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Lockdowns drive shadow economy – Globes

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 A., a veteran hair stylist and owner of a hair salon that ordinarily employs a staff of 12, this week slipped into a client’s home – right under the nose of a police officer. Inside a large bag, he carried hair dye, scissors, and a blow-dryer. Salons and barbershops are shut down by law, but A. isn’t shutting down. “We get to our customers like thieves in the night. We pack everything in sealed bags that won’t be noticed and make sure there are no inspectors around,” he says.

During the first closure, A. didn’t provide services to his customers, but this time around, he’s no longer obeying the law. “In the first closure, I had zero income for seven weeks. Clients kept contacting me and asking me to come to their homes. At first, I refused because I was law-abiding and didn’t want to be a criminal, but slowly I realized I had no choice. We’d spent all our savings, including funds for our children’s education, we took out a state-guaranteed loan to inject money into the business, to pay suppliers and employees, and there’s nothing left for us.”

A. feels there’s no logic to the government’s current decisions, and no one looking out for him. “There’s no logic in collective closures or contagion area lockdowns, so we’re no longer obeying the law. The government decided to close barbershops, while businesses that sell thingamajigs from China can stay open because they set up a stand selling masks.

“Another lockdown will be a death sentence for us. This isn’t just harming business, it’s life-threatening. We don’t have security like unemployment benefits, and the government grants make a mockery of those of us drowning in business debts. That’s not money I can bring home to buy food with. I’m married with three children, and up till now, I’ve always supported my family with dignity. Now I have nothing.”

The current situation makes A. a double offender: he’s both violating the closure and also not paying tax. But he feels no shame. “I don’t enjoy it. We’re a luxury hairdressing salon, and suddenly I find myself providing pirate home services. It takes me back 25 years, to the time I was a kid, cutting hair as a hobby. And, of course, I’m breaking the law, but I don’t feel guilty about not paying taxes. The state should feel guilty for bringing me into this situation; for years the state has neglected the self-employed – we pay national insurance, but it’s given us no assurance.”

Yossi Alkobi, President of the Association of Crafts and Industry (ACI), views the intensification of Israel’s underground economy during the Covid-19 period as a phenomenon born of government mismanagement. “We’re witness to the fact that unfavorable circumstances have led to criminal behavior. Thousands are working like this because they’re hemorrhaging and have to bring food to the table. Staying home doesn’t help get you to the supermarket. Compliance was higher during the first closure. People didn’t work because they still had some savings, and they managed, but there’s no breathing room left in the second closure. They’ve got to work and the only option is to work under the radar, on the black-market.”

Alkobi feels particularly sorry for new businesses. “Those businesses that opened over the last three years, took loans, invested in their business, worked on marketing and gaining customers – they entered this crisis at a problematic starting point, with lots of commitments and little revenue.

“In the first round, they could still make do, but in this second round they’ve reached a point where they can’t pay back loans or meet obligations. So, they have no choice but to work under the table. They have homes and families to support. If they don’t pay their bank loans, it will look bad in the future, because anyone marked as a bad credit risk who tries to recover from the ruins of the coronavirus period will have a hard time with the banks. These businesses are at a crossroads, they’re in a bad way. These aren’t people who’ll steal bring home food – these are people who go to work.”

Do these people blame the government?

“There’s a lot of anger towards the government. Management on the part of the decision-makers has been a failure, for the most part. They especially don’t know how to take care of new businesses, but older ones are also suffering. This is an economic failure unequalled by any other western country. Businesses have been pushed to the brink. You have to bring home the groceries, so you do what you have to do. That’s what’s these failed policies and mismanagement have led to.

“People are losing their homes. People are threatening suicide. Things are out of control. We at the ACI have seen this mainly in the beauty industry because they were hit very hard and shut down for a very long time, but it’s evident in other professions as well: fitness trainers, gardeners, chefs, and other professions. “

“This time around, I didn’t hesitate for a second”

Indeed, working “black” these days – cash-only, no receipt, and no invoice – isn’t just for hair stylists or beauticians. Almost everyone today knows someone who works off-the-books, or pays under the table for services, from private chefs who come to cook at one’s home, through home remodelers, to personal trainers. This phenomenon – an offshoot of a shadow economy courtesy of the coronavirus – runs across professions and services. Nor is it the domain of mere “tax offenders”. People who in ordinary times perceived themselves as normative, law-abiding citizens, today pay on the black-market without thinking twice.

That’s why, Y., 47, from North Tel Aviv, doesn’t hesitate to pay cash-in-hand these days. “I am usually a law-abiding person who insists on full payment including VAT, with a receipt, from all tradespeople. But the last time I hired a plumber and he quoted a price in cash that was, of course, lower than the price I would’ve gotten if I’d paid by check, I didn’t hesitate for a second,” she says. Her change in attitude, she says, is due to the government’s unequal treatment of its citizens.

“What stood out to me was that, at a time when the ultra-Orthodox – who pay far less tax and work under the table a lot – allow themselves to behave in a way that endangers me and my family, and hampers our national health and economic recovery. I don’t need to be ‘more righteous than the Pope’. I handed him the cash without feeling guilty at all – maybe even the opposite. Of course, it’s irrational, because I know that if everyone were to act like me, things here would be even worse. But that’s how I felt.”

The data: Cash use on the rise

These stories are not extreme cases. Today’s self-employed have been in deep crisis in recent months, especially during the prolonged lockdowns, and are seeking solutions in order to survive. With them are also employees who have been furloughed or laid-off; they do benefit from a state-sponsored safety net and received monthly payments of up to 70% of their income. However, these sums aren’t always enough to live on – which also shortens their entry into the shady black-market economy.

It’s a challenge, of course, to pin down in numbers this feeling: that the volume of undeclared income has increased during the Covid-19 period. This “shadow economy,” as it’s called, is hidden from view and very difficult to quantify. But the Bank of Israel (BOI) does have data about a recent increase in the use of cash.

A BOI survey published last month shows that during the Covid-19 crisis, cash turnover in the economy has increased significantly: at the end of August this year, cash turnover was NIS 100.9 billion – an increase of 15.7% since the crisis broke out in early March. This increase is six times greater than the annual increase measured at the beginning of 2020, before the Coronavirus outbreak, when cash turnover increased 2.7%.

The BOI attributes the high demand for cash to the fact that keeping paper money on hand contributes to Israeli citizens’ sense of security. Other BOI surveys show that this sense of security is evident among population groups that are in any case biased towards using cash, such as the Arab sector and ultra-Orthodox communities, as well as people who have been more affected by the economic crisis, such as those on furlough or are otherwise no longer employed.

The bank does not attribute the use of cash to the shadow economy engendered by the Covid-19 period. As mentioned, there is a built-in methodological problem that arises whenever one tries to evaluate black-market capital in Israel (and in the world in general). What is clear is that the shadow economy is based on cash, whose use has now indeed increased significantly.

“People respond to incentives”

Prof. Omer Moav, professor of economics at the IDC Herzliya and the University of Warwick in England, believes that the current situation is a rare intersection of many “bad” things. “One side of the issue is the ease of committing the offense, paralleled by a reduction in the strength of social norms against the offense. In committing the offense of paying off-the-books, we need the cooperation of two parties, buyer and seller, and this is where the social norm that condemns these offenses should come in.”

In fact, according to Moav, what we have here a combination of “a government that is perhaps the worst functioning one in the history of the State of Israel, and an epidemic that’s unprecedented. So, normative people, who in ordinary times feel uncomfortable paying under the table, are now saying ‘The government is, in any case, operating out of political considerations instead of practical ones, so there’s no reason why we should obey the law.’”

The flip side of the same coin is the incentives provided by the government. “People respond to economic incentives,” he notes, “and the government’s serious failure is that they created a mechanism that guaranteed unemployment benefits for a whole year. There’s a great deal of evidence that shows people don’t want to work and prefer to receive unemployment benefits, and that, of course, enables ‘win-win’ deals where one side says, ‘I’ll pay in cash, so you’ll get paid and also maintain your unemployment benefits.’ They’ve created an insane incentive here that’s fertile ground for the coronavirus shadow economy. This is compounded by the fact that when economic activity is made illegal, it immediately creates an incentive to do it illegally.”

Behavioral economics expert Prof. Ori Heffetz, of the School of Management at Cornell University and The Hebrew University of Jerusalem – who was invited to advise the prime minister in formulating an economic aid program for the current crisis – is not jumping to the conclusion that Israel’s shadow economy is on the rise.

“It sounds logical to me that the volume of black-market economic activity has increased recently, but that’s just a feeling. In difficult economic situations, people will try to survive in any way they can. This isn’t surprising, it’s not unique to Israel, and it’s not new. When you’re in danger of drowning, you make fewer judgements about what’s proper and what’s not. The main thing is to keep your head above water.

“But let’s not be naive. The black-market economy here in Israel wasn’t created today, nor is it because of the current crisis. It’s true there’s a terrible crisis here – economic, health, political, social, institutional as well as a great crisis in trust and solidarity. But the black-market economy, bless its soul, has been alive and kicking since long before that. There are deep, ingrained norms within Israeli culture – you can’t blame everything on the coronavirus.”

Nonetheless, he admits, “When you issue a decree that the public is unable to follow, it makes criminals of us all. And that’s terrible, in my opinion, because it erodes norms even more.”

What about the incentive created by the guaranteed unemployment benefit policy for a year, decided on by the government? You advised the prime minister and supported this decision.

“It’s true that if unemployment benefits are given to anyone who has lost their job, there’s an incentive to claim eligibility – meaning, they can either not work, or work illegally and lie about it. That’s always the cost of unemployment benefits, not just during corona times.”

Tax Authority sympathetic but won’t give in to tax evaders

These days, Eran Yaacov, Director General of the Israel Tax Authority and Deputy Director General of the Ministry of Finance, is busy paying grants to the self-employed and reducing the restrictions imposed on businesses during the closure. But the shadow economy, whether the old breed or the new Covid-19 type, isn’t something he can ignore.

“Globally, in periods of unusual events, like wars, levels of compliance with tax laws decline,” he says. “And this is war. We’ve never been in a period like this before and we’re also trying to figure out how to deal with it.”

No doubt these are complicated times. In addition, the Tax Authority is operating with a limited staff. Are you even dealing with the shadow economy right now, or setting it aside for more normal times?

“The Tax Authority, as the entity which provides grants, is also choosing its battles these days. A large part of our workforce is dedicated to helping businesses and distributing grants. We treat employers and the general public with a very high level of sensitivity. We understand that businesses are experiencing hardships and cash flow problems, and therefore, we’re more understanding: we agree to payment in installments, we don’t rush to foreclose, and we’re considerate of businesses that are on the verge of bankruptcy. But along with that sensitivity, we have not for one moment neglected enforcement against economic crime.

“When the first lockdown was eased, very quickly we saw there were ‘corona nouveau riche’ – people who used Covid-19 as an opportunity to commit crime. We’ve never stopped taking action against fake invoices and large-scale tax evasion, constantly collecting evidence, and pursuing medium and large-scale criminal activity. And whoever is taking advantage of the coronavirus to commit economic crime is being observed by our investigation unit. We’re deeply involved in handling ‘corona scams’ – scams related to the sale of pandemic-related accessories and medical equipment.”


You mentioned medium and large-scale crimes, but what is your approach towards self-employed people currently getting paid under the table?

“Regarding small business – the hairdressers or beautician making house-calls, the chef making home-cooked meals, and others getting paid off-the-books – they’re experiencing a different reality today from what they’re used to, and we’ve adapted ourselves to this situation. We’re reasonable and sensitive on one hand, but we’re still gathering information about these businesses, and we won’t overlook them out at the end of the crisis.

“Complying with the law and paying taxes means that it has to be done, even at a time like this. We don’t come down on just anyone. When it comes to people experiencing hard times, we act sensitively, but that doesn’t mean we’ve stopped collecting evidence. We’ll get to the big criminals as well as a portion of those working off-the-books. When Covid-19 ends, we’ll get to the others as well, and that could cause damage to their grants benefits.”

The Ministry of Finance responds

In response to “Globes”, the Ministry of Finance stated: “The program dealing with the economic impact of the coronavirus includes a number of tools designed to provide an economic safety net for employees, the self-employed and businesses, with a budget that is unprecedented. These tools include, among other things, extending furlough benefits, encouraging employment, social welfare benefits for the self-employed, participation grants for fixed business costs, state-guaranteed loans, and more.

“Regarding financial assistance – the grant to the self-employed provides up to NIS 15,000 for two months, based on the past income of each self-employed person, if the business activity has been damaged by at least 40%. This tool confers entitlement to government assistance, even if the business is operational, in order to preserve the incentive to reopen or continue its activities. The grant comes in addition to a fixed costs benefit, in the thousands of shekels and up to half a million shekels, once every two months.

“Regarding unemployment benefits for the self-employed – these cover a range of difficulties, including the obligation to close the business in order to receive eligibility, a qualifying period that would have prevented new businesses from being eligible for assistance, difficulties in calculating the amount of assistance, and more. Due to these and other difficulties, unemployment benefits for the self-employed are not customary in most developed countries, neither before nor during the Corona crisis.

“Regarding the case in your article that mentions a sales turnover of NIS 300,000 per year: in general, a business of this size is entitled to NIS 6,000 once every two months from the fixed costs grant, as well as up to NIS 15,000 per month, depending on prior taxable income, and additional relief. This business can receive an amount of up to NIS 21,000 for two months, and entitlement can be maintained, even if business activity has not stopped completely. “

Published by Globes, Israel business news – en.globes.co.il – on November 8, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020


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A Look Back At Housing 2020: Rental Housing Gets Riskier

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According to the American Housing Survey cited in a recent article, there are about 48 million rental housing units in the United States ranging from single-family homes to large multifamily apartment complexes. Of those 48 million units about 23 million are owned by individuals, according to a recent Rental Housing Finance Survey; that’s more than half of the occupied units in the country. Yet private rental housing providers have been under relentless attack in recent years increasing risks and costs. This has worsened in 2020 as I have pointed out. More risk means fewer housing units and higher prices, not a good outlook for the future.

Any business based on renting assets is based on risk. Think about the last time you went bowling. When you rent the shoes, the person behind the counter often will hold a driver’s license? Why? It’s a way of offsetting the risk that you’ll go home with the shoes either on purpose or accidentally. Nobody wants to deal with a lost driver’s license. Offsetting this risk has absolutely nothing to do with you or your trustworthiness; it is uniformly applied and routine.

Housing providers have to similarly offset the risk of allowing a stranger occupy their private property. There are several ways of doing this, including using credit checks. But lately, politicians are beginning to eliminate the credit check from the tools that housing providers can use to offset risk. Minneapolis for example has eliminated credit checks arguing that they are a “barrier” to housing.

Is race a factor in bad credit and thus a barrier to people of color to get housing? The fact is, yes, African American people have more credit issues. But would eliminating credit checks help them? The answer is, “No.”

An article in the Washington Post, “Credit scores are supposed to be race-neutral. That’s impossible,” is emblematic of how this issue plays among the public and policy makers. The author says two contradictory things. First,

“This would lead one to think that credit-score calculations can’t be biased. But factors that are included or excluded in the algorithms used to create a credit score can have the same effect as lending decisions made by prejudiced White loan officers.”

Then she writes,

“One quick way to impact your credit history is a court-ordered judgment. And Black borrowers are more likely to fare badly when taken to court by their creditors. Debt-collection lawsuits that end in default judgments also disproportionately go against Blacks, according to a 2020 Pew Charitable Trusts report.”

Logically, the right way to state this is that credit measures are biased against people who have default judgments against them, and African Americans have higher rates of defaults. Then the next question would be, “Why?” The most obvious answer is the right one, poverty is disproportionately concentrated among people of color.

But eliminating credit checks for housing won’t help that problem. If a housing provider is unable to evaluate risk based on past financial performance her only option will be to raise rents and deposit amounts in case there is a problem; that extra cash would provide a buffer if a resident stops paying rent. This won’t help anyone with less money. What’s the response to that? Ban rent increases by imposing rent control! That’s a bad idea too and won’t help either.

The answer is to figure out how people who have less money and therefore have more issues making ends meet can solve that problem and improve their credit scores. The author of the Washington Post article makes a sensible suggestion: include steady rent payments in credit scores. Some housing providers do, and it’s a great idea. But it is a positive one that actually helps the family; banning quantitative measures of past financial performance doesn’t.

The danger that unfolded in 2020 is that justifiable outrage about racism could lead to interventions that don’t address poverty and it’s negative consequences like default judgments but elimination of accepted measures of those consequences. Eliminating the evidence of poverty – struggling to pay bills – doesn’t help pay the bills! At best, these kinds of measures sweep the problem under the rug ensuring higher rents and making housing a risky business only big corporations will be able to do.

The answer is to address the broader underlying issues of poverty and increasing housing production. When there is more supply of housing providers compete with providers for residents and will be forced to bargain with potential residents, even those with dings or dents or completely destroyed credit. Housing abundance solves a housing problem while eliminating measure of risk only makes that risk higher and actually creates a housing problem.

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Can My Cosigner Take My Car?

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Cosigners don’t get any rights to the vehicle they signed the loan for. However, if the cosigner is trying to take your car, it may be time to take some action.

Cosigners and Ownership

Can My Cosigner Take My Car?Cosigners can’t take the vehicle they cosigned for because their name isn’t listed on the title. A cosigner isn’t responsible for making the monthly payments, maintaining car insurance, or really anything else. Cosigners simply lend you their good credit score to help you get approved for the auto loan, and if you can’t make payments, the lender can require them to pick up the slack.

Since you’re the primary borrower on the vehicle and your name is listed on the car’s title, you have ownership rights. Your cosigner can’t come to your residence and take possession of the vehicle – even if they’re the one making the car payments right now.

If you do default on the loan and the vehicle is repossessed, the cosigner still can’t take the car.

But My Cosigner Did Take My Car!

If your cosigner did somehow take your keys and your vehicle without permission, it’s considered theft. If you want to take action, you can report the car as stolen.

However, a better first step is probably contacting the cosigner and letting them know that they don’t have any ownership rights (if you want to maintain a relationship with them). You can ask them to return the vehicle and explain that their name isn’t on the title.

Removing a Cosigner From a Car Loan

If things are dicey with your cosigner, then it may be time to consider removing them from the auto loan. The easiest way to remove a cosigner is by refinancing.

Refinancing is when you replace your current loan with another one. You can work with your current lender or another one, but most borrowers look for another lender to refinance with.

You don’t need a perfect credit score to refinance your car loan – it just has to be good or better than it was when you first got the loan. Another common requirement of refinancing is that you’ve had the loan for at least one year.

Other common requirements for refinancing are:

  • You’ve stayed current on payments throughout the loan
  • You have equity or your loan balance is equal to the vehicle’s value
  • Your car has less than 100,000 miles and is less than 10 years old

Most borrowers usually refinance to lower their loan payments. Since you’re replacing your current auto loan with another one, many borrowers try to qualify for lower interest rates or extend their loan to lower their payments. If your credit score has improved, you may even be able to get a better interest rate and remove your cosigner!

Can’t Refinance to Remove the Cosigner?

Refinancing isn’t in the cards for everyone. However, another efficient way to remove a cosigner is by selling the car. Cosigners don’t have to be present at the sale of the vehicle, since they don’t have to sign the title to transfer ownership.

If you sell the car and get an offer large enough to cover the entire balance of your loan, you and the cosigner can walk away from the auto loan scot-free.

However, many borrowers need cosigners because their credit score isn’t the best. If you want to sell your vehicle to remove your cosigner, but you’re worried you can’t get a car loan by yourself, consider a subprime auto loan for your next vehicle.

Bad Credit Auto Loans

Since many traditional car lenders don’t work with borrowers who have poor credit histories or lower credit scores, they often ask them to bring a cosigner. But what if you don’t want a cosigner (or can’t get one) on your next auto loan? Enter subprime car loans.

Subprime lenders are teamed up with special finance dealerships, and they operate remotely. When you apply for financing with a special finance dealer, you work with the special finance manager who acts as the middleman between you and the lender.

You need documents to prove you’re ready to take on an auto loan – typical things like check stubs, proof of residency, valid driver’s license, a down payment, and other assorted items depending on your credit situation. If you qualify, the lender determines what your maximum car payment can be, and you choose a vehicle you qualify for from there.

What sets subprime auto loans apart from traditional car loans is that they assist borrowers in tough credit situations and offer the opportunity for credit repair. Some in-house financing dealerships that don’t check credit reports don’t report their auto loans, which means your timely payments don’t improve your credit score.

Finding a Car Dealership Near You

The best way to improve your credit score is by paying all your bills on time. Payment history is the most influential piece of the credit score pie. There are many lenders willing to work with bad credit borrowers, you just have to know where to look!

Here at Auto Credit Express, we’ve already done the searching, and we’ve created a nationwide network of dealers that are signed up with subprime lenders. Get matched to a dealership in your area, with no cost and no obligation, by filling out our car loan request form.

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United Way hoping to raise thousands of dollars on Giving Tuesday –

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“We have partnered with Carter Meyers Associates in the community and developed what we call Driving Lives Forward, an automobile loan program to help families that maybe have no credit or bad credit to access resources to have an affordable loan to purchase a reliable used car,” said Barbara Hutchinson, the Vice President of Community Impact for the United Way of Greater Charlottesville.

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