buy then bail strategy

Sometimes the free market is darned entertaining. Home lenders let visions of wealth overwhelm the reality that sizable downpayments tend to keep people from walking out on mortgages. Now they get their comeuppance. Ha ha, re car financiers! With their typically ridiculous interest rates, they too may get their comeuppance. Though I am thinking that car loans have "preventive measures" in them to ensure payment or at least getting every cent possible out of the borrower, including going after assets.

OTOH, this all tends to promotes chaos, and that's not good for the economy as a whole. Hurting these businesses hurts many a stock portfolio.

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Walking away doesn't discharge your debt.

-- Ron

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True, unless it's a non-recourse loan, or maybe a lease (I'm not familiar with the terms of most car loans). Also, depending on the amount, the lender may find it cheaper to write off the bad debt instead of leaving it on the books, this happens often enough.

The real point was, since the borrower knows ahead of time they are about to trash their credit record, they can take advantage of that knowledge.

-Mark Bole

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Corporations and other businesses do stunts like this all the time. Somehow when an individual person takes advantage of loopholes in the law or the tax code or whatever, it is viewed as a terrible, unethical, immoral thing, but when a big company does it it is O.K., just business.

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Many moons ago I had a co-worker who had gotten herself in over her head to the point of needing to declare bankruptcy. Given that the bankruptcy was imminent, she and her husband when on a protracted vacation, including a trip to Disneyland, on credit with the clear intent that this would be a "free" trip (what the heck, might as well!). Yes, I consider this unethical behavior.

-Will

william dot trice at ngc dot com

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Well, you could move out of the old house, and into a cheap rental apartment (on a month-to-month lease), while getting set up with a new tenant in the old house. Then apply for the mortgage on the new house. Less pressure on all levels, since you would have more time to shop around.

I wonder if auto lenders might start doing something like the credit card "universal default" idea. Which is when Bank A (which issued your credit card) notices that you are delinquent on a card from another bank, and then jacks up your interest rate.

Plenty of mortgages are already on variable interest rates. So perhaps auto lenders might start offering the equivalent of an ARM. With the risk of fine print authorising a risk-based increase similar to the credit card issuers?

It's odd that she could have had "imminent" bankruptcy and yet the credit card company had no clue? Of course, the bank probably appreciated those hefty finance charge profits they had been collecting all along...

(My original example did not include bankruptcy).

Pacific Gas and Electric, one of the larger investor-owned energy utilities in the country, declared bankruptcy in the aftermath of some questionable energy price "crises" in California at the beginning of this century, also right after re-organizing itself into a holding company and various subsidiaries (how convenient). Shares lost 60% or so in value but since then have rebounded back as high as ever. The second most-screwed person after the taxpayer is the utility rate payer, pardon my lack of objectivity.

-Mark Bole

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eventually a poor credit score would catch up with person in 7-10-15 years... assuming they needed credit again.

My take is that if a person needs credit twice or three times, they will usually need it over and over and over.

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The energy price crises at that time, were not of PG&Es doing. And the state of California basically said "screw PG&E". and the governor (since recalled) said "there is no energy problem. there is no energy price problem. Don't bother to conserve." And then the state tried to take away one of the most lucrative portions of PG&E. the company really had no alternative than declaring bankruptcy, getting things back in order, and making everyone whole.

bad example, here.

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Why? How many banks knew (and if they knew, acted on the knowledge) of imminent foreclosures? I'm not saying she had filed before doing this.

Yes, this was very good for those of us (like me) who picked up shares of PG&E after the fall (and Edison International who had similar issues but did not go bankrupt).

-Will

william dot trice at ngc dot com

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Unethical spills over into fraud if the debtor has no intention or reasonable expectation to pay the debt? I'm surprised nobody involved in the bankruptcy process didn't notie the dates and raise a fuss about this.

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Not just unethical. It is called, "load-up," and constitutes fraud. It can result in a creditor challenging whether that debt should be discharged or not, in the bankruptcy. And can potentially lead to criminal charges. Although the debtor/petitioner probably got away with it quite often, under the old BK rules.

I suspect that there will be a lot less such behaviour under the new rules, with more people being pushed to Chapter 13 repayment plans, instead of a straight liquidation.

For everyone of these crooks I can show a several people with six figure hospital bills from medical emergencies. After struggling for a few years they take the only reasonable way out. Reform both helps and hurts some.

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Agreed! It is unethical in the extreme. It should be unlawful! And if GM or American Airlines or any of the others did any similar self-serving act knowing that receivership was imminent, it would be unethical in the extreme. And its should be unlawful.

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Please clarify. Are you saying that bankruptcy can be a good thing also?

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That has rarely stopped corporate America. If their lawyers say they can hide it, get away with it, postpone it until you are retired, or you have bought enough congress-critters to write a new law getting you off the hook or even get more corporate welfare- Go for it.

Chip

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True. Ethics is not a high priority in corporate America. A small investor doing his or her best to plan for the future should not be held to higher standards than are applied to business in general, big or little. As far as I am concerned, financial planning for an individual should involve taking advantage of all the tax loopholes and using whatever legal methods can be expected to turn a profit, just as is done by corporations.

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I think you are painting with far too broad a brush. I have worked for some very ethical corporations. Ethics was and is a high priority for them.

In my mind, corporations are no more or less ethical than the people in them. So corporations are ethical in about the same percentage and degree as people.

It is not hard to find examples of unethical behavior by either. That's what makes the news. Everyday ethical behavior rarely gets much publicity.

-- Doug

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No argument from me about that. Of course, what is "ethical" means different things to different people. I am saying that from the standpoint of financial planning, investing, tax paying, and making various financial plans, individuals and corporations should be judged by the same standards.

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