Question

Cohen and Sarah have substantial debt including 4 credits cards, 2 student loans, 2 auto loans, and a mortgage. Their credit cards are now with collection companies and the phone keeps ringing from debt collectors.

They feel that if they had a couple of months to get things in order they could get back on track, but they are considering filing bankruptcy.

Using all of the information that we have learned please provide some recommendations that will help with a 1) debt repayment plan 2) working with collection companies 3) Stopping phone calls from bill collectors 4) keeping their assets.

Answer 1

The question has mentioned situation where Cohen and Sarah is going through a financial ordeal that hundreds of thousands of borrowers go on a regular basis. When financial situation of a borrowers go bad and they can't keep up with EMI payments, the lenders classify their loans as non-performing assets and start the process of recovery of their advances.

It's extremely important to note that it's not in the interest of lenders to go for recovery through bankruptcy processes or auctioning of mortgaged assets. This is because of the following reasons:

• Many loans, including credit card loans are unsecured loans and the lenders don't have title to any asset directly linked to the loan that they can auction off easily
• Auctioning the mortgaged asset in case of secured loan, such as auto loans may not ensure full recovery of the loans and accrued interest
• Filing bankruptcy filings or legal processes also may not result in full recovery of their debts
• Recovery processes involve heavy expenditure on the part of lenders and they are forced to give up a big chunk of recovered amount to collection companies

This is why the lenders also try their best to accommodate to mutually beneficial agreements where they see greater chances of full recovery of their loans rather than resorting to recovery by force/bankruptcy/auctioning assets. Also, Sarah and Cohen are likely to get back on track financially in a couple of months. Therefore, they just need some time from the lenders to honour their liabilities

Due to the above reason, Cohen and Sarah need not worry and should come up with a plan that is a win-win situation for them and the lenders. A single plan of action should be able to help them with all the four objectives. If they can get their debt repayment back on track, the bill collectors will stop troubling them and their assets will also become safe.

Following are the recommendations to Cohen and Sarah with regards to the above mentioned plan:

1. They should enter into a debt restructuring arrangement with their lenders. A debt restructuring arrangement involves resetting the underlying interest rate terms, EMIs, schedule of repayment, etc. The lenders are willing to do it in order to increase their chances of recovering the full amount of underlying loans.
2. In order to do above, they must contact their loan relationship manager with their plan of how after two months their financial situation would be better and how resetting the underlying payment terms will help them honour their liabilities. For e.g. reduction in interest rates and extension in repayment period will reduce their EMI and help them manage their finances
3. If possible, they can sell off some of their personal assets and pay off their defaulted EMIs so far as a way to negotiate great terms under the debt restructuring arrangement. This will ensure that all of their other assets are safe and don't go into recovery process.
4. Once they have their debt restructuring approved, they can share the relevant agreement with collection companies to ensure that they stop their recovery process and also make sure that the recovery phone calls stop. They can also get in touch with their lender and ask them to update the collection agencies about the renewed terms and hence the required stoppage of recovery process.
5. Doing the above they will also make sure that their assets don't go into recovery process and hence are safe

Conclusion:

Based on above plan of action, Cohen and Sarah will be able to meet all the four objectives, i.e. 1) Get debt repayment back on track, 2) Work will collection companies to stop their processes, 3) Stop phone calls from debt collectors and 4) Safeguard their assets.