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What You Should Know About the Rise of Cash-Advance Apps
As the economic repercussions of the COVID-19 pandemic persist across both Illinois and the entire nation, consumers have been looking for new ways to fund their daily expenses from paycheck-to-paycheck. Enter the cash-advance app, clever applications on their smartphones that link to their bank accounts and offer small cash advances each pay period provided the user meets certain requirements. Among them are such apps as Earnin, Dave, Branch, and Brigit, with countless others cropping up every day on your smartphone’s digital marketplaces. With these apps becoming more and more popular, many financiers and finance companies funding such major joint “fintech” ventures might be wondering how they can ensure appropriate debt collection. Overall, though, that might be the least of their worries at this point. Here are a few reasons why.
How Credit Card Companies and Consumers Have Reacted to the COVID-19 Pandemic
According to the August report from the U.S. Federal Reserve, the amount of unpaid credit card debt in the U.S. has been dropping since the start of the COVID-19 pandemic. Outstanding consumer credit card debt in July was reported as $994.7 billion, which is down from $996.8 billion in May and $1.078 trillion in Quarter 1 of 2020. Declining credit card debt is a predictable response to a downturn in the economy. In fact, both consumers and credit card companies have changed their behavior because of the pandemic
Consumers’ Approach to Debt Has Changed
Millions of Americans lost their jobs, were put on leave, or had their hours reduced in response to the COVID-19 outbreak. When consumers are uncertain about their job income, many will become more risk-averse about taking on credit that they may not be able to repay. The pandemic affected the activities of cardholders in several ways:
Why Equipment Lenders Try to Avoid Repossession from Clients
Leasing is a useful way for businesses to acquire equipment if they do not have the money or see the need to purchase the equipment in full. Equipment vendors and leasing companies charge a monthly fee to lend the equipment to the business, sometimes with the option for the business to purchase the equipment at the end of the lease. As with any lease, the lessor must weigh the likelihood that the lessee will be on time with the payments for the duration of the lease. Unfortunately, a business can be unpredictable, and the client may fall behind on their payments despite good credit history. The terms of the lease may give you, as the lessor, the right to repossess the equipment, but repossession is often not the best option.
Problems with Repossession
There are several reasons why you may want to avoid repossessing equipment if a client is not paying their lease:
Understanding the Chapter 7 Bankruptcy Means Test
In general, bankruptcy is an outcome that most creditors want to avoid when dealing with a debtor. If you are an unsecured creditor, the debtor may use bankruptcy discharge to clear their debt while paying you little or none of what they owe. Most consumer debtors file for either Chapter 7 or Chapter 13 bankruptcy, and the chapter they choose may depend on what they qualify for.
A debtor cannot use Chapter 7 bankruptcy if the bankruptcy court deems that they are capable of repaying their debts. One way that a potential bankruptcy filer can determine whether they qualify for Chapter 7 bankruptcy is through the Chapter 7 Bankruptcy Means Test. If the debtor does not pass the test, then Chapter 13 bankruptcy may be their only option.
Chapter 7 vs. Chapter 13
Before explaining the Chapter 7 Means Test, it is helpful to understand the difference between the forms of bankruptcy from a creditor’s perspective:
How Banks Are Using Technology to Help with Debt Collection
With the ways that technology has changed consumer behavior, lenders have been rethinking their approach to debt collection. A room full of people calling delinquent debtors may no longer be the most efficient or effective way to collect debts. Instead, lenders such as banks are using communication technology to more quickly reach clients with a tone that sounds and feels less aggressive.
Efficient debt collection may become a necessity given the current financial status of households and businesses throughout the United States. Many lenders have allowed borrowers to defer payments or use forbearance because of the financial hardship they are suffering during the COVID-19 pandemic. When the deferrals have ended, however, lenders may need to ramp up their debt collection efforts.
New Ways to Facilitate Collections
There are three main ways that banks are using technology to help with debt collection:
Four Keys to a Strong Guarantee in a Loan Contract
A loan contract can have more than one party who is liable for the debt. For instance, a loan may have a guarantee, in which a third party called a guarantor promises to repay the debt in the event that the principal debtor defaults. A guarantor can be an individual, bank, or other financial institution and can agree to put up assets as collateral for the debt. For creditors, a guaranteed debt provides security if lending to someone who has a poor or unproven credit history. However, the guarantor could try to get out of their liability by finding a weakness in the contract. Here are four tips for creating a strong guarantee in your debt contract:
- Get the Guarantee in Writing: It may seem obvious, but it is crucial that the guarantee is a written agreement. Courts typically do not recognize oral agreements for guarantees, and even if they did, an oral agreement is an unreliable way to set strict terms for the guarantee.
Illinois Mortgage Delinquencies May Rise Due to Recession
Lawmakers in the U.S. recognized from the beginning of the COVID-19 crisis that homeowners would need help with mortgage payments in order to avoid a surge in mortgage foreclosures. The Coronavirus Aid, Relief, and Economic Security Act had several provisions for homeowners, including:
- A moratorium on foreclosure of single-family homes with federally backed mortgages, which the Federal Housing Finance Agency recently extended until at least Aug. 31
- A mandate that forbearance be provided to homeowners, regardless of their delinquency status
- The loosening of restrictions on modifying loans
Illinois has issued executive orders that put a moratorium on evictions, though it also said that homeowners are still responsible for making mortgage payments. Housing market analysts are concerned that the downturn in the economy could lead to the state’s worst mortgage delinquency rate since the Great Recession of a decade ago.
How to Collect from a Deceased Debtor’s Estate
It is common for a person to die before they are able to pay off all of their debts. As a creditor, you have the right to seek repayment for debts even after a debtor has died. If someone cosigned on the debt, your collection efforts can shift towards the living party. Otherwise, you will be collecting the debt from the deceased party’s estate. Each state has its own rules for how soon creditors must make claims against the estate and how much of the estate is available to creditors. For creditors operating under Illinois law, here are the answers to three basic questions about retrieving debt from a deceased party:
- What Priority Do Creditors Have?: A deceased person’s estate must repay the person’s creditors before it distributes assets to beneficiaries. Illinois exempts certain assets from being collected, such as life insurance and retirement benefits. In the event that the deceased person’s debts are greater than their assets, their assets will be distributed based on the priority of each creditor’s claim.
Which Types of Federal and State Benefits Are Creditors Not Allowed to Garnish?
When all other attempts to collect a debt have been unsuccessful, a creditor may be left with only more drastic measures, such as wage garnishment. You cannot garnish a debtor’s wages until after you have filed a lawsuit against the debtor and the court has found in your favor. With wage garnishment, you can order the debtor’s employer to divert a portion of their paycheck to you in order to repay their debt. You can also freeze the debtor’s bank account in order to garnish money without the debtor being able to withdraw it. However, there are some sources of income that you cannot collect from. For instance, many federal and state benefits are exempt from garnishment.
Which Benefits Are Exempt?
Federal and state laws protect individuals’ benefits from both garnishment and deduction. In Illinois, exempt benefits include:
Strategies for Creditors Negotiating a Loan Modification
With the millions of people who have lost their jobs the past few months, creditors face the possibility of an increasing number of borrowers defaulting on their debts. With some clients, creditors will eventually need to decide whether to pursue collection on the debt or offer to modify the loan. Creditors who use debt collection may risk the debtor filing for bankruptcy and receiving little or no repayment if they are not a secured creditor. Negotiating a loan modification can be more beneficial for both sides but may not work with all clients. The creditor must balance receiving some return on the loan without surrendering too much money with the modification.
Should You Offer Loan Modification?
You should evaluate each client individually before deciding whether to approach them about loan modification or accept their offer to negotiate a loan modification:
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