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When You Can’t Pay….

Given the tough economic times we are living in today, I thought it prudent to offer advise when money runs short and bills are due. Unfortunately, this reality will become more Main Street in 2009 than it has been in a long while.

There is no shame to run low or even out of money, however the ultimate outcome depends on the borrowers willingness to handle the situation properly. So what to do when you get in a bind?

Back in college ( late 70’s) I managed to always be 2-4 weeks behind on every bill I had. Rent, utilities, frat dues, school dues. The only pay on time diligence I consistently displayed was party and beer. That was a priority, of course. I learned at an early age that if you are in a hole and want out, quit digging. In this example, continuing to dig equated into laying low and avoiding my creditors. I wrongly thought if I just laid low and paid them later, the consequences would finally go away with the eventual payment. Not so. I played the fool by paying late fees galore, endured poor credit ratings after I graduated, and most of all was held in low esteem by my creditors. It made it much harder and more expensive to buy a car, rent an apartment or secure a credit card.

I decided to quit digging and get out of the hole. In so doing, I unexpectedly discovered in many cases the good will of humanity.  At 23 years old, and largely still a goof at heart, it was unreasonable to think I would never get behind on another payment again in my life, but I did realize that I could make proactive choices that would at least keep all affected parties informed.  Surprisingly, I learned that creditors felt respected if I would preemptively warn them in advance when a payment would be late. I was relieved that they not only were forgiving of my trespass but willing to offer advise and sometimes even help to solve the problem. I became motivated to pay on time because of their goodwill.  The more I kept my word and stuck with the plan, the better friends we all became. I liked their acceptance even in the midst of difficult financial times. A hardship became an opportunity to display integrity, honesty and a big dose of humility. Little did I know that a storm was coming of record proportions in the Austin Real Estate market that would put to test the lessons learned.

Fast forward to Oct 1987

While honeymooning at Martha’s Vineyard with my lovely new bride my business partner packed up and left town. He graciously helped himself to the joint bank account set aside to pay property taxes, maintenance, etc on all the joint owned properties, and left me with all the properties. The only tincy wincy problem with the “equitable” trade was we owed +/-$300,000 more on the properties than they were worth due to the recent fallout of the local market. Needless to say, the honeymoon abruptly ended when we arrived back in Austin to a registered letter from the first of many attorneys demanding that I accept and hold harmless all properties and liabilities therein via enclosed quit claim deeds. I had a major problem and it was about to become my Banker’s problem too. (As a side note, this was rather shocking to say the least to my new Bride, that we were suddenly in financial peril so soon after our eternal vows.  I found out my wife married me for all the right reasons!)

In 1987 foreclosures were at a high, banks were going broke or consolidating daily, and personal bankruptcies in Travis county would break a record in the next 2 years. There was financial fallout everywhere and I was now a part of the problem. My pride was real hurt, I was embarrassed and fearful of business failure.  All mortgage payments were coming due Nov 1st, many of the properties were vacant, property taxes were due in 2 months, and deferred maintenance was overdue. What to do, what to do.

Understanding my financial lifeline was now fully relegated to my creditors, I determined the best What-Would-Jesus-Do move would be a formal meeting with my Banker and his boss, the Owner of the Bank. Remembering from my college days, I wanted out of the hole and digging more did no good.

“While on my honeymoon, my business partner left town with the whole joint account, no where to be found, and left me with the properties that I owe you for. Furthermore, I do not have the money to even pay the Nov. payments, property taxes are due in 2 months, 5 vacancies, Insurance is about to lapse, maintenance needed. Worst yet, your loan balance is $300,000 more than what I believe I could sell them for today. I needed to come face to face with you with such bad news. I am willing to do anything in my power to help solve this issue but I can say that I do not have the financial means to pay you today or anytime soon.” “I will not run and I will not file bankruptcy to avoid the consequences of this unfortunate situation.”

An uncomfortable silence fell over the room. My Banker looked at his Boss rather sheepishly but could not come up with words.

The Bank Owner spoke:

“Mr Otto, what did you mean when you said you would do anything in your power to help solve this problem?”

“Mr Banker, I mean I will do anything in my power, from cleaning the toilets in this bank at night, to cutting your grass at your home, to selling your real estate foreclosures free of charge. This is my problem Sir, and I am here in hopes that it will not become your problem.”

After a long pause….”Mr Otto, If everyone in the State of Texas had your attitude, I don’t think Texas would have nearly the real estate problems that it does. Would you like to work for my Bank?”…….and the rest is history.

Problem solved.  I can’t boast that I learned much in college, but this lesson learned proved to be a lifeline in disguise of a disaster. The job offered that day carried me for 3 years through the worst real estate downturn on record in Texas. All properties were eventually sold, all agreed deficiencies paid, a paycheck every month, and some great lifelong friends were made during this time.

It is better to run to your creditors when there is a problem rather than run from them. I assure you, you will be in the minority.

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