Here ye, here ye, let it be known from this point forward: DON’T BANK WHERE YOU BORROW!
Posted May 10 2010 in Wink and Wink by @winkhesaid
Over the course of civilization, pearls of wisdom are developed which are so important and self-evident, they become part of the basic lessons passed down from generation to generation. Who knows when they came about in the evolutionary chain, but maxims such as ‘Never eat yellow snow’ are so well established that they seem to be part of our DNA. While it may be rare for anyone to join the short list of people who actually coin a phrase which becomes part of our fundamental decision making, I believe I may just be one of those people. For the recent financial crisis (and my work as a bankruptcy attorney) has given me clarity to see a basic truth which your mother never told you about – DON’T BANK WHERE YOU BORROW.
It seems so harmless – borrowing from your bank. After all, once you trust an institution enough to hold your money, it’s hard to imagine why you wouldn’t take advantage of at least one of the various credit options they have to offer.
But I’m here to tell you, there’s something about loans from your bank which makes them worse than loans from other banks. It’s called cross collateralization. Try saying it ten times fast.
What does it mean? Well, it means banks can generally take money out of your bank account without your permission to satisfy a loan obligation you owe them. This is known as the bank’s right of setoff.
It may not seem like the kind of tenet to pass on to your children, especially since the vast majority of people who take out a loan never really consider the possibility of default. But think about – say you get laid off, or divorced, or sick, or your car just died, or any number of real life situations happens to you and you become unable to meet your loan payment to your bank. You may think your bank (or even better, your trusted credit union) will work with you. After all, you’ve probably been a customer for years and they seemed so nice when they gave you the loan.
But this is when banks earn their reputation as greedy mother-(insert expletive here)! By the way, your trusted credit union is no different. Just when you need forbearance, they take advantage of their trusted position as your bank to screw you when you most need some help. They take your money directly from your bank account. To make matters worse, the usually accelerate your loan, which means they can take the entire loan balance from your account. For many borrowers, this means they leave you with nothing. And they seem to have knack from taking the money right when you need it most.
Check out this real life story about a couple in Atlanta who took the full brunt of Wells Fargo’s right of setoff. She defaulted on a student loan because she couldn’t find a job and, WHAMMO, they accelerated her loan balance and took all of the money from her bank account – $4,059. Wells Fargo then hit them with $385 in overdraft fees because their outstanding expenditures at the time their account was raided suddenly could not be fulfilled.
Now you can’t make rent, or fix the car, or make your co-pay, or eat, or sleep at night. A bit dramatic? Not if it’s you!
At this point, you might feel the fury of a thousand loyal banking customers. You may decide to do some research. “Can they really do that?” you might say. You might decide to call the Better Business Bureau, or write a letter to your congressman, or talk to an attorney!!!
Let me stop your quixotic mission right there. You cannot win such a fight. First, it is all spelled out in the very fine print of your loan documentation. Second, don’t forget the golden rule – “He who has the gold, makes the rules” – and for purposes of cross-collateralization and the right of setoff, the banks make the rules.
My friend, you don’t stand a chance of redeeming this great wrong perpetrated by your bank. But you can avoid making this same mistake twice. Like the man who learned about yellow snow the hard way, you need just commit a simple principle to memory. DON’T BANK WHERE YOU BORROW.
For if you simply borrow only from banks where you don’t keep your money, you will never have a bank suddenly take money from your account without your permission. This is because cross-collateralization does not exist across different banks. For example, let’s say you miss a credit card loan payment with one of those large banks which nearly brought down our economy (you know the ones), but keep your money at the small local bank. Because you have no money with the large bank, they have no cross-collateralization. They must go through legal proper channels to get anything from you.
Suddenly, the large bank has more motivation to work with you. After all, they’d rather get paid than hire a lawyer. Of course, their willingness to work with you is limited, usually to two or three months. If you can’t start paying during this time, they will hire a lawyer and pursue a judgment against you.
However, absent the right of setoff, the legal process of getting to your bank account now requires getting a judgment and then a writ of garnishment. This is an additional 2-3 months from when the start the process. In case you’re counting, you’ve just bought at least 4 to 6 months by not banking where you borrow (2-3 months of attempts to collect followed by 2 to 3 months of legal proceedings). Furthermore, since you will receive notice of the lawsuit when it begins, you can simply liquidate your bank account and start living on cash at that point.
Of course, if you are in this situation, they will likely seek to garnish your wages (if your state allows wage garnishment as they do in Colorado, where I practice). We cover this little gem in a separate blog post, the bottom of line of which is that you should definitely consult a bankruptcy lawyer to find out your rights. Heck, it doesn’t hurt to consult a bankruptcy attorney as soon as you find yourself missing loan payments.
So there it is – DON’T BANK WHERE YOU BORROW! Say it to yourself over and over, like a mantra. Tell it to your friends. For as God as your witness, you will never be cross-collateralized again!!
September 4th, 2010 at 4:59 am
I am an attorney in Mesa, Arizona (www.fifecestalaw.com); and having read the above blog, I would have to say that it is sage advice. Credit Unions are notorious for these clauses in your contracts. Often, in Bankruptcy a debtor will find that in order to keep their car the Credit Union wants them to reaffirm the car loan and the credit card debt up to the value of the vehicle. Unfortunately, the Courts often uphold these adhesion contracts, so the Credit Union has the upper hand. But not always. I would say the best thing is to remember what the writer above said, that “he who has the gold, makes the rules” so “DON’T BANK WHERE YOU BORROW!”