How a man’s $250k debt ballooned to $21m due to high interest and penalties

A man who borrowed $250,000 from a licensed moneylender not only ended up losing his home, but his debt also ballooned to over $21 million when he could not keep up with the exorbitant interest and penalties levied on him.

The unusual case came to light only because in a bid to allow his family of five to have a roof over their heads, he sold his $2 million home to the director of the moneylending company to pay off part of the debt. He then signed a tenancy agreement so that his family could continue living there for a monthly rental of $7,000 to $8,500.

The parties eventually ended up in a district court, not over the $21 million debt, but over unpaid rental and the subsequent refusal of the debtor to leave his home.

When the case came up on appeal by the debtor, High Court Judge Philip Jeyaretnam found that the man’s plight merited further investigation and ordered a retrial of the whole saga to uncover whether there was truth in the allegation that both the loan and rental transactions were tainted with “illegality”.

“In my judgment, it shocks the conscience that borrowing $250,000 has led to (the borrower) being indebted – through the accumulation of interest and so-called late payment fees – in the tens of millions,” he said.

The debtor wanted to nullify all the transactions because he argued there was evidence of illegality on the face of the documents. For instance, he was charged exorbitant interest rates of 4 per cent a month, or 48 per cent annually, and this was more than double the interest levied on most credit card debt.

The late payment interest was even more punishing at 8 per cent monthly or 96 per cent annually. On top of that, he was also levied late payment processing fees of $2,500 per month for the initial loan.

As a result, the debt grew from an initial sum of $250,000 in 2010 to about $21 million by 2021.

The director of the moneylending company objected to a retrial because he claimed the debtor was “the author of his own misfortune” and that the court did not have the full picture as well as the company’s explanation for the charges.

But Justice Jeyaretnam noted that the debtor, who was initially not represented by a lawyer, had now made various claims including that the tenancy agreements were a sham and the loan facilities had to be reviewed due to alleged fraudulent misrepresentation, deceit or breach of statutory duties.

The judge found the matters pleaded had “a substantial and reasonable prospect of success” and added that it was just and right to order a retrial to look at matters such as how the debtor ended up selling his home and also became a tenant of the director.

In doing so, Justice Jeyaretnam said it was hard to describe the district court’s decision on upholding the tenancy agreements as an error because the debtor did not argue his case clearly.

But the documents provided showed the case merited a further probe because of potential illegality. “It is worth recalling that when it comes to illegality, the court may in appropriate circumstances investigate it even when it is not pleaded,” the judge added.

After all, Singapore’s highest court had directed that the courts “must look beyond the mechanical application of rules and decisions, and carefully assess the interests at stake in every case to ensure that a fair outcome is reached through the application of fair processes”.  

The case presents two important lessons on managing debt that all of us should take note.

The high costs of borrowing

No matter how attractive an investment can be, you should always think twice about borrowing to invest because you can end up with the double whammy of losing money in that deal, as well as being stuck with a loan that you cannot afford to pay off.

It was not disclosed why the debtor needed the initial $250,000 loan and why he chose to get the loan from a moneylending firm that allegedly imposed interest and penalty rates that were far higher than bank rates.

As he and his wife had been owners of the home since 1997, he could have applied for a second mortgage, which would be more affordable than a loan that charged a monthly interest of 4 per cent.

Although one should be slow to overspend by applying for a bank overdraft or rolling over debt of credit cards, doing so in this case would still attract lower interest that incurring a whopping 48 per cent annual interest charge from the company.

As a result of such exorbitant rates, the debtor’s initial loan of $250,000 that he took out around 2011 had shot up to over $3 million in just four years.

In July 2016, the debtor sold his house to the director of the moneylender for $2.1 million, but the sales proceeds did little to lessen his debt burden.

He appeared to believe he had a right to buy back his home if he was able to clear his debt. His wishful thinking of paying off his debt not only did not happen, but he also fell even deeper into the dark hole of debt, which ballooned to over $21 million by 2021.

Family should not be involved

If a joint owner of a property owes money and is sued, the creditors can apply for the home to be auctioned off so they can stake a claim on half of the sales proceeds.

Creditors cannot stake a claim on an entire co-owned property unless they can show that the co-owner is also responsible for the debt.

It is common for creditors to apply for auctions of real estate and, in many of these cases, they can only stake a claim on half of the proceeds because the other half belongs to the debtor’s spouse who does not owe any money.

In this case, it was not disclosed why the debtor volunteered to sell his home because this indirectly meant his wife’s share would also be used to pay off a debt that she might not be responsible for.

If such a sale did not take place, they could have sold the home and the wife could retain her share of over $1 million, which she could then use to buy a more affordable home for the family.

Probably realising the mistake of doing so, the debtor has since planned to file his own suit to declare that the transfer of his home to the director should be rescinded so the ownership of the home would go back to him and his wife.

As a result of this new action, Justice Jeyaretnam also approved his application to include his wife as a claimant to fight for the return of their home.

If there is a lesson from this case, it is that it is never a good idea to spend beyond your means, whether it is for personal or business expenses.

Overspending is the No. 1 reason why people end up in financial trouble, and the situation will become even worse if you borrow in order to continue spending.

Many people always assume they can always earn more money and settle their debts quickly, but the harsh reality is such wishful thinking often lands many of them in deeper trouble.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

ADV: From Cost Center to Value Driver: Strategic Legal Operations for Legal Professionals Taking employers to task for discrimination: How easy is the legal process?: Commentary