Thursday, April 27, 2017

How the Something-for-Nothing Mentality Gets You in Trouble

When someone offers you something-for-nothing, chances are, you are going to be ripped-off.

We are traveling in the RV and listening to Pandora.  We let our subscription to Pandora expire so they do play ads occasionally.  The ads are interesting as they are for debt consolidation loans,  tax resolution centers, and debt resolution companies.  As I noted before, it seems Pandora panders to people immersed in debt culture.

At the same time, I noticed two articles on MSN News which are related to this topic. The first was by a young lawyer who went to work for a tax resolution company.  He describes his experiences before he quit, disgusted.  The company offered, for a fee, to negotiate with the IRS to have your back taxes and penalties reduced.

While the IRS will do this on occasion, it is quite rare.  The young lawyer quickly figured out it was a scam in that the operator of the boiler-room would call people and promise them huge reductions in their tax bills if only they would give them a credit card number to charge them some modest fees - of a few thousand dollars. Of course, later on they would say they tried their best but the IRS would not reduce the debt, but thanks will keep the thousands of dollars in fees.

Another article recounts the experiences of an "immigrant" who bought a house described as a "modest" house in Brooklyn New York - one of the hottest real estate markets today.  Of course, he bought the house years ago when Brooklyn was not quite the yuppie enclave it has become.

Anyway, his wife died of cancer and he was injured at work and can no longer make the mortgage payments.  Of course to me, the obvious thing to do is to sell the house, considering what properties in Brooklyn are bringing these days, and cash out and take all that big pile of money and move down to Florida and live happily ever after in over-55 park model community.

But once again, we have the "stay in the house" mentality raising its ugly head.  Rather than cut his losses and get out from underneath a mortgage he can't afford, he fired his lawyer and hired a debt resolution company which claimed they could stop foreclosure and rework the mortgage, forgiving tens of thousands of dollars of debt.

The mortgage workout company, of course, was fraudulent and had the poor fellow sign documents basically deeding the house to them.  The story does have a happy ending in that the con-artist ended up going to jail, although it is not clear whether the fellow get his house back or not.

What do all these stories have in common?  The common denominator here is not stupid people being taken advantage of, but rather greedy people being taken advantage of.  For some reason, in America, the mythology is strong that you can have debts forgiven or wiped out for no reason whatsoever.  All you need to know is the secret code words and handshakes, or hire the right people and suddenly thousands, or tens of thousands, or even hundreds of thousands of dollars worth of debt will be wiped out just as though you would erase it off a chalkboard.

I hate to break it to all of you but this is a fantasy.  Banks and other lending institution just aren't willing to walk away from huge amounts of debt for no reason whatsoever, when it is possible they can collect on those debts - even in part.  Sure, Donald Trump can force a cram down on his casino loans before walking away from them entirely and leave the banks holding the bag.  The big players get away with that because if the banks foreclosed on those mortgages they lose almost everything in short order.

But under modern personal bankruptcy code, lenders get a "workout" of debts owed and usually the bankrupt has to pay back or work out a schedule of payback of debts over a fixed number of years such as five years.  Since the lender has already collected a lot of interest, there's no incentive for them to reduce the balance on the debt.

Not only that, lenders have found from experience that when they do offer these sorts of deals, the borrower in question usually ends up going insolvent and ends up in bankruptcy anyway.  Since the lender has reduce the debt, they are given even a smaller slice of the pie in bankruptcy court.  So from the lender's perspective, there is no incentive to write off debts as all they're doing is shooting themselves in the foot.

Similarly with the IRS, there's little incentive for them to write down overdue tax bills.  Doing so only encourages more people to not pay their taxes and then try to negotiate something on the back end.  I have found that just calling the IRS directly usually results in resolution of any trivial matters as the people there are friendly and genuinely want to help out.  I strongly suspect they will turn down any settlement offers made by a tax resolution company just to discourage that sort of thing.  Not only that, tax bills are pretty easy for the IRS to collect.

Unlike MasterCard and Visa, the IRS can garnish your wages, attached bank accounts, and put liens on your property, all without having to go through bankruptcy court.  They have huge leverage on their side, so there's very little incentive for them to settle for pennies on the dollar.

I have found in some situations they are willing to waive interest and penalties for late payments or at least reduce the amounts in question, where there has been some sort of legitimate understanding.  But the actual tax amount due, they are pretty inflexible about that.

Again, this gets back to the poverty stories posting I mentioned earlier. Poor people and unsophisticated people - usually the same people - believe that there are secret tricks to getting wealthy and all you need to know the secret handshake or the right person to "get lucky" and become wealthy.

So they believe that companies will "write off" huge amounts of debt or bills without much fuss or trouble, mostly because they don't understand what the term "write off" even means.  I recall while working at both GM and United Technologies, hourly workers telling me that some huge horrendous loss that the company suffered was merely a "write off" for the company, as if somehow the company made a profit from its losses.

Well it is true you don't pay taxes on losses, and losses do offset profits and those reduce taxes on your profits, they are also just losses.  And if you have enough losses, you have no profits, which means of course you pay no taxes, but it also means you are slowly going out of business.  Eventually, company has to make a profit, something that many "" companies don't seem to realize.  It's also something that many poor and unsophisticated people don't realize as well.

If you have positive equity in your house, there is very little incentive for a mortgage company to adjust your mortgage and write off thousands of dollars in debt.  During the post 2009 meltdown, some banks actually did this in limited circumstances.  However the way it was handled was very haphazard and uneven.

I recall reading one story about a woman in Fort Lauderdale who bought a condominium at the height of the bubble.  She arranged for the mortgage holder to write off a huge portion of the debt. She then turned around and sold the condominium and actually made a $20,000 profit.  This illustrates why banks are reluctant to write down mortgage amounts.  It also illustrates that such write-offs are unfair, as they can profit the profligate, while punishing the thrifty.

(It is sort of like Ontario's experiment in guaranteed income which comprises sending $16,000 to random people in the province.  This is not really so much a guaranteed income program, but a lottery for a lucky 4,000 people in the province.   If I wasn't one of the 4,000, I'd be plenty pissed, that's for sure!  Similarly, randomly and unevenly "forgiving" debts is not fair, either, which is why it is not commonly done).

In addition, markets recover, much as they have since 2009.  Except for a few instances where people bought at hyper-inflated prices in huge bubble areas (or areas where mortgage fraud was common), most houses today are worth more they want they were mortgaged for in 2008.  So, you wait a few years and you have positive equity again.  If the bank writes down a big chunk of the mortgage, they end up giving away equity to the homeowner.  This is not fair to the bank, nor fair to those of us who chose to buy houses we could actually afford and put down proper down payments.

Regardless of whether mortgage write-downs were right or wrong, today they are a very rare beast - if in fact they were common at all, even in the depths of the recession.  If you give your money to a company promising to write down huge chunks of your mortgage, chances are you're going to be ripped off.  Either they are just a cover for a refinance company, or they're going to play one of these debt reduction scams which could result result in you losing your home or going bankrupt.

As noted in the recent article, many of these people are just outright scam artists, who bamboozled clients by telling them they need to sign over their house their company in order to reduce the mortgage balance.  This is just outright fraud and they are basically stealing the person's house.

Other debt reduction companies promise to reduce your debt load, but ask for a huge fee upfront and then tell you to "escrow" your normal monthly payments to them.  Rather than pay your lenders, they argue that they will hold that money in trust for you, and then negotiate with the lenders to reduce the balance owed.

Again, as outlined above, lenders have no incentive to to merely write off huge chunks of debt for no reason whatsoever even if an impressive sounding company with big ads on television calls them.  In fact, they may just hang up on such folks.

Again, theses debt resolution companies will tell you they tried their best, but failed, but thanks we'll keep the fee plus the money you put into "escrow" with them.  Now you are really behind on your bills and facing foreclosure and probably have to declare bankruptcy as a result.  Thus, you have not avoided bankruptcy but actually have made it worse and gave away what little is left of your hard-earned money to scam artists.

All of these scams that one thing in common.  They're very much like the invention broker scams I have talked about before, that have you sign contracts where they argue they will use "best efforts" to help you out of your situation.  With the invention brokers, they promise to use "best efforts" to market your invention.  One year later, they tell you they tried their best but didn't succeed and, by the way, thanks for the money.

"Best efforts" contracts are impossible to enforce.  There is no legal definition of what constitutes best efforts.  So long as they can point to one brochure they mailed out or one phone call they made they can argue they use their best efforts.  And of course, for the amount of money involved you can't afford to sue them anyway.  A lawyer will want $10,000 to $20,000 just take such a case, and $2,000 to $5,000 isn't worth suing over.  And oh-by-the-way you are bankrupt, so you can't sue anybody anyway.

Now if you think these sorts of organizations are scam artists and scoundrels and criminals, I have to agree with you.  And the fact that they advertise on the radio and television and billboards does make me sick. But then again lawyers and doctors have her ads on billboards these days, too - and I probably would advise against using the services of either.

And sadly, many unsophisticated poor people believe that if something is advertised on television or the radio or even on the billboard, somehow it has been vetted by the organization that puts up the advertisements and therefore it must be legitimate.  Nothing could be further from the truth.  As I noted in some earlier postings, some of the worst bargains in the world are advertised in the back pages of Smithsonian Magazine, a magazine published by an organization which is funded by the federal government.

And a lot of stuff appears on television which is, if not outright fraud, are at least real bad bargains.  If you see life insurance for seniors over 50 advertised by one of the former cast members of Happy Days, odds are it is not a very good bargain.  Henry Winkler - how could you?

And yes, we should rein in that sort of advertising and hold media outlets accountable for the advertisements they present.  And yes we should have stronger enforcement mechanisms to go after con-artist and fraudsters and even people just offering shitty bargains.

But guess what?  That ain't about to happen.  As a story about the mortgage reduction fraud illustrates, there are thousands of complaints about this sort of thing, but very limited resources to prosecute the offenders.  It behooves us as individuals to look after our own best interests as our first line of defense.
And to do this it isn't hard.  You just have to stop believing in the something for nothing mentality, as it always gets you into trouble.

As soon as you start thinking that there are easy ways to get out of your debt situation, you are prime fodder for some sort of con-artist.  If you think there is easy money to be made in MLM schemes, you're going to get ripped off. If you think you can make a lot of money by having special secret knowledge or knowing the right people, chances are, you are going to get fleeced.

So just stop believing in that stuff.  There is no magic get-out-of-jail-free card, just more misery piled upon misery.