around this.  I made an agreement to pay for this debt, and these houses.  But must now do something else.  Do I feel bad?  Yes, but keep in mind this is just business.

Let's say you didn’t own the house, lets say you owned a business that employs 20 people.  Your business builds picnic tables for the parks department.  You have been doing this for five years.  But one day, the budget for the parks department gets cut, and as a result they can’t buy anymore tables from you. As a result not only do you have to layoff your employees, you have close down the business.  Feel bad?  Yes.  But it happens all the time.  Could you have stopped this from happening?  Sure, should not have built a business on the expectation of selling tables.  But you did, and you ended up making some money and employing 20 people.  Are you going to keep the shop and tools and machines and people there to do nothing?  No.  So everyone is canned, they go to the unemployment line.  You hock the tools and equipment for what you can, you break the lease and give back the shop.  Do you pay everyone the little cash you gleaned out of the business?  No, because you are a business person.

Why is this any different?

When you buy the house, sign for the credit card, buy the car, you sign a contract. The contract says exactly what each party must do.  The bank agrees to loan you the money and hold the house as collateral, you agree to pay the payments and use the house.  If you do not pay, the agreement spells out that they take the house.  That's it.  Simple.  No blame, no bad words, just action and reaction.  

Lets talk about the credit cards.

Here, they loan you money to buy stuff.  You agree to pay monthly and they give you more and more credit.  If you stop paying, they will try to get you to pay and in the end they will try to garnish your wages.  Keep in mind, they are not losing money.  They may not get all that they want but you have already paid them many times over and over in the years you have had this credit.  This is their risk, not yours.  They charge high rates for money they loan you specifically because it is unsecured.  They made the plan, not you.
One thing you should know.  These credit card companies will try to get money from you for a little while.  But eventually they give up on you.  They take this debt you owe and sell in to another company very cheap.  So if you owe $3,000 dollars, they will sell it to “ABC Recovery” for $200.  That's how much they don’t care about you or your debt.  They have already made their money and are just trying to glean as much as they can as fast and as easy as possible.

ABC Recovery then goes after you for the full $3,000 plus the $200 they paid for the contract.  Eventually they may sell it to another collection company for $200 dollars. Eventually one of these companies will try to garnish your wages if they can find where you work. Which brings us back to the beginning of this deal.  When you start getting calls from the creditors, they are not going to give you a “deal” they are not going to change your loan, or help you out.  They are trying to get you to give them all the information they can get on you.  This way, when they sell your loan to a recover/collection company, the more information, they have on you, the more they sell your debt for.
Also keep in mind, the collection companies are now using Facebook and Twitter to locate you and your income.

One last thing to think about:

When renting a car you get insurance for it.  If the car gets damaged, you have insurance, that is why you paid for the insurance, it’s no longer your risk of damage it is now the insurance companies. What if you did not damage the car? are they going to give you back the cost of the insurance, no, that is the risk you agree to.
Same with credit cards and all loans.  The risk on both sides are spelled out, don’t let anyone guilt you into not doing what you legally can do to provide for your family.  I don’t see the banks apologizing for the massive bailouts they got, in fact they act as though it never happened.

Life moves on

I am doing very well at my job and am no longer fearful that I will get canned The kids are doing great and my wife loves not having to snowmobile every day up and down the big hills in the winter.
We still can’t get a credit card, we have tried a few times.  And we have to educate the landlord when he was trying to screen our credit.  Again, people don’t get it, that you can have a great job and still go bankrupt and foreclosure.
This was a long process, but at this point we can just play the hand of cards that we have. I hope this story helps encourage others that find themselves in the same sort of boat we were in.

God Bless and remember Luke 12:15: "Take heed, and beware of covetousness: for a man’s life consisteth not in the abundance of things which he possesseth."

JWR Adds: Again, a pending bankruptcy should not be used as a excuse for excess. Never, ever borrow money with the knowledge that you have no intention of paying it back. That is simply theft. Thou shalt not steal.

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This page contains a single entry by Jim Rawles published on February 19, 2012 11:00 PM.

Letter Re: Planning for Shingles in TEOTWAWKI was the previous entry in this blog.

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