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Crossing the Bridge from Financial Crisis to Financial Recovery

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BY MIKE HALES

Financial distress is a daily challenge for millions of American consumers.  Millions of adults have non-mortgage debt reported past due, and they need to pay well over a thousand dollars on average to become current on that debt. In addition to creating difficulties today, delinquent debt can lower credit scores and result in serious future consequences. Credit report information is used to determine eligibility for jobs, access to rental housing and mortgages, insurance premiums, and access to (and the price of) credit in general.   Many of these consumers were once “Prime” credit union members.

Many Americans are still recovering from financial crisis brought on by the Great Depression, while others have fully recovered.  While reasons or events causing financial crisis vary widely, recovery is not necessarily dependent on the cause, but on available opportunities for rehabilitation and the time it takes to rebuild.

The irony is that in millions of cases, borrowers recover their capacity to repay long after their accounts have been charged off but are still within state and federal collection statutes of limitations.  It is estimated that $20 billion in unrecovered charge offs owed to credit unions is legally collectable. Additionally, many of those borrowers have worked through their financial crisis,recovered their life style, and are willing and able to repay their obligation. Many of those “prior prime” members would qualify for reinstatement of credit union privileges once they repay their obligation but they’re too embarrassed to reach out.

There are multiple stages of credit decline and recovery and they are easily illustrated by the Debtor Fiscal Lifecycle.

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The FIRST STAGE of the Debtor Fiscal Lifecycle is the Decline in Credit Quality.  Bad things happen to good people, and past due credit can be the result of a medical emergency, divorce, death in the family, loss of employment, or other negative live event.  Regardless of the cause, in many cases the snowballing downward spiral results from the use of other available credit to make past due payments.  It doesn’t take long before past due debt becomes debt in collections.  It is estimated that 35 percent of people with credit files have debt in collections reported in those files.  Debt in collections can remain in a credit report for up to seven years.  The downward spiral of credit quality is generally exacerbated by “robbing Peter to pay Paul” – using what available credit might still exist to pay current past due payments. The downward spiral can sometimes last several months, or even years.

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