What is Bankruptcy?

June 13th, 2013

Bankruptcy is not a bad word. It is the Federal Governments remedy to assist honest people, overwhelmed by debt regain their financial control.

I like to refer to the bankruptcy court and the tax court as similar governmental approaches to helping American society function and move in a positive direction. Both courts have federal judges, both have code books for the rules and regulations, both have forms that one fills’ out, and both have end results that are designed to keep society functioning with an approach that assist individuals and families.

At death, who inherits credit card debt?

August 27th, 2012

By Sally Herigstad, Bankrate.com Highlights

  • There’s a big difference between being an authorized user and a co-signer.
  • If your ex takes custody of a joint credit card, it pays to check your credit.
  • Credit card debt is unsecured, so collectors could end up out of luck.

After the death of a family member, many spouses, ex-spouses and even adult children find themselves with a surprise “inheritance” — leftover credit card debt.

When someone dies, the estate pays credit card balances and other debts. If a person dies with more debts than assets to pay them, creditors can be out of luck — and they often are.

But there are exceptions that could leave you on the hook for someone else’s credit card balance after that person’s death.

Joint cardholders beware

If you’re a joint cardholder, meaning you co-signed for the credit card, you’re liable for the debt. Parents sometimes do this for children who are just starting out, or adult children will co-sign with their elderly parents, perhaps to help keep track of expenses.

If you’re only an authorized user, you’re not liable when the cardholder dies. If you co-signed as a joint cardholder, then you just got a new credit card debt.

“Sometimes, people can be on a credit card and not even know it,” says Pennsylvania attorney Linda A. Kerns. “Maybe when they filled out the credit card applications, (the joint cardholder) didn’t even tell them.” These accounts could show up years later, at the time of a death or divorce.

“I tell people to check their credit card reports regularly. Resolve it before a death or divorce or traumatic event,” says Kerns.

Who got custody of the credit card?

It happens too often: One spouse agrees to pay off a joint card as part of a divorce settlement. But if the ex doesn’t do it or dies before the debt is paid and your name is still on the card, the credit card company may come looking for you.

Furthermore, according to Texas attorney Glen Ayers, if you live in a community property state, you’d better hope you didn’t receive community property in the divorce. “That divorce judgment does not bind the credit card company. It’s going to chase you,” he says.

In a community property state, the rules are different during life and at death. “In community states such as Texas, any community property that passes to my wife as well as any specific bequest to my children would be liable on my death,” says Ayers.

If a wife, for example, has no contractual obligation to the community property, her separate property can’t be touched, Ayers adds. However, community property can be used to pay off debts. Community debt laws are complex and vary even among community property states, so talk to a lawyer in your state about your situation.

Using a card after death could spell trouble

Continuing to use a credit card as an authorized user after the cardholder’s death could put you in big trouble. “That’s got criminal implications,” says Ayers. “If somebody wanted to make a case of that, is that any different than picking up a card on the street?”

The same goes for using the card as an authorized user when you know the debt won’t be paid. For example, says Kern, “You’d be committing fraud if you knew a parent was near death and the estate didn’t have money and you used it knowing it wouldn’t be paid off.”

When the estate loses, beneficiaries lose

Even if you are not held personally liable for the debt on a credit card, you’ll feel the effects of it if you’re a beneficiary of the estate. Debts will be paid from the estate before beneficiaries receive any distributions.

There is a specific time period for creditors to file a claim against the estate. When an estate is probated, creditors are prioritized. Credit card debt is unsecured, unlike a mortgage, which is secured by property, or a car that is secured by the vehicle. So it’s likely the credit card company will be at the back of the line when it comes to paying debts from the estate.

That doesn’t mean the credit card company won’t try to recoup the debt from family members, so don’t fall for it if you know you’re not liable. Taking some pre-emptive action, such as notifying credit card companies that the cardholder has died, will help prevent them from contacting you.

Before any debts are paid out of an estate, including credit card debt, consult your attorney.

Five Steps to Overcome Financial Trauma

August 17th, 2012



by Tamara E. Holmes

Published August 17, 2012

CreditCards.com

Hitting bottom financially is bad enough. In addition to money problems, the fear, guilt or shame associated with financial distress can make pulling yourself up by your bootstraps seem impossible.

But there’s hope for an emotional recovery, too, experts say, one that can walk hand-in-hand with a financial comeback.

A financial crisis is emotionally traumatic because it threatens our survival and our sense of belonging, says Brian H. Farr, a licensed professional counselor in Portland, Ore., who specializes in financial therapy.  Financial therapists help clients understand the emotional issues connected to money management problems. “We can get knocked out of our peer group if we don’t have the cash flow,” says Farr.

The recent recession was particularly traumatic for Americans, with more than half experiencing some type of work-related hardship and 32% saying they lacked confidence in their ability to retire, according to the Pew Research Center. Others are simply jaded, having watched family and friends grapple with credit card struggles, according to Patricia Sahm, managing director at Auriemma Consulting Group.

But the good news is you can regain control over your emotions — and your money — by taking the following steps offered up by experts.

1. Confront the shame. Guilt and shame are common feelings when people make major financial flubs such as accumulating massive credit card debt, says Katie Ross, education and development manager for American Consumer Credit Counseling (ACCC). “People feel that they’ve been a failure,” says Ross, who co-wrote the book, “Financial Peace of Mind,” to help people pick up the pieces.

While many go to great lengths to keep others from learning about their precarious financial situation, the process of telling someone can be very liberating, says Rick Kahler, president and founder of the Rapid City, South Dakota-based Kahler Financial Group, a financial planning company. “Just admitting a financial failure to someone is usually enough to begin letting go of the shame,” Kahler says. Talking to a financial therapist, a financial planner trained in dealing with financial therapy or a good friend could prove helpful.

2. Focus on behavior. Some who have endured difficult financial situations vilify financial tools and swear off using them ever again. For example, a person who ran up credit card debt might decide he will never use a credit card again. But the credit card is not the bad guy; rather it’s the use of the card that got you into trouble, says Farr. In fact, used wisely, a credit card can save you money through rewards, purchase protection and other bonuses. The better solution is to modify your behavior so financial products are no longer a curse, but a blessing.

3. Take responsibility. It’s important to look closely at the factors that caused the trouble, says Marie McNabb, a financial therapist based in Seattle. “Bad luck or other people’s actions may have played a role, but in most cases, there were moments when one could have changed the course of events,” she says. “Maybe we trusted when we knew better or gave in to social pressure or the desire for things we couldn’t afford, or took unreasonable risks or shortcuts.”

Once you own up to any role you may have played in creating your money blunders, you empower yourself to create a better future. After all, if your choices had the power to wreck your finances, they also have the power to improve them.

4. Create new habits. It’s not enough to simply say you’re going to change your money behaviors. “Humans are creatures of habit so new habits must be formed, which will pay off financially and emotionally,” says Kathleen Gurney, CEO of Financial Psychology Corp. and author of “Your Money Personality: What it is and How You Can Profit From It.” Implementing rules such as saving 10% of your income or paying credit card bills in full each month takes emotion out of the equation and creates a safety net that will make you feel less anxious if financial difficulties arise again, she says.

5. Take small steps. Just as a person who has recently been in a traumatic traffic accident may be overly cautious at intersections, a person who has undergone financial trauma can become overly cautious with his or her money, says Farr. For example, a loss of money in your 401(k) might tempt you to hoard cash when you may have plenty of time to recoup those earnings in the stock market. While you’re not likely to get over new money fears over night, you can take small steps to restore your confidence. First, you might invest a small amount. Then, you might slowly raise the percentage. Over time, you’ll regain trust in your ability to create a sound financial future.

Applying past lessons is key to rebounding from a financially traumatic event, says ACCC’s Ross. “Once you accept your mistakes, there are tools to help you make better decisions moving forward.”

Credit-Card Rates Rise Again

July 11th, 2012
  • Jul 09, 2012, 2:05 PM

By AnnaMaria Andriotis

Borrowers continue to pay record low rates, with one major exception: credit cards.

Rates on student credit cards hit 16.3% on average during the second quarter of 2012, up from 15.8% during the previous quarter and 15.9% a year ago, according to new data from CardHub.com, a credit-card comparison web site. Banks have been raising rates on credit-card users of all stripes over the past year, but consumers with no credit histories or poor credit scores saw the biggest increases. Rates on “secured cards,” which require borrowers to pay a security deposit in order to get a line of credit, now average about 19%, up from 17.7% in the first quarter.

Rates for consumers with excellent credit scores averaged nearly 13% during the second quarter. That was unchanged from the first quarter, but up from 12.7% a year prior. Merchants, meanwhile, are pushing for the right to charge customers extra for credit card purchases, The Wall Street Journal reported Monday.

Financial advisers say consumers should rely on a mix of payment methods in light of rising credit card costs. They suggest shoppers pay mostly with cash and limit credit cards use to purchases which can be paid off in full each month.

These higher credit-card rates come as rates on other types of loans are at historic lows. For example, rates on 30-year mortgages average 3.76%, according to HSH Associates, a mortgage-data firm. Rates on many car loans also remain in low single-digit territory. The reason for the discrepancy, says Keith Leggett, vice president and senior economist at the American Bankers Association, is that credit cards still present more risk than most other types of loans. Most credit cards are unsecured, meaning lenders can’t reclaim an asset if borrowers stop paying their bills. In contrast, banks take back homes and cars when those loans aren’t paid.

In addition, banks have been offering more credit cards to riskier borrowers since last year, which has led to an increase in the average credit card rate.

Another contributor: incentives. Credit card issuers have been expanding their 0% interest-rate offers on purchases and balance transfers, and to make money they’re raising the rates they’re charging after the promotional periods end, says Odysseas Papadimitriou, chief executive at CardHub.om. The average length of 0% introductory offers on balance transfers and purchases lasted around 10 months during the second quarter, up from seven to eight months a year prior, according to CardHub.com.

Government launches credit card complaint database

June 19th, 2012

June 19, 2012
NEW YORK (AP) — The government is launching an online database of complaints about credit cards.

The public can see what types of complaints people have filed against any bank that issues credit cards. They can also search complaints by ZIP code and see how banks responded. The database does not include personal information.

The database goes live Tuesday. It will be maintained by the Consumer Financial Protection Bureau, which was set up after the 2008 financial crisis to protect consumers from loans and cards with hidden fees or other traps.

The CFPB is the first agency to set up a public website to track complaints about consumer financial products. The agency will use the database to track complaints and identify potential problems in the marketplace, such as a new card that carries hidden or poorly disclosed fees. It also wants consumers to use the information to research financial products they might use.

‘‘Each and every time we hear from American consumers about their troublesome transactions with financial products, it gives us important insight,’’ CFPB director Richard Cordray said.

Also Tuesday, the agency released some details on thousands of complaints it has fielded about credit cards, home mortgages, student loans and other bank products. Among the findings:

— The agency received 19,000 complaints about home loans from December through June 1. The most common came from people having trouble paying their mortgages and were released to loan modifications, collections or foreclosure.

— It received 17,000 complaints about credit cards, mostly related to billing disputes, from December through June 1. In about 2,000 of those cases, customers recovered money.

The credit card database will contain information on complaints received by the agency since June 1. The agency expects to add retroactive data later this year.

The public database of complaints could be extended to mortgages, student loans and bank accounts.
__

Online: www.consumerfinance.gov/complaintdatabase

Beware the predatory-lending trap

June 12th, 2012

6/11/2012 7:25 PM ET

|By Marcia Passos Duffy, Bankrate.com

Unscrupulous lenders are eager to prey on people desperate for loans in these tight economic times. Here’s how to avoid falling into their snare.

Borrowing money in this economy is not easy. But even if you are desperate to get a loan, don’t let your guard down. Predator creditors are on the loose.

These unscrupulous lenders prey on borrowers using deceit, manipulation, sales pressure and even fraud to get their victims to sign on the dotted line.

The hallmarks of a predatory loan are exploitation and entrapment: These loans have sky-high interest rates and target consumers who have little ability to repay, such as the elderly, people with limited education, those with weak credit histories and other low-income groups, according to the Center for Responsible Lending, a nonprofit research group based in Durham, N.C.

While predatory lending is often associated with payday loans and subprime mortgages, the practice can be found with any loan. And new schemes are cropping up every day — online and off.

Predators of all stripes

According to the center, predatory lending practices can happen in a wide range of loans, including home improvement, auto financing, car title, tax refund anticipation and payday loans.

Don’t be fooled into thinking that predators are lurking only in back-alley storefronts or on flashy websites. There is a growing trend among some large, reputable banks to offer high-cost, short-term “payday” loans as well, says Kathleen Day, spokeswoman for the center. These loans are typically called “account advances.”

“These loans can have an APR (annual percentage rate) in the triple digits,” Day says, referring to the types of short-term, high-interest loans that some banks are offering.

For example, one bank’s “checking account advance” loan charges $2 in interest per $20 borrowed (with a $35 late fee), which must be paid back within 10 days. Taking out a $400 loan would cost $40, which calculates to a staggering 365% APR.

“All high-cost, short-term loans trap people. Steer clear of these loans,” Day says. “They are designed to make you come back over and over again for more loans.”

Look for red flags

While borrowers should be wary of any short-term, high-interest loan, regardless of its source, predatory practices on long-term loans, such as auto loans or mortgages, also can entrap the unsuspecting.

Tom Alexander, an associate professor of finance at Northwood University in Midland, Mich., says predatory loans have recognizable red flags.

Be on the alert if the lender allows you to borrow more money than you can afford or asserts that bad credit isn’t a problem, he says. Suspect a predatory loan if the lender asks you to fudge or make false statements on your loan application, asks you to sign blank documents or a document with blank spaces, or discourages you from reading the fine print, Alexander says.

Steve Wolf, a certified fraud examiner and executive director of Capstone Advisory Group in Washington, D.C., says borrowers should also be wary of any lender that:

  • Charges excessive fees or penalties if the loan is refinanced or payment is late.
  • Puts in fine print that the borrower cannot take legal action against the lender.
  • Adds unnecessary insurance or financial products to the loan.

Ask the right questions before signing

While your questions will depend on the loan product purchased, Wolf suggests these basic questions that you should ask the lender before you sign:

  • What is the actual rate of interest when all loan origination fees and prepaid interest is included?
  • What is the payoff period for the loan? (Six months, 10 years, 30 years, etc.)
  • When will the loan rate go up or reset?
  • When the loan resets, what will the payment be?
  • Are there any penalties for late or delinquent payments?
  • Do late payments trigger a higher loan rate for the remaining period of the loan?
  • Are there any refinance restrictions and fees?

Not only should you grill the lender, but you should also ask yourself some hard questions, says Alexander.

  • Can I afford to pay back this loan?
  • Is the length of time for the loan reasonable? For example, a 10-year car loan might not be reasonable.
  • Are my total loan payments more than 36% of my gross monthly pay? They shouldn’t be.

What to do if you are caught in a predatory loan

If you realize that the loan form you have signed is predatory, there are some steps you can take.

The Obama administration’s newly established Consumer Financial Protection Bureau is the place to launch a complaint about any predatory loans except those from auto dealerships, which are exempt from the bureau’s authority.

“People should also complain to their state attorney general,” Day says. If you suspect fraud, you may want to consult with a legal aid attorney.

“As (borrowers) become aware that they can take action against mortgage fraud and predatory lending, and policymakers, consumer advocates and civil-rights leaders take more action against the predators, more people will be protected from its burden,” Wolf says.

However, launching a complaint may not immediately ease your problem, such as a high monthly loan payment with unfavorable terms or an exorbitant interest rate.

For that, there is only one solution: “Do whatever you can to pay off the loan and get out from under it,” Day says.

Repent of these 7 credit card sins

June 7th, 2012

5/25/2012 3:20 PM ET

|By Karen Haywood Queen, CardRatings.com

Using plastic can be convenient and even rewarding. But if you handle credit poorly, you’ll pay dearly in time, money and frustration.

Likely you’ve lost your credit card bill under a pile of papers at least once. By the time the bill surfaces, it’s past due. Congratulations, you’ve just committed one of the seven deadly sins of credit card use — and the costs will add up.

Yes, the best credit cards make paying convenient. Compare the time you save when you swipe your credit card at the gas pump with the hassle of stepping inside a cramped, noisy convenience store to hand over cash. When you pay with plastic, you can also rack up credit card rewards. But committing any of the following credit card no-no’s can ding your credit score, cost you money and even eat up some of that time you thought you’d saved.

Paying late

“The No. 1 deadly mistake is paying your bill late,” says Manisha Thakor, the author of “Get Financially Naked.” “People say, ‘It’s just a day late — it’s not a big deal.’ But a lot of people don’t realize that being an hour or a day late is as bad as being five days late.”

And you can end up paying in multiple ways. First, a late credit card payment can cost you up to $25 in late fees, plus interest. Second, your low-interest card can quickly become a high-interest-rate card, says Jessica Cecere, a former regional president for CredAbility of South Florida, a nonprofit for credit counseling and education. “You can be late one time and you’re done,” she says. “You might have a 12% interest rate and it could go to 24%.”

Finally, your credit score also can be affected. “The timeliness of your credit card payment is 35% of your credit score,” Thakor says. “One small thing — being late — mucks up a third of your credit score.”

Paying only the minimum

“A lot of people are still paying off Christmas 2010,” says credit counselor Patrick Owens, of ClearPoint Credit Counseling Solutions in Richmond, Va. Bad idea. You’ve probably noticed that your credit card bill now has a required box showing how much you’ll pay over time if you cover only the monthly minimum payment. “You may be paying for 20 years on a couple thousand dollar balance,” he says.

You could end up paying nearly double for that cute outfit or fancy meal, Thakor says. “A rough rule of thumb is, if you have an interest rate in the high teens or above and just make the minimum payment, you have essentially almost doubled the price,” Thakor says. “So that $100 pair of jeans cost you nearly $200.”

Co-signing for a credit card

Many parents co-sign for a young adult child’s credit card with good intentions, hoping to help the child establish credit, Owens says.

“But it’s a gamble for parents when you add children on,” he continues. “Some kids have not used credit cards before and they run up a big balance. That causes problems for both the kids and the parents.”

If you’re co-signing for a credit card, first make sure your child understands how credit cards work, Owens says. Also, consider a secured credit card or prepaid debit card set up with money to cover the balance, he advises. When the money’s in such an account is gone, the card can’t be used anymore.

It’s not just parents getting burned on co-signing for a child’s credit card. Sometimes it’s the other way around, Thakor says. “I’ve seen cases of kids helping adult parents,” she says.

Co-signing for anyone can be a bad idea, Thakor says. “It’s like unprotected sex once you co-sign,” she says. “The other person’s reputation is reflecting back on you. And if they don’t pay, creditors are going to be coming to you next for that money.”

Letting someone else use your credit card

Letting someone borrow your credit card can cause problems that go beyond exposing you to financial risk. “One of my friends lent her credit card to an individual to use at a store,” Owens says. “His name wasn’t on the card. They asked for ID at the store and when the name didn’t match, they confiscated the card and she had to go to the store to pick it up.”

Robbing Peter to pay Paul

While a balance transfer to a low-rate card can save you money on interest, if you’re transferring the balance because you can’t afford to pay it, that’s a bad sign, Cecere says. “You’re not actually getting yourself anywhere when you do that,” she says. “You’re robbing Peter to pay Paul. That’s not only one of the seven deadly sins, but also a warning sign you’re in financial trouble if you’re using one card to pay another.”

Too many credit cards

Rewards programs and store discounts can entice you to apply for, and end up with, too many credit cards, Cecere says. “If you apply for too many cards at once, your credit score will go down,” she says.

Canceling all of your credit cards

Perhaps you’ve decided to just get rid of all your credit cards — the business credit card, the gas credit card, the rewards credit card. All the plastic, gone. Then you can’t possibly mess up your credit. Right?

Wrong. “You don’t want to cancel all your credit cards at once,” Cecere says. Then you have no available credit, she says. Further, you’re essentially closing the book on your credit history, which will lower your credit scores. Instead, pay them all off but don’t close them, she advises.

I am proud to have helped thousands of individuals and families in the course of my practice. My office has provided guidance to our clients to work their way from unmanageable debt to regaining financial control. My office is not a “bankruptcy factory,” where clients are processed without regard to their individual needs. Rather, I build relationships and represent people not only in their bankruptcies, but with their other legal needs. In fact, knowing my clients and their families is the only way I can understand their individual goals and aspirations. I understand that nobody wants to talk about bankruptcy with a lawyer. I have learned over the years that clients filing for bankruptcy are not trying to avoid their responsibilities, but are looking to alleviate a difficult situation. You owe it to yourself to consider all of your options. I look forward to meeting you, answering your questions and helping you and your family.

MSN Money Wipe out your student loan debt

January 18th, 2012

1/16/2012 3:12 PM ET |  By Liz Weston,

There’s no easy way to escape from your college loans, but for most people, options such as repayment and forgiveness plans do exist. The point is to avoid defaulting.

Here are two things you need to know about student loan debt:

1. There’s no magic wand that makes it easily disappear.

2. The more desperate you are, the fewer options you may have for relief.

The rising default rate on federal student loans reflects these realities. The U.S. Department of Education in September said 8.8% of borrowers had defaulted in their first two years of repayment, up from 7% the previous year.

That’s just the tip of the iceberg. When the window is expanded beyond the first few years of repayment, the default rate soars. One in five federal student loans that entered repayment in 1995 has gone into default, according to a review by the Chronicle of Higher Education.

Still, most people have better options to deal with their education debt than to simply stop paying it. A smart repayment approach can get you out of debt faster or at least make your loans more manageable as you build the rest of your financial life.

Here’s what you need to know to start planning your escape from student loan debt:

Understand the trade-offs

Federal student loans offer a variety of repayment options. If the payments on the standard 10-year repayment schedule are too high, you may be able to get extended plans that lower payments by stretching your loan term out to as many as 30 years. Or you can ask for graduated payments that start smaller and get bigger over time. Or you can take advantage of repayment plans based on your income.

The longer you take to pay back the loan, the more interest you’ll pay. Switching from a 10-year to a 20-year plan, for example, will cut your monthly payment by about one-third but will more than double the total interest you’ll pay, said financial aid expert Mark Kantrowitz, the publisher of FinAid and Fastweb.

If you have a manageable amount of federal student loan debt and can afford to make the bigger payments, you should do so. But consider opting for lower payments, even though you may pay more interest, if:

  • You really can’t afford a larger payment right now.
  • You otherwise couldn’t save for retirement.
  • You have private student loan debt in addition to federal loans.

Focus on your private student loans first

Unlike federal student loans, private student loans have variable rates. Even if the rates are low now, they likely won’t stay that way for long, Kantrowitz said.

Private student loans also have fewer consumer protections and repayment options than federal loans, plus no forgiveness options — more reasons to dispatch this debt as fast as you can. Consider paying the minimum possible on your federal loans so you can throw more money at your private loans. Your lenders can help you compare your repayment options; if you’re not sure who holds your loans, start your search here.

Consider income-based repayment plans

Federal student loans offer three repayment options that are tied to your earnings: income-contingent, income-sensitive and income-based. The income-based plan is the most generous and can even get your payments down to zero if you’re poor. The plan caps payments at 15% of your so-called discretionary income, which is the difference between your adjusted gross income and 150% of the federal poverty line.

This cap will fall to 10% in 2014. (The cap will fall this year for certain borrowers, who will be notified this month by mail if they’re eligible for lower payments. To qualify, the borrowers can’t have taken out any loans before 2008 and must have taken out one new loan in 2012.)

Explore your forgiveness options

The balance of your federal loans can be forgiven after 25 years of on-time payments if you’re in the income-based repayment plan. That term will drop to 20 years starting in 2014 and will drop this year for a select group of borrowers — who, again, will be notified by mail if they qualify. The clock generally starts when you enter the income-based repayment program.

You can get your balance erased in just 10 years if you’re in the income-based repayment plan and work in certain public service jobs, including teaching, health, military and public safety jobs. (See a complete list here.)

You also can get some or all of your federal loans forgiven through volunteer work, military service or working in certain high-need areas. Service in AmeriCorps or Vista, for example, can earn you a $4,725 stipend toward paying off your loans. Participating in the Army National Guard can earn you up to $10,000 for loan repayment. Doctors and nurses can get loan forgiveness through the National Health Service Corps or the Nursing Education Loan Repayment Program if they work for a few years in areas that lack adequate medical care. Teachers have a number of options for forgiveness if they work in disadvantaged areas or with special-needs children. For more, visit FinAid’s page on loan forgiveness.

Don’t ignore your debt

Defaulting will trash your credit, which will make it harder for you to get other loans and may impair your ability to get a job. You could be sued and have your wages garnisheed. Your income tax refunds could be withheld, and you might not be able to get or renew professional licenses.

If you really can’t pay your federal loans, even under an income-based repayment plan, consider applying for a deferral or forbearance — which will allow you to suspend payments for a time without penalty, although interest will still accrue — rather than simply ignoring your debt. You must apply for deferrals or forbearance before your loans go into default. (Default is defined as being more than 270 days overdue on your federal student loans or 120 days overdue on your private loans.)

Private student loans have fewer options when you can’t pay, but a one-year forbearance may be available, or you may be able to get extended-payment plans.

If you’ve exhausted all your repayment and forgiveness options and still can’t pay, you should:

Understand your worst-case options

Student loans are different from most other debts. Education debts typically can’t be erased in bankruptcy court, and there’s no statute of limitations on how long a lender can pursue you for what you owe. Age or disability won’t protect you: The U.S. Supreme Court ruled against a 67-year-old disabled man who lived in public housing, deciding that he had to give up 15% of his $874 Social Security check to pay back defaulted student loans.

Because they have such powers to pursue you, student lenders aren’t going to settle your debt for a fraction of what you owe, as a credit card lender or collection agency might. But Kantrowitz said that people who have lump sums to offer may be able to negotiate small discounts on what they owe, such as 10% off the total amount or forgiveness of half the interest accrued since defaulting. Again, this assumes you have a lump sum, such as an inheritance or a loan from your parents. If you have to make payments, you’ll be stuck paying off the full amount you owe.

Bankruptcy almost certainly won’t help you get rid of your student loans. Of 72,000 filers who asked for discharge of their student loans in 2008, only 29 were granted any relief, according to student loan guarantor Educational Credit Management, the U.S. Department of Education’s designated provider for student loan bankruptcy services. Borrowers essentially have to prove not only that their financial situation is dire but that it’s unlikely to ever improve — which is a harsh standard to try to meet, Kantrowitz noted. If you’re permanently and totally disabled, you may have a shot; otherwise, fuhgeddaboudit.

Bankruptcy may, however, wipe out enough other debt to give you the ability to start repaying your student loans. Credit card and medical bills are among the debts that can be erased in a bankruptcy filing.

If you’re really up against a wall, consider talking to a bankruptcy attorney about your options. You can get referrals from the National Association of Consumer Bankruptcy Attorneys.

Liz Weston is the Web’s most-read personal-finance writer. She is the author of several books, most recently “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Click here to find Weston’s most recent articles.

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I am proud to have helped thousands of individuals and families in the course of my practice. My office has provided guidance to our clients to work their way from unmanageable debt to regaining financial control. My office is not a “bankruptcy factory,” where clients are processed without regard to their individual needs. Rather, I build relationships and represent people not only in their bankruptcies, but with their other legal needs. In fact, knowing my clients and their families is the only way I can understand their individual goals and aspirations. I understand that nobody wants to talk about bankruptcy with a lawyer. I have learned over the years that clients filing for bankruptcy are not trying to avoid their responsibilities, but are looking to alleviate a difficult situation. You owe it to yourself to consider all of your options. I look forward to meeting you, answering your questions and helping you and your family.

As home prices fall, more borrowers walk away

January 9th, 2012

From MSNBC.com

By John W. Schoen, Senior Producer

When David Martin and his wife bought their north Seattle condo five years ago, they figured they had plenty of time to downsize if they needed to before they retired.

Now, with the property worth roughly $60,000 less than the balance of their mortgage, Martin, 68, has been giving serious thought to just walking away, a process lenders call “strategic default.”

“Guilt and morality are one side, and objective financial analysis are on the other side,” Martin said. “They’re coming to two opposite conclusions. I wonder how many other people are struggling with the same question.”

Strategic defaults like the one contemplated by Martin are on the rise. A survey last year by two Chicago-area finance professors, Paola Sapienza at Northwestern University and Luigi Zingales at the University of Chicago, found that roughly three out of 10  mortgage defaults in 2010 were by homeowners who could afford to make their payments, up from 22 percent in 2009.

“It’s a looming problem that’s in the shadows,” said Jason Kopcak, a mortgage trader at Cantor Fitzgerald who advises lenders on how to value the loans on their books. “It’s very worrisome to mortgage lenders.”

Researchers point to a number of forces that are driving borrowers to walk away from their mortgages. At the top of the list is the estimated 12 million homes that are underwater, meaning the owners owe more than they are worth.

Until recently, borrowers like Martin and many industry analysts held out hope that a housing recovery would reverse the rising tide of “negative equity.” But after stabilizing this summer, home prices began falling again, dropping 7.5 percent in the third quarter alone and leaving more homeowners underwater.

Even if prices stabilize this year, millions of underwater borrowers face a long wait before they can sell their homes without having to write a big check to their lender to cover the shortfall. Economists at Goldman Sachs recently forecast that after bottoming in 2013 house prices won’t recover their 2006 peak until 2023. (No, that’s not a typo.)

Many homeowners simply can’t wait that long.

In the early stages of the housing bust, the main causes of defaults included unemployment or other financial setbacks and adjustable mortgages that reset to unaffordable levels, according to researchers. Now, five years into the housing recession, strategic defaults are growing as financially healthy borrowers learn of friends or family who have decided to walk away.

A recent study commissioned by the Mortgage Bankers Association likens the rise in the rate of strategic defaults to the spread of a disease. The longer the crisis drags on, the more homeowners will be exposed to someone who has successfully walked away, making the decision easier, the study suggested. “As fundamentally social animals, humans consciously (and subconsciously) look to their peers when forming opinions, habits and behaviors,” the report said.

“Most people who own a home know of someone — a friend, a colleague a family member — who has defaulted, especially in housing markets that have taken a big hit,” said Chad Ruyle, co-founder of youwalkaway.com, a service that advises homeowners on walking away from their mortgage. “They realize these are not bad people. They’re not deadbeats. They’re just like them.”

Researchers say strategic default is also more common among borrowers who feel no personal connection to the party on the other end of the transaction. Gone are the days when you walked into a bank and met with a lender who shepherded your application and congratulated you when the loan was approved, said Michael Seiler, a finance professor at Old Dominion University and a co-author of the MBA study.

“If you defaulted, it was like you were defaulting on your friend,” he said. “Your kids might go to the same school. You all might go to the same church. And you’re constantly reminded of who you’re defaulting on.”

That scenario is a far cry from the modern system of mortgage finance, where loans are sold over the phone or online, chopped up into pieces and then sold to multiple, anonymous investors. Many underwater homeowners who try to negotiate with their lender can’t even find out who owns their loan.

“We’re finding that people are much more willing to walk away when the other party is unknown or what you might call a ‘bad bank,'” said Seiler. “Those are the ones that received a lot of bailout funds or were active in the subprime market, giving loans to people who couldn’t afford them and they knew that.”

The mortgage lending industry’s widespread reluctance to modify loan terms has also changed homeowner attitudes about walking away, according to Ruyle.

“They feel much better about doing it if they’ve tried to contact the lender and the lender won’t budge,” he said. “They feel justified about it because they’ve tried to do their best to work it out.”

Shifting attitudes about the causes of the housing bust are also playing a role, say researchers. In their surveys, Sapienza and Zingales found that 48 percent of Americans said they would be more likely to default if their bank was accused of predatory lending, even if they are morally opposed to strategic default. Some 11 percent said they’d be less likely to pay their mortgage, and more likely to walk away from their loan, if their lender was cited for using false foreclosure documentation.

The government’s ineffective response to the housing crisis, even as it went to extraordinary lengths to backstop banks, has also propelled walkaways, say researchers. Since the housing bubble burst in 2006, some $7 trillion in home equity has evaporated, according to Federal Reserve data. Now, as home prices resume their fall, some homeowners believe lenders should bear at least a portion of the losses inflicted by a housing bust the industry helped create.

“The money didn’t disappear,” said Martin. “We still owe it to the bank, so the bank will end up getting all of its money back on a loan that no longer has its original value. They’re taking no part in the loss.”

Widespread reports of lenders’ bad behavior, from filing defective paperwork to selling investors bad loans, have begun to erode one of the strongest deterrents to walking away: the sense that skipping out on a debt is morally wrong. University of Arizona finance professor Brent White interviewed hundreds of homeowners for his research on strategic default. He found that, in the eyes of many homeowners, mortgage bankers have lost the moral high ground.

“The reality is: for the bank it is simply an economic transaction,” he said. “They have no moral qualm about taking your house, and they feel no moral obligation to modify your mortgage even if you’re in a difficult financial situation.”

Still, there are much more serious consequences to strategic default than pangs of guilt. Any loan default will damage a borrower’s credit score. But some strategic defaulters are finding that the impact isn’t as long-lasting as widely believed, according to Ruyle.

“You don’t destroy your credit, you wound your credit,” he said. “Just like a wound, it heals over time.”

Ruyle said surveys of the roughly 8,000 customers who have signed up for his service in the last four years found that some strategic defaulters are able to restore their credit in as little as a year and a half.

The bigger risk for walkaway borrowers is that their lender will pursue them in court and win a so-called “deficiency judgment,” a court-ordered, full repayment of the mortgage balance. That process is governed by state laws; some so-called “non-recourse” states bar lenders from pursuing such judgments.

But the force of that deterrent is also weakening, according to Sapienza.

“(There’s an) increasing perception that lenders are not going after borrowers who walk away,” he said.

That perception may be dangerously misplaced, as many lenders continue to aggressively pursue judgments against homeowners who strategically default. That’s why there’s widespread agreement that homeowners considering it need to get solid legal advice from an experienced real estate attorney in their state.

“There’s a process to strategic default and a lot of people don’t know how to do it,” said Kopcak. “They don’t really know what their options are. People really need to talk to a lawyer who knows the process.”

For now, Martin is electing to stay in his home and continue paying the mortgage.

“We intend to continue as we are on the basis that we gain nothing from acting at this point,” he said in a note. “We think that the real estate market in Seattle will rise by 2013 enough to offer better alternatives. There is a small chance that the federal government will act to offer more rational choices. The real possibility is that the debt might be refinanced in 2013 at a level that might offer enough reduction in payments to allow us to hang on long enough to shore up our financial position.”

In short, giving up at this point may be worst of all alternatives. Giving up seems to run counter to our value system, no matter how financially wise experts seem to believe it may be.”

12 myths about bankruptcy

December 15th, 2011

11/17/2011 3:44 PM ET
|By Bankrate.com
Will you lose your house and retirement savings? When will you be able to borrow money again? Get the facts on these questions and more.

Like most big, bad scary things, bankruptcy has a reputation based on a few tidbits of truth and a lot of embellishment. And like most creepy crawlies, it’s not nearly as frightening once you know the truth.

With a mind toward declawing the monster, here are a dozen misconceptions about bankruptcy:

1. Everyone will know I’ve filed for bankruptcy. Unless you’re a prominent person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. While it’s true that bankruptcy is a public legal proceeding, the number of people filing is so massive that very few publications have the space, manpower or inclination to run all of them, although some local newspapers do print the names of those who have filed in that community.

2. All debts are wiped out in Chapter 7 bankruptcy. You wish. Certain types of debts cannot be discharged, or erased. They include child support and alimony, student loans, restitution for a criminal act and debts incurred as the result of fraud.

3. I’ll lose everything I have. This is the misconception that keeps people who really should file for bankruptcy from doing it, says Chris Viale, the chief operating officer of Cambridge Credit Counseling in Massachusetts.

“They think the government will sell everything they have and they’ll have to start over in a cardboard box,” Viale says.

While bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house, your car (up to a certain value), money in qualified retirement plans, household goods and clothing.

“For most people, they’ll pass through a bankruptcy case and keep everything they have,” says John Hargrave, a bankruptcy trustee in New Jersey. If you have a mortgage or a car loan, you can keep the property as long as you keep making payments (like the rest of us).

4. I’ll never get credit again. Quite the contrary. It won’t be long before you’re getting credit card offers again. They’ll just be from subprime lenders that will charge very high interest rates. “There are innumerable companies that will provide credit to you,” says California bankruptcy attorney and trustee Howard Ehrenberg.

“I don’t advise any of my clients to run out and run up the bills again, but if someone does need an automobile, they can go and will be able to get credit,” he says. “You don’t have to go underground or something to get money.” (Do you know your credit rating? Take MSN Money’s quiz for an estimate.)

5. If you’re married, both spouses have to file for bankruptcy. Not necessarily. “It’s not uncommon for one spouse to have a significant amount of debt in their name only,” Hargrave says. However, if spouses have debts they want to discharge that they’re both liable for, they should file together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who didn’t file.

6. It’s really hard to file for bankruptcy. It’s really not. Technically, you don’t even need an attorney — you can do the paperwork without one. However, going through the procedure alone is not recommended.

7. Only deadbeats file for bankruptcy. Most people file for bankruptcy after a life-changing experience, such as a divorce, the loss of a job or a serious illness. They’ve struggled to pay their bills for months and just keep falling further behind.

8. I don’t want to include certain creditors in my filing because it’s important to me to pay them back someday, and if the debt is discharged, I can’t ever repay them. Bless you for even thinking about such a thing. You’re no longer obligated to repay them, but you always have the opportunity. If your conscience won’t let you sleep because you didn’t pay your debts, there’s nothing in the bankruptcy code that prevents you from doing that once you’re back on your feet. But it is nearly impossible to leave any account with a balance out of your list of creditors. In general, all creditors receive notification of your bankruptcy filing, whether they are listed in the petition or not.

9. Filing for bankruptcy will improve my credit rating because all those debts will be gone. Filing for bankruptcy is the worst “negative” you can have on your credit report. Unlike other negatives, which stay on your report for seven years, bankruptcy can be there for 10 years, but you do get to rebuild your credit eventually.

10. You can’t get rid of back taxes through bankruptcy. Generally speaking, this is true. However, there is such a thing as tax bankruptcy, says tax educator Eva Rosenberg, known on the Web as TaxMama.

11. You can only file for bankruptcy once. The truth is, you can file for Chapter 7 bankruptcy only once every eight years, says Justin Harelik, Bankrate’s bankruptcy adviser. For Chapter 13 reorganization, you can file more often than that.

Of course, that doesn’t make it a good idea.

“Multiple bankruptcies are really bad,” Rosenberg says. “Many people get into the habit of once they’ve done it, it becomes a way of life. This is not good for your karma.” Or your credit rating.

12. I can max out all my credit cards, file for bankruptcy and never pay for the things I bought. That’s called fraud, and bankruptcy judges can get really cranky about it.