March 14, 2016

Debt Settlement With a Bank

Late last year we were approached by a 63-year old lady who presented with the following ‘financial symptoms’:

Assets Liabilities
50% interest in a vacant block – $25,000 Bank debt (unsecured) – $215,000
Motor vehicle – $5,000
Superannuation – $100,000
Income (self-employed) – $50,000 p.a.

The debtor’s main income-producing activity from 2002 until 2009 was buying and selling properties.  She encountered financial difficulty during the GFC which, as we know, affected the real estate market and her ability to service the debts secured against her properties.

The secured lender had sold all available property covered by its security, however a residual debt of $215,000 remained.  The Bank had instructed solicitors to pursue the debt who had commenced legal action.

Ordinarily, the most cost effective prescription for this case would be bankruptcy.  It would resolve the financial problem with certainty and would not have an adverse effect on her self-employment.

However, the debtor was concerned with the risk of her beloved father passing away during the next 3 years (the standard term of bankruptcy).  It was explained to the debtor that this would result in any beneficial interest in the deceased estate, vesting in the bankruptcy trustee and ultimately being available to creditors.

Given the debtor’s stage in life, and her limit superannuation / future earning capacity, it was quite important to the debtor that any amount she stood to receive from her father in such circumstances be retained to fund her retirement.

We were aware the debtor was likely able to borrow limited funds from her father.

We took on the case in a consulting capacity, to prepare a report for the Bank and cast our opinion as to whether the Bank would be better off if the debtor went bankrupt versus accepting a financial settlement proposed by the debtor.

We first liaised with the Bank’s solicitors to establish the ‘mood’ of the Bank toward this case, and confirm that the Bank would consider any proposal from a commercial perspective.  This seems obvious, however in some instances, Banks have been known to let a degree of emotion influence their strategy which could limit the prospects of any settlement proposal.

Having established the Bank would act commercially, we undertook a process of review and investigation in order to compile a report for the Bank.  This process is quite intentionally very similar to the process undertaken during a bankruptcy.  We considered the likely net realisation from the unencumbered property if it were sold (including obtaining appraisals), the income of the debtor and whether she would be required to pay income contributions during a bankruptcy, whether there were any voidable transactions identified, and the anticipated bankruptcy Trustee fees.

Finally, we depicted the likely result to the Bank in the event of the debtor’s bankruptcy.  In this case, the Bank was not likely to receive any return in the bankruptcy, based on the facts as known.  The debtor was able to borrow $20,000 from her father, which meant the proposal would result in about 10% return to the Bank.

The Bank ultimately accepted the proposal in full and final satisfaction of the debt, thereby avoiding the need for the debtor to go bankrupt or enter into a Part X, which would likely have been more costly.

Our reports are trusted by the Banks as our engagement is not contingent on the outcome of our findings.  We also have the prerequisite expertise to advise on a bankruptcy scenario with a high degree of authority.  This type of consulting engagement, whilst not a formal insolvency alternative, can be effective in eliminating a major creditor which can transform the debtor’s financial position in a timely manner.

Article written by Matthew Bookless, Director, Queensland.

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