In the first few weeks of 1994 things actually appeared to be picking up for the credit industry. We were receiving telephone calls from debtors stating that they wanted to enter into payment plans to pay off their debts. Many of our collection matters that did not have any life to them, all of the sudden seemed to start breathing again. Then, the earthquake.
Once the earthquake hit, most of our settlement negotiations with debtors completely stopped. The debtors that did enter into written payment plans, defaulted on the terms. It seemed as if everyone had been adversely affected by the earthquake.
Since the quake, our office has been absolutely barraged with telephone calls from clients with questions about how to handle these debtors. The three main problems that our clients are facing, are:
- Existing loans and accounts are going into default as a result of customers being affected by the quake;
- Debtors who have entered into payoff plans for delinquent accounts, are now seeking to restructure the payoff with longer terms;
- Customers are using the earthquake as an excuse to modify the terms of their existing account/loan.
The first and most important thing a creditor can do to protect themselves, is to take the time to verify the customer’s loss. Many creditors are just taking their customers word that there was a loss, and frequently the debtor has not been affected at all.
We suggest that you gather all of the specific information about the loss, and then actually send a field inspector or one of your salespersons out to the place of business or residence to make a report of the alleged damage.
Once you have been satisfied that an actual loss has been suffered and you have witnessed the extent of the loss, you will be much better equipped to handle the situation.
The next determination you want to make, is whether you had collateral and if that collateral has been destroyed. If the collateral has been rendered valueless through damage or destruction, it is necessary to secure new collateral for the debt. If you don’t investigate the condition of the collateral, you risk changing your position from a secured creditor to an unsecured creditor without knowing it.
If the debtor is unable to offer any new collateral, then you may want to insist upon a personal or commercial guaranty to protect yourself in the event of default by the principal obligor.
Next, it is extremely important to encourage the debtor to apply for any federal loans or grants that he may be entitled to. The reason for this, is because he can use these monies to make the necessary repairs to his business so that it can be fully operational again. If his business is fully operational, there is a greater likelihood that he will not go into default on his account with you.
You should also encourage your customer to settle with his insurance companies as quickly as possible. Once your customer has gotten his insurance proceeds, he can also use these monies to rebuild or make necessary repairs and this will in turn increase your chances of getting paid.
We have also had a few of our clients threatened with blackmail. Customers have threatened our clients with bad publicity exposure if our clients do not extend loans or credit terms to suit the customer’s demands.
An example of this occurred with one of our banking clients. The debtor has defaulted on his loan, and we had worked out a monthly payment plan with this debtor. After the earthquake, the debtor called us and stated that if we did not extend or freeze his payments on the loan for three months, he was going to call a local radio station and tell it that the Bank was refusing to help earthquake victims.
This was a difficult situation because obviously we didn’t want to risk bad publicity to the Bank, but we also didn’t want the debtor to get away with this threat.
The way we ended up handling the situation, was by sending a field investigator to the debtor’s business to see the damage first hand. We were able to confirm that the damage was not as severe as the debtor had claimed, and we were then able to use this information to deflate the debtors threat and regain control of the negotiations.
In general, these matters should be handled on a case-by-case basis. The best solution is always to attempt to reach a compromise that is acceptable to your client and also accommodating to their customer.
In conclusion, the more information you have about your debtors, the more effective you can be in dealing with their problems. It will be impossible for creditors to devise a set policy to deal with all earthquake victims, because each person is in a different situation. And remember, the earthquake was a unique occurrence that will require unique ideas and resolutions to come out in the best position. Good luck!