Before the Event Legal Expenses Insurance Will Cover All Legal Costs

A before the even legal expenses insurance provider will be able to understand your needs and deliver a product designed to meet your specific requirements. They are always keen to work closely with solicitors, accountants, broker networks and underwriting agencies to develop solutions relevant to their client’s demands and needs. These providers are well experienced and can assist the clients to better manage the risks, which they are facing. They provide innovative sustainable solutions and insure against the legal risks faced by the business community as well as offer clear and simple communication, exceptional customer service and inexpensive products. You can rely on these specialists for truly insightful advice and a cover that is tailored to meet your specific requirements.

• Before the event legal expenses insurance advisers also specialise in structured arrangements (through standalone or protected cell captives) for intermediaries, affinity groups and specialist agents, providing them with the opportunity to share in the underwriting results. They offer vital underwriting expertise and capacity to fulfill the legal expenses insurance requirements. Their unique products are made especially for the clients’ needs. Most insurance brokers work closely with distribution partners comprising of insurance brokers, trade and affinity groups, insurers and professional organisations who sell and distribute the products and services to their clients and members.

• In some cases, even if you may win your case but still be liable to pay your own legal costs as well as the legal costs of the other party to the dispute, particularly if you are at fault in some way. In majority of cases the amount of any out of pocket expenses will be payable regardless of the outcome of the case. In addition to that, if the case is lost it is likely that you will be ordered to pay the other side’s legal costs, which are not covered.

• Before the event legal expenses insurance normally includes motor, personal and commercial legal expenses insurance.

• This type of insurance is quite easily available to both the individuals and companies. You can get this insurance by either adding cover to a household, motor or just as general commercial policy. The cover may also be ideal for the other side’s costs for an event that has already occurred, such as a personal injury, contract dispute or insolvency litigation.

• It is no secret that legal advice can be costly, and often this can stop an individual from seeking to enforce their rights. You must consult an advisor prior to choosing an insurance company, to discuss your requirements and conditional fee agreements. You may also take advantage of the funding options that are available to assist with the cost of legal work.

Most of the time, a dispute has a general principle, which is that the loser will have to pay the winner’s costs. Before the event legal expenses insurance allows access to advice and cover for the legal costs of pursuing or defending certain classes of legal action.

Use The Right Risk Management Framework For End Of Employment Decisions

There is an economic chill in the air.

Despite low unemployment rates in the United States, there is a sense that corporate layoffs and employee layoffs will once again take place. One level of decisions facing leaders is “who stays/who goes.” A second level of decisions revolves around “how do we treat people who leave?” This second level of decisions puts leaders in a dilemma between being generous to people that you are harming versus being prudent with owners’ money during times of economic stress.

At one end of the termination continuum, many associates who enter partnership track at the international law firm of Bingham McCutchen may not be elected to that role. Whatever their reasons for leaving the firm, one of the things that make Bingham stand out is that it considers former associates to be future resources. End of employment is the start of membership as Bingham McCutchen Alumni. The firm goes out of its way to assist departing professionals and maintains an active alumni group.

At the other end of the employment termination continuum are companies that treat departing employees with the same corporate rationale as they treat office refuse: Remove it with as little cost as possible and do not involve us in litigation. We don’t care what happens to our refuse or our former employees after exiting the facility.

These two approaches represent extreme ends of attitude towards end of employment decisions. Where does your company fit? Where should it fit?

The purpose of this article is to provide leaders with a framework for helping them decide where on this continuum their company ought to be. And we want to provide a framework with a more business-like rationale than, “It’s nice to be nice.”

In planning for terminations, it might be useful to look at the threat analysis framework developed by the 2005 Nobel Prize for Economics winner, Thomas C. Schelling. Schelling is professor of Economics at the University of Maryland. He received his Award for applying game theory to conflict. His focus was on the weapons issues but we have applied his ideas to the design of executive termination packages.

Schelling says “uncertain retaliation is more efficient than certain retaliation” when bargaining and “the capability to retaliate is more useful than the ability to defend.” Now let’s get practical.

GOODBYE SCENARIO

As a verb, “Goodbye” denotes parting. Saying “goodbye” assumes that once employees leave the building, they will never be a factor for the firm’s future. The relationship was transactional and the transaction is now over. If the firm defines termination as a goodbye scenario, the firm should be guided by a business model that says, “What’s the least expensive way of terminating this relationship consistent with reducing legal risks?”

AUWIEDERSEHEN SCENARIO

“Auwiedersehen” is a German word that is often used when people depart. But Auwiedersehen is not “Goodbye.” It literally means, “Until we meet again.” Saying “Auwiedersehen” assumes that once employees physically leave the building, they have only physically left the building. They can continue to be factors for the company’s success or failure. For example:

Once their non-compete agreements end, they may join other firms in your industry. Will they be opponents of your M&A plans or attempts to foster industry-wide standards or strategic alliances?

As you seek to attract new talent to your company, are the people you terminated considered thought leaders in your physical or industry community? Will they caution new talent about joining?

Once their non-compete agreements end, they could work for customers or potential customers and encourage customers to go elsewhere.

Each of these scenarios assumes capability of retaliation plus degrees of uncertainty about that retaliation. This is the Schelling scenario. Signing a Waiver of Rights either does not reduce these risks or reduces it for a defined period of time. From a company perspective, the two questions are:

o How much higher than zero is the probability of retaliation?

o Does it matter?

ARE COMPANIES EMPLOYING TOO NARROW A PERSPECTIVE ABOUT RISK MANAGEMENT WHEN MAKING TERMINATION DECISIONS?

With many of our client companies, termination discussions often involve representatives from Finance, HR, and Legal meeting to discuss risk management and cost factors. All three functional perspectives are important. They are also incomplete.

In examining risk factors, the voice of marketing and strategy need to be at the table.

We employ a framework like the one below to help structure the conversation.

TERMINATION THREAT ANALYSIS ONCE NON-COMPETITION AND NON-DISPARAGEMENT AGREEMENTS LAPSE.

Rate each factor on a 0-9 scale. A score of “0” means that the factor does not apply. “1” means “minor threat” whereas “9” means a “significant threat.”

SCORE FACTOR

Ability to harm M&A objectives over the next 36 months.

Ability to harm strategic alliances over the next 36 months.

Ability to negatively influence sales over the next 36 months.

Ability to negatively influence talent we seek to hire over the next 36 months.

**

We used 36 months as a framework because many critical business decisions in building product lines, acquiring companies, or being acquired require that type of time perspective.

The above is a framework for discussion during the termination planning stage and can apply to group as well as individual termination decisions.

The people around the table have different areas of competency to evaluate these marketing/strategic issues. HR and sales can best discuss the impact on attracting and retaining talent. But strategy people can best discuss M&A plans.

In applying these and other risk factors, the objective of the meeting is for the group to determine if the end of employment decision approaches the Goodbye end of the continuum or the Aufwiedersehen end of the continuum.

In moving towards the Goodbye end of the termination continuum, a company should pay departing employees severance fees no greater than median relative to other companies its size in the industry and should keep outplacement costs to a minimum. There would be no follow-up with employees once they leave the building other than what is legally required. The company message is: “Good bye. We want to give you a running start on your job search.”

In moving towards the Auwiedersehen end of the termination continuum, a company should pay departing employees severance fees and outplacement programs using the median as a starting point. At the extreme end of Auwiedersehen, former employees would be called Alumni and there might be a section on the company website for Alumni to learn about what is going on with the company and to communicate with other Alumni. At the same time, those who frequent the Alumni section are useful targets for the company’s sales staff. Alumni would be invited to reapply for job openings the company would have in the future. The company message is: “We would like to see you land on your feet in the wake of this termination decision and we want you to know that you are still a member of our business ‘family.’ We are sure that our paths will cross again.”

COMPANY CULTURE

As someone who works with leaders in their departure from organizations, we love working for client companies that treat departing employees with dignity because it is integral to their culture. Our perspective in this article, however, is a contingency-based approach to managing end of employment decisions. Our framework suggests that representatives from marketing and strategy be present when termination decisions are made and some specific questions be raised to examine threat from a broader perspective than a strict legal perspective.

End of employment decisions can be oriented towards the Goodbye scenario or oriented towards the Auwiedersehen scenario. Where your company is on that continuum should be a carefully thought out business decision.

Money Laundering and Major Risks

The concept of money laundering is very important to be understood for those working in the financial sector. It is a process by which dirty money is converted into clean money. The sources of the money in actual are criminal and the money is invested in a way that makes it look like clean money and hide the identity of the criminal part of the money earned.

While executing the financial transactions and establishing relationship with the new customers or maintaining existing customers the duty of adopting adequate measures lie on every one who is a part of the organization. The identification of such element in the beginning is easy to deal with instead realizing and encountering such situations later on in the transaction stage. The central bank in any country provides complete guides to AML and CFT to combat such activities. These polices when adopted and exercised by banks religiously provide enough security to the banks to deter such situations.

However if a bank encounters any such situation it encounters the following types of consequences:

Reputational risk

The major risk a bank faces when it finds itself caught in any sort of money laundering is reputational risk. The reputation of the bank goes negative and in turn it might face huge withdrawals. There might me loss of profitable business and many other liquidity issues. The quantum of this risk might cause a bank to confront various investigations costs and penalties. The biggest hurdle a bank has to undergo is the situation of mistrust by the customers which is devastating.

Operational risk

It is another one of the major consequences of money laundering which a financial institution faces. It is a kind of risk which lies in the internal procedures, people and system after they breakdown. It is a risk which is included in the operations of the business. Thus it creates disturbance in the smooth functioning of the organization.

Legal risk

Legal risks are also posed to the organizations due to the uncertainties in the legal actions which might come up for the organization to deal with them. These might include certain charges on the bank, the dealing between the money launderer and the bank etc.

Concentration Risk

This type of risks is majorly pertains to the banking industry and defines the probability to which any bank has lent money to a particular group. The increased lending without proper identification or the realization after encountering money laundering act may cause a bank to suffer loan losses which in turns deteriorate banks standing in the industry.

Opportunity Cost

One of the major consequences a bank faces is the increase in opportunity cost. It is increased in a way that the management finds itself spending its time in managing the damage control which the act of money laundering has caused instead of utilizing that time for other better perspective.

Money Laundering and Major Risks

The concept of money laundering is very important to be understood for those working in the financial sector. It is a process by which dirty money is converted into clean money. The sources of the money in actual are criminal and the money is invested in a way that makes it look like clean money and hide the identity of the criminal part of the money earned.

While executing the financial transactions and establishing relationship with the new customers or maintaining existing customers the duty of adopting adequate measures lie on every one who is a part of the organization. The identification of such element in the beginning is easy to deal with instead realizing and encountering such situations later on in the transaction stage. The central bank in any country provides complete guides to AML and CFT to combat such activities. These polices when adopted and exercised by banks religiously provide enough security to the banks to deter such situations.

However if a bank encounters any such situation it encounters the following types of consequences:

Reputational risk

The major risk a bank faces when it finds itself caught in any sort of money laundering is reputational risk. The reputation of the bank goes negative and in turn it might face huge withdrawals. There might me loss of profitable business and many other liquidity issues. The quantum of this risk might cause a bank to confront various investigations costs and penalties. The biggest hurdle a bank has to undergo is the situation of mistrust by the customers which is devastating.

Operational risk

It is another one of the major consequences of money laundering which a financial institution faces. It is a kind of risk which lies in the internal procedures, people and system after they breakdown. It is a risk which is included in the operations of the business. Thus it creates disturbance in the smooth functioning of the organization.

Legal risk

Legal risks are also posed to the organizations due to the uncertainties in the legal actions which might come up for the organization to deal with them. These might include certain charges on the bank, the dealing between the money launderer and the bank etc.

Concentration Risk

This type of risks is majorly pertains to the banking industry and defines the probability to which any bank has lent money to a particular group. The increased lending without proper identification or the realization after encountering money laundering act may cause a bank to suffer loan losses which in turns deteriorate banks standing in the industry.

Opportunity Cost

One of the major consequences a bank faces is the increase in opportunity cost. It is increased in a way that the management finds itself spending its time in managing the damage control which the act of money laundering has caused instead of utilizing that time for other better perspective.

7 Tips on Outsourcing Legal Support for Startups

One service where outsourcing really pays off when you’re getting started is legal help. Knowing the right kind of legal entity for your business is tricky. You want a good advisor who looks at your whole business and listens to what you want to accomplish. Here are 7 things to consider when you’re hiring an Attorney:

1. Rates – Do you want to agree to pay by the hour before you know how many hours each necessary step will take? Look for an Attorney who charges a flat fee for their services. This will limit your costs and simplify your budget. Find out up front what the flat fee will be.

2. Experience – You want someone with corporate experience, someone who can look at the big picture, not just the legal aspects. You want someone who knows how to balance legal risk with your business requirements and your ability to innovate and react quickly to necessary changes.

3. Questions – You want to work with someone who understands you and understands your outlook. How will you know this about an Attorney? You’ll know by the questions they ask you. An Attorney who has the potential to develop a working relationship that fits you will ask the right questions. You’ll know.

4. Answers – Not having a contract or having a poorly negotiated contract can bring problems. It often seems as if contracts are written to trick us, to hide issues that will trip us up later. You want an attorney who can communicate clearly and concisely, who can translate the gobbledygook and make negotiations successful.

5. Interest – You want an Attorney who shows a genuine interest in your business, in how you operate and how you make money. You want someone who comes to your place of business and looks around, speaks with your employees. You want a trusted advisor.

6. Resources – An Attorney with roots in your community has connections. You want to be able to turn to them when you need other services and ask for recommendations with the confidence that they have your best interests at heart. Ask them how they meet other professionals in the area.

7. Advice – Ask for advice on topics other than legal issues and see what kinds of answers you get. Are they knowledgeable about the business challenges that your startup faces beyond the law? Do they know about financial, marketing, sales issues? If they don’t, are they able to refer you quickly to experts they trust?

Conclusion: Your relationship with an Attorney should be comfortable; clear, concise communication should bridge the gap between your legal knowledge and the requirements that will keep you out of trouble. Communication should feel effortless not like a struggle. You want an attorney who knows more than just the law and knows how to minimize the risk of lawsuits, maybe even avoid them. The right Attorney can reduce stress and expenses.

Understanding the Risks of Outsourcing to Another Company

Contrary to what you might believe, it is not at all easy to outsource work. We are talking about many aspects that have to be considered and a lot of people fail to do it properly. It is plain to understand that it is illogical to plan an outsourcing strategy even before you actually start a project but this is crucial to the success of your business (if you are outsourcing, of course).

When you outsource work you will be working with another individual or another company. One of the biggest advantages of outsourcing stands in the fact that you can easily work with someone that lives in another city or even country. Unfortunately this is exactly where the problems start.

The Common Risks of Outsourcing to Another Company

There are a lot of problems that can appear but in most situations there are some basics you have to always consider. First off, the start needs to lie in identifying the country of the third party company you want to hire. Think about how stable that country is when thinking about politics and then start thinking about communication. Will you talk by phone? E-Mail? Fax? These are organizing problems that need to be fixed in advance.

Next you have to take a close look at the legal aspect involved. There are legal risks of outsourcing to another company. You have to see how taxes have to be paid and check whether or not problems can appear. The good news is that there is a big chance you will not be faced with legal problems since you will sign a proper agreement but even this has to be considered in your outsourcing strategy. For instance, a friend of ours has not built a good contract in the sense that there was no clause in it that said his product can not be revealed to the public. We are not aware of all the details of this problem (it is his secret project) but the bottom line was that he lost money and time through trials because the contract was not good.

At the end of the day you have to understand that the risks of outsourcing to a third party business have to be taken into consideration at all times. You need a good outsourcing strategy built even before you think about who to hire. The good news is that this is not at all difficult. The bad news is that sometimes you will need help. The bottom line is that the importance of outsourcing through a strategy should not be taken lightly.

Better Risk Management With Prince2

Step 1 – Having a risk management strategy

In my experience risk management is something that is talked about a lot but rarely done. One problem is that people don’t know who should be doing what. To help with this Prince2 2009 introduces a Risk Management Strategy. It outlines the way in which risk will be identified, evaluated and dealt with in a project. It shows who should be responsible for carrying out the various risk management roles. It also sets out how much risk an organisation is willing to bear. The strategy is put together at the outset of the project; everyone reviews and signs up to it.

Step 2 – Risk identification Techniques

Where do you start when it comes to identifying all the potential risks in your project? The new manual gives a number of approaches. These include reviewing lessons learned from previous projects, carrying out a risk brainstorming session, using an industry specific prompt list showing likely areas of risk or creating a risk breakdown structure. The latter is a hierarchical diagram like an organisation chart. It can be sub divided in a range of ways, for example by product, by team or using PESTLE (political risks, economic risks, social risk, technological risks, legal risks, environmental risks) It can be used as a focal point for a workshop to identify all risks in each area of the project.

Step 3- Early warning indicators

It is all too easy for a project manager to myopically focus on a small set of performance areas such as work completed to schedule. The new manual suggests a range of other early warning indicators that identify how the project is performing. For example percentage of approvals accomplished, number of issues being raised and number of defects being captured in quality inspections. Reviewing all aspects of a project increases the likelihood of identifying more critical risks

Step 4 – Assessing the overall risk exposure

Prince2 2009 gives an approach to show the overall risk situation of a project. Each risk is given a likelihood in percentage terms and an impact should it occur in monetary terms. By multiplying one by the other an expected value can be calculated. Totalling the expected values of all the risks gives a monetary figure that easily shows the exposure of the whole project to risk.

Step 5 – Considering the effect of time on a risk.

Prince2 has always recommended recording when each risk will occur. It calls this the proximity of the risk. But in this latest release it gives examples of how you might categorise proximity, such as imminent, in the next stage of the project or after the project. It also recommends considering whether the probability of the risk occurring and/or the impact on the project if they do occur, might vary over time. Having this information can help focus on risks that are of a more pressing concern.

Step 6 – Giving a clearer approach to help define risks

Rather than just thinking about the event that may or may not occur such as a road collapsing underneath a heavy load, the new manual considers what could cause the event. This allows for a deeper analysis of any individual risk. If the road collapses it could be caused by heavy rain, bad driving or initial poor construction of the road by the council. Understanding what are the most likely causes for each potential risk event, can help implement better mitigation plans to deal with them

Step 7 – Focus on opportunities

Risks can be opportunities. For example a new technology might appear to speed the programming of a software module. Prince2 2009 gives three ways of approaching an opportunity: exploit it by doing something that ensures it occurs, increase the probability or impact of the event occurring or simply reject the opportunity. In practice a good project manager is always looking for opportunities to improve their project, but making this explicitly part of the risk management process, improves the probability of spotting more.

Managing Bank Operations Risk

So we have had another massive loss at a major bank. The unfolding Société Générale loss may be the biggest (so far), but it is neither the first not the last. Jerome Kerviel seems set to join a notorious band of rogue traders such as Nick Leeson and Toshihide Iguchi.

And the funny thing is that despite all the hand wringing and accusations leveled at its newly exposed rogue trader, the management of Société Générale fails to see where the real blame truly lies. Put simply – on it’s own doorstep.

As the evidence of this massive loss and its underlying circumstances begins to emerge one thing is eminently clear. The whole debacle can be blamed squarely on the failure of Société Générale’s Board and its Senior Management to take its operations risk management obligations seriously.

Already, within days of the loss being discovered an abundance of anecdotal evidence has begun to emerge. Let’s look at a few of these;

o “The … bank said that it tried on several occasions to make Mr. Kerviel take a few weeks off, but that it ultimately went along with his excuses for staying at work” (breakingviews.com)

o “The prosecutor also said that Mr. Kerviel admits to disregarding Société Générale’s trading rules but says others also flouted limits designed to contain risks to the bank”. (Wall Street Journal – January 29, 2008).

o “… was the IT drawbridge properly raised when he made his move out of the back-office and onto the trading desk in 2005? Clear segregation of back-office and front-office activities was one of the clearest lessons to emerge from the rogue-trading scandal at Barings Bank in 1995; at SocGen, those lines seem to have blurred.” (Economist.com).

o “Eurex, the futures exchange of Deutsche Börse, questioned the trading position of Mr. Kerviel last November.” (Wall Street Journal – January 29, 2008).

o “Veterans of the futures markets are baffled about how Mr Kerviel got away with building up such a big position unnoticed.” (Economist.com).

And yet initially Société Générale painted themselves as the hapless victim of a canny and malicious fraudster who ruthlessly overrode all controls, so carefully designed to trap his ilk.

And all this points squarely at a massive management failure in the operational risk arena.

Basel II , which the European banking industry has spent the last half decade preparing for and which officially came into effect in the EU on 1st January 2008, is the current standard of best practice for management of operational risk.

The Basel II definition of operational risk is “… the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.”

Aside from the specific details of how capital is to be allocated against operational risk Basel II requires that apart from the “Basic Indicator Approach” (whose users are anyhow required to comply with “Sound Practices for the Management and Supervision of Operational Risk” standard of the BIS), those more sophisticated banks using either the “Standardized Approach” or the “Advanced Measurement Approaches” must satisfy its local banking supervisor that, as a minimum;

o Its board of directors and senior management, as appropriate, are actively involved in the oversight of the operational risk management framework,

o It has an operational risk management system that is conceptually sound and is implemented with integrity, and

o It has sufficient resources in the use of the approach in the major business lines as well as the control and audit areas.

If we look more closely at “Sound Practices for the Management and Supervision of Operational Risk” we have an outline prepared by the Risk Management Group of the Basel Committee on Banking Supervision, which sets out a series of principles that offer a framework for the effective management and supervision of operational risk, for use by banks and supervisory authorities when evaluating operational risk management policies and practices. The first three of these principles relates to the role and responsibilities of the directors and senior management of the bank regarding an appropriate operational risk management environment. Principles 4 to 6 deal with the identification, assessment, monitoring, and the mitigation/control of operation risk while Principle 7 deals with the need for appropriate and effective Business Continuity.

Clearly on the basis of the emerging evidence, the parties who need to shoulder the blame in the Société Générale debacle seem to be eminently clear.

What are the Basel II Operational Risk Requirements?

“Basel II” has been in the news an awful lot these past 18 month or so. Unlike Basel I the new standard introduces a capital charge based on operational risk. The words Operational risk themselves immediately raise a whole bunch of questions; What is “Basel II”? What is operational risk? How is the charge going to be calculated? What are the operational risk standards that banks will have to comply with?

Basel II or to use is full name “International Convergence of Capital Measurement and Capital Standards” defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. This definition explicitly includes legal risk but excludes strategic and reputational risk.

In terms of the Basel II Accord there are three methods for calculating the capital charges for operational risk. The methods provide a range of increasing sophistication and risk sensitivity. The three approaches are:

oBasic Indicator Approach (BIA) – which requires banks to hold capital for operational risk equal to the average over the previous three years of a fixed percentage of positive annual gross income.

oStandardized Approach – which uses gross income across eight business lines as a stand-in for the level of business operations and therefore the probable size of operational risk exposure within each business line.

oAdvanced Measurement Approaches (AMA) – this requires a bank to calculate its regulatory capital requirement as the sum of expected loss and unexpected loss. This is a highly complicated process and still remains the subject of much controversy.

The Basel Committee has encouraged banks to move along the range of available approaches as they develop more sophisticated operational risk measurement systems and practices.

Internationally active banks, as well as banks who have significant operational risk exposures (such as specialized processing banks) are expected to use an approach that is more sophisticated than the Basic Indicator Approach and which fits the risk profile of the institution.

A bank will not be allowed to revert to a simpler approach once it has been approved for a more advanced approach without supervisory approval. However, if a national bank supervisor determines that a bank using a more advanced approach no longer meets the qualifying criteria for this approach, it may require the bank to go back to a simpler approach for some or all of its operations, until it meets the conditions specified by the supervisor for returning to a more advanced approach.

A bank will be permitted to use the Basic Indicator or Standardized Approach for some parts of its operations and an AMA for others provided certain minimum criteria are met. The conditions under which this is permitted are;

oAll operational risks of the bank’s global, consolidated operations must be captured

o All of the bank’s operations that are covered by the Advanced Measurement Approaches must meet the qualitative criteria for using an AMA, while those parts of its operations that are using one of the simpler approaches meet the qualifying criteria for that approach

oAt implementation of an AMA, a major part of the bank’s operational risks must be captured by the AMA

oThe bank must provide its supervisor with a plan specifying its intended timetable for implementing the AMA across all its operations

The Basel Committee expects that such approvals will only be granted on an exceptional basis and limited to circumstances where a bank is prevented from meeting these conditions because of implementation decisions of supervisors of the bank’s subsidiary operations in other (foreign) jurisdictions.

Despite the relative brevity of the Operational Risk section the Accord, the source material for risk mitigation is wide and deep indeed. The following is a brief list of some of the current Basel guidelines dealing with various aspects of operational risk.

Two Hidden “Legal” Risks of Debt Consolidation Loans

What are Debt Consolidation Loans

Debt consolidation is combining outstanding loans (debt) into a single package (consolidation). The debts therefore become one “new” loan, and instead of making several small payments on the loans you used to have, you make one larger payment on the new loan. Ideally and typically-and what has made debt consolidation loans popular as a home remedy for debt-the new loan is secured by some asset, often your home, and this allows you to obtain lower interest rates. Thus consolidation, in the final analysis, is the conversion of debt that is not secured into debt that is secured by some real asset, in exchange for lower interest rates. It can reduce your monthly payments considerably.

Occasionally people ask me whether debt consolidation is a good, economically constructive solution to their credit card problems. Usually, the answer is that it is no. Certainly it is not a solution by itself.

Why Doesn’t Debt Consolidation “Work?”

As a pure financial transaction, exchanging a lower interest rate for a security arrangement can be a very reasonable decision. Why then has it been such a disaster for so many people? Risk. Most people entering into complex financing are not able to assess risk and account for it, particularly when they are under economic pressure-which they usually are when they consider debt consolidation loans. Thus people systematically underestimate the risk that they won’t be able to make the payments on the new debt.

Additionally, since most people do not really want to go into debt in the first place, the existence of large credit card debt is indicative of other problems, either too little money or a tendency to overspend on unnecessary items. These issues are more likely to be made worse by the sudden reduction of economic pressure and the sudden, apparently greater amount of money or credit available to be spent.

The Hidden Legal Risks of Debt Consolidation

In addition to these “systemic” issues, there are two main hidden costs of consolidation that should be considered: loss of flexibility, and the nature of secured debt versus unsecured debt.

Consolidated Loans are Less Flexible

When you have ten loans for different things, from automobiles to credit cards, you have flexibility if hard times strike. If you simply cannot make your payments, you can give up some, but not all, of the things you have purchased. You can let some, but not all of the credit cards go into default. This is certainly not a happy thing, of course, but it raises the possibility of individualized debt negotiations, debt forgiveness, or even missed statutes of limitation. Again, these are not the choices and hopes of someone in flush economic conditions, but they are real options facing many people right now. In order for a debt collector to start garnishing your wages, it must find and sue you, must win, and then find your assets. It is an expensive and risky process for the debt collector if you fight. They sometimes drop the ball, and there are limits to how much of your wages can be garnished.

If everything else fails for you, you can declare bankruptcy, where homestead exemptions are likely to allow you to remain in your home.

The Nature of Secured Debt

The bigger risk of debt consolidation loans is the nature of secured, versus unsecured, debt. Remember that what powers the lower payments for consolidation is the existence of security-usually your home. Your home secures the debt, and that means that if you do not make your payments on the new debt, the lender can foreclose on your home and take it away. Foreclosures are generally “expedited” proceedings, meaning that your defenses are limited and the time for asserting them is restricted. In many states foreclosure is not even a judicial proceeding, although you have some legal rights you could assert in certain circumstances.

And what all that means is that instead of facing the prospect of years of battling over high-risk debts and questionable payoffs that could be trumped by bankruptcy, the banks can waltz into court and emerge in a very short time with your house.

Put a little differently, your debt consolidation loan could make you homeless almost before you know it. And bankruptcy often, if not usually, will do nothing to protect you.

Conclusion

I urge anyone considering debt consolidation to think about these risks very carefully.