Tuesday, January 18, 2011

Flood Victims – Strategic default?

I spend all day Saturday and all day yesterday in the suburbs of Brisbane cleaning up the mess of what is shaping up to be one of Australia's most financially costly natural disasters.

Residents homes and financial situations are completely devastated. Here are a few pictures i took from the one spot - all i did is turn around at a T intersection.

The piles of rubbish are often 6 - 8 feet high of furnisher, white goods, walls, carpets, insulation. The houses are stripped bare from the floor to the ceiling. All the power points are filled with mud and need to be repaired by an electrician. The there is no gyprock on the walls and carpenters needs to do extensive repairs. The kitchens and bathrooms are bare and need to be replaced.

It is easy to expect that each house will require $50,000+ to repair it back to it's original condition and another $30,000 - $50,000 to replace the furnisher, white goods, clothes etc. And where will the insurance companies be in all this.... well if you're not covered with Suncorp and GIO, then they'll be high and dry and won't pay out a cent.

One questions which comes to mind is: 'Will Suncorp and GIO offer insurance for these homes at policy renewal? and if so will the premium increase by 100%, 200% or more' I might discuss this in another post in the future.

On top of the close to $100,000 that each resident will be out of pocket to get themselves back to where they were, the mortgage will still need to be paid on a house which may now be worth less then the debt your paying off - and you can't live there because there is no power, has no kitchen or bathroom and stinks with 10cm of slimy mud.

So the situation for many might look like this:
  1. You need $100,000 to repair and furnish your house, and cloth your family.
  2. Your house is now worth less then your mortgage.
  3. The bank still wants mortgage payments.
  4. Your house is unsellable.
  5. Your house could flood again this year... or next, or the year after that.
  6. You're renting another house to live in while you figure out what to do. (still paying the mortgage)
  7. Because of the above you can't afford to cloth you kids, feed your family or go on a holiday ever again.
  8. Maybe you have even lost your job as the small company you work for is broke because all their stock was also wiped out in the flood.
So what do you do if you are in this situation??? Many may choose to strategically default and declare bankrupt. This would not be an easy decision but may be the best decision to put your finances back into a position to move forward. Here why.

1. The banks will go after you for everything you have... lets see what that is:
  • Your House.... That's ok because it's worth less then your debt, and it needs at least $50,000 work to make it livable again.
  • Your personal possessions... well you don't have any because the flood wiped them out and the insurance company is not going to pay out.
2. You won't be able to get a loan for 7 years - but that shouldn't be an issue because it will take that long to build up your personal assets again and save a deposit.

3. You won't be able to be a company director again - not everyone wants to be one anyway.

4. You can start again from scratch - this sounds bad but it actually might be a lot better (by hundreds of thousands of dollars) then your financial position at the moment.

5. You can rent a nice place to live (maybe on a hill) and you can feed, cloth and education your family and maybe even take them on a holiday every now and than.

Because insurance wont pay out for many people they might not ever be able to repair their homes to a livable condition (the banks wont give them the money). The best option for many may be the strategic default.

One thing is for sure, property prices will not be as high again in the affected suburbs for years and maybe decades to come. A flood of defaults maybe just around the corner.

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