April 2010 Archives

The Millennial generation --Americans born between 1980 and the year 2000 -- may be the most educated generation in American history. Unfortunately, they are also among the most likely to be unemployed, carry excessive debt and face insolvency.

According to recent studies by the Pew Research Center and Demos, a nonpartisan public policy think tank, the recession has hit Millennials hard. The national unemployment rate among those under 25 was 18.8 percent in March, compared to an overall average of 9.7 percent. People under 30 face the highest percentage of unemployment or underemployment in more than 30 years.

Even as they struggle to find jobs, many Millennials are burdened with educational and credit card debt. According to the Pew study, 2008 graduates left school with an average of 24 percent more debt than 2004 graduates -- and nearly double the average of 1996 grads.

At the same time, Fidelity Investments reports that the average Millennial carries more than three credit cards and that a fifth maintain a balance of over $10,000.

"San Diego is very far from even being close to insolvent." Joined by Mayor Jerry Sanders, Jay Goldstone, chief operating officer for the city of San Diego, assures residents and creditors that the city has no plans to file Chapter 9 municipal bankruptcy.

Nevertheless, the administration has expressed strong opposition to a California Senate bill that would limit the right of municipalities to declare insolvency -- opposition shared by the League of California Cities and at least 145 of its constituent communities.

Assembly Bill 155, which passed the Senate Local Government Committee along party lines on April 19, would require cities and local districts to obtain permission from the California Debt and Investment Advisory Commission before filing for bankruptcy. The commission could have authority to force cost-cutting measures on municipalities and municipal agencies before they could file. Overall, the goal of the bill is to reduce the number of municipal bankruptcies in California.

California continues to lead the nation in the number of personal bankruptcy filings for the first quarter of 2010 -- up more than 40 percent over last year. With the widespread insolvency caused by the economic downturn, the trend is likely to continue at least into the second quarter, when most tax refunds arrive.

University of Illinois Urbana-Champaign law professor Robert Lawless, bankruptcy filings typically rise in February and March as cash-strapped debtors use their tax refunds to pay for the cost of bankruptcy.

According to David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, many consumers had been waiting to file because they hoped to receive help with mortgage debt. As that hope fades, many who seek out credit counseling are left with no option but to file for bankruptcy because their level of indebtedness is so great. High rates of new bankruptcy filings appear to correspond heavily with high unemployment and foreclosure rates.

Although bankruptcy has credit consequences, for many people it can be a positive choice. According to Paula Langguth Ryan, author of "Bouncing Back from Bankruptcy," a number of myths exist about credit repair after bankruptcy.

Myth #1: Bankruptcy Ruins Your Credit Forever

A bankruptcy stays on your credit report for seven to ten years -- not forever. Assuming you have no further debt problems, you could very well have a higher score at the end of that period than you do now.

Myth #2: Bankruptcy Means No Credit for Ten Years

In fact, you may start receiving credit card offers immediately after you file for bankruptcy, although they often have very expensive terms and interest rates. As your credit improves, the quality of the offers you receive should also improve.

As the economic downturn forces many consumers into insolvency, there has been a big increase in credit card delinquencies. In California and nationwide, credit card issuers and collection agencies are suing delinquent borrowers by the millions, and often enforcing court judgments through wage garnishment.

Far from simply collecting debts fairly owed, however, some banks have managed to use the legal system to keep consumers virtually in perpetual debt.

In order to limit "abusive" bankruptcy filings, the 2005 Bankruptcy Abuse and Consumer Protection Act (BAPCPA) placed income restrictions on Chapter 7 filings, made credit counseling mandatory, and placed certain restrictions on bankruptcy lawyers. Ultimately, Chapter 7 personal bankruptcy filings were expected to drop dramatically.

According to commentator David Weidner of MarketWatch, the law did not have that result. Instead, Chapter 7 filings are back up to pre-BAPCPA levels -- and the BAPCPA actually appears to have played a key role in the foreclosure crisis.

In part because of the economy, the disquieting reality has been a sharp increase in Chapter 7 filings. Worse, a November 2008 study by the Federal Reserve Bank of New York showed that the BAPCPA encouraged reckless lending by banks.

The federal HARP and HAMP programs have failed to prompt mortgage lenders to enter into practicable debt negotiation with enough troubled homeowners, says commentator Philip Holmes of FinancialWire, and lack of lender motivation is the likely reason.

Bank of America recently promised to work with more underwater mortgage borrowers to actually reduce principle, as opposed to merely modifying mortgage terms to lengthen the repayment period or agreeing to reduce penalties. B of A's pledge is voluntary -- probably not much different from an agreement to participate in the Home Affordable Modification Program (HAMP) or Home Affordable Refinance Program (HARP).

A California Senate bill intended to pressure mortgage lenders to take more effective debt negotiation actions before they foreclose on struggling homeowners has cleared the Banking, Finance and Insurance Committee. There are additional hurdles before the bill could reach a full Senate floor vote.

The foreclosure prevention bill, Senate Bill 1275, would force banks and loan services to make greater efforts to secure loan modifications that are workable for borrowers before proceeding with the home foreclosure process. In addition to endeavoring to reduce the likelihood of foreclosures, the bill seeks to hold banks accountable for unwieldy or even illegal collection practices.

If passed, the bill would give mistreated borrowers the right to have their foreclosures voided by the courts and to seek monetary damages.

Student loans have increased about 50 percent since 2007, according to Equifax. In 2009, alone, students took out $55 billion in loans. Debt and unemployment are at all-time highs. Students are graduating with bigger bills and without the money to pay them.

Many students are taking out loans to attend graduate school immediately following undergraduate programs because of the poor economy.

To this point, most of this money has come from private banks and lenders, used as middlemen by the government, who guarantees the loans. Billions of dollars have been spent by Washington to pay interest on these loans, but maybe not for much longer.

In 2009, even as the economy began its slow recovery, businesses continued to struggle. That was the news released this morning by Equifax Inc. According to the credit reporting agency, commercial bankruptcy filings increased by more than 50 percent last year.

Such filings did slow towards the end of 2009, but the brisk pace set in January kept the total number of bankruptcy submissions at 40,000 higher than in 2008. However, many hope that the pace will continue to slow in 2010, offering some margin of relief to the hard hit business sector.

Out of all geographic areas stricken with commercial bankruptcy, the top four were from California and included both San Diego and Los Angeles. Businesses can opt for either Chapter 7 or Chapter 11 bankruptcy, with Chapter 7 functioning in much the same way as it does for individual bankruptcies.