Tag Archives: credit cards

Bankruptcy Alphabet: I is for Instant

Instant - I want it NOW!

We have a tendency to want (and expect) things to happen instantly. And we want those instant solutions to be without any negative consequences.

Frequently, I’ll meet with clients who will sit down and tell me (a) they do not want to file for bankruptcy and (b) they want to get out of debt instantly.

Here’s the thing. Despite what the lotto commercials say, for most people, getting out of debt and accumulating savings requires one simple formula:

Spend less than you earn.

But, here’s the problem - if you are like most of my clients, after all the bills are paid each month, you are at a negative number requiring you to use credit cards to make up the difference. Next month, you are even further behind and the cycle continues.

There comes a point where you’ve accumulated so much debt that no amount of belt tightening, reduction in expenses and instant ramen will get you out of debt. Bankruptcy laws exists so that you won’t be enslaved to your debt forever and gives you a chance to live a productive, successful, debt-free life.

Is bankruptcy an instant solution? No. But it’s probably as close to an instant solution as one can find with Chapter 7 taking about 3 - 4 months and Chapter 13 taking 3 - 5 years.

By the way, if your debt free strategy involves winning the lotto, you might want to read this article from Freakonomics.

 

Image credit: Leo Reynolds

Ripping off the debt Band-Aid

By: Jeena Cho

I often meet with people who spend months or years peeling the debt Band-Aid off millimeters at a time instead of yanking it off at once. Instead of making concrete plans to either repay the debt, settle, or file for bankruptcy, they go on extending the pain and the inevitable.

Here’s the problem with credit card debt. It enables you to live beyond your means. Repaying the debt requires 1. stop using your credit card and 2. scale back your spending to create disposable income. The difficulty is that in order to repay $1 borrowed requires you to earn approximately $2 to pay taxes and all the associated costs of earning the money (e.g., transportation, clothing, day care, lunches, etc.) Therefore, you not only have the feeling of being deprived when you stop charging expenses on the card, but having to live with a lot less money when you start to repay it.

Here’s an example.

John has $30,000 in credit card debt at 18% interest. Assuming his monthly minimum payment is interest + 1% of the balance, his payment would be $750. Assuming he doesn’t make any additional purchases, his monthly repayment amount would decrease slightly as follows.

Mo Min P/ment Interest Principal Remaining Balance

1 $750.00 $450.00 $300.00 $29700.00

2 $742.50 $445.50 $297.00 $29403.50

3 $735.09 $441.05 $294.04 $29109.91

4 $727.75 $436.65 $291.10 $28819.25

5 $720.48 $432.29 $288.19 $28531.52

6 $713.29 $427.97 $285.32 $28245.71

7 $706.15 $423.69 $282.46 $27962.85

8 $699.07 $419.44 $279.63 $27682.93

9 $692.07 $415.24 $276.83 $27405.93

10 $685.15 $411.09 $274.06 $27131.85

11 $678.30 $406.98 $271.32 $26860.70

12 $671.52 $402.91 $268.61 $26592.48

Here is the danger. By making the minimum payments, it would take you 451 months or 37.5 years to repay this debt in full. You’d also end up paying $44,416.16 in interest! Also, since the monthly minimum payments decrease, the temptation is there to charge more on the cards.

Now, let’s suppose you made a plan to repay all of your debt in 5 years. Your repayment amount isn’t that much different than the minimum payment amount at $761.80 per month for 60 payments. So, instead of taking almost 38 years to repay the debt, you can be done in 5 years.

Some expenses you may consider cutting or decreasing includes:

  1. Cable, or other monthly/annual subscriptions
  2. Dining out - lunch and dinner
  3. Grocery bills - find cheaper food
  4. Pet expenses
  5. Clothing, shoes, purses, jewelry, etc.
  6. Storage units
  7. Travel expenses

The important thing to realize is that for many people in overwhelming debt, no amount of tightening the belt, and trimming all the expenses will free up enough money to repay the debt within a reasonable amount of time. If you fall into this camp, it’s best to realize this sooner rather than later. What’s the point of paying $750 per month for years in minimum payments since it does almost nothing to reduce the principal balance?

There are few things that frustrate me more than meeting someone who has spent so much time trying to avoid the big “ouch” of ripping off the debt Band-Aid quickly that they suffer so much more in the long term. So, my message is this. If you are determined to avoid bankruptcy, make a concrete plan to repay your debt as soon as you possibly can. This will save you tens of thousands in interest alone. Also, know your own situation enough to know that repaying is simply not an option.

In other words, leave the band-aid on and heal, or just rip it off. Stop torturing yourself.

Can I keep a credit card if I file bankruptcy?

by: Jeena Cho, San Francisco Bankruptcy Attorney

Can I keep a credit card if I file bankruptcy?

One of the most common questions I get from clients is “Can I keep a credit card if I file bankruptcy?” The answer is generally “no.” For many clients who has relied on credit cards to get by on a daily basis, it’s difficult to imagine life without one. It’s important to keep the end result of bankruptcy in mind - a life without debt. Imagine being able to have a savings, a retirement fund, or your set money aside for your children’s college fund. For many who has been living paycheck to paycheck, on the edge, it’s often difficult to imagine.

In general, any debt you owe must be listed on your bankruptcy petition. This means that even if you have a balance of $1 on a credit card, it must be listed. The opposite of this is also true. If there is a $0 balance, it does not need to be listed. However, I discourage you from paying off a credit card with hopes of keeping it for the following reasons.

1. It will probably be cancelled anyway. Most financial institutions get electronic notices of bankruptcy. This means that most likely, even if the card is not listed, the bank will get notice that you have filed for bankruptcy. Even if the bank does not get notice of your bankruptcy, most credit card companies will run your credit report periodically and will most likely cancel your card.

2. Preference. If you pay any one credit card over another in excess of $600 in the 90 days prior to your bankruptcy, the Trustee in your case can get the money back from the credit card as a preference. This can cause delays in your bankruptcy, hence not advised.

You can get new credit after bankruptcy. (Although, I don’t recommend it.) Clients often tell me they received offers for car loans and credit cards shortly after filing for bankruptcy. It’s important to read the fine print as oftentimes, there is a very high monthly charge, interest rate and no grace period. The reason for these new offers are simple. After bankruptcy, you cannot file for 8 years (in case of Chapter 7 bankruptcy) and 4 years (in case of Chapter 13 bankruptcy). So, the creditors view such clients as “good bets.” The clients have no debt and can’t re-file for several years.

Almost any purchase requiring a credit card will accept a debit card. You can also get secured credit cards after bankruptcy (e.g., you give the credit card $1,000 in exchange for a credit card with a $1,000 credit limit). As mentioned in the beginning, I encourage you to save money after bankruptcy and live within your means.

This example is merely meant as an informational tool. You should consult with a San Francisco bankruptcy attorney to discuss the specifics of your case.

DEBT CUT IN HALF? DON’T COUNT ON IT

Posted: Friday, June 26 2009 at 05:00 am CT by Bob Sullivan

Like anyone with a radio or TV, Lorena Altamirano heard the ads promising quick and painless debt relief. If there was a way to settle her debt for 50 cents on the dollar, she sure needed it. A recent divorce had led to a nasty financial surprise: Her ex-husband’s unpaid bills had pushed her almost overnight from having virtually no debt to being $17,000 in the hole.

“I was paying everything perfectly, no problem, until the divorce,” she said. “Then the skies fell on me. These were bills he never told me about. We were married and I was responsible, but that put me totally out of balance.”

Altamirano still had a decent job as a benefits claims processor, but she was now living paycheck to paycheck. With a son in college, and $1,600 a month rent for her San Mateo, Calif., apartment, she had nothing left at the end of the month to pay down the debt. The interest rates on her credit cards climbed, and the late fees started to pile up.

A friend had enjoyed great success with a debt consolidation loan, so Altamirano started researching debt workout plans on the Internet. She quickly found Debt Remedy Solutions in Boca Raton, Fla., and sent an inquiry. The response seemed like an answer to her prayers.

“We are generally able to settle debts for about 40 cents on the dollar and have our clients debt free in a very short period of time on a low monthly payment plan,” said the letter, which Altamirano provided to msnbc.com. “We charge the lowest fees in the industry.”

Like most Americans with debt trouble, Altamirano knew nothing about the fast-growing debt negotiation industry, and did not understand the important distinctions between debt consolidation, credit counseling and debt settlement. She believed she was simply entering a payment program that would lower her interest rates and help her climb out of the hole she was in.

She missed the reference in the pitch letter she received – “We are generally able to settle debts” – that indicated she was about to trust her finances to a debt settlement company. She signed up, and began sending $200 a month to Debt Remedy solutions. A year later, the answer to her prayers had become a nightmare.

Rogue industry

In May, New York Attorney General Andrew Cuomo announced an investigation into the debt settlement business, calling it a “rogue industry.” Among the 10 firms that received subpoenas from Cuomo’s office was Debt Remedy Solutions. Unfortunately, that came too late for Altamirano.

There are perhaps 1,000 firms that offer debt settlement services, according to the industry’s lobbying group, The Association of Settlement Companies (TASC). About $20 billion in consumer debt is currently enrolled in debt settlement programs, according to the association.

Ads for debt settlement companies are ubiquitous, and nearly always use the same pitch: Consumers have the “right” to have their debts reduced by 50, 60 even 70 percent, the ads say, promising information that “credit card companies don’t want you to know.”

But as Altamirano discovered too late, there also are things the debt settlement companies don’t want you to know.

For help understanding how these firms work, msnbc.com interviewed Ray Hardy, who said he recently quit working for a debt settlement company after becoming frustrated with its business tactics. He did not wish to identify the company, but provided intimate details about the industry’s tactics during several conversations with msnbc.com.

The dark side

The basic strategy these firms employ is to instruct consumers to stop paying creditors. Instead, they are told to save money in a separate account. After receiving nothing for many months, the settlement companies say, lenders will be happy to take a lump sum payment for far less than the total debt. Sometimes, it works.

The problem for consumers is that high up-front fees — and additional monthly fees — often mean they have very little to offer creditors after six months or a year in the program.

“The program takes time, we have to get the credit card companies to think they will never see a dime, then approach them with the 50 percent offer,” Hardy said. “The dark side of debt settlement is that most clients could not pay their monthly credit card bills and now we are asking them to send money to our company on a monthly basis. Most of the money paid during the first year goes toward the fees and most clients who agree to debt settlement give up after less than a year. So the company will collect some monthly amount from them for one to 12 months, offer no service whatsoever and not a penny paid goes toward getting them out of debt.”

That’s precisely what Altamirano said happened to her. She agreed to pay more than $200 as month to Debt Remedy Solutions in early 2008. She says she was told that in 120 days, the firm would begin settling debts with her creditors. She was also told that collection calls and threatening letters would stop.

But as months rolled by, and she continued making payments, the threatening calls didn’t stop. In fact, they increased. Then, phone calls and letters to Debt Remedy went unanswered. After 300 days, and $1,850 in payments, she stopped paying the firm.

“Nothing had happened,” she said. “And now things were much worse.” Her debt had spiraled upward to nearly $25,000. After numerous complaints to the company, she was offered a refund — of $100.

Altamirano has filed complaints with the California state attorney general’s office and state banking regulators, but so far, she has gotten no relief.

“They did not do anything for me and stole $1,857 from my checking account,” she said. “It’s tricks everywhere. The problem is there are so many people in this situation. They are having a feast with us.”

Debt Remedy Solutions disputes Altamirano’s account.

“We made every effort to work with this customer,” spokeswoman Erika Papp said in an e-mail. She declined to answer specific questions about Altamirano’s account, but said that her story was investigated by the Better Business Bureau and Florida state officials, who rejected “rejected this customer’s complaint as unfounded and without merit.”

But a spokeswoman for the Florida Department of Agriculture and Consumer Services, which sent a letter dated June 11 to Debt Remedy Solutions that Papp provided to msnbc.com, disputed her characterization of the agency’s finding

“We have not sided with either party,” said Sophie Campfield, a program administrator at the agency. “We have merely acknowledged that the company responded to the complaint. It does not mean we agreed with what they said.”

Papp also said Debt Remedy Solutions was complying with the New York attorney general’s subpoena, “and we are working hard with his office to explain the work we do and assist his efforts in trying to understand our industry.”

Big fees, small benefits

Hardy, the former debt settlement worker, said debt settlement companies rack up charges against consumers in numerous ways. For example, he said, while the money saved for eventual debt repayment is held in an outside bank account, there are often fees associated with that. After all the fees are added up, there’s often very little benefit to the consumer — even if the credit card company agrees to a 50-cents-on-the-dollar offer, he explained. A consumer with $10,000 in debt would eventually pay nearly $4,200 in fees by the time commissions, up-front charges and bank account charges are added in. After paying $5,000 to the creditor, the consumer’s savings amount to only about $800, he said.

“The concept is nuts”

Consumers Union recently advised debtors not to use settlement companies. In 2005, the Center for Responsible Lending said that such services are only appropriate for a very thin slice of consumers — those who cannot pay their bills but can pay something toward their debts each month. The vast majority of those consumers could work out their own arrangements with lenders, it said.

“Basically you are saving your money instead of paying your bills, and paying someone to do that. The concept is nuts,” said Gail Hillebrand, legislative director for Consumers Union. “Those who can’t pay their bills should be in bankruptcy.”

Settlement companies have no legitimate product, but are thriving because so many consumers are deeply in debt, she said.

“They are selling hope. They are selling optimism,” Hillebrand said. “Scams always come back in a recession, and now they are just roaring back.”

The debt settlement industry has attracted the attention of regulators and legislators around the country. In addition to Cuomo’s investigation, numerous other state attorneys general have taken action against individual firms. And several states have pending legislation that would limit fee structures or force licensing on agents.

Industry defends practice, blames “bad players”

Andrew Housser, who runs the Freedom Financial Network debt settlement company and sits on the board of The Association of Settlement Companies, said that settlement firms offer an important service to customers in certain circumstances. But he said an influx of new settlement firms — many of them run by former mortgage industry workers — are giving the industry a bad name.

“Hundreds of companies are flooding into this and frankly some of them don’t know what they are doing,” he said. “There’s been explosive growth and unfortunately you get some good players and some bad players.”

TASC is actively supporting regulation in 24 states, he said, in an attempt to reign in abusive companies. It’s also self-policing its 200 members and investigating complaints against other settlement firms lodged via the association’s Web site, TASCsite.org, he said.

“It’s frustrating when we hear ads that say ‘guaranteed 30 percent (debt reduction) in 12 months,” he said. Still, he argued that complaints against settlement firms represent an “extraordinary small minority” of customers.

Housser defended the industry’s business model, and disputed claims by consumers and consumer organizations that legitimate settlement firms tell customers to stop paying their bills. By the time consumers arrive at settlement companies, they’ve already stopped paying bills and often can’t afford even minimum payments, he said.

Sending small sums to credit card firms or other creditors won’t do any good, he said. “It will just be a never-ending game,” he said. Those debtors are better off receiving help negotiating settlements with creditors, he said.

He also said that credit counseling isn’t a viable alternative for many indebted consumers.

For example, consumers who enroll in credit counseling generally still face highly monthly payments, because counselors can only negotiate lower interest rates and friendlier loan terms – not principal reductions. Many debtors can’t afford those payments.

“Some (consumers) fit in sweet spot of debt settlement, where they can’t afford credit counseling programs but still have some income,” he said. “We give them a program to work out their debt for less than face value.” Typical monthly payments for debt settlement are 1 to 1.5 percent of total debt, vs. 2 to 3 percent for debt counseling, he said.

Total settlement fees typically average about 15 percent of debt, he said — meaning a consumer with $10,000 in debt would pay $1,500 to a debt settlement company for help. Housser justified the fees, saying that debt negotiation is a very “labor intensive” business. Legitimate companies clearly list their fees up front, and don’t pile on extraneous charges, he said.

Ray, however, said his experience with debt settlement left him with great cynicism for the industry.

“Debt settlement as an idea is good, but the companies are so greedy they charge high fees, most of which are upfront,” He said. “I got into debt settlement because I thought it was saving people from the evil credit card companies, but it turns out the debt settlement companies are profiting mostly from the people that never complete the program. I walked away after just six months. I had too many questions, and the companies that do debt settlement prefer salespeople who are ignorant and just sell without asking.”

Altimirano said her experience with debt settlement left her even more desperate than when she started.

“I don’t think I have any future until I get rid of this debt,” she said. “I cannot sleep. I cannot get peace. I’m always in a bad mood. It’s horrible. I don’t how I still smile.”

RED TAPE WRESTLING TIPS

Consumers with debt troubles have several options, though none of them are easy.

Debt consolidation: Using a single loan – such as a home equity loan — to pay off multiple debts at full price. The benefit is usually lower interest rates, though debt consolidation loans are now much harder to get. This option is generally credit score neutral.

Credit Counseling: Involves paying a small fee – usually under $100 – to a service that offers budgeting advice and will negotiate lower fees and interest rates with debtors. Debtors pay the counseling service, which in turn pays the lenders. These nonprofits sometimes receive financial support from credit card companies. Still, Consumers Union says credit counseling is often the best choice for consumers who are struggling with high interest rates but capable of paying back their debt. Debt counseling will impact a consumer’s credit scores, but not as severely as other options. To find a debt counselor, visit the National Foundation for Credit Counseling.

Debt settlement: Specialized firms that instruct consumers to stop paying bills with the hope of negotiating discounts at a later date. This has a dramatic negative impact on your credit score.

Bankruptcy: A federal judge will consider your debts and assets, and decide which debts get paid and which get erased. While bankruptcy is the only option for some consumers, it has the longest negative impact on credit scores.

In general, those in debt should never sign up for a service that requires a large up-front fee.

TIPS FOR DEALING WITH DEBT SETTLEMENT COMPANIES

Some advice from N.Y. Attorney General Andrew Cuomo’s office:

  • Be wary of debt settlement companies that falsely promise to obtain substantial lump sum debt reduction settlements. Many advertise “reduce debt now,” and claim to be able to erase as much as 75 percent of credit card debt, but they rarely obtain advertised reductions.
  • Never sign a contract with a debt settlement company that requires payment prior to obtaining the promised debt reduction.
  • Enrollment in debt settlement plans may not stop creditors from bringing collection lawsuits or prevent enrolled accounts from growing larger through the addition of late fees, interest and penalties. Also, credit reports will be adversely affected.
  • Creditors are under no legal obligation to accept a settlement offer for less than the outstanding balance.
  • Only a small number of consumers who enroll in debt settlement plans have the financial means to complete them. Usually, they drop out after having paid service fees to the companies without reaching settlements.
  • Enrollment in a debt settlement plan premised on stopping payments to creditors will likely lead to more frequent and aggressive creditor collection efforts, often resulting in judgments, wage garnishments and freezing of bank accounts.
  • Check with the Better Business Bureau to obtain a Reliability Report on a particular debt settlement company and its rating.
  • A wise first step to help resolve an outstanding account is to speak directly to the credit card issuer. Alternatively, it may be helpful to speak to an attorney or an accredited credit counselor who can help develop a plan of action that best works for each consumer’s unique situation.