For most people the answer is no. Even though credit card debt is expensive, the costs of borrowing from your 401(k) or IRA probably far outweigh what you'd save on interest.
More important, your retirement accounts are an essential asset that takes years to build. For most Americans, they're the only way they'll be able to pay their expenses once they retire, and the only way they'll be able to save enough for those years is to start early and save consistently over the years.
Consider the Net Costs of Cashing Out Your 401(k) Plan
]]> Say you had $1,000 in a regular savings account that was earning you 1 percent interest and you had $1,000 in credit card debt that was costing you 10 percent interest. All other considerations aside, financially it makes sense to use your savings to pay off the credit card because, as it stands, keeping the money in that savings account is actually costing you a net 9 percent.On the other hand, if the savings account paid you 10 percent and the credit card cost you 1 percent, it makes more sense financially not to use the savings to pay off the credit card. In fact, you might want to borrow more from the cheap credit card and invest it in that high-return savings account -- you'd come out ahead.
With a 401(k) account, however, it's not that simple. These and some other retirement savings accounts have tax advantages to encourage you to save. In many cases, you get to put money into the account before any taxes are taken out of it.
When you take money out of such an account before retirement, you have to pay taxes on it. Additionally, you will have to pay a 10 percent penalty for withdrawing the money early.
Practically what that means is this: In order to get $30,000 out of your 401(k) account that you can use to pay off credit card debt, you actually have to withdraw $46,000. The other $16,000 will disappear forever in the form of taxes and penalties.
So, before you make the very expensive choice of using your retirement account to pay off credit card debt, talk to a credit counselor or a bankruptcy attorney to find out what your options are.
Source:
"Don't retire card debt with 401(k) savings" (To Her Credit blog, CreditCards.com, July 23, 2010)
]]>Zide, the producer of such hits as the "American Pie" and "Final Destination" series of movies, filed for Chapter 7 bankruptcy earlier this month in Los Angeles. He recently completed the credit counseling required of all individual Chapter 7 filers and has been given notice that he needs to complete a course in financial management.
Zide's bankruptcy filing didn't list his debts individually, but he indicated that his total debt is in the range between $1 million and $10 million. His assets likely include the rights to his popular movie series and other intellectual property. His copyrights, merchandise licensing deals and other sources of income related to the movies he has produced will likely be sold to satisfy his creditors.
]]> The Detroit News reports that Zide, a Michigan native, also owes the State of California $518,630 in back taxes, which are generally not subject to discharge through bankruptcy. The tax debt will be one of the first debts submitted for repayment in the Chapter 7 bankruptcy process, leaving creditors ranking lower in preference to be paid out of what remains.The 1999 hit "American Pie" was followed by two sequels that were released in theaters and a number of direct-to-video spinoffs. The "Final Destination" series is made up of four movies so far, including 2009's "The Final Destination in 3-D."
Related Resource:
"American Pie Producer Files for Bankruptcy" (Bankruptcy Beat, The Wall Street Journal, August 31, 2010)
]]>As you might expect, a lot of people are facing painful personal finance challenges in these economic times -- even if they haven't been laid off and aren't facing foreclosure. Last week Fidelity Investments reported that a record number of people are borrowing from their retirement accounts despite the expensive penalties for doing so.
This sign is particularly troubling because many of the people doing so are still employed. The high unemployment rate makes workers reluctant to leave their jobs, and many companies have cut back on overtime or even reduced salaries.
"People tend to be taking home less," says Beth McHugh, Fidelity's vice president of marketing insight. "As a result the percentage of individuals initiating hardship distributions is one of the things we're concerned about."
A Growing Number of Employed People Seeking Hardship 401(k) Withdrawals
]]> The number of workers borrowing from their Fidelity retirement accounts is apparently at a 10-year high. Fidelity administers 17,000 401(k)-style retirement investment plans with 11 million participants. According to Fidelity, 62,000 plan participants applied for hardship withdrawals from their plans in the second quarter, compared to only 45,000 a year ago.Even more surprising, 45 percent of those who asked for hardship withdrawals last year took a second one this year.
Fidelity says that the average age of workers seeking hardship withdrawals is between 35 and 55 -- which are most people's peak earning years.
A hardship 401(k) withdrawal is a loan. For those under 59 1/2, an early withdrawal will cause them to incur tax liability plus pay a ten percent penalty, which can essentially destroy the value of a lifetime's investment increases.
In order even to eligible for this expensive withdrawal from a 401(k) plan, the IRS requires you to demonstrate an immediate, heavy financial need. That could be financial problems caused by medical debt; damage to your primary home; burial or funeral expenses; payments to prevent foreclosure or eviction; or certain expenses related to education or primary housing.
Despite the disheartening news that many Americans are so insolvent that they can no longer afford to leave their money in 401(k) plans, Fidelity did have good news for those who can. The average Fidelity 401(k) account balance was up 15 percent in the second quarter over the same time last year, although it was down from the first quarter of 2010.
Related Resource:
"Fidelity sees record number raid their 401(k)s" (Associated Press, August 20, 2010)
]]>The truth is that, while these kinds of debt are very hard to discharge through either Chapter 7 or Chapter 13 bankruptcy, there are exceptions. For example, under the 2005 bankruptcy law, student loans can still be discharged in limited cases by going to trial to prove "undue hardship."
Federal tax debts were also made harder to discharge by the 2005 bankruptcy law, but in a few cases, they can still be released in Chapter 7 and Chapter 13. Some taxes are never dischargeable, such as payroll taxes, an IRC ยง6672 trust fund tax penalty, most state sales taxes and certain excise taxes.
There Are Alternatives to Bankruptcy That Can Resolve IRS Tax Debts
]]> For most people, the best option for handling federal tax debts will be the IRS's debt negotiation and settlement process. The IRS works with taxpayers to resolve tax debts through innocent spouse relief, installment agreements, offers in compromise and agreements to reduce penalties.If the IRS debt negotiation process doesn't resolve the situation, you may have some tax debts that are eligible for bankruptcy discharge. Your own situation may have aspects that can't be covered in a blog post, so you should check with a bankruptcy attorney before making any decisions.
Some Federal Tax Debts Are Dischargeable in Bankruptcy
Federal bankruptcy law sets up a mechanical formula for determining whether IRS tax debts can be discharged. The general rules are:
If you have a federal tax debt that meets the criteria of all four of these rules, you can discharge it through bankruptcy. Check with a bankruptcy lawyer to make sure.
If your tax debt meets the criteria in the first, second and fourth rules but not the third, it is not dischargeable, but will be reclassified from "priority debts" to "non-priority debts."
Related Resource:
"Discharging Taxes in Bankruptcy" (The American Chronicle, August, 2010)
]]>The report, entitled "Dreams Deferred: Impact and Characteristics of the California Foreclosure Crisis," analyzed more than 500,000 foreclosures statewide and found 48 percent of those affected were Latino, while whites totaled 35 percent, African Americans 8 percent, and Asians 6 percent. The percentage of Latinos facing foreclosure far outstripped their representation in the population.
The report also found that Latino and African American borrowers were more likely than similarly situated whites to have been offered high-cost subprime mortgages, which had loan terms that increased their default risk. That is to say, when white and minority borrowers had the same credit and risk profiles, the minority borrowers were offered less favorable loan terms, on average.
Insolvency has also disproportionately hit minorities in the economic downturn, with a number of studies showing that African Americans and Latinos have been more likely to be laid off and less likely to find new employment during the crisis.
No "McMansions" for Most Victims of Foreclosure, Study Shows
]]> The report also looked at whether most foreclosures were caused by people buying homes that they couldn't afford. It has been widely believed that the availability of no-downpayment loans and adjustable-rate mortgages (ARMs) with cheap initial loan terms encouraged many to buy homes that were outside of their realistic price range. Conventional wisdom held that borrowers either didn't understand that their payments would become unaffordable with the ARMs adjusted, or that people planned to sell the homes at a profit before the higher payments came due.The Center for Responsible Lending's analysis reveals that 75 percent of the nearly half a million foreclosed homes studied were actually quite modest. This indicates that homebuyers were not gaming the system or foolishly buying homes they could never hope to afford in the long term.
Did Gains in Latino Homeownership During the Past Decade Backfire?
A 2009 study on Latino homeownership by the Wall Street Journal found that, between 2000 and 2007, homeownership among Latinos grew by 47 percent. During the same period, however, general homeownership grew by only 8 percent.
The Federal Financial Institutions Examination Council reported that mortgages written to Latinos jumped by 29 percent in 2005 alone -- with the incidence of expensive subprime mortgages written to Latinos soaring by 169 percent.
The Wall Street Journal's investigation reported that there had been a "a push by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos" in the period between 2000 and 2007 and suggests that this push may have backfired.
The Center for Responsible Lending recommends several solutions, including giving bankruptcy judges cramdown powers so they can modify mortgages on principal residences. It also recommends increased funding for organizations that offer pre-purchase and insolvency-related housing counseling or legal help for distressed homeowners.
Related Resource:
"Revealing the racial makeup of California's foreclosures" (Crosscurrents, KALW Public Radio News, August 19, 2010)
]]>"Cramdown" basically means that bankruptcy judges would be allowed to reduce what is owed on a mortgage without discharging it completely. The judge would "strip" the loan into two parts: a secured loan equal to the current market value of the home and an unsecured loan equal to the rest of the original mortgage. Because the payment priority of the unsecured portion would be lower, many borrowers would qualify for Chapter 13 repayment plans that essentially resulted in that part of their loan never being paid off.
The idea of giving bankruptcy judges cramdown powers came up early in the debate after the housing market crashed, but it never came to fruition. Many people believe the banking industry simply wouldn't tolerate it.
In a recent editorial in the Atlantic, business and economics editor Megan McArdle argues that it may not be just another case of Washington protecting banks at the expense of the little guy. She says there are good reasons to believe that cramdown wouldn't really help -- at least not without overall bankruptcy reform.
Would Chapter 13 Cramdowns Help a Lot of Troubled Homeowners?
]]> McArdle's main argument is that mortgage cramdowns wouldn't be a good solution for all that many people, but the negative impact they would have on the availability of credit and on real estate values could be big. Here are some of her arguments:First, bankruptcy cramdown wouldn't help people who aren't otherwise insolvent but can't pay off their mortgages. Most people put into Chapter 13 plans are better off because they're already paying virtually all of their discretionary income to creditors. For people whose only real problem is a deeply underwater mortgage, McArdle argues, a Chapter 13 repayment plan could actually accelerate their repayment, resulting in them with even less discretionary income than before.
Some scholars estimate that nearly two-thirds of Chapter 13 filings fail. If that is true, McArdle points out, many homeowners could end up with the same debt load they had before they filed for bankruptcy -- but they would have been making smaller payments during the period of the plan. Now they'd be even worse off.
Worse, if a lot of underwater mortgage borrowers failed, we might see another big dump of foreclosed homes on the market. That would drive real estate prices down.
Because of the high administrative costs caused by the 2005 bankruptcy law (BAPCPA), 15 to 18 percent of Chapter 13 plan payments are actually going to cover attorney fees and court costs. Ideally that money would be used to pay down the mortgage.
The reason mortgages on primary residences are immune from cramdown is because Congress wanted to keep the cost of borrowing down. The idea was brought up in the 1977 bankruptcy reform, and the banking industry argued that mortgages that were subject to cramdown would be more expensive. It's true -- mortgages on vacation homes and investment properties, which are currently subject to cramdown, are more expensive.
Allowing cramdown could entice homeowners into premature bankruptcy, driving up lending costs. If a lot of distressed homeowners chose Chapter 13 for the cramdown, a lot of mortgages might be discharged that would otherwise have been paid off. That could cause banks to significantly increase mortgage costs or clamp down on lending standards.
What do you think?
Related Resource:
"Mortgage Cramdowns Are No Panacea" (Megan McArdle, The Atlantic, August 12, 2010)
]]>The data collected reflects both business and personal bankruptcy filings under Chapter 7, Chapter 11 and Chapter 13 of the U.S. Bankruptcy Code.
The numbers appear to reflect a virtually unprecedented level of insolvency among California businesses and consumers. An astonishing 8.3 percent of the 388,148 bankruptcies filed in the U.S. in the first quarter were filed in the Central District of California.
A total of 32,236 bankruptcies were filed in the Central District between January and March. 60,523 bankruptcies were filed in California during that period. Florida, the state with the second highest total bankruptcy rate, didn't even come close to California's numbers: 26,404 bankruptcies were filed in Florida during the first quarter.
Data Shows Bankruptcy Filings Back Up to Pre-2005 Levels
]]> The American Bankruptcy Institute's data also shows that the 2005 bankruptcy law called BAPCPA had only a temporary effect on bankruptcy filings. The law was intended to reduce the overall number of bankruptcy filings and to force most consumers into filing Chapter 13, which requires them to repay at least a portion of their debts.The number of bankruptcy filings nationwide indeed dropped sharply between 2005 and 2006. A total of 2,078,415 bankruptcies were filed in the U.S. in 2005, while only 617,660 were filed in 2006.
California filings showed a similar drop after the 2005 bankruptcy law was passed: a total of 166,709 were filed by businesses and consumers in 2005, but only 39,285 in 2006.
Since that time, however, the recession, unemployment, the housing crisis and other factors contributing to insolvency have driven bankruptcy rates back up -- to levels exceeding those before the law was passed. In 2009, 209,661 individuals and businesses filed for bankruptcy in California alone. The nationwide total was 1,473,675.
Nor did the law succeed in reducing the number of consumers who petitioned for Chapter 7 relief as opposed to Chapter 13 relief. In 2009, 155,224 individuals -- over 77 percent -- filed for Chapter 7 personal bankruptcy, whereas only 45,180 opted for Chapter 13. In 2006, slightly more than 74 percent filed under Chapter 7.
Related Resources:
Unfortunately, as record levels of insolvency across the board demonstrate, these are not ideal times. While it appears to be true that many U.S. consumers have substantially paid down their credit card balances, the real story is that student loans are increasingly the source of financial trouble for many people.
Mark Kantrowitz, publisher of the financial aid websites FinAid.org and FastWeb.com, calculates that Americans owe a total of $829.785 billion in outstanding student loan debt. For the first time, that total exceeds the total debt owed in revolving credit -- $826.5 in June 2010 (most revolving credit is credit card debt).
Nevertheless, mortgages and credit card debt receive the lion's share of media coverage. The nonprofit advocacy group Student Loan Justice points out that the media prefers stories about credit card debt to student loans "by a factor of approximately 15-to-1 based on unscientific news surveys conducted since 2007."
Perhaps America's astonishing addiction to consumer credit makes sexier news, but the pain inflicted by the student loan burden may actually be worse.
Under the 2005 bankruptcy law, student loans typically can't be discharged in bankruptcy. That means that if anything happens to interrupt the expected income benefits of a college education -- a disability, a poor economy, or another life event -- educational debt can become a millstone that can never be removed.
]]> Student loans -- often made to young people with little financial experience -- are made outside the purview of the basic consumer protection laws that apply to credit cards. The repayment terms can have surprisingly harsh consequences for borrowers who get behind -- such as the garnishment of Social Security disability benefits.Overburdened Student Loan Borrowers Could Herald the Next Debt Crisis
Kantrowitz describes the growth in the educational debt burden this way: "The increase in total student debt occurs slowly but steadily, so by the time you notice that the water is boiling, you're already cooked."
By his estimate, there is currently about $605.6 billion in outstanding federal student loans and another $167.8 billion in private student loans. Of the federal student loans, about $300 billion was incurred in the last four years alone.
Studies show that people are having to borrow a lot more to go to school today, and they're having to borrow at less favorable rates than in the past. According to the Pew Research Center, 2008 graduates owe an average of 24 percent more than 2004 graduates did -- and nearly double what 1996 grads had to borrow.
The cost of education is soaring -- college tuition is up more than 400 percent in the last 25 years. Post-college unemployment rates are a historic highs, and the percentage of college students able to finish in four years is down. Many are borrowing record amounts of debt only to be forced to drop out before they receive a diploma.
Overall, the average person between the ages of 20 and 29 owes $23,200 in student debt, according to the Project on Student Debt -- a 24% increase from 2004.
Worse, many students build up credit card debt during college. Fidelity Investments estimates that the average member of the Millennial generation has more than three credit cards, and a fifth of them owe a balance of more than $10,000. Juggling credit cards and student loans can be extremely challenging even for those with above-average incomes.
Add to this the fact that student loans have been one of the most profitable sectors in lending, and the outline of a true crisis becomes visible.
Related Resource:
"Student-Loan Debt Surpasses Credit Cards" (Real Time Economics blog, The Wall Street Journal, August 9, 2010)
]]>Of all U.S. Chapter 13 bankruptcy filers, those in Northern California had, on average, both the highest income in the month before they filed and the highest expenses. Nationwide, the total assets consumers reported on their bankruptcy petitions was up 34 percent, meaning that relatively wealthier consumers were increasingly at risk for bankruptcy.
Approximately 71 percent of all consumer bankruptcies last year were filed under Chapter 7. People filing under Chapter 7 either make no more than the median income for their region or are demonstrably unable to pay even a portion of what they owe.
Of the 109,936 people who filed for Chapter 13 last year, 28 percent had filed for bankruptcy before within the last eight years.
The report, which is required as part of the 2005 bankruptcy law known as BAPCPA, compiles information provided by consumers on Chapter 7, Chapter 13 and Chapter 11 personal bankruptcy filings.
Most San Diego-Area Filers Owe Substantially More Than Their Total Assets
]]> The numbers revealed by cases filed in the U.S. Bankruptcy Court for the Southern District of California, which covers San Diego, were troubling.A total of 19,487 consumers filed for bankruptcy in the district last year. Of those, 82 percent filed for Chapter 7 -- a substantially greater percentage than the national average.
Of all those who filed for consumer bankruptcy last year, the average person had assets of around $239,769 but owed $417,170. To break that down, the average Chapter 7 personal bankruptcy filer had about $212,637 in assets and owed $389,954. Chapter 13 filers owned an average of $391,279 in assets but had $563,468 in debt.
In Chapter 7 cases, 81 percent of what people reported as their assets was real estate; it was 79 percent for Chapter 13 filers.
Debtors categorized the vast majority of their debt as dischargeable in bankruptcy, meaning it fell into categories including mortgages, medical debt and general consumer obligations like car loans and credit card debt. Non-dischargeable debts such as taxes, alimony and child support, and student loans made up a negligible amount of the average filer's debt load -- only about $11,278.
Related Resources:
These lawsuits may signal an historic clawback of funds from companies Madoff family members allegedly bought with money stolen from investors in Bernard L. Madoff Investment Securities LLC. The complaints seek the return of $34.5 million paid into the businesses, along with majority ownership in one of the companies, Primex Holdings LLC.
While it is common in Chapter 7 bankruptcy proceedings for trustees to recover fraudulent pre-bankruptcy transfers, it is unusual for a trustee to go so far back in time. The case is also unusual in that Picard isn't seeking the clawback only from the direct recipient of the fraudulent transfer, but against third-party companies allegedly purchased using the fraudulently transferred funds.
Chapter 7 Trustee Lawsuits Seek Clawback of Money Used to "Fund Lavish Lifestyles"
]]> According to the complaints filed with the U.S. Bankruptcy Court, Madoff "was quite generous with money he stole." He allegedly gave $250 million to his wife, brother, two sons and a niece, who used it to "fund lavish lifestyles." The Madoff family members also used $22 million to invest in personal business ventures including a hedge fund, a biotechnology company, energy companies, and Primex Holdings LLC, a company designed to replicate an auction process.Bernard Madoff, 72, is currently serving a 150-year prison term for fraud after pleading guilty to orchestrating the biggest Ponzi scheme in history. After his 2008 arrest, $65 billion in nonexistent client accounts were discovered, causing investors in Bernard L. Madoff Investment Securities LLC to lose $20 billion in principal.
Madoff was forced into involuntary Chapter 7 personal bankruptcy in April 2009. That case was ultimately consolidated with his firm's Chapter 7 business bankruptcy.
Related Resources:
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.
]]> Background and Bad FaithA former staff writer for the TV show "Happy Days," Vincent made a career change in 1982 when he was hired by KISS to replace guitarist Ace Frehley. As the lead guitarist for the band from 1982 to 1984, he played on the albums "Creatures of the Night" and "Lick It Up." He made $2,000 a week.
When Vincent was hired, all of the band's members took on personas that were reflected in their over-the-top costumes and full face paint. Vincent chose Egyptian-style face paint for his "Ankh Warrior" persona, then continued with the band as they entered their non-makeup period. He was later fired, reportedly for "unethical" behavior.
Vincent later formed a new glam-metal rock band called the "Vinnie Vincent Invasion," which released two albums in the late 80's. He currently lives in Nashville.
In his failed 2009 Chapter 13 bankruptcy filing, Vincent's lawyer argued that selling off the copyrights to his songs would leave Vincent "destitute, as the property sought to be sold constitutes the debtor's life's work."
Vincent later fired his bankruptcy attorney and proceeded pro se. In his appeal, he argued that any mistakes made in his bankruptcy filing were not due to bad faith but were the inadvertent errors of a plaintiff representing himself.
The Sixth Circuit panel shot that argument down.
"We cannot excuse a lack of good faith based on debtor's pro se status, particularly when the debtor was in fact represented by counsel or had retained counsel during the vast majority of his time in the bankruptcy court but failed to follow counsel's advice," it said in its ruling.
Related Resource:
"Former Kiss Guitarist Loses Bankruptcy Appeal" (Bankruptcy Beat, The Wall Street Journal, July 7, 2010)
]]>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.
]]> Are Pre-Employment Credit Checks That Much of a Problem?Credit reports were never designed to predict job success, say experts, and that's one problem. "The [report] is designed to determine the likelihood of someone defaulting on a loan, not whether someone would make a good employee," points out Brad Clarkson of the National Association of Professional Background Screeners.
Bad credit is the result of a lot of factors, many of which may not be under the job seeker's control. A negative credit entry could be in error or caused by misbehavior on the part of a former spouse. Of course, many of those black marks could be there because the applicant has been unemployed and hasn't been able to pay the bills.
When you try to predict future behavior on a few data in a relatively unrelated area, says Liz Ryan, you're on a slippery slope.
"What's next?" she asks. "Asking a job-seeker whether he or she is married, or has ever been depressed, or has ever had negative thoughts about a boss or employer?"
The good news for people stuck in the unemployment and insolvency cycle is that the federal government and a number of states are coming to the same conclusion. Three states -- Washington, Oregon and Hawaii -- have already passed laws regulating pre-employment credit checks. Sixteen other states and the federal government are considering doing the same.
These laws prohibit typically employers from pulling credit reports without a specific, clear, legitimate business reason. For example, an employer wouldn't be allowed to pull credit reports on applicants for a job as a janitor. They would, however, be allowed to do so if they were hiring a company accountant.
"Even hardworking people have been losing jobs since the economic downturn," says Healy Jones, head of marketing for Office Drop. "It doesn't make sense to discriminate against someone who worked hard their whole life and then lost a job and had problems meeting obligations."
Related Resource:
"Employer Credit Checks May Soon Be Illegal" (MainStreet.com, July 23, 2010)
]]>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."
]]> Both Chapter 7 and Chapter 13 Offer Help to Save Your HomeChapter 7 bankruptcy usually results in assets being sold off, and that can include the home. Whether your home will be exempt from being sold to pay your creditors is something a bankruptcy attorney can determine for you.
On the other hand, Chapter 7 wipes away most or all of your unsecured debt, which may be enough to resolve your debt problems. Your mortgage is secured debt (which means a debt with collateral), so it won't be discharged in a Chapter 7 bankruptcy. If you qualify for Chapter 7 and you would be able to make your mortgage payments if you got rid of most of your other debt, Chapter 7 could make it possible to save your home.
Many bankruptcy attorneys prefer Chapter 13 for people who are trying to save their homes. This is because Chapter 13 sets up an income-based repayment plan that results in all of your qualifying debt being paid off or erased in three to five years. So, if you are able to keep up on your payments, you can emerge from Chapter 13 still owning your home.
Bankruptcy courts do not have the authority to reduce the total you owe on your mortgage, lower your interest rate or stretch out the term of your loan, in most cases.
However, if you are underwater on your first mortgage, they can "strip off" your second mortgage and treat it like unsecured debt. In a Chapter 7, that usually means that your second mortgage is discharged.
One final note: If you're in foreclosure -- or if you have already lost your home to foreclosure -- you should definitely get legal advice. There can be tax consequences you may be unaware of.
Related Resource:
"Bankruptcy can save your house from foreclosure" (CNNMoney.com, July 21, 2010)
]]>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.
]]> With the help of a legitimate debt negotiator, however, you may be able to get some relief through deferment, forbearances or loan consolidation. It may even be possible to negotiate changes in the terms to lower your monthly bill.Taxes
Although most federal, state and local tax debts are also hard to discharge in bankruptcy and aren't eligible for debt settlement plans, there are a lot of options.
The IRS has processes in place to set up payment plans and negotiate settlements, and the IRS is often more than willing to help you out. You can even propose your own monthly payment, and it's often accepted.
You can also try meeting with an IRS representative about an "offer in compromise," which could reduce the total amount you owe, including reducing or eliminating penalties.
You will end up paying interest and, if the IRS forgives some of your debt, you will have to pay taxes on that amount as if it were income.
Alimony and Child Support
Communication with the courts is essential if you're having trouble paying support obligations. The amount you owe isn't automatically recalculated if you lose your job -- you have to ask, and you have to do it right away.
If something has changed and you can't make your monthly payments, ask for a modification of your child support or alimony order. For missed payments, you may be able to arrange a payment plan or even seek hardship assistance.
Utility Bills
If you don't pay your phone, electricity, gas, water or other utility bills, they'll just cut you off. Before that happens -- or even afterward -- you can often get help if you're in financial trouble. Most utilities offer payment plans and deferments for people having debt problems, and payment assistance programs also exist.
Auto Loans, Mortgages and Other Secured Debts
Secured debts are those where there is collateral against the loan. The deal is that you pay your bill or they take the collateral.
"Credit card bills are important, but if you have to choose between paying your Visa bill or making your house payment, you should make your house payment," says Jessica Cecere, president of the Consumer Credit Counseling Service in Florida.
If you can't, your best options are to call the lender and see what help is available, or to hire a legitimate debt negotiation provider, such as a nonprofit or an attorney, to help you.
Related Resource:
"Debts that debt settlement can't solve" (Bankrate.com, April 14, 2010)
]]>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 percentage of consumers at the ends of the spectrum has risen sharply, with the percentage at the extreme top end (800 or higher) showing a dramatic increase from an historical average of about 13.33 percent to 18.7 percent in April.The percentage of those with "poor" credit scores (between 300 and 599) also mushroomed from the historical average of 15 percent of active consumers to a shocking 25.5 percent in April. That represents an addition of nearly 2.4 million people to the ranks of those who will pay the most for credit, if they can get it at all.
Who Will Be Affected Most by the "Shrinking Middle Class" of Credit Scores?
This trend is likely to affect those in the middle ranges the most. Having the spread weighted at the ends is likely to affect banks' lending behavior. Fewer credit products are likely to be offered or demanded by those on the lower end of the scale, and banks will likely compete heavily for clients whose credit scores are at the top end.
Consumers with mid-range scores usually had access to credit at reasonable rates before the economic meltdown. Today, it's increasingly difficult for them to find banks who are interested in lending to them, even though their mid-range scores rarely indicate insolvency.
Do Lenders Rely Too Much on FICO Credit Scores?
While studies generally show FICO scores to be reliable predictors of a consumer's payment behavior, they have at least one major drawback: They offer no way to differentiate between two people with the same credit score.
For example, a consumer whose home foreclosure was the result of irresponsible borrowing might have a FICO score of 590. But so might the consumer whose foreclosure was the result of mortgage fraud.
Banks do want to make those kinds of distinctions, according to Edmund Tribue, a senior vice president in the credit risk practice at MasterCard Advisors. He admits that in the past, credit was often offered based on FICO scores alone. However, the very things about which FICO scores only provide a general gauge -- consumers' ability to repay and likelihood of doing so are critical parts of lending decisions.
Related Resources: