Debt before and during an economic collapse

[daddymikey1975]

I'm wondering what would or could happen if someone has some debt, then the economy tanks. For example, I'm sure folks in Greece have mortgages and their financial system is in the toilet. Are their payments still due and payable? How do they make their payments? What happens to credit card debt, car payments, etc...

What if something similar (or worse) happens here. What if it's worse than what's going on in Greece?

I understand that we can speculate and no one may know for sure, but it's a discussion I'm interested in.

Thoughts?

 

[T.Lex]

I'm wondering what would or could happen if someone has some debt, then the economy tanks. For example, I'm sure folks in Greece have mortgages and their financial system is in the toilet. Are their payments still due and payable? How do they make their payments? What happens to credit card debt, car payments, etc...

That situation is what causes economies to spiral out of control. As much because of perceptions as reality.

This is an oversimplification, but is the general idea.

Banks rely on deposits and loan payments. They give small interest on deposits and earn bigger interest on loans. The amount they actually have ("reserves") is usually less than what they "owe" to people who have deposits. (Think of the Christmas movie Its a Wonderful Life.)

Something triggers a collapse. People stop paying their debt - either because they are unemployed or because the cost of everything else skyrockets and they prioritize. Food is more important than the mortgage, for instance. But then, banks don't have the revenue. People need their deposits out of the bank, so they want to withdraw. But, the banks don't have enough reserves to give everyone all their money.

The short answer to your questions is that the people are still legally obligated to pay what they promised to pay. The reality, though, is that in a true collapse, not as many people can. And usually, the collateral they used (if any) is also nearly worthless.

Things can get f'd up pretty quick.

 

[IndyDave1776]

Great concise explanation! The only question I would have left is what happens if a currency completely fails? My mind hasn't really thawed out enough this morning for a good explanation of my point, so I will say that my thought is analogous to after the Civil War is over, you had a mortgage denominated in Confederate money, is your obligation to repay the value of the mortgage in Confederate dollars or do you have to repay in the prevalent currency of the day?

 

[T.Lex]

Great concise explanation! The only question I would have left is what happens if a currency completely fails? My mind hasn't really thawed out enough this morning for a good explanation of my point, so I will say that my thought is analogous to after the Civil War is over, you had a mortgage denominated in Confederate money, is your obligation to repay the value of the mortgage in Confederate dollars or do you have to repay in the prevalent currency of the day?

Well, keep in mind that the US is unlikely to have a situation like that. The CSA was a sovereign entity, printing its own money. When that sovereign disappeared, so did the value of the money.

US cash (whoever's face is on it) will be good as long as there is a US. The vast majority of domestic contracts (easily greater than 99%) are either explicitly or implicitly valued in dollars.

So, the currency of the day will be dollars in the US for many, many days to come.

When the currency "fails" it doesn't really mean it has no value, it just means that it has very little value. Russia experienced hyperinflation. The ruble was still the currency, but it took a ton more of them to buy anything.

Your scenario would probably only come about if the dollar crashed and people went back to a bartering system, but then locally or regionally started using or printing "currency" that would really be more like chits or IOUs that could be traded. (On INGO, we might call them derivatives.) Once the dollar gained back value, those regional currencies would not really be worth much.

 

[T.Lex]

This is worth posting again:
One Year In Hell?Surviving a Full SHTF Collapse in Bosnia | SilverDoctors.com

I remember reading it on another forum in about 2001. Compelling every time I read it.

 

[rvb]

when the price of a loaf of bread becomes equal to your mortgage or car payment, paying your mortgage or car payment won't be a big deal, will it? Assuming you can have an income that changes somewhat reactively, of course.

-rvb

 

[stocks52]

What about old retired bastards like me that live off Social Security?

 

[CountryBoy19]

As stated above, most currency failures aren't really a total failure, it's a hyper-inflation caused by numerous issues.

In a hyper-inflation environment, as long as you still have a job and your pay increases with hyper-inflation you're golden. You now owe money on a mortgage and the "dollars" you're making and paying with are worth a LOT less, meaning (as alluded to above) you're trading a loaf of bread for a mortgage payment in a way.

The problem comes when hyper-inflation occurs and your pay DOESN'T match it or at least try to keep up with it. That is when your weekly pay-check is worth less and less and less, and so you have to choose BETWEEN paying your mortgage and buying the loaf of bread.

Examples:

Hyper-inflation where income follows:
Prior: Income=1200, groceries=$400, mortgage=$600, monthly excess=$200
Post: Income=12,000, groceries=$4000, mortgage=$600, monthly excess=$7400

Hyper-inflation where income doesn't follow:
Prior: Income=1200, groceries=$400, mortgage=$600, monthly excess=$200
Post: Income=$1200, groceries=$4000, mortgage=$600, monthly excess=-$3400

Now we have a problem... even if you stop paying the mortgage (the monthly rate is fixed by your mortgage contract in most cases) you still can't afford the groceries...

How does this apply to real life?

In real life, hyper-inflation typically has warning signs long before it happens. PREPARE FOR IT UP FRONT. Guess what doesn't lose value during hyper-inflation... durable goods (including precious metals)...

But the problem with dumping all your money into durable goods is that they don't gain value either so it's very hard to grow wealth... Thus a well diversified mix is best.

Start with food items; they are durable goods and they are the items that people CANNOT live without so they will experience the largest price increases. Stock up on shelf stable foods and/or perishable foods plus preservation methods for those (freezer + solar panels to run it would be a good support system for perishable foods)

Energy is next; heating homes, keeping foods from spoiling, transportation, they all take energy, energy prices will be very high in a hyper-inflation situation, prepare for it. Store a reasonable amount of gasoline to keep you going on the "bare minimum" uses for at least 3 months (longer is better), get a solar system etc.

Clothing, shelter, personal security items are next, have multiple plans in place before-hand...

Last but not least, what is your plan if it doesn't all go south? You may have the greatest survival durable goods on the planet but if it doesn't go south those items will just lose value and you won't have a cash-flow in retirement. Continue a well diversified approach; contribute to your retirement plan, invest a little to take advantage of market gains, but have your durable goods and cash on-hand too.

IMHO, diversification is key to a well-rounded survival plan.

Note: debt isn't necessarily bad, it can actually be used as a benefit. You buy your house today with valuable dollars, carry a low-rate mortgage through inflation all the while you're paying it off with the same number of dollars that have less and less and less value... If you had taken the approach many take and tout as the only way to do it (be debt free, don't buy a house until you've saved up enough to buy it in cash) you will end up saving lots of dollars that have less and less and less value and it will take that much longer to actually buy the house because as time goes on the price increases more and more and more.

 

[CountryBoy19]

What about old retired bastards like me that live off Social Security?

You're effectively screwed unless you have enough durable goods to weather things short-term until stability returns...

 

[daddymikey1975]

These are great explanations. Thank you.

 

[stocknup]

All your question makes me think of is a look back at History ......... 1930`s , The Great Depression .
Why would that be any different from today ? Many homes, farms were lost and went back to the " Broke " banks .
They took all they could . ......... Bread lines and Hoovervilles was the new way of life if you were not prepared .
Get as Debt free as you can ...........

 

[miguel]

Would love me some hyperinflation to get that mortgage paid off. Of course I'd be buying $20,000,000 loaves of bread, but it would still be fun to "win" on the mortgage.

 

[Leo]

For a collapse like Greece, there will be people like George Soros who buy up property from the mortgage holders at ridiculously discounted rates if the mortgagee cannot make the payments. They will then throw people out that cannot pay. The lenders will gladly take money to keep at least a little cash flow. In America, even if you own your house free and clear, the government can tax lean the property and evict you. Take a look at the history of germany when the devalued the money 50% one month after WWII. There is no pretty picture in history during an economic collapse, with the exception of the very rich. I am not sure even that will be enough to stand through the next financial collapse that will be world wide.

 

[GodFearinGunTotin]

Interesting discussion. When you stop paying your mortgage (and probably your taxes) in those SHTF situations, you'll probably find your self living out of your car, after awhile. At some point, the government will want that money to keep itself alive and there'll be somebody with enough wealth to buy that property from the banks. On top of your $2000 loaf of bread, you probably won't be able to afford, you'll probably worry about finding a place so you won't freeze to death.

 

[CountryBoy19]

All your question makes me think of is a look back at History ......... 1930`s , The Great Depression .
Why would that be any different from today ? Many homes, farms were lost and went back to the " Broke " banks .
They took all they could . ......... Bread lines and Hoovervilles was the new way of life if you were not prepared .
Get as Debt free as you can ...........

ETA, after reviewing the original question it seems the OP was asking about economic down-turns as well as the Greek financial crisis... My comments below have been edited to reflect that. I apologize if my previous comments were off-base.

While there are many lessons to be learned from the Great Depression that was primarily an economic down-turn while the Greek crisis is primarily a financial crises. While the 2 are often related, they do not necessarily go hand-in-hand.

I would love to be debt-free just like anybody else, but being debt-free doesn't get you anything if you don't have preparations in place to feed your family etc... Debt-free is good, but isn't feasible for everybody. Unless you're just plain wealthy, if the great depression happens and you don't have any income you are going to be homeless. It doesn't matter if you chose to rent or chose to buy a house with a mortgage, you're not going to be able to pay that bill and you're going to lose your home.

OTOH, if you properly prepare with a well diversified approach, you can weather that storm MUCH easier.

For example, having a 6 month emergency fund, at least part of which is in cash and only accessible by you (not in a bank) you can continue to pay bills after the down-turn and job-loss. Having 6 months of food purchases and stored can stretch your emergency fund even further because you can tap into food reserves and won't have to buy groceries. Of course you can tap into ANY preps you have on-hand to prolong your cash emergency fund. You can continue to pay bills in that way. And ANY employment or cash you can bring in from ANY source is just helping to prolong the amount of time you can "hack it". It may seem like a losing battle, but every bit helps and if you do bite the dust you can always looks back and know that you truly gave it your everything.

I would rather have a mortgage and a castle to call my own, with some financial safe-guards in place than to have a rental where I'm at the mercy of the landlord (but hey at least I'm "debt-free")...

The added benefit is that in sound economic times buying the house using a mortgage will pay off great dividends in the long-run if you're wise with your finances...

Of course it can all back-fire too. Sometimes you're going to get hit, you're going to lose, and there is nothing you can do about it because the hit is just too large to survive. A small life-lesson I learned from reading one of the other survival boards during the last down-turn and has always stuck with me came from a well regarded guy that had a very profound look on things when the dust settled. This guy was a well-respected member doing well for himself before the collapse. Unfortunately it hit his home double-time; both he and his wife lost their jobs within a month of one-another. His one lesson looking back on the progress of things (written as if he were the one saying it but this is not a direct quote): Don't wait too long to accept the fact that your life just took a drastic change. We tried to continue on in denial that we were in trouble; we sold EVERYTHING we owned to keep paying the mortgage because things were going to come around and we were going to recover and live on in harmony. In the end we were left on the street with no personal possessions to our name except the clothes on our back and a few dollars cash. We didn't even have a car to live in or get to a prospective job because we sold it to pay an extra couple months of mortgage, which just prolonged the inevitable. If I had to do it all over again I would have accepted the fact up-front and let the mortgage lapse sooner and saved some of our personal possession. It was VERY tough to get a new start when we had NOTHING left of our old life; we should have let the house go sooner so we at least has some pieces to pick up when it was all over.


That being said, I wouldn't let your mortgage lapse immediately; you have to try to correct things. But I would have a pre-defined "tipping point". Once your preps (mainly financial) reach that tipping point you have to start thinking about your life AFTER you lose the house (or get evicted from your apartment).

 

[spencer rifle]

 

[Thor]

Between the big European wars, the Versailles Treaty to end all peace, took our great depression and added a few powers of effect for Germany. When things were really bad here, the dollar (as in one) was worth 4.5 Trillion Marks.

There was a reason Paris was 'gay', the Germans were working for their party and losing almost everything while the world quite literally was preparing to burn.

As Marcus Tullius Cicero said before the Roman Senate in 55 BC - “The national budget must be balanced. The public debt must be reduced. The arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced. If the nation doesn't want to go bankrupt, people must learn to work, instead of living on public assistance.”

A generation later Tacitus wrote of the Republic that was and the freedoms they used to enjoy.

Their economic downturn resulted in a dictatorship. When a majority of the population could no longer meet what was needed of them their answer was Caesar while Germany's was Hitler. The money remained, was reminted with each new dictator, and the winners and losers were chosen by the state. I could easily see that happening here, where some redistribution advocate would come to your home to make sure you didn't have too many sq/ft per person, maybe accuse you of being a space hoarder, and redistribute some of your rooms to others...or just move you out for a more 'deserving' clientele.

Now, in a total lights out SHTF scenario, the mortgage won't matter. In about 3 days bullets will be worth more than bullion. If you're still there in 3 months you might survive.

 

[jbombelli]

The mortgage company doesn't reduce my debt when the dollar gets stronger so they're not likely to increase it when the dollar collapses. What would happen in my case, provided the bank didn't fail, is that I would sell a couple ounces of gold and pay off my mortgage.

 

[T.Lex]

The mortgage company doesn't reduce my debt when the dollar gets stronger so they're not likely to increase it when the dollar collapses. What would happen in my case, provided the bank didn't fail, is that I would sell a couple ounces of gold and pay off my mortgage.

Interesting notion, but a couple issues:
- anyone who could afford to buy your gold wouldn't need it
- why would you even bother to spend the whateveryougotforyourgold on your mortgage? The bank would be unlikely to foreclose, I would think.

Plus, here's something whacky, given how many times mortgages change hands and how the mortgage companies track them, in a SHTF situation with any sort of internet sabotage, they might not even be able to figure out who owes what. Anyone remember that terrible Emilio Estevez movie where he kinda plays Robin Hood in the west by ruining records of farm mortgages, then it ends up that it was all a fantasy? (Oops, spoiler alert.) It'd kinda be like that, I think.

The mortgage holders would have a really difficult time foreclosing.

 

[stocknup]

Plus, here's something whacky, given how many times mortgages change hands and how the mortgage companies track them, in a SHTF situation with any sort of internet sabotage, they might not even be able to figure out who owes what. Anyone remember that terrible Emilio Estevez movie where he kinda plays Robin Hood in the west by ruining records of farm mortgages, then it ends up that it was all a fantasy? (Oops, spoiler alert.) It'd kinda be like that, I think.

The mortgage holders would have a really difficult time foreclosing.

I like that kind of thinking...........Not too far off base to imagine a cyber glitch and have all peoples` info lost .

If something were to happen and people couldn`t pay their mortgages, do you really think there would be people willing to be enforcers and evictors , at least in today` society ? I would say that could be the #1 Most Dangerous jobs to have .
I don`t think I would let someone get too near to my home in a crisis " Claiming " to be one of these enforcers .