At Death, Who Inherits Credit Card Debt?

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.

Credit-Card Rates Rise Again

  • 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 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

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.

Avoid These 7 Credit Card Sins

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.

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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

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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As Home Prices Fall, More Borrowers Walk Away

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.”

Recession dealt blow to credit scores of 50 million

By Kenneth R. Harney / The Nation’s Housing
Sunday, December 4, 2011

WASHINGTON — How big a whack did your credit scores take during the grim years of economic distress after the housing bust? Was it 20 points, 50 points, 100 points — or maybe no drop at all?

These are key questions affecting millions of potential homebuyers who hope to qualify for mortgages, and current owners looking to refinance. New research from a major credit-risk evaluation company suggests the drop in huge numbers of Americans’ scores was dramatic.

FICO (formerly known as Fair Isaac Corp.), which developed and markets the eponymous score that dominates the home-mortgage field, found that approximately 50 million consumers saw their FICO scores plunge by more than 20 points during 2008-09.

Nearly 21 million of those lost more than 50 points. Many lost 100 points or more because of the most severe delinquencies.

During the same period, lenders and investors began ratcheting up their standards for acceptable scores and to extend special preferences in fees and interest rates to loan applicants who rank among the highest scorers. Consider these developments:

L Loans originated for purchase or guarantee by the two dominant home-loan investors — government-run Fannie Mae and Freddie Mac — carry average FICO credit scores in the 760 range and above, record highs for both companies. That’s good for them, but not necessarily for you if you need a loan. (FICO scores range from 300 to 850; higher scores indicate lower risk of default.)

L Even new mortgages insured by the Federal Housing Administration (FHA) — traditionally the fail-safe financing refuge for first-time buyers with modest incomes and less-than-perfect credit histories — now have average credit scores slightly above 700.

L During the housing boom of 2004-06, by contrast, a score of 620-640 earned you a good mortgage rate and terms at Fannie Mae and Freddie Mac. At the FHA, the agency often approved loans where FICO scores were in the mid-500s with barely a blink.

Earlier FICO studies found that the deepest score declines — creating the toughest challenges for obtaining new credit on affordable terms — have been among borrowers who ranked among the credit elite.

Homeowners with scores in the high 700s may have lost as much as 130 points when they fell three months behind or more on loan payments. They might have lost as much as 160 points when they negotiated a short sale with their bank and as a result had unpaid deficiency balances left over.

Score bruises and wounds from past years are likely affecting the ability of consumers to get a new mortgage or to buy a house. In a survey released before Thanksgiving, the National Association of Realtors reported that large numbers of sales contracts are falling apart because of financing issues, including would-be buyers having difficulties meeting lenders’ increasingly stringent requirements, including credit.

Contract failures were reported by 33 percent of realty agents in the study, according to the association, a big spike over the previous year when just 8 percent reported cancellations. Though other factors may also be at work, credit problems stemming from 2008, 2009 and 2010, combined with lenders’ higher FICO requirements, clearly are retarding the housing recovery by thwarting sales.

Part of the reason: Though FICO scores are dynamic and constantly changing, they can take extended periods to recover, much like a body that has suffered severe trauma.

In research released earlier this year, FICO estimated that a homeowner with a 720 score who falls 30 days late on mortgage payments can take as much as 30 months to recover the 70 to 90 points lost in the process. And this assumes the owner gets current on all debts, keeps balances relatively low on credit cards and generally becomes a model user of credit.

For homeowners with higher scores in the 780 range to start, the same 30-day delinquency — with a loss of 90 to 110 points — can take 36 months to cure fully.

What does this all mean to you if you’re one of the 50 million who lost significant points during the past several years? You should be in rebuilding mode if you seriously want another mortgage.

As a more immediate alternative, though, keep FHA in mind. Though the average FICO scores of its customers never have been higher, FHA still accepts scores in the upper 500s and is more open than other financing sources to hearing about “extenuating circumstances” — unexpected job loss, medical problems, divorce and other issues — that caused your credit score to plunge in the first place.

Personal Finance Explaining the Statute of Limitations on Debt

By Steve Bucci

Published November 04, 2011

| Bankrate.com

Dear Debt Adviser,

I have several items on my credit report that list a date to be removed. I thought after seven years negative items — except for government items such as student loans — are gone and no longer haunting. I spoke to someone at the law firm that received my debt. He said he couldn’t explain it to me but that even after seven years, while the debt might not be on my report, the company can still come after me for the debt through courts and garnishments. How does this work really? This one in particular is scheduled to expire this year, and I don’t want to struggle finding the money for it if it’ll be gone after that date. Any help would be greatly appreciated or at least point me in a direction where I can get the information. Thank you very much.

– Christine

Dear Christine,

I can understand why you are confused. Believe me, you are not alone. What is going on here are three different threads all attached to the same debt. First, there is the reporting of the debt by the credit bureaus. Second, there is the debt itself you owe. And third, there is the statute of limitations in your state that limits the collection options a collector can use in pursuing you for the debt you owe. Here’s how it all works:

Garden-variety debts such as credit cards, mortgages or loans stay on your credit report for seven years, depending on the state. Debts to or guaranteed by the government, child support and bankruptcies stay on for 10 years to life. Many people mistakenly believe once a debt no longer appears on their credit reports, it is no longer owed. The truth is the debt is owed as long as it is unpaid or otherwise settled.

However, state laws prevent a collector from using the courts (to seek a judgment that can be used to garnish wages or bank accounts, or place liens on real property) if the debt has passed the statute of limitations time frame set by the state. The clock starts on the statute of limitations from the date of the last payment made on the account. You can determine the statute in your state by visiting the website of Nolo, a legal information company.

An important element to keep in mind with statute of limitations laws is that, in most states, any payment on a debt restarts the clock. For example, let’s say the statute of limitations in your state is four years, and you have not made a payment on your debt for five years. But, in a moment of weakness, after being harassed by a collector, you sent in a payment. In most circumstances, the statute of limitations clock is restarted by your payment, and the collector would be within their legal rights to use the courts to collect.

So, the bottom line is you may still receive calls and/or letters from collectors attempting to collect your old debts, even those that can no longer be reported to the credit bureaus and appear on your credit report. The only sure way to make old debts go away (those that you are certain you owe) is to pay them, settle them or have them dismissed in a bankruptcy.

In your case, I suggest you answer any correspondence from any collectors. Tell them the debt is past the statute of limitations in your state, and you don’t intend to pay anything. A collector who has been notified that a debt is unenforceable can be sued if they pursue it in court.

Good luck!

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.

Read more: http://www.foxbusiness.com/personal-finance/2011/11/03/explaining-statute-limitations-on-debt/#ixzz1d3mKuys6

Cards for the Bank or Plastic Averse

From WSJ.com and Market Watch

By JENNIFER WATERS

Reloadable prepaid cards are magic bullets to help overspenders and those who steer clear of banks. But they won’t build your credit and can cost you plenty in fees if you’re not careful.

“If you know what questions to ask and you spend some time shopping, prepaid cards can be a positive tool for managing money and can even be a substitute for a traditional checking account,” says Jennifer Tescher, chief executive of the Center for Financial Services Innovation, a consultant specializing in serving the unbanked.

Network-branded prepaid cards are peddled primarily to the roughly nine million so-called unbanked U.S. households, those, according to a 2009 Federal Reserve survey, without any checking or savings account. Another 21 million households are underbanked. Taken together, that accounts for some 60 million adults, or one-quarter of U.S. households.

[23MW] Christoph Hitz

Of those households, only 28% have used a prepaid card, meaning there’s plenty of untapped opportunity. Most credit-card experts expect prepaid-card use to explode beyond the 20%-plus annual growth of the past five years as banks pile on charges for debit cards and checking accounts and impose hefty minimum balances on checking accounts to waive fees.

“Prepaid cards offer a compelling value because they fill a growing void created by increasing fees for checking accounts,” says Michael Flores, chief executive of Bretton Woods, an economic research firm.

They also are gaining traction with high-school and college students whose parents fund the cards. And they have been used by the government for unemployment benefits and disaster-relief aid. Many employers also issue prepaid health cards tied to flexible health-care spending accounts, eliminating the wait and paperwork for refunds. Others deposit pay directly onto prepaid cards.

For people with bad credit or spending problems, prepaid cards allow them to operate in a plastic-ready world by using the cards to pay for airline tickets, online purchases, hotel stays and car rentals—all of which require a credit or debit card.

But don’t be fooled by promotions that offer no credit checks and promises to notify credit bureaus of your positive financial behavior. These aren’t lines of credit, so there’s no need for a credit check, and credit-rating companies don’t care how you use them, just like they don’t care how you spend cash.

Though they can be cheaper than holding a checking account or having a credit card, prepaid cards are far from free. Many are loaded with fees for gaffes like inactivity or cancellations and will charge you for balance inquiries and bill paying.

“You have to be a fine-print warrior,” says Beverly Harzog, Credit.com’s credit-card expert. “Every card is different. Some cards are more transparent about their fees while with others you have to look all over the fine print to determine all the fees.”

Plan on a start-up fee of sorts to activate and load the card. Most cards have monthly fees that can be as high as $9.95. Some will charge to transfer money from one card to another or to write checks.

Among the cheapest cards, Wal-Mart MoneyCard MasterCard, which is issued through GreenDot.com, has a $3 monthly charge. American Express’s new prepaid card doesn’t charge one at all. But you must reload the American Express card from a bank account, which makes it useless for the unbanked who will need a GreenDot MoneyPak. The MoneyPak is a means of loading cash onto the cards, much like buying an airtime card for a prepaid cellphone. Each card costs $4.95 and cannot hold more than $500, which means you have to buy a new one once the money’s gone.

American Express cards do charge you to withdraw money from an ATM, $2 after the first withdrawal each month. Wal-Mart charges $3 to reload and $2 for a cash withdrawal from an ATM and $1 for a balance inquiry. Those ATM charges are on top of the fee the owner of the ATM is charging.

Other popular prepaid cards include NetSpend, Western Union and BillMyParents. You can compare prepaid cards at websites like Credit.com and CreditCards.com.

Here are some tips for finding the prepaid card that works for you:

• Like everything you financially bind yourself to, read the fine print. For some of these cards, reading what’s on the website might not be enough, so read the literature that accompanies the card before you purchase it.

• Look for cards with low or zero monthly fees. There aren’t many of them, so you have to look hard.

• Get reloadable cards so you’re not paying an activation or fulfillment fee for a new card.

• Look for cards that don’t charge transaction fees or inactivity fees.

• Opt for direct deposit to fund prepaid cards. It will save you load fees and in many cases, monthly fees, not to mention a trip to a retailer.

• Don’t count on prepaid cards to help you build credit. Like checking accounts, major credit agencies don’t look at them to chart your financial behavior.

• Some cards provide overdraft coverage, similar to a checking account. But plan to pay hefty charges for it.

• Most cards will give you one to two free ATM withdrawals a month but then charge for extras.

• Many cards will allow you to get cash back from the cashier at the point of sale, which will help avert ATM fees.

• Not all cards are protected if lost or stolen, so guard them as you would cash and be wary of who you give the card number to.

Write to Jennifer Waters at jennifer.waters@dowjones.com

—Jennifer Waters is a columnist for MarketWatch in Chicago.