A friend suggested that a easy way to resolve his current fiscal dilemma would be to move someplace where there are plenty of natural disasters. That way when the big one hits and he loses his house and car, all the loans should wash away with them. Ironically he is already underwater on his mortgage.
So what happens your Majesty, when your house is repossessed by the ocean, your car gets a lava wash, and your bank falls off the map? Is there some sort of get out of debt free card, if all you’ve got left is your undies? Does it affect your ability to throw yourself right back into the debt pool?
You still owe on all your loans. You end up with a lot of bad debt. The bank can forclose on your property, if you have not refinanced the mortage the bank can not collect more than just foreclose. They can areposess your car you owe the difference between the loan and the value.
There’s always a get out of debt free card. It’s called bankruptcy.
Otoh, if you live in an area prone to natural disasters, generally the insurance rates reflect that risk… If you can afford it. If you go bankrupt, your credit score goes down quite a bit. If your house, car, job, and probably some of your family washed away - odds are your ability to borrow will be irrelevant as you sleep in a cot in some school gymnasium, waiting for a FEMA tent of your own…
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Why would someone think that? He would still owe the money. In fact, I’d think he would be even worse off; since there is no house or car to be seized as collateral, the lending institution could come after him for the whole amount.
The lending institution can’t come after him (unless they’re suing him for fraud, or something). They can try and repossess the collateral, but that’s it. That’s why lenders require you to carry insurance on the collateral, whether that’s a house or a car or a boat, etc.
You can insure those assets while waiting for the earthquake – and, as friedo has said, the lender will require you to insure it – but insurance costs money, you can’t insure for more than the assets are worth, and insurance companies set their premiums at a level where (overall) they expect to make a profit. So you can expect to make a loss (though the advantage of insurance is that you have an expected low level of loss, via the premiums, but you avoid the small chance of a very large loss).
Surely they can send his account to a collection agency, and sue him for the debt if he fails to pay. The reason they require insurance is to make it easier for them to get their money without having to sue him. And it is always possible that they won’t bother to sue anyway. But surely they can if they choose to. Why do you think they can’t?
What happens if you live in an area where earthquakes usually don’t occur, but one destroys your home anyway? My family lives in Arkansas, which has lately had a few small earthquakes. After checking with their insurance companies, they found that their homeowner’s insurance does not cover any damage due to earthquake, but they can purchase a rider (with a $50K deductible) for a whole lot of money. In the very unlikely even that the earth opens up under their house, are they just completely fucked?
I’ve lived in an area (Newcastle, Australia) where earthquakes were not expected, but one did happen in 1989 that destroyed some buildings. (The earth didn’t “open up” – it just shook around, and shaking buildings enough will make them collapse.) In our case, insurance did pay for the cost of rebuilding one exterior wall of our house. I don’t understand why insurance would exclude unlikely events like that. Yes, if there’s a large earthquake in an area where it’s never happened before, the local insurance companies might have to pay out more than their total assets, but they can re-insure with other companies for catastrophes like that. That’s exactly what insurance is for!
I think that’s pretty much what happens to people who don’t have flood insurance when their house gets submerged/washed away. In flood-prone areas the lender (or the federal government) may require borrowers to carry flood insurance, which is not part of most home insurance policies.
Presumably the same would be true for a homeowner whose policy does not cover (or specifically excludes) damage due to earthqakes.
Some number of years ago there was terrible flooding around the North Dakota - Minnesota border, and Fargo was particularly hard hit. It so happens that at the time I had an auto loan with a bank based in Fargo. One day our local paper had a picture of a building in downtown Fargo that was literally covered in what looked like at least three feet of ice. I’m fuzzy on the details, but the flooding had in some way caused a fire (I don’t get it either), and due to the fact that the fire department was fighting the fire in sub-zero temperatures, the building was encased in ice by the time they were through spraying it with their hoses.
The building was the very bank which held my auto loan. :eek:
And yet, somehow, they still managed to send me a late notice the following month when I didn’t send my payment in on time.
Depending on the laws in your state or province - some chattel loans (for car, boat etc.) and IIRCalso for some mortgages - in some places, they either sue you or repossess, but cannot do both. In some places, they can repossess, sell the item, then sue you for the difference between what you owe and the sale amount.
A bank that does not take nto account that the majority of their customers in a region have lousy credit ratings because of a massive natural disaste will probably lose those customers to other banks who have some form of compasssoin in their approval process. Ditto for a bank that generated the appropriate PR from pursuing victims of natural disaster for the balance of their life’s savings and all future earnings…
However! The bank may take circumstances into account, but - if you want to borrow money, whether you own a house or a pile of rubble, you still would have to demostrate the ability to pay.