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HDB downgrading and financial stress FAQ

Leong Sze Hian, Alex Lew, Ko Siew Huey/

In view of the large number of comments to the article “HDB: $431,000 CPF – But homeless soon?”, we would like to thank all who have contributed to the discussion.

In particular, we would like to thank those who have made suggestions on helping the family, who is expected to be homeless by end July

Using this case as an example, we have compiled an FAQ to help people have a better understanding of the various policies that affect cash-strapped Singaporeans who may be trying to downgrade their homes:

Q: Why is it that bankrupts have to use the cash proceeds when they sell their Executive Condos (EC) or private properties to pay their creditors in full?

A: Under the law, all proceeds from property sales (except HDB flats which are protected from creditors) must be used to pay off all creditors.

Q: What can't some of the cash proceeds be used to pay the Cash-over-valuation (COV) of a resale flat, and then pay off creditors in instalments ?

A: Once a family is in a default situation, such as when the minimum amount that needs to be paid on debts like credit cards, credit lines, loans, etc, has not been paid, the matter may already be in the hands of debt collectors, lawyers, etc. Thus, the option to pay in instalments may not be available anymore.

The moment one creditor sues for bankruptcy, even the resale transaction will be aborted, because all assets including cash will be taken by the creditors, and all bank accounts will be frozen.

The bankrupt will only to able to open one new bank account with $100.

Q: Why can't a family borrow from friends and relatives?

A: If you have been struggling to pay your mortgage for many years, it is quite unlikely that you have any relatives or friends left who may want to lend you some more money.

Q: Why can't the entire CPF proceeds from the property sale be used to pay for a resale flat?

A:  The CPF Special Account (SA) portion cannot be used. For example, if a family has been given special dispensation to pay say about $450 a month from their SA towards their monthly mortgage repayment, these amounts, plus the higher accrued four per cent interest cannot be used.

If the SA amount allowed is so high, it is an indication that the approving authority deems the case to be an acute “mortgage deliquency”problem.

Q: Considering their job title, shouldn’t they be earning quite a good income?

A:  Job titles may be deceiving.  For example, an executive may have a net pay of about $1,300.

Q : Why can't a family of five buy a smaller 3-room resale flat?

A : Typically, smaller flats may have similar COVs to larger flats now, except in the mature estates. Families with financial difficulties would also typically have been and may still want to rent out a room to supplement their income.

Q: Why can't people be financially prudent and do financial planning?

A:  Everyday, there are people who lose their jobs, get pay cuts, fail in their business, fall sick, have an accident, etc.

Q:  If you can't afford it, why did you buy an EC?

A         The EC was created by the HDB, to cater to those with household incomes exceeding the $8,000 ceiling. When the EC were first introduced, Singaporeans were being encouraged by analysts and media reports that the EC was value for  money, relative to resale flats.

Q: Why not use CPF for the children's university tuition fees for the first year of study?

A: Since the entire CPF is typically used to pay for the downgraded resale flat unit,  they would not have any funds left in their CPF account, to meet the use for education eligibility criteria.

Q: Why not take a bank loan for the tuition fees?

A: Banks generally do not lend to bankrupts, discharged bankrupts or those with bad credit records.

Q: Why don't they accept the authority's advice to use the cash proceeds to pay off the COV first, followed by their debts?

A:  When you see a listing of debts in an official letter, it may not tell the whole story. For example, the amounts may not include  other costs like the 10 per cent debt costs and administrative fees, fees and expenses of debt collectors and and lawyers, penalty interest of typically 10 per cent on late mortgage payments, employer loans, income tax, etc.

Q: Why aren't the reasons for the mortgage arrears stated?

A: It is of no relevance to the current situation, or the solution going forward. If the client volunteers the information, it is fine. Often, it may aggravate the situation when husband, wife and children are involved.

In financial counseling, we focus on the solution, unless the causes are of  relevance to the solution. For example, in the 2003 SARS crisis, many businesses failed, and some families may still be struggling to keep a roof over their heads.

In any case, we have to bear in mind that we should try to maintain the privacy and dignity of the client.

Q: Why can't the children apply for financial aid?

A:  Financial aid is based on gross household income and does not take into account negative cash flows. Therefore, many cash-strapped families may not qualify.

Finally, in financially counseling, we do not make a judement call as to whether a family is deserving of help – we focus on the plight of the family now and how we can help.

If you see a story written, it probably means that despite our volunteers' more than 10 years of experience in financial counseling, we have run out of options, and hope that readers can offer suggestions that we may have missed, or not be aware of. If we have a solution from the financial counseling or financial planning perspective, the story may not have been written in the first place.

Our purpose in writing these stories is to highlight those issues that affect a group of people who, despite their best efforts, find themselves working against a system with odds that may be stacked against them.  We hope to tap into your collective wisdom to brainstorm ideas on better ways to address these gaps.

Alex Lew, Lee Mei Wei, Ko Siew Huey and Leong Sze Hian provide free financial counseling every Thursday from 8 – 10 pm., at Block 108, Potong Pasir Ave 1.