Bankruptcy Questions Answered

Be Wary of Credit Repair & Debt Settlement Promises

To consumers struggling to make ends meet, advertisements for credit repair or debt settlement may sound like the perfect solution to their financial woes. But in some cases, these services do little or nothing for consumers’ debt problems and instead sap their finances and leave them in need of bankruptcy protection.

Before you sign up for any service that promises to improve your credit, make sure you understand the potential risks involved in such offers.

Credit Repair Scams

Credit repair offers (which are often scams) generally advertise their ability to “wipe out negative information” on a credit report or provide a “quick and legal” way to improve your credit. But the truth is this:

• You can remove negative information yourself…if it’s false: You don’t need to hire an outside company to remove mistakes from your credit report. Rather, visit annualcreditreport.com and request a free copy of your report. If you see any information that doesn’t belong, simply follow the site’s instructions for contesting the information and the responsible parties will take steps to remove it.
• Only time can erase true negative information: On the other hand, if your credit report contains damaging information that is correct (e.g. that you’ve missed payments, defaulted on a loan, or something similar), only time (and positive credit behavior) will ease the information’s impact.
• A blank credit report isn’t good news: Even if a credit repair company managed to erase all negative information from your credit report, having a blank credit report might be a disadvantage for you. Why? Because without any credit history at all, potential lenders are unable to make an assessment about whether or not to lend you money.

Debt Settlement (Scams)

Another commonly advertised financial service is debt settlement. While some debt settlers are legitimate and can be helpful to those in financial need, others are less scrupulous and simply take customers’ money without helping them much in exchange. Here’s the truth:

• You can settle your own debts: If you’re struggling to keep up with or have fallen behind on some bills, your creditors may be willing to negotiate with you. Why? Because in many cases, creditors stand to make more money from settling a debt (say, for an amount less than the total owed or for a lowered interest rate) than from a customer’s bankruptcy filing.
• You shouldn’t have to pay upfront fees: Recently passed rules from the FTC mandate that debt settlement firms cannot charge upfront fees for their services in most cases. Some debt settlers, it seems, were taking payments from customers but putting little or nothing toward actual creditor payments.
• You have a legal obligation to pay your debts: Part of the agreement you have with any lender is that you will pay the bill for any debt you incur – that’s why you have to sign a contract before anyone will loan you money. If a debt settlement company suggests that you will face no legal repercussions from withholding payment from your creditors, be suspicious: in many cases, that’s simply not true.

Posted in Credit and Bankruptcy, Debt Settlement, bankruptcy alternative, credit repair scam, scam | Comments Off

Understanding the Changed U.S. Debt Outlook Rating

The credit rating agency Standard & Poor’s made waves last week when it announced that it had downgraded the outlook on U.S. debt from “stable” to “negative,” leaving many ordinary Americans wondering what the change means for the economy and how debt rating works in the first place.

Here’s a look at what our country’s debt rating might mean in future months and how that rating is like an individual credit score.

Rating the U.S. Debt

Currently, the United States has a credit rating of AAA, which is the highest rating possible. This rating indicates that the U.S. is a stable country and is likely to repay any loans it takes out. But there’s more to the story.

• Outlook on U.S. debt: While the other two major credit rating agencies (Moody’s and Fitch Ratings) have not announced any changes to their ratings on the outlook for U.S. debt, Standard & Poor’s downgraded that rating last week, citing as one reason the continued inability of Congress to make a decision regarding the long-term future of spending policies.
• A warning move: While the change in the outlook rating does not officially alter the country’s credit rating, it serves as a warning and reminder to legislators and others in positions of power that the country’s financial stability and credibility on the world stage are at stake.
• Potential for positive impact: Some commentators have mentioned that the changed credit rating could actually prove beneficial to the country, as it may push Congress to act swiftly (and without unnecessary political posturing) in taking steps toward changing financial policy.

The Parallel with Individual Credit Ratings

As anyone who has ever file for bankruptcy, applied for a mortgage or thought about borrowing money for a car knows, individuals have credit ratings too. And, as with the credit rating for the United States, credit ratings for individuals are used to help lenders and investors determine whether or not to lend money to a person and on what terms.

If Standard & Poor’s actually downgraded the country’s credit rating, it would have a similar effect on the nation as seeing a drop in a credit score would for an individual. In other words, the U.S. would have more difficulty borrowing money and could suffer a variety of financial consequences.

So how can a country (or an individual) keep its credit rating as strong as possible?

• Pay bills on time.
• Pay down as much debt as possible.
• Try to keep credit usage low (that is, stay well below the limit).
• Keep old accounts active (but not maxed out).
• Contact creditors before bill due dates if there is ever reason to expect inability to make timely payments.

Posted in Bankruptcy and the Economy, Credit, Credit Rating, Credit Report, Credit Score, Credit and Bankruptcy, debt | Comments Off

One Bandwagon to Hop on: Credit Card Spending Down

Consumer credit use has dropped since the beginning of the Great Recession, which seems like good news for a country plagued by excessive consumer debt (often in the unhealthy, revolving credit-card type), as a recent report from Credit.com notes.

Here’s a look at some potential causes of that dip and how you can resist the urge to spend, even if you’re surrounded by good-time plastic-swipers.

What Do Lowered Credit Card Debt Numbers Really Mean?

The easy assumption is that Americans are purchasing less on credit and/or paying down the debt they currently have. But, according to some insiders, that may account for only part of the decrease in credit card debt we’ve seen lately. Here are some other potential causes:

• Credit card issuer charge-offs: Credit card companies make a lot of money from fees and interest, but they also end up "charging off" a lot of debt each year. Of course, they can afford to do this because of all the other income they collect, but still. When a customer files for bankruptcy and has her credit card debt forgiven by the court, the company generally writes that off as lost revenue. Similarly, if a consumer simply cannot pay, the issuer may sell the debt to a collection agency and charge off that debt. These numbers may not show up in the report of how much credit card debt Americans are currently holding, so we may have racked up more than we actually have to pay off.
• Tightened lending standards: Another result of the credit crisis we’ve found ourselves in is that lending standards for ordinary Americans have gotten tighter than ever before. This means that, even if an ordinary consumer may want to take on more debt, he may not be able to because nobody will lend to him. While this reads on a numbers-only report like lowered consumer debt, it can be a bad thing if consumers need access to lines of credit to buy cars or homes.
• New credit card rules: Finally, some analysts have suggested that the new rules introduced by the Credit CARD Act have given consumers a better idea of what they’re getting themselves into when they sign up for credit cards, and thus acted as a preventative measure against excessive consumer debt.

Climb Aboard the Less-Debt Ship

So how can you take advantage of this trend to help improve your personal financial situation? Check out these tips on avoiding over-spending when you’re out with non-frugal buddies. Suggestions include:

• Stick with cash so you don’t get caught with other people’s meals or drinks on your card;
• Pretend you’re coming down with something to avoid being pressured into pricey drinks with dinner;
• Think up something big you can say you’re saving for to avoid endless purchases… and then really save; and more.

No matter what your reasons for improving your financial profile, these tips should help you get a head start.

Posted in Bankruptcy and the Economy, Consumer Credit, Credit Cards, Credit and Bankruptcy, Economy, consumer debt | Comments Off

A Look at Consumer Debt Where You Live

Though the U.S. economy is certainly not in top health just yet, a number of indicators suggest that we may be pulling out of this recession – but that may be a mixed blessing for many consumers.

Two recent reports (one from the Federal Reserve and one from CareOne Services) suggest that Americans have started spending more, which may be good for the economy overall, but could be a bad thing for individual debt loads.

Consumer Debt, State by State

The CareOne Services report examined 135,000 people across the country who were active in some sort of debt management program in 2009 or 2010 and found that, among that group, the average debt load was more than $10,000 in every state.

Here’s a look at the top of the heap for unsecured debt in the U.S.:

• Delaware: Average consumer debt is $20,233, spread over seven creditors.
• Rhode Island: Average consumer debt is $20,130, spread over seven creditors.
• Maine: Average consumer debt is $19,454, spread over six creditors.
• Alaska: Average consumer debt is $19,225, spread over six creditors.
• Colorado: Average consumer debt is $18,811, spread over six creditors.
• South Dakota: Average consumer debt is $18,707, spread over seven creditors.
• North Carolina: Average consumer debt is $18,536, spread over six creditors.
• Connecticut: Average consumer debt is $17,334, spread over six creditors.
• Wisconsin: Average consumer debt is $16,903, spread over five creditors.
• Alabama: Average consumer debt is $16,591, spread over seven creditors.

The ten states that had the lowest debt totals for those seeking debt settlement or debt management services are:

• California: Average consumer debt is $12,801, to five creditors.
• Michigan: Average consumer debt is $13,328, to five creditors.
• Mississippi: Average consumer debt is $13,512, to six creditors.
• Vermont: Average consumer debt is $13,707, to five creditors.
• Missouri: Average consumer debt is $13,737, to six creditors.
• Indiana: Average consumer debt is $13,945, to five creditors.
• Kentucky: Average consumer debt is $14,028, to six creditors.
• Iowa: Average consumer debt is $14,099, to five creditors.
• Virginia: Average consumer debt is $14,194, to five creditors.
• Tennessee: Average consumer debt is $14,222, to six creditors.

Increased Spending, Increased Debt, Increasing Need for Debt Relief?

During the holiday season, many economists seemed cheered by the increases in consumer spending, but personal finance advocates may find the same numbers troubling. The Fed’s report shows that our nation’s revolving debt (which basically means credit card debt) rose by 3.5 percent in December of last year.

Further, though our total amount of revolving debt apparently dropped in 2010, it dropped by a smaller amount than in 2009. This could mean that people are optimistic about the job market and the economy in general, but it could also mean they’re turning to their credit cards for necessities they can no longer afford thanks to rising prices or decreased income - and risk taking on more debt than they can handle and heading towards bankruptcy.

Posted in Bankruptcy and the Economy, Credit and Bankruptcy, Economy, consumer debt, recession | Comments Off

Lawsuit Challenges Legality of Pre-Employment Credit Checks

The U.S. Equal Employment Opportunity Commission (EEOC) has filed a lawsuit alleging that the practice of conducting pre-hiring credit checks by Kaplan Higher Education Corporation, a company that provides test-preparation and post-secondary services, discriminates against certain classes of Americans and is therefore unlawful.

And, in case that’s a little too much legal information for your comfort level, here’s what that means and why it’s good news if you’re struggling with debt and/or recovering from bankruptcy.

So What’s the Deal with Pre-Hiring Credit Checks?

Here’s a look at the basics of employer-conducted credit checks.

• What they are: As part of the hiring process, many employers (as many as 60 percent, according to some polls) have begun running credit checks on job applicants (in addition to conducting criminal background checks). In theory, these credit checks are valuable to employers because they divulge information about an applicant’s overall capabilities.
• Why they’re controversial: While few people oppose the practice of running credit checks for applicants to positions that involve finance, many consumer advocates have spoken out against credit checks for applicants in non-financial fields. After all, if the current recession has taught us anything, it’s that poor credit can have little to do with a person’s responsibility, intelligence and job worthiness. Further, a few states have already made pre-employment credit checks illegal for non-finance jobs.
• The current lawsuit: The EEOC’s charges against Kaplan include allegations that Kaplan’s practice of conducting credit checks before making hiring decisions constitutes to discrimination, because black and Latino Americans reportedly have statistically lower credit scores than white Americans.
• The legal reasoning: According to a Credit.com piece on the issue, the case has teeth because it applies legal reasoning the EEOC used to show that criminal background checks also disproportionately affected black job applicants because blacks are more likely to be arrested than whites.
• The reason it’s important: If the court rules that pre-employment credit checks lead to discriminatory hiring decisions, such credit checks could be outlawed in more states, potentially making employment easier to find for people who have struggled with debt problems.

Potential Outcomes of the Case

While the lawsuit is still in its early stages at this juncture, it has the potential to change the current state of pre-employment credit checks in the U.S. The court could, depending on the evidence presented, rule that pre-employment credit checks amount to discrimination in the hiring process.

This could be good news for people recovering from a bankruptcy filing or otherwise fighting debt burdens, because being denied employment for credit-related reasons can lead to a frustrating and debilitating debt cycle.

In the mean time, you may want to consult with a bankruptcy lawyer if you have been denied employment because of something in your credit report.

Posted in Consumer Protection, Credit, Credit and Bankruptcy, Financial Literacy, Legal Info, unemployment | Comments Off

Your Post-Bankruptcy To-Do List

If you’ve filed for bankruptcy, you’ve probably already heard a thing or two about how important it is to rebuild your credit. A recent post at CreditBloggers.com provides an excellent guide for how, precisely, a person can begin this daunting process.

Here’s a look at some of the key tips discussed on the post.

Know Where Your Credit Stands

If you haven’t already, now is the time to visit AnnualCreditReport.com and get a free credit report from each of the big three credit reporting bureaus (every American is entitled to one free credit report per year from each bureau). When you get the report:

• Review all the information carefully: Accounts that were discharged in your bankruptcy filing should have a balance of zero dollars and indicate that the debt was forgiven in bankruptcy.
• Look for mistakes: Check for any incorrectly reported information – this could include a report that you still owe money on an account that was discharged.
• Contest the mistakes so they can be removed: If you notice any incorrectly reported information, contact the credit reporting bureau and identify the problem. You’ll probably be asked to send written documentation that you no longer owe the debt, but the process will be worth it because the less your credit report says you owe, the better off your credit will be.

Start to Make Credit Amends

Once you’ve figured out how your credit looks, it’s time to start engaging in the kind of behavior that will replenish your credit report with positive credit actions and thus make you look like a more attractive credit risk to potential future lenders.

One of the most important things to keep in mind while focusing on rebuilding your credit is to be wary of credit scams – they abound, and scammers often target people who have recently filed for bankruptcy. Here are some common scams to avoid:

• Advance fee loan scams: This term covers a variety of scams, but for people trying to rebuild after bankruptcy, advance fee scams might involve someone posing as a lender and “guaranteeing” you a loan – if you agree to pay a fee in order to have that loan offered to you. If, in fact, you were able to get a loan and make regular payments on it, the loan would likely help you rebuild your credit. But if it’s an advance fee scam, what will likely happen is your loan will never materialize and the fee you pay will be gone forever.
• Credit repair scams: These, too, are sadly common. They involve a company promising to “repair” or “wipe out” your credit record – even if the information on it is completely accurate. Of course, this is not legal to do and will end up costing you money that you’d be better off saving or putting toward real credit-building ventures.
• New credit file scams: This variety of scam involves a company giving you a “new credit identity” – essentially, the company gives you an Employee Identification Number (EIN) to use with the credit bureaus in lieu of your Social Security Number. The claim is that you’d get to build credit from a clean slate, but the catch is that this is highly illegal and could lead to jail time and/or hefty fines. Plus, all the time you spend building your “new” credit identity is time in which your real credit identity just languishes.

Posted in Bankruptcy, Credit, Credit and Bankruptcy, Financial Literacy, Loans, after bankruptcy | Comments Off

FTC Halts Robocall Credit Card Scam

The Federal Trade Commission announced this week that it has shut down operations of a company charged with a scam that involved illegally making robocalls and taking consumers’ money by falsely promising them lowered credit card interest rates.

The scam, according to the FTC, worked like this:

• Automated phone calls: The company, JPM Accelerated Services, reportedly set up robocalls to thousands of homes (some of which were on the National Do Not Call Registry). The calls indicated that the company was a “card services” provider and little else.
• False promises: Telephone respondents who pressed one were apparently transferred to live telemarketers who offered to lower their credit card interest rates and thus save them thousands of dollars. The price of the service, sources note, ranged from $495 to $995, and the company apparently guaranteed a full refund to anyone not satisfied with the results.
• Failure to follow through: Of course, because this was a scam, the company did not follow through, and thousands of consumers in need of financial relief ended up losing even more money they couldn’t afford.
• Serious settlement fine announced: As part of the settlement, judgments of $5.9 million against JPM Accelerated Services and $3.2 million against related scammers have been imposed; however, the defendants at this time are unable to pay the fines, according to sources. The judgments represent the amount of money consumers were bilked out of as a result of the scams.

The Truth about Lowering Your Credit Card Interest Rates

Scams like the one recently halted by the FTC are all too common, perhaps because unscrupulous scammers know that financially strapped consumers are often willing to take even big chances to get out of debt.

But if you’re interested in lowering your credit card interest rates, the truth is that you can negotiate with your creditors yourself. Here’s how:

• Figure out where you stand financially: Look at your monthly budget and figure out what you can afford to pay toward your credit card debt each month.
• Stop charging: When you commit to paying off credit card debt, it’s important to stop putting new charges on your accounts.
• Look at your bills: Lay out your most recent bills and figure out what you owe, what your current interest rates are, and what your current monthly payments are.
• Call your credit card issuers: When you’re armed with all this information, contact your credit card companies directly, explain your situation and ask for some sort of lowered payment. It’s usually a good idea to ask for something specific, like lowered interest rates, lowered monthly payments, or a reduction of the total principal you owe.
• Reassess your situation: If your credit card issuer denies you, you may want to explore other debt-relief options, like filing for personal bankruptcy.

Posted in Bankruptcy and Predatory Lending, Consumer Credit, Consumer Protection, Credit Card, Credit and Bankruptcy, predatory lending | Comments Off

Can No-Limit Credit Cards Hurt Your Credit Score?

A recent article in the New York Times warns of the potential credit-score harm that a no-spending-limit credit card can have. And, while a credit card with no spending limit may seem like a product that would only be available to folks with strong credit, actually using one might backfire.

How Your Credit Score Works

In order to understand how no-spending-limit cards could hurt your credit score, it’s important to know how a credit score is calculated. Here’s a summary:

• Payment history: Your record of on-time payments is one factor that determines your overall credit rating. Unsurprisingly, timely payments help improve your credit score and late or missed payments can hurt a score.
• Available credit ratio: This refers to how much credit you’re currently using compared to how much you have at your disposal. As a general rule, using only a small percentage of your available credit is best for your credit score; maxing out credit cards or otherwise approaching the limits of what you can borrow is worse.
• Age of accounts: Older accounts are considered “better” than newer ones because they demonstrate your long-term ability to handle credit.
• Diversity of accounts: This factor refers to what kind of variety you have in your credit sources. It’s best to have credit from various sources (e.g. from a mortgage, a car loan, a student loan, and a credit card rather than just four credit cards). Theoretically, this demonstrates your ability to handle different kinds of credit.
• Credit inquiries: Having lots of credit inquiries on your credit report can damage your score. This is because inquiries happen when consumers apply for a new loan or line of credit. A person trying to take out lots of new credit in a short time is seen as a high credit risk.

How No-Limit Cards Can Affect Your Score

No-limit credit cards play into the “available credit ratio” factor of the credit score. Depending on how your card issuer reports your account to the bureaus, one of two things can happen:

• The card is reported as an “open account”: In this scenario, the card issuer reports the account as, essentially, one without a set limit. Because of this, the no-limit card shouldn’t have much of a negative impact on your credit score.
• The card is reported as a “revolving account”: In this scenario, the card issuer must report an account limit, which usually defaults to your current balance or your highest balance within a certain time period. Naturally, this method of reporting would essentially show your card as "maxed out" at all times - even though you can always take on more debt - and put a significant dent in your credit score .

So how to decide whether a no-spending-limit card is for you? First of all, figure out how your issuer plans to report your account to the credit bureaus. And if it identifies the revolving account technique, you might want to drop that application form.

Posted in Consumer Credit, Consumer Protection, Credit, Credit Cards, Credit and Bankruptcy, Financial Literacy | Comments Off

Watch out for these Ridiculous (but Legal) Credit Card Fees

Since the passage of the Credit CARD Act and its full implementation this summer, consumers have been protected in some important ways from the credit card industry. But, as Credit.com reminds us in this post about absurd credit card fees, there are still plenty of credit card industry practices to be wary of.

Here’s a look at some of the fees you should watch out for (and avoid, if possible) if you’re in the market for a credit card.

• Hefty upfront or activation fees: Though the CARD Act limited how high initial fees can be on credit cards, many issuers are still charging upfront and/or activation fees. One industry insider has apparently defended these fees as legal because many issuers assess them before an account has officially been activated, meaning that they can’t contribute to the card’s limit.
• Credit insurance or protection: This credit card charge is reportedly designed to allow consumers to stop making payments if they lose their job unexpectedly (but, one would assume, it would not stop any interest from accruing on the balance due). Naturally, it’s not free, and, according to Credit.com, your credit card issuer may not even tell you that you’re paying for such “protection” – you have to check your bill to determine whether you’re forking over cash for this. And, if you are, consider calling your card issuer to cancel it.
• Inactivity fees in disguise: Because the CARD Act forbids credit card issuers to charge inactivity fees (that is, charges for not using a card), some companies, it seems, have done little more than renamed their inactivity fees to keep them alive. Some cards apparently charge “annual fees,” which consumers don’t have to pay if they charge a certain amount each year. If you use your card very little and don’t think you’ll reach the annual fee limit, you may want to close the account.
• “Pick-a-rate” interest rates: This practice, according to Credit.com, is particularly nefarious because it can go undetected by individual credit card holders – it doesn’t cost individuals very much money, but, when applied to millions of accounts, earns a hefty chunk of change for credit card companies. What essentially happens is that credit card issuers charge a slightly higher interest rate than usual – your best bet is to avoid cards that have this language in the agreement: your interest rate “will be the maximum prime rate reported in the 90 days preceding the last day of the billing cycle.” An ordinary interest rate will be signified in your contract in this language: your interest rate “will be the maximum prime rate reported on the last day of the billing cycle.”

The bottom line? Watch out. Even though federal law protects your consumer rights to a certain extent, it’s still essential to read all the fine print and make sure you understand the terms of your credit card before you sign anything.

Posted in Consumer Credit, Credit Card Debt, Credit Cards, Credit and Bankruptcy, Financial Literacy | Comments Off

A Better Alternative to Payday Loans?

The financial dangers of taking on a payday loan (a short-term, high-interest loan offered to people with weak financial histories) generally outweigh any benefits. For cash-strapped Americans who need to make rent or utility payments, though, payday loans are often the only viable source of cash.

But, according to a post on WiseBread.com, that might change soon: it seems that, in some parts of the country, a more consumer friendly alternative to payday loans is cropping up.

More Affordable Small Loans

Here’s a look at what might soon act as a better option for people looking to borrow a little money for a short amount of time.

• FDIC pilot program: Between February 2008 and February 2010, the Federal Deposit Insurance Corporation tested a program that allowed Americans to borrow up to $2,500 for a period greater than 90 days. Interest rates were capped at 36 percent (but were often less).
• Non-payment loan requirements: In addition to making regular payments on their loans, borrowers were often required to meet other criteria, such as opening and putting money into a savings account, taking a financial literacy class and more. These measures were instituted to reduce or eliminate a borrower’s need for small dollar amount loans in the future.

According to the FDIC’s web site, the experiment showed promising results in many of the volunteer test banks (28 across the country). Now, the question many consumer advocates are asking is when will such programs be more widely available.

Finding Affordable Loans Near You

If you’re in need of a loan but don’t have the credit score or history to qualify for a traditional bank loan, you may be able to find a small dollar amount lender near you that won’t charge punishing interest rates. Here’s what to look for:

• Check out your local banks: Sources note that national banks like Bank of America and Wells Fargo have not yet hopped on the small loan bandwagon, but various regional banks across the country do offer a variety of small loans. To find out what your options are, call some local banks and ask about their non-traditional lending programs.
• Visit a credit union: If no banks in your area offer smaller loans, check out some of the credit unions. Because they’re structured on a more community-centric model, credit unions may have more alternatives for local members without other options.

It’s uncertain right now whether these programs will catch on (and even whether they’ll get some sort of national support to help them grow), but it seems that the FDIC’s chair, Sheila Blair, hopes they do.

To learn more about small dollar amount loans and how they might help you, visit the FDIC’s web site (link above) or check out the full WiseBread.com article.

Posted in Bankruptcy and Predatory Lending, Consumer Credit, Credit and Bankruptcy, consumer debt, predatory lending | Comments Off