This post will not apply to most readers…but bad luck / redundancy / business failure can hit anyone…please share this with anyone that you think would benefit from it…
One of the big lessons that I learned working in corporate finance and restructuring is that companies do not go bust when they make losses or their assets go down in value.
No, companies go bust when they run so low on cash that they can’t pay their bills as they fall due. In this sense, cash is king. Cash is like the oil in your engine. If a car engine runs out of oil, the engine seizes up and the car is rekt.
Cash plays the same role in your personal finances. You must always have enough “oil” in your engine…enough cash to meet your fixed liabilities as they fall due. Insufficient cash can force you to become a forced seller of assets at the worst possible time (i.e. during a market crash).
Okay…we all make mistakes. So let’s avoid unhelpful advice about avoiding debt in the first place (eg “I wouldn’t start from here…”) and let’s imagine a situation where we’re over-stretched financially and struggling to juggle liabilities / debts.
What should we do? Who should we pay first?
1) DO NOT overpay your mortgage
Hang on to your cash…you are going to need it.
Your mortgage is likely your cheapest debt and your softest debt. By cheapest debt, I mean the lowest % APR (Annualised Percentage Rate). That’s a number that can be easily quantified.
What do I mean by softest? This is harder to quantify but it highly unlikely that your mortgage will be the debt that tips you into bankruptcy. NO ONE GETS EVICTED IN THE UK JUST FOR FALLING BEHIND ON THEIR MORTGAGE.
The bank will probably be well-secured. There is likely a decent equity buffer for them. Eviction is a PR nightmare for the banks / building societies / mortgage provider. The threat of bad PR is a leverage tool that you have against a mortgage provider (especially for a photogenic family with cute kids). And bear in mind that banks / building societies in the UK are de facto extensions of The State and thus easily swayed by bad PR.
The reality is that the banks will not evict a customer – even one who is not able to make anything other than notional payments – who is responsive, engaged and replying to correspondence. So do not bury your head in the sand, do not throw away warning letters, do not “go dark” on the mortgage provider.
What would be better than over-paying your mortgage? How about asking them for a grace period? How about asking them to temporarily switch you to “interest-only” and reduce your payments by the capital element.
Always be polite. Frame the interaction as someone that needs help. Control your emotions. Do not allow any fear or anxiety that you may be feeling to manifest as hostility or aggression to the bank’s staff. And always be ready to appeal / complain / escalate up the chain and even write to the CEO if necessary.
2) Go Monk Mode in your personal life
In Monk Mode you work, you think and you rest. Then you repeat.
In Monk Mode you spend NO MONEY other than needed for food and utilities.
There’s more to Monk Mode than just not spending. Monk Mode is a spiritual experience. It’s de-cluttering for the mind. It’s a time to get your shit together.
Monk Mode is life without stupid consumerist nonsense. Monk Mode is how you reverse the hedonic treadmill. Monk mode is where you stop even trying to keep up with The Joneses.
Monk Mode is a temporary retreat from the world to focus on Introspection, Isolation and Improvement. You acknowledge your weaknesses and you deal with them.
The focus is on minimising your time contribution to social obligations and junk activities because these consume much of your time whilst yielding little to negligible real benefits. Monk mode is a serious commitment that is not to be half-arsed. You’re either doing it, or you’re not.
In Monk Mode you never, ever go “shopping”. You go to the grocery store and get single ingredient foods…and that’s it.
YOU HAVE NO BUSINESS STEPPING FOOT IN A BAR / RESTAURANT / THEME PARK / TRAVEL AGENT / SPA / CINEMA / SHOPPING CENTRE etc if you have any consumer debt (payday loans, bridging loans, car finance loans, credit card balances that are not 0%, overdrafts etc).
Other things you never need to buy: bottled water, ready meals, convenience foods, fizzy drinks, branded clothing, bling watches, jewellery and anything ever found in a “gift shop”.
I have gone full Monk Mode a number of times in my life. You don’t have to do it forever. You can set a deadline for your Monk Mode to end. It could be 3 months, it could be 6 months. You do you.
3) Identify the creditor(s) that will take you down the hardest and fastest
You need to identify and pay your “hardest” creditor first.
Your hardest creditor is your most dangerous creditor. It’s your most aggressive and your most motivated creditor. It’s the person that is most likely to file a court order for your bankruptcy. It’s the person that is most likely to send baliffs round to your house.
The hardest creditor will generally depend on your unique circumstances but here are some examples:
- HM Revenue & Customs is a hard creditor because they have the full might of The State behind them and you have very little power compared to them (although you shouldn’t be afraid to ask for an extension).
- A builder / contractor where you have defaulted on a payment plan might be a hard creditor if they’re desperate / out of patience / used to dealing with slow-paying clients and used to construction disputes.
- A credit card company could be your hardest creditor…especially if you want to buy a house in the next 18m because they can easily “ding” your credit rating and thereby impact your lifestyle for years
4) Talk to your creditors
Talk to your creditors (ideally before you default).
I said above that the reality is that the banks will not evict a customer – even one who is making only nominal payments – who is responsive, engaged and replying to correspondence. So do not bury your head in the sand, do not throw away warning letters, do not “go dark” on them.
SOMETHING LIKE THIS APPLIES TO MOST OTHER CREDITORS. In most cases, you will get brownie points (and thus more likely to get future grace periods and concessions) if you do the right thing and give lenders a “heads up” before you miss a scheduled payment.
Bad debts are part of the normal course of business for lenders. They don’t like it but they deal with it everyday.
So try to be rational, try not to be paralysed by fear or guilt or shame. Talk to your creditors.
5) Reschedule everything that can be rescheduled
The appropriate mindset set here is to act as if EVERYTHING IS NEGOTIABLE.
Interest rates are negotiable. Grace periods are negotiable. Penalties and fees are negotiable.
I worked in restructuring for 6 years and saw things get negotiated that I would never have thought possible.
- A bank writing off debt to a company that they could have bankrupted but didn’t? I’ve seen it happen many times.
- HM Revenue & Customs accepting a delay and waiving interest? Seen it happen more than once.
- A syndicate of 50 different banks signing a standstill agreement that prevented any of them from forcing bankruptcy? Seen it happen many times.
6) Rank your debts by interest rate (highest % APR first)
You need a “payment waterfall”.
In other words, once you have a stable base and you have cash available to pay to your creditors, you need to rank your debts to decide your priority list for debt repayment.
This will mainly be a function of % interest rate on the loan but obviously you will need to factor in any repayment penalties on the loan or debt.
DO NOT START OVER-PAYING ANY OF THESE DEBTS YET. Not even the overdraft at the top of the list with a 40% APR. Cash is king. Cash is optionality.
7) Re-build your cash emergency fund
Let’s say you have negotiated payment holidays / reduced payments and are meeting your minimum required payments on your (re-negotiated) debts.
At this point, you should not being paying anything over and above the bare minimum required to keep your creditors from initiating court / bankruptcy proceedings against you.
Once you send cash to a creditor in a distressed situation, you are not getting it back from them.
You should instead be looking to re-build your cash emergency fund. Build up a cash pile to protect yourself from future bumps in the road. This is one time when a hoarding mindset is appropriate (actually necessary). Like I said…cash is king. Cash is optionality.
8) Apply cash to your debts in line with 3 & 6 above
So in step 3 we figured out the “hardest” creditor to prioritise (e.g. the loan shark, the Mafia, the State) the one that is most likely to tip us over the edge into full scale bankruptcy, fines or other unpleasant consequences.
Then in step 6 we ranked the other creditors by cost of the debt (% APR) to come up with a “payment waterfall”.
In other words, once you have a stable base and you have cash available to pay to your creditors, you need to rank your debts to decide your priority list for debt repayment.
Throughout all of the above you need to be taking care of yourself and have an exercise regime to burn off the excess emotions involved.
Take care and look after yourself!
If you would like to discuss your own situation, you can set up a call with me here.
The Escape Artist 