From the Wall Street Journal

Bankruptcy is a key component of this country’s safety net. If you plan ahead, it doesn’t have to wipe you out.

There’s a surge in personal bankruptcy filings at the moment, for obvious reasons. Some 30,000 Americans are filing each week, and the figures could top 1.4 million for the year.

But too many people are talking about bankruptcy as if it’s a sign this country’s social safety net has failed.

It isn’t. Bankruptcy is part of the safety net. Other countries have welfare states, America has bankruptcy. And so long as you plan ahead, it doesn’t have to wipe you out.

If you are smart you could get through a bankruptcy filing and still keep your home, your retirement savings, the childrens’ college funds, your car and your personal effects. Amazingly, according to a recent study by the Federal Reserve Bank of Boston, you may even get your credit cards back pretty soon — whether that is a good thing is another matter.

I don’t want to encourage irresponsible behavior. But I don’t write the laws, and they are there for a reason.

Furthermore, although there is some dispute about the numbers (we’ll get to that in a minute), it is certainly the case that sheer bad luck lands a lot of people in bankruptcy court. Yes, some people spend themselves into oblivion on Jacuzzis and trips to Lake Tahoe. But many others are walloped when their job is eliminated or when a child gets very sick.

Every middle class family should be aware of the risks of bankruptcy, and how to protect their assets if the sky falls.

Bankruptcy laws are complex and vary from state to state – if you want to make substantial plans you should probably talk with a lawyer in your state who specializes in the subject.

Some basics: Money in pension plans, including a 401(k), should be secure from creditors. The same is true for money in an IRA in amounts up to $1 million. If you have children or grandchildren, money in 529 tax-sheltered college savings plans becomes secure two years after deposit. You can contribute $65,000 per child to your 529 plan this year without triggering gift taxes, or $130,000 if you’re a couple. You retain control of the money in the plan, too.

Life insurance products, including retirement annuities, may also be protected, though rules vary by state.

Many states have a homestead exemptions that shield your home from unsecured creditors (though your home’s mortgage isn’t shielded, of course). You usually have to file paperwork to obtain the exemption. Florida and Texas, famously, offer virtually unlimited homestead exemptions. “It’s irresponsible not to have a homestead exemption on your house,” says Frank Morrissey, who teaches bankruptcy law at Boston University.

Little known: In more than 20 states married couples can own their home as “tenants by the entirety,” which affords substantial protection against a creditor of one spouse (though not of both). “In effect, neither party owns the property, it’s owned by the marriage,” explains Richard Nemeth, a bankruptcy lawyer in Cleveland.

There are other exemptions that vary by state, from a car and working tools to some other personal effects. Iowa exempts a family shotgun: An enterprising bankrupt several years ago bought a $10,000 antique gun on the eve of filing for bankruptcy to claim the exemption. He got away with it, too.

Such boldness is usually a bad move, however, as courts frown on naked greed. “When it comes to bankruptcy,” says B.U.’s Mr. Morrissey, “the usual rule is, pigs get fat, but hogs get slaughtered.” The earlier you shelter assets, the safer they should be.

As long the economy stays grim, bankruptcy filings will become increasingly common – which may diminish the stigma that accompanies bankruptcy. It is, in a sense, surprising that so many Americans should still feel ashamed of bankruptcy when those in a far more comfortable situation feel no such chagrin. Corporate bankruptcies are an accepted part of doing business from Wall Street to Silicon Valley. Executives who collect $30 million from a bank in the years before it collapses are not expected to give it back.

Bankruptcy gives people a fresh start, but the long-term effects vary. A study last year by researchers at the Federal Reserve Board in Washington, D.C., found that people who filed for bankruptcy were more likely than others to fall back into debt arrears, even many years later. But there may be complex reasons for that, and every case is different. (Here’s a link to the study: http://www.federalreserve.gov/pubs/feds/2009/200917/200917pap.pdf)

As for the causes of bankruptcy: The widely reported statistic that nearly two-thirds of personal bankruptcies are caused by medical bills deserves a more skeptical eye. The number comes from a study by Dr. David Himmelstein, et. al, to be published next month in the American Journal of Medicine. Yet if you read the report you’ll discover only 29% of those interviewed for the study actually said their medical bills caused their bankruptcy. And while the “medically bankrupt” claimed average medical bills of $17,943, that group’s total net debt averaged $44,622, or more than twice as much.

Claire Ann Resop, a bankruptcy lawyer in Madison, Wisconsin, adds that medical debt may show up more in bankruptcy filings because it’s often the last bill you pay when you get into trouble. Hospitals may be lenient on repayment and charge no interest, while the landlords demand cash and the credit card company charges 30% interest. “Medical facilities may simply be the best creditors to have,” she says.

Write to Brett Arends at brett.arends@wsj.com

From the Salem Evening News

By Matthew K. Roy
Staff writer

From the Boston Globe Business Team

From the Wall Street Journal

By JENNIFER LEVITZ

Rhonda Brewster and her husband have decided they don’t want to be married to each other anymore. But while they’re ready to move on, they still can’t move out.

They don’t want to sell their home, in Huntsville, Ala., in a down market. They can’t afford two households until Ms. Brewster finds steady work. So for now, they are living under the same roof but on separate floors.

The “kids are OK with it.” says Ms. Brewster, a 39-year-old freelance writer and stay-at-home mother. “They just know that mommy lives upstairs and daddy lives in the basement.”

Unwinding the ties of matrimony is rarely simple or inexpensive, but for many couples, the sour economy is complicating the process further.

Divorce lawyers say many couples are delaying the decision to dissolve marriages and are staying in unpleasant situations for fear of being on their own at a time of economic uncertainty. Others are being forced to live together after the divorce is final for financial convenience. That can strain the emotions and result in awkward negotiations about subjects like dating.

In Nashville, Tenn., Randy and Lori Word jointly filed for divorce in February, after 10 years of marriage, and expect to get a court date this summer. Meanwhile, they continue to share a house while Ms. Word — who had been a stay-at-home mother in recent years — tries to find work in marketing. “I don’t see jobs out there,” she says.

Things are getting a little cramped in the house. Mr. Word, a 36-year-old construction-project manager, keeps his clothes in boxes in the study and sleeps in the living room. “Luckily, we bought a very nice couch two years ago,” he says.

Ms. Word, who is 37, works part time as a waitress while she is searching for full-time work. Some nights she returns home from a shift to find Mr. Word in the bed complaining that his back can’t take another night on the couch — and asking her to please sleep in the living room, which she does.

Both say they are actually getting along better now that they are no longer in an emotional marital relationship.

“We’re a lot kinder to each other,” says Ms. Word, adding, “We’re not so offended and bothered by each other.” Mr. Word says, “We’ve actually developed or redeveloped a friendship that I think had gotten lost a little bit.”

A May survey by the Institute for Divorce Financial Analysts, a national organization for financial professionals who work on divorce cases, found that the recession was delaying divorces, and inspiring “creative divorce solutions” in living arrangements.

“People are saying, ‘I’ve put up with it for the last 10 years, I can put up with it for another year,’” says Gary Nickelson, president of the American Academy of Matrimonial Lawyers. In a poll of 1,600 of its members, the group says, respondents estimated that divorce cases in the six months through March were off 40% from normal levels.

It’s still unclear how the recession is affecting divorce rates overall, because of lags in government data. But courts in some major population centers say fewer people have been filing for divorce since the downturn began in late 2007. In New York County 9,349 couples filed for divorce in the first four months of 2009, off 14% from 10,848 in the same period in prerecessionary 2007, according to records from New York State Unified Court System.

In Los Angeles County, divorce filings in the first four months of this year dropped 3%, to 9,048, from the same period last year and are down 9% from the comparable span in 2007, according to records from the Los Angeles Superior Court.

A lull in divorce could be a silver lining in the recession, says Steve Grissom, president of Church Initiative, a Wake Forest, N.C., organization that runs DivorceCare, a national support group. Mr. Grissom says couples who postpone splits may be able to work through problems and reconcile.

Bonnie Hughes, a 51-year-old financial planner, says she developed stomach problems when the real-estate slump turned her marital split into “the divorce that never ends.”

She and her husband divorced in February 2007, but for financial reasons continued to live together in their house in Chattanooga, Tenn., until the following May. Ms. Hughes moved out, but the ordeal wasn’t over. They put the house up for sale, with each planning to use the proceeds to finance the next stages of their lives, Ms. Hughes says, but “it just wasn’t selling.”

They finally sold in August 2008, after dropping the price by $100,000 to $324,000, which was less than they had paid for the place four years earlier. She used her proceeds to move to Atlanta.

In Alabama, Ms. Brewster and her husband say they are avoiding complications by sticking together even as they plan to part.

The couple decided in March to split after 16 years of marriage. Ms. Brewster has hired a divorce lawyer and says she has been advised to have as little interaction as possible with her husband. Both say reconciliation isn’t in the cards.

But to afford two separate households, they either need to sell the house they bought four years ago — which they don’t want to do in a down market — or wait until Ms. Brewster has steady income.

In the meantime, Ms. Brewster lives on two floors of the house, residing with the couple’s two children, plus the family pets: a guinea pig, a squirrel, a dog, two rabbits, two gerbils, five cats and five lizards.

Her husband lives in the finished basement, formerly the family’s game room. “We had to take down the pool table so he’d have a place to sleep,” she says. He sleeps on an air mattress, and has his own entrance and a full bathroom, though his only cooking equipment is a microwave.

Each calls the other before entering their respective domains; they schedule use of the washer and dryer and negotiate evenings out, Ms. Brewster says.

“He still takes the garbage out and mows the lawn. Sometimes, I will call him and say, ‘I know you’re eating frozen dinners; I cooked extra, come up,’” Ms. Brewster says. “I try to take the high road in front of the kids. Goodness knows they’ve seen the bad side of marriage — the arguing.”

Both have resumed dating and have even given each other advice on how to get back into the singles world. Ms. Brewster took the photograph of her husband that he put on match.com, the online dating Web site. On some Saturday nights, she says, they hire a baby sitter so they can both go out, and they share their plans so they won’t run into each other.

Their living situation has scared away some potential suitors. “It freaks a lot of them out,” says Ms. Brewster. “I tell them upfront: Here’s my situation. Eventually I will move on, but I’m not going to do something to mess myself up financially.”

Write to Jennifer Levitz at jennifer.levitz@wsj.com

From the Wall Street Journal

By ELEANOR LAISE

Wally Bowman, a part-time security guard in Miamisburg, Ohio, had roughly $15,000 in credit-card debt when he signed up with a “debt settlement” firm last year. The company said it could resolve his debts for far less than the amount he owed and advised the 63-year-old to stop making payments to his creditors, according to Mr. Bowman.

Mr. Bowman paid hundreds of dollars in up-front fees and made regular monthly payments of $249 to Hess Kennedy, but the Coral Springs, Fla., firm never settled any of his debts, he says. By the time he dropped out of the program this summer, Mr. Bowman says, his debt had ballooned to about $20,000, due to interest and late fees, and creditors were threatening to garnish his wages. Finally, he filed for bankruptcy last month.

“I wish I had done that to begin with,” Mr. Bowman says. “I’d have been much better off.”

As the economy weakens, a growing number of consumers are paying big money for services from debt-settlement companies that purport to help them settle their debts for a fraction of what they owe. But as Mr. Bowman’s experience shows, customers can end up wishing they hadn’t sought such help.

At financial-services Web site Credit.com, the number of complaints about debt-settlement companies received so far this year is already double the number received in all of 2007, says John Ulzheimer, the site’s president of consumer education. The Federal Trade Commission, which has also seen an increase in consumer complaints, was concerned enough about the issue that it held a workshop late last month to examine debt-settlement business practices.

The Florida attorney general’s office has received more than 1,400 complaints about debt-settlement and other debt-relief companies this year through early October, compared with fewer than 890 for all of last year, and Attorney General Bill McCollum plans a push for licensing requirements and to strengthen other rules governing the industry.

Some major creditors, including American Express Co., say they won’t even work with debt-settlement companies, though the companies dispute this. “There’s no service or benefit that a debt-settlement company can offer our card members that they don’t receive from working with us directly,” says Lisa Gonzalez, a spokeswoman for American Express.

Regulators, consumer advocates and industry groups are taking a closer look at debt-settlement firms. But even some nonprofit organizations that offer alternatives, such as credit counseling and education, have come under scrutiny, with the Internal Revenue Service examining their ties to for-profit outfits.

Hess Kennedy, the firm hired by Mr. Bowman, was sued by the Florida attorney general earlier this year for allegedly violating the state’s laws on unfair and deceptive trade practices. The firm was placed in receivership in July, and on Monday, a Florida Circuit Court judge entered an order to wind down the firm and approved a process for consumers to apply to get their money back. The firm referred questions to an attorney, who didn’t respond to requests for comment.

Hefty Up-Front Fees

Debt-settlement companies generally advise clients to make monthly payments into a special account instead of paying creditors. The firm promises to use the accumulated cash to settle debts for pennies on the dollar. They often charge hefty up-front fees, and their tactics can trash customers’ credit scores, boost their tax bills and leave them in greater debt than when they started.

Rules governing these firms vary by state, but a number of states have recently passed laws allowing for-profit credit-counseling and debt-settlement firms to do business within their borders. Membership in the Association of Settlement Companies, a debt-settlement industry trade group, has roughly doubled in the past year, to more than 150.

Because the industry has so many new people, “there’s a lot of misunderstanding about how a company should be run, what are good standards and business practices,” says Wesley Young, an executive board member at the trade group. In recent months the association has begun monitoring its members’ sales practices and Web sites to be sure they meet the group’s standards, he says. It hasn’t yet taken any action.

Regulators are concerned about misleading debt-settlement sales practices. In a string of recent cases against such companies, the FTC alleged that firms misled consumers about what services they could deliver, how long it would take and how much it would cost, says Alice Hrdy, an assistant director of the FTC’s division of financial practices. And though many debt-settlement companies are set up to look like legal services, “usually it’s a sham,” says Norman Googel, an assistant attorney general in West Virginia. Consumers often don’t receive any legitimate legal services, “and the lawyer is like the Wizard of Oz back there behind the curtain,” Mr. Googel says.

The high fees charged by debt-settlement firms can prolong the process of paying off debts. The companies often charge an up-front fee of 10% or 15% of the total amount owed. They may also charge monthly fees of about $50, and a back-end fee of about 20% or 30% of the amount “saved” for clients in a settlement.

Credit-Card Lawsuits

Meanwhile, creditors aren’t getting any payment, so interest and late fees accrue, debt rises and clients get a steady stream of calls from creditors and collection agencies. They may even be sued and have their wages garnished. Lawsuits against credit-card holders are becoming more common as card issuers increasingly sell delinquent accounts to debt purchasers, regulators say.

Debt-settlement companies often refuse refund requests, says West Virginia’s Mr. Googel. And though regulators may try to get money returned to customers, these companies are generally not well-capitalized, “and often the consumer harm vastly outstrips whatever assets the company would have,” says the FTC’s Ms. Hrdy.

Consumers in debt-settlement plans often see their credit scores tank. While they’re not making payments, of course, their scores will drop. But settling a debt for less than the amount owed is also “a serious negative on your credit score” and stays on your credit report for seven years, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which developed the widely used FICO credit score. Debt settlement can also boost consumers’ tax bills, since they generally must pay income tax on the amount of debt forgiven in a settlement.

Even when companies deliver, many customers drop out of the programs early. David Gillson of Sherwood, Ark., a 38-year-old quality-control manager at a construction firm, signed up with debt-settlement firm Elite Financial Solutions of Fort Lauderdale, Fla., in 2006. He owed more than $71,000 in seven different credit-card accounts. Elite helped him reach two settlements within the first year or so.

‘Just Horrendous’

But the collection-agency calls were “just horrendous,” Mr. Gillson says, and his credit score was plummeting, two creditors sued him, and his wages were garnished. Given his reduced wages, he couldn’t afford to put anything in the debt-settlement account, and he dropped out of the program in June.

Elite’s contracts “clearly explain all the negatives, such as garnishment, that interest rates will accrue and that late fees will apply,” says a supervisor at the firm.

Consumers who can’t work out debt problems on their own do have alternatives. Many nonprofit credit-counseling organizations offer “debt-management plans,” in which consumers steadily pay the full balance owed but often get concessions from creditors such as lower interest charges and waived fees. Such nonprofit programs come with some consumer protections. For example, they must provide services tailored to the needs of individual clients and charge reasonable fees.

But even here, consumers must tread carefully. The IRS began examining nonprofit credit-counseling organizations several years ago and found that many were funneling fees to for-profit companies, or doing little or nothing to educate consumers. In its initial examination, the IRS looked at 63 organizations, and in 49 of those cases either the IRS issued proposed or final revocations of nonprofit status, or the organization went out of business or became a for-profit firm on its own.

Write to Eleanor Laise at eleanor.laise@wsj.com

From the Wall Street Journal:

By JANE J. KIM

Could fixed-rate credit cards soon be a thing of the past?

In June, Bank of America Corp. and J.P. Morgan Chase & Co.’s Chase Card Services notified some cardholders that their fixed rates were being converted to a variable rate tied to the prime rate. In March, Discover Financial Services also notified some customers that their fixed rates were changing to a variable one.

Spokespersons for the banks—who declined to provide details on the numbers of cardholders affected—said the changes were an attempt to better manage the businesses’ costs as market conditions change.

Nearly all of Bank of America’s fixed-rate cards will be converted to a variable rate. The exceptions: some student accounts, accounts in debt-assistance programs and some newly opened accounts, says spokeswoman Betty Reiss. At BofA, customers will not be able to opt out of the changes, which they will start to see with August statements.

Chase customers, however, will be able to opt out of the changes, although they will have to close their accounts. Chase spokeswoman Stephanie Jacobson said the switch was prompted by the company’s “changing costs for funding credit-card loans.” Discover cardholders were also allowed to opt out of the changes, which took effect May 1, but had to close the accounts.

With a variable rate, rates generally rise as interest rates rise, and fall in a declining-rate environment. With rates already near a bottom and expected to rise, most consumers probably won’t see their rates fall further.

The changes will make it easier for issuers to bump up the rates they charge without notifying cardholders. By contrast, fixed-rate cards typically must first mail a notice to clients announcing any rate changes. The changes come at a time when issuers are rushing to comply with new legislation that will soon limit their ability to raise rates on existing balances, require them to notify customers at least 45 days in advance of any changes to their terms, and make them eliminate other confusing practices.

Write to Jane J. Kim at jane.kim@wsj.com