Bankruptcy Questions Answered

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

Students & Parents Need Financial Literacy Lessons

Hard economic times (like the ones we’re in) tend to remind us of how important understanding financial matters can be. After all, everyday transactions and financial decisions are what pave the way to larger financial events like being able to purchase a home or requiring the debt help offered by bankruptcy.

But, according to a recent report from Credit.com, fewer than half of the nation’s high school students were able to earn passing grades on a test of the basic tenets of financial literacy. And, according to another Credit.com story, many American parents are similarly befuddled by money matters.

What Your Kids Need to Know about Money

According to Credit.com, financial literacy lessons are best given and demonstrated in the home. Here are some finance basics to consider:

• Debt starts early: Sources note that the average college student leaves school with about $4,000 in credit card debt and $20,000 in student loans – that’s a pretty big hole to be in, especially in this economy, when jobs are difficult to find. Further, reports indicate that bankruptcy filings are increasing most rapidly among citizens aged 18 and 25.
• Money affects the whole family: It seems that as many as half of all college graduates are now moving in with their parents after leaving school because of an inability to find work or afford alternate housing. This can put a financial strain on parents, especially those who are already having difficulty making ends meet.
• Talking is important: It’s unfortunate that money is often a taboo subject in this country, because discussing finance issues in an open, frank manner may be the best way to make sure everyone is on the same page financially. Credit.com reports that 85 percent of teenagers are worried about money – in many cases, speaking with teens about a household’s finances might relieve some of their stress.
• It’s okay to be confused…if you seek help: One study suggests that a mere five percent of American parents were able to name the main factors that affect a person’s credit score, which means that if you’re not sure where to begin teaching your kids about money, you’re not alone. The good news is that there are plenty of educational resources available for free online, which means you and your family don’t have to be in the dark much longer.

Start Your Kids on a Path to Financial Success

If you don’t talk with your kids about money, now might be the time to start. Consider addressing some of the following:

• How much things cost: If you’re paying all your kids’ expenses, they probably don’t understand the dollar value attached to each item.
• How much people make: While you may not be comfortable revealing your salary to your children, you can discuss minimum wage, typical salaries for various professions, and how much time a person must spend working.
• How credit cards work: Kids probably don’t ever see a credit card bill – only the magic of using plastic in a store. So teach them about interest rates and monthly payments.
• Allowance: If you don’t already give your kids an allowance, it might be a good tool to teach them how to handle money.

Posted in Bankruptcy and the Economy, Consumer Protection, Financial Literacy, Personal Finance | Comments Off

Credit, Cosigning and Bankruptcy: What You Need to Know

If you’re thinking about cosigning a loan for a friend or family member to help him qualify for better interest rates or a greater loan amount, make sure you know your responsibilities if the borrower is unable to make payments or ends up in bankruptcy.

This post from WiseBread.com provides a reminder about the responsibilities of a loan cosigner. Here’s a recap and expansion.

Your Responsibilities in Cosigning

Before putting your signature on the dotted line of someone else’s loan, review the facts:

• You are considered a borrower: Even though you may have nothing to do with this loan or line of credit after you sign your name, it will appear on your credit report. This means that the primary borrower’s payment habits have the potential to affect your credit score.
• Your credit may take a hit: Besides the question of timeliness of payments, having an extra loan on your credit could affect your credit in another way: by shifting your credit-to-debt ratio. This ratio (which compares your total credit limit to how much debt you have) affects your credit score, which in turn could affect your ability to get future loans.
• You are agreeing to pay: According to figures from the Federal Trade Commission, of cosigned loans that go into default, 75 percent are paid by cosigners. And if the primary borrower decides to file for bankruptcy protection, you’ll likely be required to pay the loan as well.
• You agree to all loan terms: This means that if the primary borrower falls behind or defaults, you’ll be responsible not only for the loan payments but also for any late fees, penalties, increases in the interest rate, and so on. Further, a debt collector could conceivably approach you for payments, and might (in extreme cases) even resort to legal measures.

The Moral: Cosign with Caution

This isn’t meant to detract people from cosigning altogether – in fact, cosigning a loan can be a great way to help a loved one build or rebuild credit. But before you agree to put your signature on lending papers, make sure you understand the potential consequences. You may want to consider:

• Making a separate contract between you & the primary borrower to define expectations;
• Setting up an “emergency plan” for making payments if the primary borrower thinks she might miss a payment;
• Discussing the primary borrower’s income sources and spending habits to get an idea of what you’re working with financially; or
• Setting aside some money specifically for covering that loan.

The bottom line is to treat a loan you’re asked to cosign as you would any other loan – after all, it could have as big an impact on your credit score and financial health.

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

Credit, Cosigning and Bankruptcy: What You Need to Know

If you’re thinking about cosigning a loan for a friend or family member to help him qualify for better interest rates or a greater loan amount, make sure you know your responsibilities if the borrower is unable to make payments or ends up in bankruptcy.

This post from WiseBread.com provides a reminder about the responsibilities of a loan cosigner. Here’s a recap and expansion.

Your Responsibilities in Cosigning

Before putting your signature on the dotted line of someone else’s loan, review the facts:

• You are considered a borrower: Even though you may have nothing to do with this loan or line of credit after you sign your name, it will appear on your credit report. This means that the primary borrower’s payment habits have the potential to affect your credit score.
• Your credit may take a hit: Besides the question of timeliness of payments, having an extra loan on your credit could affect your credit in another way: by shifting your credit-to-debt ratio. This ratio (which compares your total credit limit to how much debt you have) affects your credit score, which in turn could affect your ability to get future loans.
• You are agreeing to pay: According to figures from the Federal Trade Commission, of cosigned loans that go into default, 75 percent are paid by cosigners. And if the primary borrower decides to file for bankruptcy protection, you’ll likely be required to pay the loan as well.
• You agree to all loan terms: This means that if the primary borrower falls behind or defaults, you’ll be responsible not only for the loan payments but also for any late fees, penalties, increases in the interest rate, and so on. Further, a debt collector could conceivably approach you for payments, and might (in extreme cases) even resort to legal measures.

The Moral: Cosign with Caution

This isn’t meant to detract people from cosigning altogether – in fact, cosigning a loan can be a great way to help a loved one build or rebuild credit. But before you agree to put your signature on lending papers, make sure you understand the potential consequences. You may want to consider:

• Making a separate contract between you & the primary borrower to define expectations;
• Setting up an “emergency plan” for making payments if the primary borrower thinks she might miss a payment;
• Discussing the primary borrower’s income sources and spending habits to get an idea of what you’re working with financially; or
• Setting aside some money specifically for covering that loan.

The bottom line is to treat a loan you’re asked to cosign as you would any other loan – after all, it could have as big an impact on your credit score and financial health.

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

What New Debt Settlement Rules Mean for You

The Federal Trade Commission issued new rules governing how debt settlement firms can charge consumers for their services. The new rules prohibit debt settlement firms from charging upfront fees for their services, which in theory will prevent some of the predatory practices that cost consumers so much money in the past.

Here’s a summary of some of the potential side effects these new rules might have on the debt settlement process.

Fewer Ads, More Honest Claims

• A drop-off in ads claiming to settle debts for little money: A ban on hefty upfront fees will mean that simply bringing customers through the door will no longer guarantee income for debt settlement firms, which in turn will mean that dropping money on TV and radio commercials may no longer be worthwhile financially.
• More selective consumer selection: Now that debt settlement firms cannot charge every customer large fees, they’ll have to more carefully choose which customers they agree to help. This will likely be good news, regardless of your goals. If you’re a good candidate for debt settlement, visiting a debt settlement firm may have a greater chance of helping you than in the past. And if you’re not a good candidate, the debt settlers may be less likely to waste your time and money with their services.
• Claims made based on all customers: Before the FTC’s rules took effect, debt settlement firms commonly made claims based only on the settlement experiences of their most successful customers. Now, though, companies must advertise using figures that represent all their customers’ experiences, meaning that the figures should more honestly represent what the company may be able to do for you.
• Some closures of debt settlement firms: Some debt settlement firms may no longer have a workable business model without upfront fees from customers, which could mean closures in debt settlement firms.
• “Innovative” trickery: And, finally, as with any implementation of new rules, some debt settlers may try to find ways around the new requirements. As always, you are still responsible for making sure your money and financial health is in good hands.

Debt Settlement without a Firm

If you’re struggling with debt and are trying to figure out which debt-relief option might work best for you (bankruptcy, debt settlement, credit counseling, etc.), remember that you can contact your creditors without any help from a third party. By exploring all of these options, you may find the debt-relief option that works best for you.

Posted in Bankruptcy and Predatory Lending, Debt Settlement, Filing Bankruptcy, Financial Literacy, debt collection, predatory lending | Comments Off

Take Advantage of Free ID Theft Protection & Education Materials

The Federal Trade Commission has announced that, in honor of National Protect Your Identity Week, it will provide consumers with a wealth of free information and materials about how to fight, avoid and protect themselves against identity theft.

Where to Learn about Identity Theft Prevention

Though federal laws exist to protect the finances of people who are victimized by identity theft, it’s still fairly common for bankruptcy filers to indicate that identity theft contributed to the financial distress that led them to file for bankruptcy. Here’s a look at what the FTC has to offer:

• Basic information: This “one-stop national resource” provides consumers with information about what identity theft is, how to recognize it, how to prevent it and what to do if they’ve been victimized by identity theft. Additionally, the site has information for businesses and law enforcement groups to help prevent and fight identity theft cases from happening.
• Informative videos: The FTC has posted some educational videos for consumers interested in learning how to reduce their online risk of identity theft and how to protect their digital lives from exposure to identity threats.
• Online application of skills: At their game portal, the FTC offers consumers a chance to test their knowledge about the risk factors of identity thefts, basic precautions to take to avoid being victimized by identity thieves and apply identity theft prevention skills by playing online games. This site might prove especially helpful for younger computer users who might be resistant to more traditional information sources.
• Reminder of your rights: Finally, the FTC has posted a reminder about every American consumer’s right to obtain and view copies of her credit report and why staying abreast of what appears in your credit is important to financial health.

Legal Help for Identity Theft Woes

To top off its bevy of useful information about fighting and preventing identity theft, the FTC has also announced that it will offer legal guidelines for identity theft victims. This web page is designed to help victims and their advocates (whether lawyers, credit counselors or other activists) determine how to proceed to maximize the benefit of fighting identity thieves.

As many people who have unfortunately felt the sting of identity theft already know, the crime can lead to hours of headaches as consumers try to sort out their financial situation and reclaim their private information. Generally, there are a few practices can help you avoid identity theft:

• Shred all sensitive documents before disposing of them;
• Don’t click on unfamiliar links online and definitely don’t enter your personal information unless you’re sure what web site you’re on;
• Don’t share your passwords with anyone;
• Check your free credit report every year for suspicious activity; and
• Make sure your email has a good spam filter. Be wary of emails from unknown sources.

Posted in FTC, Financial Literacy, Identity Theft | Comments Off

FTC Halts Tax Relief Fraudsters

The Federal Trade Commission filed a complaint last week with a federal judge to halt what was reportedly an organization devoted to tricking people out of money by promising to help with tax debts.

Tax Debt, Debt Relief Scams and You

Like so many other debt relief scams, this one is particularly difficult to stomach because it preyed on consumers who could least afford to lose the money they allegedly paid to the fraudsters. According to the FTC, here's how the scam worked:

• False promises of debt help: In TV, radio and Internet ads, the company (called American Tax Relief LLC) reportedly claimed that it could settle consumers' back tax debt for only a portion of the total amount. The company also apparently referred to part of the IRS's tax code that allows, in very limited circumstances, an "offer in compromise" for citizens truly unable to pay the taxes they owe.
• Fake "tax consultants": When victims called the company's toll-free line, they were reportedly connected with fraudsters posing as tax analysts and told, in almost every case, that they could qualify for one of the IRS's "special programs."
• Hefty upfront fees: Before offering customers the help they promised, sources note that the company charged large upfront fees (ranging from $3,200 to $25,000).
• No real help: Because the company was offering a service it could not realistically provide to so many people, it never actually gave customers any significant benefit for their payments.

Tax Debt Is Non-Dischargeable in Bankruptcy

Like child support, federally funded student loans and criminal fines, tax debts are typically non-dischargeable in bankruptcy court and are otherwise very difficult to eliminate in any way besides paying them. If you're struggling to make payments on back taxes, you may have some options:

• Installment payment plans: These plans, which individual taxpayers can arrange with the IRS, work much like any installment loan. They let those who are struggling financially catch up on their tax debt by making smaller payments over a period of time. While this may translate to paying more in total (because of interest rates and penalty charges), it's often a workable alternative for those who cannot afford a single lump payment.
• Offer in compromise: These agreements are much rarer because they involve the IRS settling a debt with a taxpayer for less than the total amount the taxpayer owes. Generally speaking, only those in extreme financial circumstances will qualify for offers in compromise.

Lavish Living: Insult to Injury

Perhaps the most galling part of the fraud case halted at the FTC's request is that the alleged fraudsters were reportedly living lavish lifestyles: driving expensive cars, residing in pricey homes, and paying for it all with ill-gotten funds from people struggling to stay afloat financially.

Posted in Bankruptcy and Predatory Lending, Consumer Protection, Financial Literacy, debt relief scam, tax and bankruptcy | Comments Off

When It’s Time to File for Bankruptcy: How to Know

Bankruptcy protection is often cited as a crucial part of the fabric of American capitalism – with the safety net of bankruptcy available, entrepreneurs and risk-takers can proceed without worrying that following their dreams will have devastating financial consequences.

Recognizing the important role bankruptcy plays in our economy, two bankruptcy analysts have developed a color-coded system to help consumers gauge their level of financial health and help them figure out whether they should be seriously considering a bankruptcy filing to protect their financial future.

Financial Warning Signs that You Might Need Bankruptcy

The various colors in this code, much like those in the code used by the feds to communicate the current level of threat of a terrorist attack, work like this:

• Green zone (no need to file bankruptcy): If you're in this category, you have no real need for bankruptcy protection. You probably make more than you spend, pay your bills on time, have assets and insurance, have no credit card debt and save money regularly.
• Blue zone (financial changes might be needed): Here, you don't quite need bankruptcy protection, but your financial habits, if continued, may lead you to a place where you will. People in this zone may be worried about losing their job, have trouble paying bills in full each month, have credit card debt and secured debt, and may not by able to save money regularly.
• Yellow zone (bankruptcy is an option): At this level, you need to evaluate your situation and consider your debt-relief options, bankruptcy being chief among them. People in the yellow zone are often experiencing some financially difficult life change (like divorce, injury or layoff), have begun to miss payments on both unsecured and secured debts, have few or no assets, are getting calls from debt collectors and may not have insurance. If you're in the yellow zone, you need to take some sort of action, whether that's negotiating with your creditors or consulting with a bankruptcy lawyer.
• Orange zone (bankruptcy should be seriously considered): Here, your debt is getting out of control. People in the orange zone tend to be delinquent (more than 60 days late) on at least one bill, use one credit card to pay off another, owe serious tax or medical debts but cannot afford them, have been out of work more than three months and may have had creditors initiate lawsuits against them. While there are still alternatives to bankruptcy available at this stage, it's generally a good idea to consult with a lawyer to see what the best option for your finances and legal status is.
• Red zone (file for bankruptcy right away): At this stage, you're no longer in a position to negotiate and need the protection of the court to prevent having your assets repossessed, your wages garnished, your home foreclosed or similar actions taken. Many people in this phase are unemployed and may have run out of unemployment benefits. Under these circumstances, filing for bankruptcy is often helpful because it may halt all collection action.

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FTC Supports Data Security Legislation

Even though federal law protects victims of information crimes, every year some people who file for bankruptcy cite identity theft or another information crime as one of the reasons for their financial distress. And, in an age of increasing online transactions, we’re more exposed than ever to data breaches that could lead to serious privacy risks.

That’s why it’s good news to hear that the FTC recently testified to Congress in favor of data security legislation.

Your Personal Data & Finances

You probably already know that your Social Security Number, your credit card numbers, your bank account numbers and similar information are valuable and should be guarded carefully. But, it seems, some businesses that collect and store our personal information don’t always take the same precautions we might ourselves.

The FTC testimony specifically suggests the passage of laws that require the following:

• Businesses that make claims or promises about data security must know that these claims are accurate and up to date.
• Businesses should take steps to guard against well-known technology threats to data security.
• Businesses must know the recipients, if any, of sensitive consumer information.
• Once they no longer need sensitive information, businesses must not continue to store it.
• When disposing of sensitive information, businesses must do so properly and completely.

If it surprises you that these laws aren’t already in place, take note. This should serve as a wake-up call to remind you to keep careful track of your personal information at all times.

Protecting Your Information and Money

So how can you reduce the threat of identity theft and thus lower your chances of becoming a victim? Here are some pointers from the FTC:

• Shred sensitive documents when you’re finished with them. This includes medical documents, financial papers, and anything else that has identifying information about you or your family.
• Protect your Social Security Number. Keep your Social Security card in a safe spot (not your wallet) and don’t give this number out unless you’re obligated to by law. If you’re asked for your SSN, question why the company needs it, how it will be used and whether you can give an alternate form of identification.
• Keep your personal information safe. Don’t communicate any sensitive info over the phone, through email or over the Internet unless you’re certain who’s on the other end.
• Be suspicious of strange emails. If you get an email from an unknown source with a link or an attachment, avoid clicking on them – they could be viruses.
• Keep your passwords obscure. Using important dates or family names can make it easy for identity thieves to access your accounts.
• Keep your personal information secure. At home, take special precautions if you have roommates or non-family workers coming and going.

If you’re concerned that you may have been the victim of identity theft, speak with a lawyer today to learn about your rights.

Posted in Consumer Protection, FTC, Financial Literacy, Identity Theft | Comments Off