Wednesday, November 23, 2011

Moral Obligation vrs Legal Obligation

I was recently reading an article on Yahoo Finance about a financial advisor that suffered the effects of recession. He talked about giving sane financial advice yet not following it himself. He took too big a mortage and then maxed credit cards over and over, until the situation became unsustainable.
He was constantly worrying about making his mortage payments even though his house value was only a fraction of what he owed the bank.
He talked to someone else about his situation. He mentioned that even though he could walk away from his mortage he felt he had a moral obligation to pay it.
This person told him something that has left me thinking since then. This person said "You have a moral obligation to your family, you have only a legal obligation to the bank. Think of your obligations the way a company would".
So this person stopped paying his mortage and eventually turned the house back to the bank which sold it and he even got a small amount back from the sale. He's in the road back to fiancial recover now.
Some thoughts on that article:
- Amazing that even a "financial advisor" could be trapped in debt thinking it was the "American Way" to a fancy lifestyle, not wondering how he would pay for it all.
- Interesting concept of not having any moral obligations to the bank. If one thinks the other way around, banks would never have a moral obligation to the customer. They would only follow their legal obligations and not help the customer more than corporate or marketing policies would allow.
- He didn't do anything "wreckless" like run away from his obligations, he negotiated and the bank was not "hurt or resented" about his actions, they just took decisions and negotiated forward.
I then talked to some from Citibank in Honduras. He told me and my boss that they have "debt fairs" every now and then for people highly in debt. Those individuals end up paying about 50% to 40% of the original capital owed.
Superficially one would think "Wow what a nice bank, other banks don't do that, they just keep chasing you legally until you pay". However, Honduran banking regulations require banks to write off debts that have 90 days delinquent. So in the accounting books once you are 90 days delinquent, the bank has "lost" all the amount owed.
They don't tell the people this and keep their collection efforts, however at this point in time any amount recovered is actually a profit for the bank. So in making payment arrangements by 40% of the original amount they are actually profiting by all the amount the customer will pay. No "moral obligation" here to help the customer.
In comparison, the Honduran electric company, the Honduran Social Security Institute, the equivalent of IRS in Honduras have all published the list of their worst debtors. Most of those are companies that have declared bankrupcy and or closed up. However their owners are known by most of the population, they are rich and are alive and well running other companies.
Their "moral obligation" would be to pay whatever was owed to this companies or organizations that have provided services are are now desperately needing this money. Their "legal obligation" is none since it's the companies they owe, not themselves, that are responsible for the debts. Once closed, the money is lost.
This diference between moral and legal obligation is hard to understand by some and easily understood by others. Some follow more the legal obligations, some do a balance betwen legal and moral, some coldly follow only their legal obligations and some actually squeme legal tricks to get stuff and not pay. Lawyers and congressmen have a hard time getting credit or loans on banks, car agencies and similar.
My personal story is a bit more complex. I could have stopped payment to my credit cards or now to the Banpais loan that I got, and eventually try and settle for a fraction of the owed amount. However I worry that in their collection efforts my boss would find out that i'm in such troubles. Given that I work in the banking industry that would not be a good thing, specially since we works with most of the banks I owed money to,
I imagine he would stop trusting me or worst fire me, making my situation worst either way. Maybe i'm wrong and he would understand and even help me, but given the way i've heard him talk (mock actually) about people highly in debt, I seriously doubt it. I've seen him get upset about some of our lower earning personnel getting a loan here or there to pay this or that. If I was starting my life, I would appreciate his tough love and life lessons, but in this situation I would really hate getting chewed out by him.
Why care if my boss talks bad about my financial situation? Well i've been in my job for years, he probably would tell most of his friends (bank executives) about my problems. If I leave my job, having bad references on all the banking sector would cut me out of the best options for a job. So my legal obligation is clear to me, but my moral obligation is supported by a complex job situation.
Another thing, me and some other people that know my situation and are in similar position feel that getting offered to pay a fraction of the debt only to those that forego their moral obligation and deal only with the legal obligations are given an unfairly benefitial treatment. We that pay or try to pay are give very little breaks or discounts. Unfair but totally "legal".
Sure these people are reported to the credit bureau and probably have a hard time getting credit again (if the new lender uses credit bureau) for a while. Yet for someone that is so highly in debt, does it really matter if they can get MORE credit elsewhere? wouldn't it be a great thing to be forced or blocked from getting any more credit which would equate to more debt?
I've written so little lately that I don't know if anyone is following this any more. If you are, please do comment on this as I think all of you would have an interesting point of view.

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