Archive for November, 2011

Tuesday, November 29th, 2011

USPS Keeps Batting Back Bankruptcy

The U.S. Postal Service announced recently that, in an effort to avoid filing for bankruptcy, it will raise prices on its most popular services (priority and express mail), as well as on standard first class stamps (up to 45 cents each starting January 22, 2012).

The USPS debt problems highlight some important differences between bankruptcy filings for individuals and businesses. Here’s a look at what you can learn from the USPS and why you may be in a better position if you’re interested in avoiding a bankruptcy filing of your own.

Shedding Expensive Baggage

When individuals see their debt spiraling out of control, they can usually take at least some meaningful action to reduce the total amount they owe – or at least to stop the ever-increasing financial burden they carry.

But because of the oversight Congress provides to the USPS, the nation’s postal system isn’t quite as free to slough off its highest costs. For example:

  • Underperforming post offices: To save money, the USPS has proposed shutting down post offices that don’t earn sufficient profit to merit staying open. In other words, the USPS wants to operate like an ordinary business or individual, eliminating its branches that cost money to operate but don’t bring in enough in return. However, Congress must approve any such shut-downs, and it has not yet ruled on USPS closures.
  • Six-day delivery: Like extra cable channels or a too-expensive car lease for individuals, six-day delivery has been cited as one of the major expenses dragging down USPS finances. While officials from the Postal Service hope to cut home delivery to five days per week, they have not yet received the okay from Congress, and so are unable to take this cost-saving step.
  • Expensive healthcare and pensions: When municipalities file for bankruptcy, one of the main debt-cutting measures available to them is the re-negotiation of contracts with workers. In many cases, municipalities are able to save serious money by cutting benefits they pay out in pensions, healthcare, and other benefits. But the USPS has not yet been able to make such negotiations with its workers, again because of inaction in Congress.

Not Enough to Prevent Bankruptcy?

The Postal Service’s rate increases, set to take place in late January, could increase its income substantially, but many analysts predict that price hikes alone will not allow the USPS to avoid bankruptcy.

Without action from Congress allowing it to make meaningful cuts in its current services, the USPS has claimed that it could need bankruptcy protection as early as next September. If the USPS is allowed to reorganize (either in bankruptcy or without its help), the business has a decent chance of succeeding: its competitors FedEx and UPS have reportedly both achieved modest growth even during the economic downturn.

A report from Financial-Planning.com notes an unsettling trend in bankruptcy filings: in recent years, the number of Certified Financial Planners (CFPs) filing for bankruptcy protection has increased. CFPs are highly trained financial experts who must undergo rigorous training and pass difficult tests in order to become certified.

In 2010, according to sources, as many as a quarter of the disciplinary cases heard by the CFP Board involved CFPs filing for bankruptcy protection. So far in 2011, that number is on pace to reach one-third of all cases.

The History of Bankruptcy among CFPs

In fairness, the CFP board only began tracking bankruptcy statistics in 2010, though its guidelines have always required the board to investigate any personal or business bankruptcy filings it heard about. Still, the frequency of bankruptcy filing seemed high to Board members, and at least one attributed the 2010-to-2011 climb to the failing economy.

One encouraging fact that emerged in the Financial-Planning.com report was that the Board takes a number of factors into consideration when deciding how to proceed after a CFP’s bankruptcy. Depending on the circumstances, the Board may:

  • Offer censure or some sort of penalty. Some CFPs who file for bankruptcy are required to take remedial courses, though they are allowed to continue practicing. Even when CFPs are allowed to move forward with practice, though, they may have difficulty bouncing back after filing for personal or business bankruptcy. Sources indicate that CFPs have reported mixed results after attempting to restart a financial planning enterprise post-bankruptcy.
  • Revoke a license. In cases that the Board judges to be egregious, it might revoke a CFP’s license to practice financial advising. Cases that raise particular red flags, sources note, are those in which actions of the CFP clearly and directly caused the debt that led to bankruptcy and second or third bankruptcy filings.
  • Do nothing. If the circumstances are beyond the bankruptcy filer’s control (for example, if the CFP filed for bankruptcy to eliminate debts associated with medical bills), the board may take no disciplinary action. It does not consider such bankruptcy filings to indicate any “fault” on the part of the filer.

Comparison to the General Public: Bankruptcy Figures

Interestingly, the CFP’s bankruptcy filing numbers are not quite in step with the rest of the country’s. While total consumer bankruptcy filings peaked among the general U.S. population in 2010 and have declined this year, filings among CFPs are still rising—and perhaps may not hit their peak for some time.

Of course, the figures associated with CFP bankruptcies cannot be considered quite as exhaustive as those for the rest of the country, especially since the CFP Board has only just begun collecting data on this particular phenomenon.

Bloomberg Businessweek reports this week that American Airlines’ parent company, AMR, may be edging closer to a bankruptcy filing. The assessment came on the day of AMR’s final board meeting of 2011, an occasion on which members were forced to acknowledge four consecutive years of losses.

Of the problems plaguing American Airlines, perhaps the most prominent is its high labor costs. At present, AMR has not been able to renegotiate its contract with pilots; the Allied Pilot Association has apparently not yet voted on a contract proposed by the airline.

While spokespeople from AMR have reported that bankruptcy is neither the company’s first choice nor its preference, indicators suggest that it might be inevitable if circumstances don’t significantly change in the next few months.

To date, AMR has access to $4.3 billion in cash and available investments. The total may sound like a lot, but considering the size of American Airlines and the cost of its day-to-day operations, many analysts are predicting that the pile won’t last much beyond six to nine months.

In fact, one ratings analyst recently cut the airline’s stock rating from “buy” to “neutral.”

Even if American manages to sort out its labor difficulties, the airline could face turbulent times ahead: it seems that competitors (including United Continental Holdings Inc. and Delta Air Lines Inc.) have already outpaced AA in passenger traffic. Any cost-cutting measure, then, would need to be accompanied by a plan for increasing revenues and wooing back fliers.

Debt Protection Costs Rising

Another indicator of rocky times ahead? The cost of insuring AMR’s debt against default for the next five years rose to its highest level since 2008. In essence, this means that:

  • Insurers are less confident that AMR will have the means to repay its debt in the coming years. These insiders base their evaluations on various financial indicators within the company.
  • AMR is running out of debt-fighting options. If it is unable to strike a labor agreement with pilots, AMR will be very limited in its ability to cut meaningful amounts of debt. This signals investors that a default may be on the horizon.
  • AMR could start seeing a spiral effect. As one measure of its economic viability weakens, others could follow, pulling the company into bankruptcy.

Of course, bankruptcy is not a sure thing at this point. And even if AMR does end up reorganizing under Chapter 11, it could reemerge stronger. In recent years, a number of airlines have successfully remade themselves with the help of the bankruptcy court.

In fact, many analysts suggest that if American had reorganized under bankruptcy when other airlines were doing so, it likely wouldn’t be in such dire financial straits right now.

Ally Bank, a unit of Ally Financial (which used to go by the name GMAC) is considering putting its struggling mortgage unit, ResCap, through bankruptcy to alleviate some of that division’s debts, according to the Christian Science Monitor.

Apparently, ResCap has not done well financially during the last two quarters, losing more than half a billion dollars. On top of its recent sub-par performance, the mortgage unit also reportedly has some serious debt coming due – about $2.3 billion between now and the end of 2013. That figure comes to about four times the mortgage company’s total reserves as of the end of September.

How Does Partial Bankruptcy Work?

So what does it mean that Ally is considering bankruptcy for just its mortgage division? Here’s a summary:

  • The bank itself wouldn’t go into bankruptcy protection. Many large corporations separate their business operations into discreet arms so that they can manipulate them individually. In the case of financial difficulty, for example, a business might be able to put one part of itself through bankruptcy without greatly affecting its other parts. Think of it as amputating an arm to save a life.
  • Despite official separation, the bank could face fallout. Some analysts think that a ResCap bankruptcy is unlikely specifically because of the effect it might have on Ally’s reputation. Even if the larger company were not financially hurt by the mortgage division’s bankruptcy, consumers and investors might start to question its viability and shy away from investments.
  • It can choose between liquidation and reorganization. Depending on its needs, Ally could put ResCap through a liquidation bankruptcy that would terminate the mortgage arm’s operations or choose to reorganize the group’s debts and emerge as a (hopefully) stronger business.

A History of Bailouts?

As of now, the potential bankruptcy of ResCap is still very much in its speculative stages. While Ally may be considering liquidation or debt reorganization, it is likely also considering a number of other options.

But some analysts are pointing to Ally’s past as evidence that it might be likely to choose bankruptcy in the future. Ally officially became a bank in 2008 in order to take advantage of bailout money that was made available to banks at that time. Prior to its conversion, it operated as GMAC, the financing firm of General Motors.

The Federal Reserve Board approved its request to become a bank, Ally collected bailout money, and the firm now operates as Ally Financial. The new company offers a number of investment and savings products, emphasizing transparency and simplicity.

Earlier Mortgage-Division Bankruptcy Considerations

Earlier this year, Bank of America (the nation’s largest bank) considered a similar move for Countrywide, a mortgage division it bought during the financial upheaval. Countrywide specialized in subprime mortgage loans and, as borrowers defaulted in droves, quickly accumulated scads of debt.

As of now, though, Bank of America has opted to avoid a Countrywide bankruptcy filing. Ally may well file suit.

Federal bank regulators from the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision have announced a measure that might mean compensation for millions of families who have lost homes to foreclosure.

According to an announcement released in early November, a newly instituted program will allow certain homeowners to collect compensation for mistakes their loan servicers made during the foreclosure process. Specifically:

  • Qualified homeowners will be mailed letters about their eligibility to participate. Homeowners should expect to receive their letter by the end of the year; those who wish to find out if they are qualified can visit the website IndependentForeclosureRview.com.
  • To be eligible, a mortgage must have been handled by one of the mortgage servicers participating in the program.
  • To determine whether mistakes were made in the processing of your foreclosure, you must apply for an independent review of your mortgage and foreclosure documents. Your application must be sent in by the end of April 2012.
  • If the reviewer finds that there were mistakes in your foreclosure or mortgage documents, you may be eligible to collect compensation.

Some analysts estimate that as many as four million homeowners might be affected and eligible for compensation.

Problems in Mortgage Documents

This announcement is not the first to highlight the problems that plagued the mortgage market during the housing boom whose collapse led to the Great Recession. In addition to the robo-signing scandal and several lawsuits against mortgage servicing company MERS, lawyers and judges have found many individual foreclosure cases that did not hold up to scrutiny.

This latest iteration of the problematic foreclosure theme highlights just how troubled all components of the U.S. housing market really are.

Sources note that mistakes or misrepresentations in foreclosure or mortgage documents that could make a homeowner eligible for compensation might include the following:

  • Fees that were unwarranted or calculated incorrectly;
  • Foreclosures that were carried out while the homeowner was protected by bankruptcy’s automatic stay; and
  • Foreclosures carried out while the homeowner was in talks with a lender about the possibility of a mortgage modification.

Who’s Paying for All This?

The independent review firms will be compensated by the mortgage loan servicers targeted by the federal investigation. As part of the terms laid out in the investigation’s findings, regulators required those mortgage servicers to hire review agencies unrelated to them to conduct the review of mortgage documents.

In other words, homeowners who apply to have their mortgages reviewed will not be responsible for paying the fees associated with the independent review process.

Photos leaked to the New York Times last week reveal shocking behavior on the part of a New York law firm responsible for about 40 percent of the state’s 46,572 mortgage foreclosures in 2010. Apparently, members of the Steven J. Baum law firm dressed as homeless people and squatters, and decorated the office to resemble a row of foreclosed properties.

Office decorations also reportedly included shopping carts, tarps, and other temporary residence structures associated with homelessness. The photos, it seems, were leaked by a former employee of the firm and come on the heels of foreclosure-related troubles for the law group.

Like many other bodies enacting mortgage foreclosures in recent years, the Steven J. Baum law firm faced allegations of improper behavior on its end of dealings. Specifically, the Department of Justice charged the firm with filing “misleading pleadings, affidavits, and mortgage assignments” in both state and federal courts.

To settle the charges, the law firm forked over $2 million, admitted wrongdoing, and agreed to change its practices.

But this most recently exposed blunder has reportedly led to further investigation, this time from New York’s Attorney General, Eric Schneiderman.

Insensitivity to Foreclosures?

Foreclosure firms are not popular during the best of times, but given the present housing situation in the U.S., they’re viewed as particularly villainous. An estimated three million people have already faced foreclosure since the housing boom ended about five years ago; some analysts predict that number will climb to six million by 2013.

It’s no secret that the widespread troubles in the housing market (of which foreclosures are currently the primary symptom) are to blame for much of the economic weakness the U.S. has experienced since 2008. Because of current economic conditions, the Halloween costumes and decorations donned by Baum employees read as particularly harsh.

Help for Foreclosures?

Foreclosures are often difficult to remedy, but at present those with mortgage troubles may have a number of options to help them hold on to their homes:

  • HARP: The Obama Administration’s recently beefed-up Home Affordable Refinance Program (HARP) offers homeowners who are current on mortgage payments a chance to refinance with their banks before they default and become at risk for foreclosure.
  • Chapter 13 bankruptcy: While the bankruptcy court cannot rewrite a mortgage loan during proceedings, people who file for Chapter 13 bankruptcy may have a chance to delay foreclosure proceedings long enough to find alternate living quarters. They may also be able to shed enough auxiliary debt to afford mortgage payments.
  • Chapter 7 bankruptcy: Those facing foreclosure may be able to eliminate some of the burdensome tax consequences through Chapter 7 bankruptcy protection. At a minimum, Chapter 7 filers often gain enough breathing room from creditors to find another place to live.

Tuesday, November 8th, 2011

Social Networking, DNA may Affect Credit Soon

Living in the Information Age has a number of advantages: we can avoid holiday crowds to shop from the comfort of our living rooms, and even ditch the commute to work remotely from home. But new stirrings in the credit card industry about future plans for collecting and using customer information have raised warning cries from a number of consumer advocates.

A recent article in Time magazine discusses plans that credit card issuer Visa has to gather more information from consumers to better target ads and evaluate credit card applicants. Sources report that the company has plans to collect information from a number of sources, including:

  • Social networking websites, on which many consumers discuss their interests and post (even if indirectly) about their desires and spending habits.
  • Credit bureaus, which they already use. This is why filing for bankruptcy has an effect on a filer’s ability to get credit in the future: credit card issuers can see that the bankruptcy took place for seven to ten years after it’s filed.
  • Search engines, such as Google and Bing. This information could include not only shopping habits and interests but also information about everything a person researches, including words like “mortgage loan help” and “payday loans offers.”
  • Insurance claims, which might paint a picture of a person’s health, driving habits, and more.
  • DNA databanks. This last information source has caused the most uproar: information hardly gets more personal than a person’s genetic code, and the potential applications of such data are mind-boggling.

So how would credit card issuers use such a bevy of private data to their benefit? In a lot of ways, according to analysts. And many of them could seriously hurt consumers.

DNA or insurance claim data, for example, could reveal to credit card issuers a person’s health history or likelihood for developing a genetic condition. If that condition typically leads to significant medical expenses, the credit card issuer might deny the person credit—after all, many people end up discharging high medical bills in bankruptcy, and credit cards often get the same treatment in Chapter 7 cases.

Insufficient Legal Protections

What worries some analysts is that the U.S. currently has no laws in place to prevent such elaborate information gathering or denying credit on the basis of information like genetic code. As usual, the technology available has progressed far faster than the legislation designed to regulate that technology.

Another major concern? Identity theft and data breaches. It’s hardly uncommon to hear about data leaks and breaches in the news, but imagine the potential fallout if thieves had access to more than names and social security numbers.

At present, of course, neither Visa nor any other credit card issuer has such information on hand. But it could be a less distant future than we first imagine.

The Obama White House has announced two new plans to help struggling Americans better manage their debt burdens. Both measures are targeted at debts that even filing personal bankruptcy cannot always eliminate, student loans and mortgages. Here’s a look at what the debt relief programs are designed to do and how they might help you.

Mortgage Relief: The New HARP

On the mortgage side of things, the Obama Administration recently rolled out revisions to its Home Affordable Refinance Program (HARP). At present, the program provides a pathway to mortgage refinancing for those who are underwater on their mortgage loans and have loans backed by Fannie Mae or Freddie Mac.

The changes will:

  • Add protections for lenders who agree to refinance. At present, the main problem with implementing HARP has apparently been getting lenders to agree to refinance mortgages. The new version will add more protections for these lenders so they’re more likely to actually offer modified mortgage loan terms to needy borrowers.
  • Expand those eligible to participate. When the new changes go into effect, any homeowner who is underwater on a federally backed loan, is current on payments, and has no late payments in the recent past will be eligible for HARP help.
  • NOT help those who are delinquent on their mortgages. While mortgage delinquency numbers have been reportedly creeping downward in recent months, fully 3.9 percent of borrowers are currently 90 days or more late on their mortgage payments, and another two million are in some stage of the foreclosure process. The HARP revisions will not help these groups.
  • NOT help those with private mortgages. Homeowners whose mortgages are backed by an institution other than Fannie Mae or Freddie Mac are also ineligible for the HARP protections.

Student Loan Relief: Pay as You Earn

On the student loan side of things, the White House has offered an updated alternative to the current Income Based Repayment (IBR) option. When the new rules take effect, students with educational debt enrolled in Pay as You Earn will be required to pay no more than 10 percent of their monthly income in student loans.

Further, the new program will forgive federal student loans after 10 years of working in the public sector and after 20 years in certain other jobs. Certain student borrowers who are unemployed may be excused from making payments until they find work.

The Pay as You Earn program will not offer relief to:

  • Those with privately funded student loans. Only federally backed loans qualify for this particular program.
  • Those who are currently late on loan payments. As with IBR, Pay as You Go requires loan holders to be current on payments in order to enroll.

The number of graduates defaulting on their loans within a year of earning their degree rose from seven percent between 2008 to 2009 to 8.8 percent between 2009 to 2010.