Are Loan Modifications Causing Foreclosures?

Editorial note: This blog post ran 8/20/2010 on Huffington Post.  It is reprinted with permission from Huffington Post.

Even with Federal mandates, foreclosures continue to rise.

When the economy crumbled in 2008 as real estate values plummeted, Congress was under pressure to appease the public’s demand for action to stem the tide of foreclosures. Congress considered repealing the prohibition in the law against bankruptcy judges modifying the terms of predatory mortgages, but rejected that option, inexplicably taking its marching orders from bank lobbyists, the very industry that caused the economic collapse in the first place. Instead, in February, 2009, Congress passed HAMP, a loan modification program touted as the answer for American homeowners facing foreclosure. While HAMP permits the banks to pay “lip service” to their commitment to helping the American homeowner save their homes, the banks are well aware that most loan modifications requests fail. The banks are also aware that the price of failure is often a foreclosure precipitated at least in part by the HAMP requirement that homeowners must be in default on their mortgage before applying for a loan modification.

One-and-a-half years after HAMP, the foreclosure rate continues to soar. For every one of the past 17 months, foreclosures have remained above 300,000 per month, an unprecedented event in American history.  According to RealtyTrac, the foreclosure numbers for the first half of 2010 increased by eight percent compared to 2009, and the 2nd quarter of 2010 set a record for the number of foreclosures in a three-month period.  Not only is HAMP helping far fewer homeowners than promised, there’s some evidence that HAMP may be leaving more homeowners worse off than if they never had entered the “loan mod” program in the first place.

The government pays mortgage servicers $1,000 for each “loan mod” application.  Studies have shown though that mortgage servicers stand to make far more in fees from a foreclosure than they ever will from a loan modification request. (Why Servicers Foreclose When They Should Modify, Nat. Cons. Law Center, 2010). No one has ever accused corporate America of not knowing how to put its own self-interest first. Perhaps this is why my client’s complaints sound a consistent theme about loan modifications.  They describe a bureaucratic nightmare, fraught with delay, and requests for the same documents again and again.  Phone calls go unanswered and messages unreturned. When clients do reach a live person, they complain that the answers they get vary depending on who happens to pick up the phone that day.

When homeowners ask their bank whether they’re eligible for a “loan mod,” they are incredulous to hear that they need to be at least 60 days behind on their mortgage in order to qualify.  This is a rigid requirement.  It doesn’t matter if a homeowner has managed to stay up to date only by liquidating a 401k or borrowing from parents.  The bank won’t even consider a HAMP “loan mod” unless the mortgage is in default for 60 days. Many homeowners, already skating on thin ice financially, don’t need to be invited twice to begin missing mortgage payments. The banks do nothing to pre-screen homeowners to ensure they are good candidates for a loan modification. Unwitting homeowners, not realizing a loan modification will take from six to 12 months, often get far more than 60 days behind with the bank’s encouragement.  In fact, one couple recently told me that the bank denied them a loan modification because they were “only” 60 days behind on the mortgage.  The problem with requiring these kind of defaults is that it forces homeowners to bet their home on a successful outcome despite the fact most “loan mods” fail.

HAMP requires a trial period of payments before a “loan mod” receives final approval. I have had several clients stuck in “loan mod” limbo making probationary payments for more than six months. During this process, one received a call from a bank collector apparently working from a list of people behind on their mortgage. This person asked if she was interested in one of their “loan mod” programs.  My client informed him that she already enrolled in one so she was not interested in applying. She later learned that her answer was misconstrued to mean she was not interested in any program, and her application was canceled.  This left her several months behind on her mortgage without a solution, jeopardizing her home.

The overwhelming majority of “loan mods” are either denied outright or fail, leading to a foreclosure. One of my clients faced a foreclosure on July 30th after a “loan mod” denial, even though the HAMP regulations were amended in June 2010 to prohibit foreclosures while a “loan mod” is pending. One of the many problems with HAMP is that it is toothless, not providing any private right of action to homeowners to go to court to complain that their bank failed to follow HAMP regulations. This client had paid an internet company $2500 to do a loan modification for them. He still had to file a chapter 13 bankruptcy to save his home from foreclosure.

The government imposes no penalties for banks that have backlogs of hundreds of thousands of loan modification requests.  Banks, overwhelmed by the number of loan mod applicants, find it easier to cut down on the number of applicants by losing paperwork and creating other unnecessary hoops for homeowners to jump through.  Many homeowners are so discouraged by this kind of institutional arrogance that they just stop trying.  To the banks, this is just a number’s game, and they don’t much care that there are real people facing real disasters on the other end of any “loan mod” request that slips between the cracks.  As one bank told one of my clients, “we don’t need to work with you, we’ve already been bailed out.”  There’s no bailout for the little guy.

That being said, there’s no reason a homeowner can’t complete a “loan mod” on their own if they are cautious.  Here are some tips that might help homeowners trying to negotiate the ‘loan mod’ labyrinth on their own:

(1) Given that HAMP is helping far fewer homeowners than expected, do a reality check on your monthly budget before applying for a loan modification. If juggling credit card payments is the only way you are able to afford your mortgage every month, hoping to drop your mortgage payment low enough to afford all your credit card payments is probably not going to work. That’s like trying to hit the perfect golf shot in a difficult situation. I can say from long experience that this doesn’t happen very often, so you might not want to bet your house on the outcome. If you can’t pay everything, prioritize your debt based on what’s most important to you. If you’ve already applied for a “loan mod,” paying your credit cards from the extra money created by your reduced mortgage payments may lead to a foreclosure if you are denied, unless you have a rich uncle to bail you out.

(2) At the risk of oversimplifying, loan modifications are designed to lower your mortgage payment down to 31% of your gross income. If your mortgage payment is already lower than 31% of your gross, you probably won’t qualify.

(3) If you decide to do a “loan mod,” don’t pay an internet marketing company to do it for you. Your desperation makes you vulnerable to being scammed. Even if you get lucky, there’s nothing they will do that you can’t do for yourself. If you want help, call your local HUD office for the telephone number of a HUD loan modification counselor near you or call 1-888-995-HOPE (4673). They will help you for free.

(4) You might think providing all of the required documentation in a timely fashion is enough, but that just gets your foot in the door — you and the other few hundred thousand homeowners waiting for the same answer. Assume your bank is overwhelmed, will lose your paperwork and not return your phone calls as a means of controlling the number of “loan mods” it has to actually consider. Don’t take it personally. The clients that succeed have a bulldog persistence and aren’t shy about contacting their bank on a regular basis. Keep a copy of everything you provide the bank.

(5) Don’t get any more than 60 days behind on your mortgage unless you are ready to give up your home if you aren’t approved for a “loan mod.” If your bank insists that you have to be more than 60 days behind before being accepted for a loan modification, ask them to put it in writing and file a complaint. Try to bank the money saved by not paying your regular mortgage payment, or the “loan mod” process may leave you in a worse position than you were before applying.

(6) Keeping in mind that most banks have several “loan mod” programs available, you should make sure you’ve exhausted all the alternatives before accepting “no” for an answer. I had one client denied under HAMP who was able to avert a foreclosure by qualifying for another “loan mod” program, something the bank had never mentioned.

More Changes to Bank Processing Fees

Watch your mail for a letter from your bank announcing overdraft protection fees

The third and final phase of the Credit Card Accountability Responsibility and Disclosure (CARD) Act will be going into effect on August 22, 2010 but many banks are trying to beat the legislation to the punch.  Included in this phase of the legislation will be new rules regarding how gift cards are processed and how banks charge on overdraft occurrences. 

As of July 1, 2010, the Federal Reserve is requiring that banks obtain their customer’s permission for charging overdraft protection and allowing purchases beyond the account’s balance.  The big banking leaders in overdraft changes are Bank of America and JP Morgan Chase who are providing their customers with an overdraft ‘opt-out’.  Now their customers will need to decide IF they want the bank to cover any charges above their zero balance and pay the overdraft fee, or if they would rather have the charges denied at the point of sale.  If, however, customers of these banks elect to keep their overdraft protection, the fees will be substantially less than they were previously. 

For example, Bank of America will be reducing the number of chargeable overdraft incidents in a given day and announced in March of this year that they would no longer be charging overdraft fees on charges made with bank debit cards – they will simply be declined.  Debit purchases amount to roughly 60 percent of all overdraft fees and represent a tremendous income loss for BOA.  In an effort to continue the flow of cash from overdraft protection, banks are gearing up full marketing efforts to encourage customers to sign up and continue their overdraft protections.  Before you agree to this arrangement, consider your options carefully.

Acceptance of overdraft protection means:

1. You will be charged a fee (anywhere from $32 to 39) for each overdraft incident up to a specified number each banking day that your account is overdrawn.
2. You will be able to spend without knowing you are overdrawn until the charges have accrued.
3. Some banks including BOA and JP Morgan Chase will not charge on small purchases under $5 (i.e. that coffee won’t cost you $43).
4. Banks will continue to charge overdraft fees on checks and automatic payments, but based on the consumer’s choice, will either decline ATM and debit purchases or cover them for a reduced fee.  BOA will charge $10 each overdraft occurrence with either a credit card or savings account tied to the account.
5. Some banks will also limit the number of charges per day.  JP Morgan Chase will reduce the number of overdraft fees to three per day. 
6. Additionally, banks will process transactions in the order in which they were made.  This is a significant change because banks processed the largest transactions first, which consumed the greatest portion of the account balance and often cause multiple overdrafts on significantly smaller charges. With this change, the transactions will process in the order they are received theoretically causing less overdrafts charges on small transaction amounts. The banking industry expects this change alone to cost them millions in lost revenue.

A majority of overdraft fees (93%) are paid by the delinquent minority of about 14% of the population according to a Federal Reserve 2008 study.  Don’t be one of the reoffending minority.  Have you received your bank’s notification letter yet?  What are your plans for overdraft protection?

What’s in Your Wallet May Not be as Good as You Think

Now is a great time to review the 'rewards' cards in your wallet

 

Credit cards offering rewards miles and other incentives may seem like a good deal, but let’s look at the fine print to learn more.  

With the recent CARD Act going into effect on February 21, 2010, consumers are now receiving additional protections when it comes to how the credit card companies can charge interest, late fees, and those roving due dates.  See my previous post (http://attorneygaudreau.wordpress.com/2009/08/21/watch-out-for-…dit-card-rates/)  for all of the details and the rollout schedule for effective dates.  By examining your credit cards and store charge cards, you’ll be better able to regain control over your finance charges and make better buying decisions.  

According to a recent report by Mellody Hobson, Good Morning America/ABC News Financial Correspondent, there are several steps consumers can take to better understand the credit card agreements they have and find better paying reward programs.  

1.  Charge Card versus Credit cards - It’s always better to carry a charge card if you can.  With charge cards, you can’t carry a balance or spend more than you can afford because balances must be paid off monthly.  The most recommended card is the American Express Green Card, not the platinum or blue card, but the original green card.  Holders receive points for purchases.  The green card has an annual fee ($95 annually) but is a good deal for the convenience of a reputable charge card.  

2. Miles by Discover -  The Miles by Discover card offers holders one airline mile per $1 pent. The annual percentage rate (APR) starts at 11.99% and there are no blackout travel dates.  

3. Capital One Visa – No Hassles Miles Card. Card holders receive one mile for every $1 spent up to $1,000 per month. The caveat here is that you don’t want to spend excessively just to get the points.  Having a rewards card should be just that, a reward for purchases you would ordinarily make, not excessive spending.  There are no blackout dates to redeem the miles and they don’t expire.  The card requires no annual fee, but percentage rate starts at 13.99%.  

4. Chase Sapphire Card – Card holders receive one point for every $1 spent.  It’s an easy process to redeem points for actual purchases.  

These are just a few of the best reward cards available today.  The best advice we can give is to research your charge and credit card options and fully understand the fine print before you sign on the dotted line.

Budgeting Basics

The building blocks of a good personal budget are as easy as 1-2-3.

Everywhere you turn, conversations revolve on tightening and maintaining strict budgets.  If you, like millions of Americans, weren’t taught how to properly create and keep a budget in high school or college, then all of those financial conversations are missing the mark.   But even if you’re not facing financial difficulties, setting a budget is a great tool for helping to keep expenses down and build future savings.  

Below you’ll find some suggestions on how to develop a budget and more importantly, maintain it so it becomes useful for your everyday life.  

Step 1 - Gather your monthly bills and expenses. This means you’ll need to review all expenses for an entire month including big ticket items like rent or mortgage, utilities, cable, cell phones, groceries, medical/pharmaceutical, credit cards, as well as gym membership fees, children’s activities, gasoline, automotive maintenance, commuting fees, dry cleaners, magazines, and yes, even those mocha lattes at the corner coffee shop.  Don’t forget about expenses that are paid quarterly, bi annually or annually such as auto or life insurance.  Once you have a solid handle on what you typically spend, it’s easier to both plan for future months as well as make informed choices about how to cut expenses and save some cash.  

Write down expenses on a legal pad or in a computerized spreadsheet under categories such as Utilities, Automotive, Groceries, Medical, etc.  You can use whatever categories that make sense, just be consistent with where you place items each month.  

If you don’t have any idea what you are spending in a typical month, grab a notebook and keep a journal of every expense (big or small) and include the debit card receipts.  You’ll be amazed at how quickly those $3 and $6 purchases add up to hundreds of dollars in spending.  

Step 2 - Balance your checking account.  Without ever balancing your checking account, you’re simply hoping that you have the available funds to cover your debit card purchases and monthly bills.  You’ll also never be fully aware if someone attempts to steal your identity and use your bank accounts.  Take 30 minutes each month and review your checking account statement, verify each expenditure, deposit and make sure what you have in the bank is what you think you should have.  If you’re not clear on how to balance a checking account, your bank statement should come with a balance worksheet on the reverse side of the statement.  Simply fill in the steps outlined and you’ll have your balance.  

Step 3 -  Weigh expenses against your monthly income.  Take the categories that you developed in Step 1 and write them down the left side of a piece of paper or in your spreadsheet.  Now write thirteen columns across the page to the right, the first one labeled, ‘Estimated’ and the other twelve broken down for each month of the year.   

Now you can begin to break down the expenses into monthly allotments.  

Write your estimated INCOME down and subtract EXPENSES to get the amount of remaining money each month.  If you discover that you’re spending more than you bring in, it’s time to make some hard decisions.  

Step 4 – Now that you’ve discovered where your finances stand, it’s time to set some financial goals.  Whether it be to pay off a high percentage rate credit card or begin building a three to six month emergency fund, putting those goals on paper will help to keep you focused.  Refer to your budget every time you pay a bill or spend at a store. Ask yourself if the purchase you’re about to make fits into your budget, if you truly need the item in your hand and if purchasing the item will completely destroy the budget you’ve worked so hard to build.  If the answer is yes, then you know what you need to do. WALK AWAY!  

After working with your budget for several months you’ll have a pretty good feel for how your spending is doing and if you can begin to save for an emergency fund, build a retirement account or even put money away for the kids’ college.  Remember to be practical with your goals and know that saving takes time, but it does pay off in the end.

In Over Your Head?

Past Due Notices and Collector Calls Can Push Debtors into a Rash Decision

If the phone never stops ringing and bill collectors are harassing you morning, noon and night, you’re not alone.  With millions of Americans facing financial peril due to job loss, medical bills, or other financial hardships, it’s no wonder that our economy isn’t yet recovering to pre-recession standards.  But there is hope and options are available to ease the stress of overwhelming financial pressures if you know where to look.     

Often one of the first places to look is in the financial management and consumer credit counseling service industries.  While this may be an option for some consumers, there are also a fair amount of disreputable firms who will only make matters worse.  People in crisis are often juicy prey for disreputable financial management companies who advertise debt management or consolidation services, but fail to explain the fine print on their agreements.  

 Debt Counseling   

Remember that even if the debt counseling organization touts itself as nonprofit, that doesn’t translate to ‘free’, low cost or even affordable services for the consumer.  Ask for all fee schedules upfront BEFORE any work commences and be sure that you understand what you’re agreeing to.  Better yet, go to your bank, a local credit union, housing authority, or branch of the U.S. Cooperative Extension Service and request assistance there.  Even if they don’t perform the counseling services themselves, they can make reputable references to companies in your area.  It’s always better to meet face-to-face rather than deal with personal finance issues over the phone, or worse yet, over the Internet.  In the meeting, you’ll learn about ways to better manage your debts, develop a working budget and receive counseling on financial management.  The purpose of credit counseling is to become self-empowered to manage your own finances.  

What’s the difference between a debt consolidation and debt management company?   

While it may seem like splitting hairs, there are tremendous differences between a debt consolidation company and a debt management company and that distinction can cost an unknowing consumer thousands of dollars.    

Debt management companies exist to coordinate a consumer’s debt repayment options, create a workable plan, and provide credit counseling services.  The form of debt is usually in credit cards, but can also include automobile loans, student loans, and numerous other forms of debt.   Typically recommended after a consumer has attended a credit counseling session and realized that his or her debts are too substantial to be self-managed, a debt management organization can assist with credit card company negotiation, reduction of monthly payments, or restructuring the debt to a more affordable monthly amount.  Working in concert with a credit counseling company, the consumer will pay a monthly amount to the credit counseling company, who in turn disburses the amount to the various unsecured debts owed (i.e. student loans, medical bills, credit cards, etc).  They do this according to a debt management plan (DMP) established with the consumer and for a fee.   Consumers should always call their creditors personally to verify that they will reduce their rate or provide the agreed upon repayment plan negotiated by the DMP.   

 What to watch for from DMPs:   

• Requests for high lump sum payments upfront for work to be done.
• Pressure to make ‘voluntary’ contributions (i.e. FEES!)
• Fast enrollment process that requires you to sign before you fully understand the program or have a repayment plan
• Will all of your creditors agree to work with the company you have chosen?  If a company won’t provide you relief for all of your debt, you will pay a high price and your problems won’t be completely solved.
• Check out any potential company with the Better Business Bureau.  Imagine the financial ruin you would face if you paid a DMP large sums of money and your creditors never received any payments on your behalf.

Debt Consolidation These organizations work with consumers to ‘consolidate’ the total amount of the unsecured and sometimes even secured debts such as car and home payments into one monthly payment, typically with a lower interest rate than the variable rates on most credit cards.  The consolidation loan can be in the form of a home equity loan, a second mortgage or via a credit consolidation company who provides the loan.  Consolidation can be an attractive option if you’re dealing with high credit card rates and even higher monthly minimum balances.    

Be advised that consolidation is not for everyone as consumers are often required to put up additional collateral, such as their primary residence, to secure the loan. If you miss a payment, the consolidation company can assume ownership of your home, leaving you homeless! Some loans may even require the borrower to pay additional ‘points’ on the loan amount.  Read the fine print carefully.  When in doubt, it is always worth having a licensed real estate attorney review the documentation before you sign.    

Consolidation loans can provide financial benefits in the form of tax credits.  With reputable consolidation agreements, it is possible to receive tax benefits in the form of interest payment deductions that can lower your tax burden.     

With any of the debt counseling, management and consolidation programs, it’s important to realize your own strengths and weaknesses with regard to finances.  If you will not be able to control your spending, or foresee a short term future need to use your credit cards again, the process will break down and debts will again to begin to mount.    

Resolve to Save Big and Change Your Financial Future

Elizabeth Leamy's Save Big CAN change your financial future.

Everyone knows that the top New Year’s resolution is to lose weight or life a healthier life, but do you know what ranks as the #2 resolution?    

The second most popular resolution is to get out of debt and gain more control over personal finances.  Like any other resolution, this change is only as feasible as the plan created to achieve the goal.  If you don’t have a plan for regaining control over your finances, I guarantee that within days, you will ultimately succumb to that credit card calling beckoning from deep within your wallet only to find yourself the proud owner of impulse purchases while in line at the store.  Spending money and not paying attention to where your hard earned dollars are disappearing is easy.   A $4 purchase at the coffee shop, $12.95 at the dry cleaners, $22.47 at the drug store, and all of those electronic withdrawals for automatic bill payment can land your account in a negative balance before lunch time.     

So how do you actually begin to regain control over your finances?    

ABC’s Good Morning America consumer correspondent Elizabeth Leamy recently released a book with just these steps clearly identified.  If you pick up a copy of her new book,  Save Big and Cut Your Top 5 Costs and Save Thousands (Wiley, December 2009) you’ll discover a veritable road map for consumers.  She focuses on some of the largest expenses a family has and ways to dramatically reduce costs.  According to Leamy, the top five expenses are house, car, credit, groceries and health care.  By looking at these five areas and not worrying about all of the little expenses or running around your home installing low-flow toilets, Leamy shows consumers how to save BIG.    

Leamy has even added an online companion through her web site that includes mortgage calculators, links and other financial resources to help consumers save.     

If you haven’t even started on your New Year’s resolution, now is a great time to pick up Leamy’s book, grab a latte (go ahead, it’s ok!) and start making plans to improve your financial future.

Happy 2010 – Ring in the New Year with Improved Financial Knowledge

Welcome 2010

Smart Money recently ran a great piece on the basics of understanding the bankruptcy filing process (http://articles.moneycentral.msn.com/Banking/BankruptcyGuide/10-secrets-of-filing-for-bankruptcy.aspx).  Many of the issues presented are ones we witness every day in our Salem, NH office.  Hardworking Americans are struggling because of medical expenses, unemployment has wrecked havoc by leaving families with mounting debt and potential foreclosure, aging Americans have worked hard their whole lives only to discover that retirement and a failing U.S. investment market has left them nearly penniless.  All of these individuals have sat across from us at our conference room table and have told us their stories of hardship.  The good news is that bankruptcy affords them a fresh start and an opportunity to set aside their burdens and begin again.  This is not a decision that they take lightly.  It is an emotionally painful process, and they walk through our front door with great fear, making what feels to them like a last resort decision. 

We’re honored to have represented these clients though the years, and after the bankruptcy process is over, we are thrilled to hear their stories about how much their lives have improved.

In the coming year, you can look to us for even greater information on our blog regarding bankruptcy law, changes in credit card disclosures via the CARD Act and about ways that you, the consumer, can improve your life with improved credit, financial alternatives and understanding your rights under the law. 

Best wishes for a safe, joyous and prosperous New Year! 

Think Before You Spend This Holiday

Even Santa might be tempted to max his credit this holiday. (Photo Courtesy: Getty Images)

Reports from last week’s Black Friday holiday shopping tell the tale of shoppers who are using their credit cards a bit less than last year.  According to a National Retail Federation survey of 8,692 consumers reported in the Wall Street Journal, an estimated 28.3% of people will be using credit to pay for holiday purchases this year.  That number is down a surprising 31.5% from the same time last year.  That’s the good news.  Many shoppers have decided to cut back on spending and are opting for cash or bank debit cards where the money is deducted directly from a bank checking or savings account.   

The bad news is that there are still large contingents of purchasers who are maxing their credit cards and spending more than they can afford.  With credit card interest rates skyrocketing in advance of the February 2010 implementation of the CARD Act, purchases made now can last months or even years beyond their originally intended payoff date and cost Americans hundreds to thousands in interests charges over the life of the loan. Is that big screen Hi-Def 52” LCD television and Wii Console really worth an additional $1000 over the purchase price?  

Before you pull your favorite credit card out of your wallet, ask the following questions:  

1. Can I truly afford the item I am about to purchase?
2. Am I willing to pay an additional 15% to 30% above the purchase price, compounded annually?
3. Will this purchase have an effect on my credit score? FICO® scores or debt percentage, generated from a credit model developed by Fair Isaac Corporation, are based on the ratio of credit card debt to limit on the card.  If the overall balance is lowered, your credit score cab tumble.  A lower credit score can negatively affect many areas of your financial life such as what you will pay for home and auto insurance premiums, potential employment opportunities, and future creditworthiness.  Is the purchase you’re considering worth that lasting impact?
4. Will this come close to maxing out my credit card?  If charge exceeds your credit limit, remember that your interest rate and fees will increase via ‘over the limit fees’.  The agenda of the credit card industry is to ensure that any credit card payments made are applied first to fees and interest and not to principal balances.  This payment application prevents you from reducing your overall balance, causing even higher interest fees and propagating the credit cycle that is so difficult break 

   

Consumer credit has eroded from last year leaving little funding available in the credit market.  Even consumers with good credit are receiving letters from their credit card company outlining an increase in their interest rate and a reduction in credit card limits.  This shift is resulting in Americans who have little buffer room in the event of a true financial emergency.  Should a car need repair, the home furnace breaks, or even a family pet requires veterinary attention, there are few financial options available.  Leaving emergency space on your credit card is a smart move for many reasons. In these challenging economic times, no one is safe from having their credit revoked, so use existing lines of credit wisely.  

Despite all of the shifts in unemployment rates, a slowly recovering credit market, and lagging consumer confidence, the average credit card balance rose to $8,083 in the third quarter of 2009 compared to $7,489 in the second quarter, according to the credit card direct-mail service, Mail Monitor.  Reasons for the shift may be attributed to consumers living on credit due to unemployment, economic hardship and other financial constraints. The end result is a large percentage of  consumers  juggling credit cards at their max or exceeding limits altogether.   

The best gift you can give yourself and your family is peace of mind and financial stability.  If that means cutting back a bit and bringing back simpler and more inexpensive traditions, do it.  If you’re feeling bad about your financial situation, take a walk down to your local homeless shelter, food bank, or Salvation Army.  There is much work to be done and many hands make light work for all.  You have the power to positively impact your family and your community this holiday season with contributions of time.  That’s a gift that returns good Karma for more than just one day.

Bankruptcy of the Elder Class

U.S. senior citizens are facing an unprecedented spike in bankruptcy filings

While the news media focuses most of its efforts on covering the economic downturn and its effect on the young and middle aged populations, there is a silent yet growing contingent of Americans who are facing financial hardships and the potential loss of their lifetime homes.  In a recent report by the American Association of Retired Persons (AARP) and the Consumer Bankruptcy Project, bankruptcy rates among senior citizens is rising faster than any other demographic.  From 1991 to 2007, the rate of personal bankruptcy filings among those ages 65 or older jumped 150%.  Moreover, the rise among those ages 75 to 84 spiked to a staggering 433%.

The study didn’t specify reasons for the increase, but trends focus on rising medical costs and the financial hardships faced by seniors after the loss of a spouse.  Bills that were once affordable for two incomes become insurmountable alone.  The scenario becomes even more crippling because this population has prided itself on their financial prowess.  Up until retirement age, they earned a living, raised their families, and even helped their children and grandchildren through colleges, weddings and other needs.  To be the family member who is now faced with financial hardship is embarrassing and emotionally devastating.

When retirees or those approaching retirement find themselves over-extended financially, there are a number of pitfalls that can make a bad financial situation disastrous.

Top Five Financial Pitfalls for Seniors

1. Draining a 401k or pension.  Not only for the obvious reason that they will need that money throughout retirement, but also because they could have kept 100% of what is in their pension if they still have to file a bankruptcy, accessing the 401k or pension to pay down debt is not a good solution.

2. Take out a home equity loan.  In New Hampshire, a married couple can have up to $200,000 in equity in their home that is exempt from their creditors.  Voluntarily giving that equity to creditors through a mortgage on their home creates the risk that when seniors can’t make the equity loan payment, they now can face a foreclosure instead of just a few calls from a credit card company.  It also ensures that if they still have to file for a bankruptcy that they can no longer get rid of this debt unless they want to give up their home.

3. Liquidate property to generate money for living expenses and to pay credit cards.  As the credit card industry continues to increase minimum payments on credit cards, consumers often look for a ‘quick fix’ to stop the phone calls.  Some people sell their assets for less than they are worth.  This is rarely a good idea and is usually just a ‘band-aid’ that doesn’t provide a global solution to their debt.  If selling some of your possessions is only going to allow you to “tread water”, i.e. pay the minimums but not substantially reduce your overall debt, then it makes no financial sense to do this.

4. Signing up for debt consolidation.  Lump sum settlement businesses sell their products by claiming that they can rid of 50% of your debt or more.  They never tell prospective customers that the forgiveness of debt will result in the issuance of an IRS Form-1099 that can result in taxable income.  Tax problems will further complicate the debtors’ financial woes.  They also never tell consumers that the credit card companies or collection agencies do not have to accept the program.  I have had several clients come to me after getting sued for a debt that they thought was part of this program.

5. Participate in credit counseling to lower interest rates.  The monthly payment that is arranged by a counseling service is determined by what the credit cards are willing to do not by what you can afford.  Credit counselors always sign people up before they know what the credit cards are willing to do and take the first few payments for their fee up front.  I have had several unhappy clients come to me after having made all the required payments but after several years could see that the payoff period is a lot longer than they were promised when at the beginning.  A cynical person might believe that the financial contributions that the credit card industry makes to these nonprofit credit counseling agencies has influenced the agencies’ decisions.

6. Using credit cards to pay credit cards or other living expenses.  Is the person:

 • Using credit cards to pay other credit cards?

 • Using credit cards to pay for food or gas so you can continue to afford to pay the credit cards?

 • Taking cash advances on the cards to afford your life style?

 • Transferring credit card balances in order to get a better rate?

If the only way seniors are able to make their credit card payments is by doing one of the actions above, this is huge ‘red flag’ that your financial situation is out of control.  Like a ‘house of cards’ that crumbles under the weight of too much load, compounding debt onto other debt just creates an unstable structure that is destined to collapse sooner or later.  Once seniors begin to fall into this trap, the amount of debt will spiral out of control very quickly.

If you see any of the above warning signs in your situation or in that of your aging parents, you might want to consider speaking to a certified bankruptcy attorney before an irrevocable decision affects a home or other property.  Denial is the number one defense mechanism for people in financial difficulty.  It’s an intricate conversation to have with aging parents (or even a spouse who has always handled the family’s finances), but a necessary one.  In a Crestwood Associates survey of 525 adult children and 525 seniors, nearly “two-thirds of seniors had not spoken with their children about their finances,” writes Jane Adler in a Northern Real Estate Online article.  “Of the adult children surveyed, only one-third had confidence in their parents’ retirement finances.”  There’s a tremendous amount of unspoken worry about money that’s never articulated. This unspoken cycle helps to breed fearful behaviors and leads seniors to make uninformed and risky decisions.

“It can get very difficult when parents perceive the role reversal between the parent and child,” says Bonnie Roberts, Certified Senior Advisor and owner of Home Helpers Londonderry.  “Communication problems arise because the children are coming from a financial perspective.  The parents’ perspective is more focused on taking care of the child with financial legacies and other responsibilities.”

Remember that regardless of age, the individual needs a respectful conversation that identifies concerns and uses emotions to open the doors to communication.  Phrases such as, “I am worried about this issue,” or “I read an article about this issue and it scared me,” can help to humanize the conversation. Be reminded that aging parents are adults too.  They have the right to not accept help or follow suggestions.

Try not to overwhelm a senior with too many facts or demands.   “As people age, the brain doesn’t process information as quickly,” continues Roberts. “It takes longer to retrieve and process.  If the parent is bombarded with questions, it’s going to overwhelm her and put her on the defensive.”  Always respect the individual’s privacy.  Unless the child has power of attorney over the parent’s finances, the decisions the parent makes are hers alone.

If people see themselves or a loved one in any of the above situations, it might be in their best interest to consider talking with a certified bankruptcy attorney before external pressures like threats of lawsuits, foreclosure, repossession, and attachments begin to cloud your judgment.  Those who survive bankruptcy in the best way are those that did not wait until the last minute to consider one because they didn’t fall into the pitfalls cited above.

Bankruptcies on the Rise amid Economic Recovery

U.S. Bankruptcy Courts Still Seeing an Increase in Filings

U.S. bankruptcies increased 35% over the last year with 1.3 million bankruptcy cases filed between July 2008 and June 2009 as the recession took a steep toll on households and businesses, said the Administrative Office of the U.S. Courts on Thursday.  Leading that trend, foreclosure activity jumped 7% in just one month from July to June 2009 and nearly 32% from a year ago.

But all is not lost.  According to Marketplace senior business correspondent Bob Moon, the economy is “not as bad as it looks.”  What happened last fall, says Moon is that companies in a near frenzied panic halted production and laid off workers without fully considering the consequences.  This knee-jerk reaction ‘froze’ the market and prevented healthy consumers from spending.  “They stopped buying cars, and houses, and other things for a while,” says Moon.  “If the Great Depression never comes, [the businesses] are going to have to rehire some or most of those people again.”  That’s the good news. 

Bankruptcies by the Numbers

• Business bankruptcies, like the high-profile collapse of General Motors Co and Chrysler LLC, totaled 55,000, while non-business filings totaled 1.25 million, the courts office said.

Filings increased among all types of bankruptcies.

• Chapter 7 filings, which require debtors to sell their non-exempt property, rose 47 per cent to 908,000.
• Chapter 13 filings, which enable wage earners to come up with a plan to repay debtors, rose 12 per cent to 384,000.
• Chapter 11 filings, used to reorganize bankrupt businesses, rose 91 per cent to 14,000.
• Chapter 12 filings, used by farmers or fishermen, rose 34 per cent to 422.

 – REUTERS

Let’s look at the last big U.S. recession in 1982.  A record 10.8% were unemployed, yet the U.S. economy saw 8% growth over the year-and-a-half post recession.  “If that happens this time, and we have no reason to believe that it won’t, we may also see another slump when the stimulus bill comes due,” continues Moon.

 

In our practice, we’re seeing record numbers of bankruptcies.  These are not individuals or families who are deadbeats.  They didn’t charge credit cards or buy a home with the intention of never repaying those debts.  These are upper-middle and middle class Americans who through a series of circumstances beyond their control found themselves at the brink of financial ruin.  One lay-off, one breadwinner taken ill and within a few short months, they are facing foreclosure and bankruptcy.  In all honesty, we are all very close to financial hardship.  Many of us save too little, spend too much, and carry far greater debt than we can safely repay.  When tragedy strikes, an illness is diagnosed, or a job is lost, the entire house of cards crumbles and there seems like no way out. 

 

What can you do to help yourself through this recession and avoid becoming a bankruptcy statistic?

1. Write a household budget.  If you have a budget but haven’t revisited it in a while, take the time to pull all of your bills and expenses and rework the numbers. If you’ve never written a budget, get a pencil, paper, monthly bills and receipts and start writing.  Track of all expenses for a month, even your morning coffee and seemingly small incidental purchases.  Now calculate what you spend versus what you earn.  Do the numbers add up?  If you’re seriously over extended, now is the time to consider what you can cut back and what must be kept. 
2. Be realistic.  Your budget will only work if you are honest with your spending.  That doesn’t mean that you need to live without any spending.  What a budget does is help you to better manage your expenses so you have funds for what you truly need or want.
3. If you’re behind, don’t wait. Take immediate action.  If circumstances have left you overdue on monthly bills or with mounting late fees, pick up the phone and talk with your creditors.  Many creditors are willing to work out more affordable repayment options rather than see you default on your debts.
4. Work on the cash-based system.  Put away or close most of your major credit cards (keep the one with the lowest interest rate) and replace them with a single checking account debit card.  Purchases with debit cards are deducted directly from your checking account and will save you hundreds or even thousands in annual interest payments and fees. 

 

We need to take a lesson from our parents and grandparents.  They were great at cash-only living.  Each week a few dollars would be taken from the budget and placed in savings.  Over a few months or even a year, the money would accrue until enough was saved for that special purchase.  The credit card industry is virtually unregulated and has designed a system to ensure that as much as possible of your monthly payment goes to interest and fees.   Once they get their hooks into you, they won’t let go.  If you can’t afford it now, don’t buy it on credit.  Be patient and save for it.   Otherwise, you’re gambling that your income will remain the same, no illness will befall you, and your finances will remain unimpaired.