Debt and Entrepreneurs: How to Avoid Losing Too Much Money on Your New Business

Sona Sulakian
“The lost generation.”

The St. Louis Fed recently used this moniker to describe older Millennials—who graduated into the 2008 recession and now are facing an economic slowdown when they should be accumulating wealth.

Many of these people are starting their own businesses.

That's good.

But it may be getting them further into debt. 

The pandemic has led to widespread loss of wages and fewer job opportunities for Americans. In early 2020 before the pandemic, the average credit card debt per household was $8,701. Surveys predict that the situation will severely deteriorate throughout 2020. 

What’s more, not everyone recovered from the 2008 recession equally, meaning not every American has the same safety net. For lower income families, salaries haven’t kept up with inflation and jobs provide little or no benefits in the emerging gig economy. 

Here’s an overview of where we are today and some potential solutions. 

Growing debt and some temporary solutions
According to the CMD’s latest Quarterly Report on Household Debt and Credit, household debt increased by $155 billion, or 1.1%, totaling $14.3 trillion in the first quarter of 2020, which is $1.6 trillion higher than the previous peak in Q3 of 2008.

The stimulus checks and federal unemployment benefits put cash into people’s pockets, allowing them to pay down existing debt. But with overall debt increasing, federal relief may prove only a temporary salve. 

Banks are already expecting a wave of defaults on all types of debt from mortgages to credit card debt. JPMorgan Chase, Citigroup, and Wells Fargo added billions to their reserves to cover losses on business and consumer loans.

Most household debt-in-collection follows a financial shock, like a job loss and illness. The Federal Reserve reports that 39% of households earning less than $40,000 a year had lost at least one job loss by May. Americans are not financially prepared for an economic slowdown: only 53% of adults can pay bills for 3 months without income and only 63% said they could cover a $400 expense with cash.

Debt collection disproportionately affects low and moderate income families, meaning these families are more likely to be sued for a debt. Creditors who may sue for debt include not only banks, but hospitals, utility companies, and auto and student loan lenders.

States have implemented emergency regulations as a temporary solution. These emergency regulations provide emergency authority over consumer debt, including creditors and debt collectors. To reduce risk of exposure and pressure on consumers during financial hardship, these regulations ban:
  • Collection lawsuits
  • wage garnishment actions, 
  • seizure or attachment of consumer property (including vehicles) or funds, 
  • use of arrest warrants
  • In-person collection efforts, whether at home, place of employment, or public place
  • Phone calls to consumers

To protect the consumer, state attorney generals have suspended debt collection activity, addressed unfair debt collection practices, suspended evictions and utility disconnections, relaxed telemedicine regulations.

The rise of predatory lending and how to stop it
Lower income individuals heavily rely on predatory loan products during financial crises, which include short-term payday loans or longer-term auto loans. These short-term loans are a quick fix that can get people stuck in a loan cycle in which more loans are taken out to pay older loans, also known as a debt trap. In fact 4 out of 5 payday loans are taken out to pay another debt. The average person with a payday loan has 10. 

The Bush administration addressed predatory lending with the Military Lending Act, capping interest rates at 36%. Experts are calling for a similar rate cap of 36% in the second round of the CARES Act. Experts are also asking for a pause in deregulation of high-cost lending and a protection for stimulus checks from being garnished by short-terms loans (Payday and auto loans) as well as checking account penalties (overdraft fees).

The CARES Act did not protect the stimulus checks from private debt collectors or child support payments. But a bipartisan bill introduced in May would stop debt collectors from garnishing stimulus checks.

Politicians are also calling for attention to this debt issue. Sen. Bernie Sanders sought to stop predatory debt collection practices. Mike Bloomberg wanted to curb high overdraft fees, stop aggressive debt collection practices, and make credit reporting agencies more responsible. Sen. Amy Klobuchar co-sponsored a bipartisan bill in 2019 to make it easier to fix errors in credit reports.

Perhaps a brighter future does await the indebted consumer. In the meantime, reach out to us for help with your debt problems.

This article is intended to convey generally used information only and does not constitute legal advice. Any opinions expressed are soley those of the author, and not LawChamps

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