July 2010 Archives

Vinnie "Wiz" Vincent, the former "Ankh Warrior" guitarist for the glam-metal rock band KISS in the mid-80's, has lost his Chapter 13 bankruptcy appeal. Former KISS members Gene Simmons, Paul Stanley and others had a judgment against Vincent and were trying to collect by selling his songwriting copyrights. His bankruptcy filing and subsequent appeal were an attempt to stop those sales.

Vincent, who has filed for Chapter 13 bankruptcy three times in the past three years, had filed most recently in Tennessee. A bankruptcy judge in that district ruled that his filing was in bad faith. A three-judge panel from the U.S. Circuit Court of Appeals for the Sixth Circuit affirmed that ruling, which also bars Vincent from filing Chapter 13 again for two years.

Vincent, whose actual name is Vincent John Cusano, wrote such songs as "Lick It Up" and "Young and Wasted" for the band, and continues to own the rights to those songs.

In 2009, Vincent unsuccessfully sued other KISS band members for unpaid royalties and defamation in California. The court awarded the other band members $82,000 to pay their attorney fees in the case. The KISS showmen then proceeded to collect on that judgment, demanding that Vincent turn over those copyrights to pay it.

During this economic downturn, a lot of people are caught in a seemingly unbreakable cycle of insolvency. They're in financial trouble at least in part because of a job loss. When they try to get a new job, their financial woes keep them from getting hired.

According to the Society of Human Resource Management, 60% of employers nationwide perform credit checks on potential hires. A poor credit report may be the factor that keeps a promising applicant from being hired.

"There can be legitimate reasons to pull a credit report," says Larry Lambert, President of Employment Screening Services, Inc. "You wouldn't want to hire someone on the edge of bankruptcy to take care of your assets."

For most jobs, however, a credit report doesn't have such a direct connection to performance of job duties. Instead, employers use it much like a character reference -- extrapolating an applicant's probability of job success from a financial report.

Nevertheless, employers continue to pull credit reports on applicants -- many without really considering why.

"Sometimes it's because the employer believes in a made-up correlation between credit problems and general irresponsibility on the part of the job applicant," explains Liz Ryan, a workplace expert and former Fortune 500 HR executive.

A recent article on CNNMoney.com confirms what we've been telling our clients and readers: Yes, filing for Chapter 7 or Chapter 13 bankruptcy can help you save your home. It's not going to help everyone, but for those in the right situation, it can be a powerful tool to get you back on your feet.

Bankruptcy has a number of additional benefits, as the article points out, for people currently in foreclosure and for those whose homes have already been foreclosed upon. Both Chapter 7 and Chapter 13 can strip off second mortgages, kill deficiencies, and prevent you from having to pay surprise taxes.

Bankruptcy Stops the Foreclosure Process and Gives You Breathing Room

As soon as you file for bankruptcy -- whether you file for Chapter 7 or Chapter 13 -- a halt is put on the foreclosure process and other collection actions. This can give you time to reorganize your finances and make up missed payments, as the article mentions.

"It's the best tool there is for people behind in payments but who have ongoing income," according to a bankruptcy lawyer from Binghamton, New York, who was interviewed for the article, "those who had been making payments and who could be making payments again."

If you work with a legitimate provider, debt negotiation can be a big help when you're drowning in debt and dealing with creditor harassment. Unfortunately, there are some types of debt that don't typically qualify for settlement.

The five types of obligations that are the hardest to resolve through debt negotiation are student loans, tax debt, alimony and child support, utility bills, and secured debts. The fact that they present challenges, however, doesn't mean there are no options.

Student Loans

Unfortunately, student loans are extremely difficult to discharge through bankruptcy, and lenders know it. Student loans are rarely written off and forgiven, and if the lender obtains a judgment against you, they can enforce it through wage garnishment, liens and other harsh means.

FICO Inc., the company that provides the credit scores 90 percent of lenders evaluate consumer credit risks, just released a survey of Americans' credit scores as of April and how they compare to consumers' creditworthiness historically.

The report shows an interesting and disturbing trend: sharp growth in the percentage of consumers with very low or very high credit scores, and a corresponding collapse in the percentage of American consumers with average credit.

These numbers seem to indicate a trend in Americans' credit fortunes similar to the well documented growth in the divide between the extremely wealthy and the insolvent. Are we facing a "shrinking middle class" in the availability and cost of credit?

What Does FICO's Latest Analysis Show About Americans' Credit Scores?

The newest numbers from FICO represent April data. The up-shot of the report is that the percentage of consumers in the mid-range groups representing "fair," "moderate" and "good" credit scores is dwindling, from 45 percent of active consumers historically to only 37.1 percent now.

The nation's largest banks might want to take a hint from a recent upswing in Chapter 13 bankruptcies by people who have second mortgages. The four largest issuers of both first and second mortgages, Bank of America, Wells Fargo, JPMorgan and Citibank hold nearly $435 billion of the $1 trillion second mortgage market, and they could face staggering losses if the trend continues.

Mortgage borrowers generally seek loan modifications before even considering filing for bankruptcy. When they face too many roadblocks to debt negotiation with their banks despite government programs like the Home Affordable Modification Program (HAMP), however, they often find that Chapter 13 is a way to keep their homes while ditching unaffordable second mortgage liens.

Bankruptcy Courts Can Reclassify Second Mortgages as Unsecured

In the case of an underwater mortgage, where a home has an appraised value of less than the amount owed on the first mortgage, Chapter 13 can offer an unexpected life raft for some drowning debtors. The homeowner can petition the bankruptcy court to reclassify the second mortgage from secured debt to unsecured, which does not have to be paid in full.

See the first four great, surprising credit repair tips in part I of this series.

Credit repair tip #5: Don't pay off existing card balances with an introductory interest-free card.

"Balance transfers can work in your favor if the interest you save outweighs the transfer fees," explains Leslie McFadden. However, "you have to be careful that you're not running up so much of the new card's credit limit that it's hurting your score." Consolidating your balances can make the credit bureaus think you're maxing out that new card.

Plus, when the introductory interest-free period runs out, you may suddenly find yourself paying an interest rate that's higher than the card you transferred the balance from.

Credit repair tip #6: Don't borrow from your house to pay off credit card debt.

The upside? A lower interest rate and the ability to consolidate your debts into one payment -- usually a lower payment. The downside? Potential for disaster. Do not put up your house as collateral for existing debts. If you can't make your payments for any reason, you could face foreclosure.

In today's economy, with job losses, foreclosures, insolvency and bankruptcy threatening ordinary hard-working people, everyone could use a few tips about paying down debt. The following eight practical credit repair tips are based on how your credit score is calculated, spending psychology and sound reason. Nevertheless, they may go contrary to some concepts most people just assume to be true:

Credit repair tip #1: Use those credit cards.

It's true that using credit cards instead of cash can give you a subtle push to spend more. Nevertheless, you need to use your credit cards for them to be counted positively on your credit report.

Because of the credit cries, many creditors are closing inactive accounts because they're not profitable but still expose the companies to risk. You may not mind losing a dormant account, but credit reporting agencies do take notice.

About 30 percent of your credit score is based on your debt-to-credit ratio, or how much of your available credit you use. When an account with no balance gets closed, it makes that ratio worse and lowers your credit score.

"Now it's use it or lose it," says Liz Pulliam Weston, personal-finance columnist for MSN Money and author of Your Credit Score.

Credit repair tip #2: Don't close your account once you pay off your balance.

The same debt-to-credit ratio rationale applies here, but there's more. Another 15 percent of your credit score depends on the length of your credit history. Closing your oldest account shortens your credit history and can blow that 15 percent.

The La Mesa-Spring Valley, Oceanside Unified, Ramona and San Ysidro school districts in San Diego have warned the state that they face insolvency and may be forced into bankruptcy without state funding increases.

This announcement came on June 29 from the California Department of Education, which collects financial stability reports of the district and provides analysis for counties and the state. The four districts are among 160 that have been put on the "fiscal early warning list." Fourteen districts turned in "negative budget certifications," which means they are unable to meet their existing financial obligations.

The four San Diego County districts have said they will not be able to pay their bills through the next two years. La Mesa-Spring Valley and San Ysidro were also on the "fiscal early warning list" in 2008.

"Schools on this list are now forced to make terrible decisions to cut programs and services that students need or face bankruptcy," state Superintendent of Instruction Jack O'Connell said in a statement.

The rate of insolvency among school districts and education agencies has shot up 38 percent since January. This represents an "alarming spike," O'Connell said.

Cuts in State Funding for Education, Not Mismanagement, to Blame

"This is not a problem of district mismanagement. This problem has been passed on to school districts by the state," said Lora Duzyk, assistant superintendent of business services at the San Diego Office of Education, in a recent San Diego Union-Tribune story.