Bankruptcy Questions Answered

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

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

Tiny, Hidden Credit Report Errors Can Lead to Bankruptcy

The Wall Street Journal recently published a new story entitled Hidden Medical Debt Trips Up Homeowners. The report documented several cases in which small medical bills that had been turned over to collection resulted in a more than 50 point drop in a homeowner's credit score.

In one situation, a homeowner attempted to refinance his mortgage, only to discover that two unpaid medical bills totaling less than $50 had caused his credit score to drop.  As a result of the lowered credit score the refinancing bank demanded over $4,000 in closing costs.

In another situation, less than $500 of medical debt reported to a collection agency disqualified a homeowner from a favorable interest rate, which would have resulted in tens of thousands of extra interest charges.

In many of these situations, the consumer never knew about the unpaid medical debt – the provider simply turned the claim over to a collection agency which immediately reported it to the credit reporting agencies as delinquent debt.

According to the Journal, "otherwise well-qualified borrowers with good loan-to-value ratios and steady employment are increasingly finding it difficult to refinance because of medical billing mistakes marring their credit."

If you or a loved one has been in the hospital, you probably know that a single visit can result in five, ten or even more bills from separate vendors – the hospital, the hospital pharmacist, the anesthesiologist, the ambulance service, etc.  I do not find it surprising at all that a patient would not know about one or more bills.

I think that an important point here has to do with the cascading effect of negative credit.   Even a small late payment on an account can result in a dramatic lowering of your credit score.  Other creditors will receive electronic notice about your lowered credit score and when permitted, they will increase your interest rate, lower your credit limit and increase penalties and fees.

Lenders Often Cause Delinquencies by Changing Terms Unexpectedly

On more than one occasion I have met with a potential bankruptcy client who was forced into Chapter 7 or Chapter 13 because of changed terms, not because of any delinquency.   These changed terms can arise from a tiny delinquency – like the unknown, unpaid medical bill issue discussed in the WSJ story, or for other reasons.  Recently I met with a small business owner who was completely current on his personally guaranteed revolving line of business credit.  His bank was taken over by another bank which conducted an audit and, without warning, the business loan was "called in."

One minute, my client was operating a viable, functioning small business that was current on its obligations – and literally within a matter of days, that business was shut down by a bank for no apparent reason.

The point here: examine your credit reports regularly and challenge even tiny delinquency reports as the damage to your credit will arise from the existence of the delinquency as opposed to the amount of the late payment.  Even small downgrades to your credit score can result in a negative debt snowball.

Posted in Consumer Protection, Credit, Credit Reports, Credit Scores, Credit reporting errors, Discover, FDCPA Claims, General consumer bankruptcy info, a, arise, bank, billing, bills, cases, claim, debt, delinquency, demanded, entitled, hidden, knew, lowered, marring, medical, medical debt and bankruptcy, medical debt and credit reporting problems, mistakes, provider, refinancing, reports, score, simply, small, story, the, tiny, totaling, trips, turned, unpaid | 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

Inside the Mind of a Bankruptcy Lawyer – Should I File and if so, Why Should I Choose Your Firm?

There are dozens of lawyers out there who offer to prepare and file bankruptcy cases.  Some work in high volume "bankruptcy mill" firms that compete on price while others compete on experience, knowledge and service.  Usually the cost differential is a few hundred dollars, but when you are considering bankruptcy, every dollar counts – so why would you want a lawyer like me as opposed to a firm that would offer to represent you for a lower price?

I could offer a glib answer like "if you needed brain surgery, would you look for the cheapest surgeon on the one with the most experience and industry recognition" but that does not really answer the question.  Perhaps it would be helpful if you could look over my shoulder as I analyze a real life situation that came before me recently.

Earlier this month an email arrived from a couple who wanted information about bankruptcy.  The wife wrote that she was a stay at home mom raising 2 children and that her husband lost his job about a year ago, and recently started back to work at a lower paying job.  Their current household income is just under $50,000.  They own a house that is now worth less than what they paid for it – the house is worth about $200,000 – the first mortgage is $210,000 and the second mortgage is $35,000.  They own one older car outright and are financing a mini-van.  They have also incurred around $25,000 of credit card debt – most of which was used trying to keep the mortgage current.

Earlier this year they fell behind on both the first and second mortgage.  The first mortgage lender started foreclosure proceedings, but suspended foreclosure and offered to consider my potential clients for a mortgage modification.  They have been making modified payments for several months but when they called the lender to ask if they had been approved for a permanent modification, the account rep told them that their modification paperwork had not been approved but that their application had been sent to another department for a reconsideration.  News of this decision had not been provided to my prospective clients – the only reason they found out was from their call.  No one from the mysterious reconsideration division was available and their multiple calls have not been returned for over 2 weeks.

They decided to contact me because they are getting the sense that the mortgage company is unlikely to approve their modification and they want to be prepared for a possible foreclosure.  What are their options? Here is what I advised them through my conversation with the wife:

First, I asked what was their desire regarding the house – was keeping the house a priority?  The wife responded that they would like to keep their house but they were not sure they could afford it given the husband's reduced salary.

I explained that Chapter 13 is the type of bankruptcy that can stop a foreclosure but that Chapter 13 would not allow us to change the amount of the monthly payments, nor would it change the total balance due on the mortgage.  Chapter 13 would allow them to "cure" their arrearage by paying that arrearage (the past due payments) over a five year period of time, along with other debts that would also be included in the Chapter 13 payment plan. However, if they were not able to afford the regular monthly payments Chapter 13 probably did not make much sense.

The only possible justification for a Chapter 13 would arise from the possibility that they could use Chapter 13 to "strip" the second mortgage and make that unsecured.  Under Chapter 13 law, a second mortgage that is wholly unsecured, meaning that the balance due the first mortgage exceeds the fair market value of the home.  If the second mortgage is wholly unsecured, we can file a motion to strip the lien, thereby making the second mortgage debt an unsecured claim in the Chapter 13.  If our Chapter 13 plan called for paying unsecured debt at 5 cents on the dollar, then Chapter 13 might be something to consider.

In this case, the wife advised me that the monthly payment due the first lender was more than what they could afford, plus she did not seem enthusiastic about signing on for a five year payment plan, so we decided to remove Chapter 13 from consideration.

We then proceeded to discuss Chapter 7.

I pointed out that Chapter 7 would allow the couple to discharge their credit card debt as well as any potential liability arising from the surrender of their home.  I felt that the real danger came from the second mortgage lender as it has been my experience that first lenders rarely pursue deficiency claims because  of the Georgia law that requires them to go to court to certify the deficiency before a judge within 30 days of the foreclosure.  Second mortgage holders, by contrast, need only file suit on the promissory note associated with their loans.  I see far more deficiency balance claims from second mortgage lenders than from first mortgage lenders.

I also noted that since the foreclosure process could take several months, one strategy here would be to remain in the house and pay nothing – nothing to either mortgage lender and nothing to the credit card lenders.  This strategy would allow my prospective clients to reduce their budget outflow dramatically for several months while they built up a small cash reserve, and then file bankruptcy in four to six months when creditors were starting to take action.  I noted that this strategy was based on economics, and that they would have to be comfortable with the moral implications of this course of action.  I also noted that this "wait until the last minute" strategy would cause significant damage to their credit in addition to the bankruptcy.  By contrast, filing a Chapter 7 when there were few or no 120 day late references would make recovery from bankruptcy a little easier.  Credit reports document payment histories and while a bankruptcy discharge will put the balances at zero, it does not delete the negative payment histories.

On the other hand, I advised the wife that if she and her husband waited to file and the husband secured a better, higher paying job, their household income might leave them with disposable income in their budget, or it might cause their household income to exceed the median income for a family of four, thereby making Chapter 7 much more difficult or impossible.  It has been my experience that when household income exceeds the median (in Georgia the current median income for a family of 4 is $68,258) by $10,000 or more, it can be very difficult to qualify for Chapter 7 under the means test.  Thus, if the husband was actively looking for employment and his target income was $80,000 or more, waiting to file Chapter 7 might not be the best idea.

The wife then asked me about the credit report issue – how long would it take for she and her husband to rebuild their credit.  I responded by saying that it my experience, a Chapter 7 debtor can expect his credit score to remain depressed for eight months to a year following the Chapter 7 discharge.  However, Chapter 7 has the positive effect of eliminating all debt and thereby causing an improvement to the debt to income ratio.  Further, individuals can only file Chapter 7 once every eight years – so from a lender's perspective a recently discharged debtor has no debt and cannot file bankruptcy for at least 8 years.

I assured the wife that I made it my practice to follow up with my clients who had received a discharge to review their credit reports three to five months after discharge.  I have found that at least half of the time, there are errors on the credit reports that artificially depress post bankruptcy credit scores and sometimes, the errors are actionable, meaning that we can collect damages from creditors for Fair Debt Collection Practices Act violations.  In a few cases I have been able to collect enough in damages to cover the attorney's fees and filing fees associated with the original bankruptcy filing!

I ended by conversation with the wife by thanking her for contacting me.  I then followed up our conversation with a brief email summarizing what we had spoken about and providing her with the "get started" link to one of my web sites.

I hope you can see that even a "simple" fact pattern can give rise to a variety of options and pratical considerations.  Consumer bankruptcy is not a "one size fits all" practice and I am able to raise all of the points that I did because I have seen a lot of different issues over the past 23 years.  If you have any questions about what have written here or if you want to discuss your personal situation, I encourage you to contact attorney Susan Blum or me by phone at 770-393-4985 or send us an email.

Posted in Chapter 13, Chapter 7, Credit, Current, Foreclosure, General consumer bankruptcy info, Georgia Bankruptcy, Lenders, Mortgage, a, and, because , choosing a bankruptcy lawyer, claims, deficiency, document, easier  , exceeds, georgia, histories, house, household, in, income, keeping, lender, median, payment, priority  , proceedings, pursue, rarely, reports, responded, started, the, wife | Comments Off

New Credit Card Protections Trigger Higher Fees by Card Issuers

As you may know, last year Congress passed a law called the Credit Card Accountability Responsibility and Disclosure Act of 2009.  This law, nicknamed the CARD Act of 2009, was designed to regulate a variety of unpopular credit card tactics, such as interest rate increases without notice, inactivity fees and unfair interest calculations.

According to credit card industry analysts, the CARD Act of 2009 will eliminate over $390 million in fees for credit card issuers.  Not surprisingly, the credit card companies do not intend to walk away from this fee income.  For every fee and penalty eliminated by the CARD Act, credit card issuers are finding replacements.   For example the annual fee for many cards has been increased, sometimes dramatically.  Card issuers are also sending corporate card applications (called "professional cards") to consumers.  Corporate cards are not included in the CARD Act.

The Wall Street Journal recently ran a story explaining how the credit card companies intends to recoup their lost fee income.   The bottom line: the CARD Act of 2009 will eliminate some consumer-unfriendly tactics used by the credit card companies, but it will trigger an equal number of new consumer-unfriendly tactics.  Caveat Emptor.

Posted in CARD Act of 2009, Congress, Consumer Protection, Credit, Disclosure, Law, a, accountability, act, act the, and, applications, called, card, corporate, credit card company tactics, credit card fees, dramatically  , fees, inactivity, included, issuers, issuers  , journal, notice, passed, responsibility, sending, street, tactics, the, unfair, unpopular, wall, year | Comments Off

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Alternatives to Filing Bankruptcy

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Consumer Borrowing, Retail & Median Home Prices Boost Economy

Government groups have published numbers for various economic indicators for March and April, giving a little insight into how our nation’s economic situation is changing. Here’s a summary of a few of these telling figures.

Consumer Borrowing Up in March

Since February of 2009, consumer borrowing in the U.S. has reportedly been falling, as we collectively try to claw our finances out of the red.

But March 2010 showed a surprising increase in consumer borrowing—a $1.95 billion increase, according to sources, which far outstripped the $3.85 billion loss many experts expected.

The increase could be a fluke, but it could equally be a sign that American households are becoming more optimistic about spending money.

Retail Rises Slightly in April

Retail sales blossomed in March, thanks in part to an early Easter. April’s numbers represent smaller growth, but growth nonetheless:

• March retail sales saw a 7.9 percent increase over sales in March of 2009.
• April retail sales grew only 0.5 percent compared with those a year earlier; however, in April 2009, sales decreased 2.7 percent from the previous year.
• Combined sales in March and April increased by 4.8 percent; January and February sales increased by only 3.3 and four percent.

While the slower growth in April may seem like cause for concern, many analysts are not worried, pointing to the fact that some growth occurred and that this year’s early Easter likely shifted people’s shopping patterns.

And, as one commentator in this New York Times article notes, economic recoveries don’t always happen linearly.

Median Home Prices

NPR reported this week that median home prices are on the rise in about 60 percent (91 out of 152) of the country’s cities surveyed.

This marks significant improvement from the final quarter of 2009, when only about 40 percent of median home prices were rising. Here’s a look at some of the hard numbers:

• 36 percent of all first-quarter sales were foreclosures and other distressed properties;
• Nationally, the median price was $166,100, about 0.7 percent below the median price in the first quarter of 2009;
• Prices jumped significantly in Saginaw, MI; Akron, OH; and Cleveland, OH; and
• Prices fell significantly in Orlando, FL; Ocala, FL; and Cumberland, MD.

Posted in Bankruptcy and the Economy, Credit, Economy, borrowing, housing, retail | Comments Off