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Success with Subprime
by Brian
Sacks
Do you have a question for Mr. Sacks? E-mail
it to brian@loanofficersuccess.com.
Click here
for more articles by Mr. Sacks.
How to Work with Buyers who have had a Bankruptcy or Other
Credit Issues
(Third in a series of four articles)
Click here to see the previous installment of this series.
You're probably wondering if there is a certain demographic profile or people
who file for bankruptcy. Is it men? Or women? Young couples? Older folks? Upper income people? Lower income people?
You'll be surprised. We hired an agency to do a demographic study for us and here's what they found.
People who declare bankruptcy tend to fall into three groups:
- Young adults who tend to be "self-focused" and view credit cards as
"free money" that allow for instant gratification.
- People in their middle years who are focused on raising families, caring for
elderly parents, and dealing with major financial obligations. Credit is seen as a necessary extension of income.
- People in their retirement years. Here, people tend to again focus on the "here
and now" and not on the future. Usually the expenses are medical. Credit is seen as a necessary convenience.
Of these three groups, the greatest number of people who currently declare bankruptcy
are in their middle years. Of the people who declare bankruptcy, 41.4% are between the ages of 36 and 50. However,
in the years ahead, the older population, comprised of aging "baby boomers," will become a larger risk
for bankruptcy.
It's hard to pinpoint exactly who the people who declare bankruptcy are. They
are people who, at some point, had some money to spend and the ability to borrow. Their large financial responsibilities
- homes, cars, families - give reason to believe that they must have started out with money.
In terms of education level, again there is little direct evidence as to who people
who declare bankruptcy are. The attitude of hoping that things will improve and the lack of acknowledgement that
they need to look into a financial future reflect more about attitudes toward money than about knowledge of money
management.
The most educated person can still spend beyond his or her means, and a person
who didn't graduate from high school can have a great sense of money management.
In a recent issue of the Baltimore Sun, there was an article about a gentleman
who grew up extremely poor in Baltimore. He worked as a parking lot attendant at a bank and as a janitor. He was
63 and getting ready to retire with a stock portfolio of more than $500,000. He had just received a raise and was
at that time making $20,000 a year. He had three or four children and had put them all through college. He amassed
his a fortune a few shares of stock at a time.
Because some bankruptcies result from medical expenses not covered by insurance,
it makes sense to look at who is not covered. Currently, 16.1% of the United States population is not covered by
medical insurance. The numbers for male and females without insurance are not statistically significantly different.
The largest number of people without medical insurance range in ages from 18-34, are white, have only a high school
education, and are usually employed.
The largest population of divorced people is between the ages of 25 and 39. While
divorce is not considered to be an extenuating circumstance for declaring bankruptcy, a lot of things that result
from a divorce are reasons for bankruptcy. For example, a husband and wife who are divorcing have debts that they
incurred jointly. During or after the divorce, both refuse to pay those bills. Often one has a high income and
the other has a low income. Unfortunately, the spouse with the lower income often inherits all or some of the debts.
Even if the person has a reasonable income, if the person is trying to pay off
debts with one income when the debts were incurred when there were two incomes, that person might not be able to
handle the debt. If the lender can document legitimate extenuating circumstances related to the divorce -such as
a former spouse with a drug or alcohol problem or a former spouse who was abusive - then the person can often get
a loan in spite of a divorce-related bankruptcy.
As you can see, no one type of person is the "typical bankruptcy candidate"
and almost anyone could be a potential candidate for bankruptcy.
Why Do People Declare Bankruptcy?
People declare bankruptcy for a variety of reasons, among them:
- Illness (mental or physical),
- Divorce,
- Loss of job,
- Mismanagement of money,
- Business failure, and
- Lots of other reasons
According to the study that we commissioned, sometimes the beginning of the end
for people - who all typically begin in a comfortable economic place - is an unexpected even that affects their
finances. This could be a divorce, loss of income, back taxes, child or parent care, or a major illness not covered
by insurance. However, there are also those who admit they live beyond their means.
People who file for bankruptcy also tend to be people with little in reserve;
they have very little 'buffer' in terms of money for an emergency or back up. They use credit cards as the buffer,
in the false hope that their economic situation will improve.
There are also some dishonest people who take advantage of the system:
I know of a couple who were in business for themselves, and their business wasn't
doing very well. So, they ran up about $200,000 on credit cards - through cash withdrawals. And what did they do
with that cash? They put it in a box and "hid" it. Then they declared bankruptcy - told their creditors
that they couldn't repay the credit card debts.
They did pay their mortgage on time, so they got to keep their house. All their
other debts were discharged in full. Shortly thereafter, they used the cash in the box to pay off their house in
full. Of course, what they did was illegal - they were supposed to declare all of their assets, including cash
- but they got away with it. Those are the type of people you don't want to do business with!
Most people who declare bankruptcy, however, are honest. They've just gotten in
over their heads financially. After declaring bankruptcy, people tend to fall into two categories: those who learn
from their mistakes and re-establish their credit and those who do not change their behaviors and don't take advantage
of the "fresh start" that bankruptcy gives them. Obviously, we want those in the former group as our
clients.
Click here for the next installment of this series.
Click here for more articles by Mr. Sacks.
Visit Brian Sacks's web site at www.loanofficersuccess.com.
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