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Tuesday, October 4th, 2011

Report: Credit Scores During the Recession

The Fair Isaac Corporation (FICO), which develops the primary formula used to calculate credit scores, released data this week on changes to credit scores during the economic turmoil of the last several years. The report shows credit score distribution from 2005 through 2011 and indicates that, on average, our credit scores have not changed significantly since the collapse of the housing market in 2007.

If that sounds fishy to you, don’t worry: the term “average” here is meant mathematically. Individual credit scores fluctuated in various ways:

  • More people in the highest group: In 2005, when the stock and housing markets were still going strong, 16.9 percent of Americans had a credit score in the highest range (800 to 850). In 2011, though, the highest-scoring group has swelled to 18.1 percent.
  • More people in the lowest group: In 2005, people with credit scores between 350 and 599 stood at 23.6 percent of the population. This year, the number has risen to 24.9 percent. Early in the recession, people with the lowest scores (350 to 499) jumped, too, though that percentage has leveled out in the last two years.
  • Fewer people in the middle: Those with credit scores between 600 and 799, usually considered to be in the middle of the credit scoring pack, saw their numbers decrease between 2005 (59.5 percent) and 2011 (56.5 percent).

Making Sense of the Numbers

While the findings at first may seem confusing or counterintuitive, there is a satisfying explanation behind the shift toward the extremes of the credit-scoring spectrum during a downturn.

  • The strong shore up: People who already have fairly strong credit scores tend to be more financially secure than those with lower scores. When the economy sours, these people tend to pay down debt more quickly than they might have otherwise, save more money, and avoid new sources of credit. These actions not only prepare them for potential financial road bumps (such as unemployment) but also improve their credit scores.
  • The weak struggle: People already overextended on credit tend to be less financially secure and may be hurt especially hard by tough economic times. Job loss, reliance on new lines of credit and unexpected expenses could cause this group even more financial distress, thus lowering their scores further.

Individuals close to either end of the spectrum may move further toward that end in tough times, thus lowering the total percentage of folks in the middle.

Individual Habits Most Important

Another important factor in determining credit scores is a person’s individual spending and saving habits. Because these tend not to change much regardless of external forces, recessionary times might not affect credit scores as much as they affect other economic indicators such as home prices and interest rates.

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Friday, September 23rd, 2011

Saving Money in a Time of Higher Prices, Higher Poverty Rate

A report released by the Census Bureau shows that income dropped for U.S. families and more families were living at or below the poverty line in 2010 than in previous years. In fact, 2010 marked the third consecutive year that the poverty rate increased; since 2007, the total has crept up by 2.6 percent.

The Census Bureau further reported that:

  • Between 2009 and 2010, the poverty rate increased from 14.3 percent to 15.1 percent.
  • Last year, 46.2 million Americans were living in poverty.
  • 2010’s numbers mark the highest poverty rate the country has seen since 1993.
  • About 16.7 percent of Americans are now either unemployed or “marginally attached to the workforce” (i.e. underemployed).

One interesting side note about these numbers is that the unemployment rate has not changed significantly in the last year, even though the number of people living in poverty has. This suggests, according to sources, that the high unemployment rate has pushed wages down.

Higher Prices

Perhaps contributing to the nation’s rising poverty rate is a steady upward movement of consumer prices. Last month’s numbers from the Bureau of Labor Statistics show that the energy index rose 1.2 percent and the food index increased by 0.5 percent, its largest jump since March.

Even without the volatile energy and food price changes, other prices rose 0.2 percent, largely driven by apparel and housing costs.

Saving Money in the Thick of It

So what can a cash-strapped consumer do when times get tough? Spend more carefully, for one thing. Here’s a look at some tips for keeping bills lower, even as prices creep up and income falls.

  • Use the freezer. While you might forget leftovers in the fridge, you can store them in all their first-night freshness in the freezer. Bonus: freezing food for later saves time when you defrost it.
  • Learn sneaky food-saving recipes. Stale bread can be a real bummer – nobody wants to spend money on something and throw it out. But recipes for bread pudding and homemade croutons are both super-easy ways to rescue stale bread. Soup stocks are a great way to rescue vegetables past their prime.
  • Buy in season. Summer’s bounty means prices on produce are often at their lowest in the hot months. To take advantage, stock up and either freeze, dehydrate, or can the extras.
  • Check your bills carefully. Small mistakes may end up costing you over the long run. Make sure you’re paying only what you truly owe on bills. And vigilance can help you detect any suspicious activity (like possible identity theft) before it becomes a major problem.
  • Downgrade. Cable and Internet services can be pretty costly. If you aren’t watching all your channels or using your Internet for work, consider trimming the extras to save every month.
  • Go green. Three small steps can help you save serious money on electric bills. First, unplug electronics when you’re not using them. To make this easier, install surge protectors that you can switch off or unplug easily. Next, replace incandescent bulbs with compact fluorescents, which use less energy and last about ten times longer. Finally, opt for natural light and air whenever possible.
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Wednesday, September 21st, 2011

Falling SAT Scores & The Future of the Economy

The College Board announced this week that SAT scores among U.S. high school students dropped from last year. While the decrease may not seem significant (the average reading score fell three points, writing fell two points, and math dropped by one), analysts are worried that the dip could be part of a larger trend.

Unfortunately, that trend could have significant long-term impact on the future of the U.S. economy and jobs market.

The Test Score-Employment Link

Here’s a look at why faltering SAT scores are raising some concern among those worried about the long-term recovery of the U.S. economy.

  • SAT Benchmark: The College Board, which administers the SAT, has determined that a score of 1550 out of 2400 indicates that a student has a 65 percent chance of earning at least B-minus grades in college and thus of earning a degree.
  • Less than half of seniors meeting the benchmark: In 2011, only 43 percent of seniors planning to attend college achieved the benchmark score. This suggests that the majority of those entering college this fall have a less than 65 percent chance of completing school (according to the College Board’s research).
  • Unemployment by degree earned: The failure to complete college is troubling considered in the context of current unemployment rates. While the national average hovers around nine percent, that number varies significantly when total education is considered. In 2010, the Bureau of Labor Statistics released numbers indicating that, when the nation’s unemployment rate was at 8.2 percent, the rate for those with a doctoral degree was a mere 1.9 percent; professional degree earners had a 2.4 percent rate; those with masters degrees, 4.0 percent; those with bachelor’s degrees, 5.4 percent; associate degrees, 7.0 percent; some college, 9.2 percent; high school diploma, 10.3 percent; and no high school, 14.9 percent.
  • The future of U.S. jobs: Those numbers reflect a trend in the U.S. that involves available jobs becoming more and more skilled. The Secretary of Education has gone on the record saying that most jobs available in the U.S. in the future will be skilled and that education and training are becoming more and more essential to obtaining and keeping employment.

Those who start college and don’t finish may still have to contend with student loans, which are not dischargeable in bankruptcy. Student debt can be especially difficult without the increased earning potential that typically accompanies a completed degree.

Economic Recovery and Employment

Naturally, nobody will insist that the economy has recovered until the unemployment rate has fallen closer to normal levels. Though many analysts say that recovery must start in the housing market, most citizens and politicians pay more attention to employment numbers, because these have a more observably direct impact on citizens.

Part of the worry that the College Board’s numbers spurred comes from overseas: students in China and elsewhere are improving on standardized tests as U.S. students fall behind. This has led some people to worry that, if American workers, students, and schools don’t improve, the country might have to start outsourcing jobs for the highly trained.

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Tuesday, September 6th, 2011

Solar Panel Producer Announces Bankruptcy Plans

Last week, Silicon Valley-based solar company Solyndra laid off more than 1,000 workers and announced plans to file for Chapter 11 bankruptcy. The move made waves in part because the company had appeared promising to many investors: Solyndra attracted more than $1 billion in venture capital and a $535 million loan guaranteed by the federal government.

The company appeared to have everything going for it: it had developed new technology to improve the design of existing solar panels and it emerged at a time (2008) when investors were eager to back “green” technology.

But a number of factors got in its way of success:

  • Changing solar equipment prices: Solyndra apparently entered the market at a time when materials to make solar panels were expensive and watched the value of its equipment decline over time.
  • Increased competition from China: When Solyndra was in its early stages, competition from China was reportedly shaky and not well established. Over the course of Solyndra’s growth, solar panels produced in China gained credibility on world markets. Plus, the Chinese government subsidizes production.
  • Oversupply: Globally, more solar panels have been produced than people have been interested in buying. Part of the diminished demand can be blamed on the recession.

Learning from Bigger Bankruptcy Filings

If nothing else, the fate that Solyndra is facing serves as a welcome reminder to individuals considering filing bankruptcy. Many factors that lead people to choose bankruptcy protection are beyond any individual’s control.

In fact, bankruptcy filing surveys consistently note that top reasons people file for bankruptcy include:

  • Divorce;
  • A birth or death in the family;
  • Job loss or reduction;
  • An unexpected illness or injury; and
  • Natural disasters.

As part of its Chapter 11 bankruptcy, Solyndra will likely sell off parts of itself (such as its thin-film solar technology) that are valuable, if not workable for the company at present. Individuals can learn from this, too, and consider some of the following cash-raising techniques before or during bankruptcy:

  • Get a part-time gig: Many people have talents from which they make no money. As part of a bankruptcy recovery, consider selling those services.
  • Lighten the load: In Chapter 7 bankruptcy, filers’ non-exempt assets are sold to raise money for creditors as part of the bankruptcy process. Chapter 13 filers could try something similar, by selling unneeded items online or via a yard sale.
  • Don’t be discouraged: A number of high-profile investors (including the federal government and the Walton family of Wal-Mart fame) supported and helped fund Solyndra. Sometimes, even the best-laid plans end badly. Bankruptcy gives individuals and businesses a chance to move forward.
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Wednesday, August 31st, 2011

Statistics Show Decrease in Small Business Bankruptcies

The latest numbers from Equifax, a credit rating organization based in Atlanta, Georgia, show that small business bankruptcy filings decreased in the first quarter of 2011 compared to the same period in 2010. Down 15 percent from last year, the first-quarter small business filings were still higher than those in the first quarter of 2008, before the recession hit.

For the purposes of its statistics, Equifax considers a small business any corporation with 100 employees or fewer. Here’s a look at what these numbers might mean for the larger economy.

Small-Business Bankruptcy & Economic Recovery

Small business bankruptcy filings might affect the economy in a number of ways:

  • Jobs: When small businesses file for Chapter 7 bankruptcy, they liquidate and cease to exist. That means that any employees of that business become unemployed and enter the job market. A Chapter 11 bankruptcy means reorganization for a small business, but some employees could still be made redundant, especially in smaller operations where salaries are among the largest expenses business owners have. While it might not seem like a small business could have a big impact on the unemployment rate, consider this: about 38 million Americans work for companies with fewer than 100 employees.
  • Local economies: In many parts of the country, small businesses give a town its individual “flavor.” Liquidation bankruptcy by these businesses might hurt a local economy by removing a draw for tourists or out-of-towners; however, a successful reorganization could mean more-booming business in the future.
  • Real estate: In an admittedly less direct way, small-business bankruptcies could affect a place’s real estate market. Empty storefronts drive down real estate prices. This can be good if other businesses fill in right away, but could be bad if multiple businesses close down in the same area. Similarly, if an area’s businesses are failing and its residents are losing work, they may move to greener pastures, leaving their houses empty and potentially driving down residential real estate prices, as well. If few businesses exist to attract potential buyers, the problem could persist.

The Cycle of Small-Business Bankruptcy

One of the most difficult parts of a slow economy is its potential to lead to unhealthy economic cycles: when people are worried about jobs and money, they tend to save more and spend less (and, in fact, numbers have shown that the U.S. savings rate is much higher now than it was pre-recession).

When people aren’t spending money, though, the economy has a hard time getting started (as much as two-thirds of the U.S. GDP is made up of consumer spending). Small businesses, which have shallower reserves of cash, may not be able to attract the customers they need to stay afloat.

When local businesses fail, more people lose jobs and fight to save money, knowing they’ll need it if they cannot find work right away.

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Wednesday, August 24th, 2011

The Bankruptcy Option for Countrywide

In 2008, Bank of America acquired Countrywide Financial, a mortgage lending company that was heavily involved in subprime lending practices during the housing boom. Since the merger between the two companies, Countrywide has proven a costly addition to the Bank of America brand.

Since 2008, according to The New York Times, Countrywide has cost Bank of American tens of billions of dollars in legal fees in addition to other significant losses.

Now, media outlets are throwing around the question of whether or not Countrywide might attempt a bankruptcy filing to help ease some of its debt. Here’s a look at what some insiders are saying.

Business Bankruptcy Rules

If an individual was losing as much money as Bank of America, she would likely need bankruptcy protection. But businesses have different considerations and are governed by different laws than individuals. Consider these.

  • Limited liability: One key element that might affect whether or not Bank of America chooses bankruptcy for Countrywide is whether it’s considered liable for the company’s losses. Business mergers commonly include provisions that limit the legal responsibility shareholders (and the other business) have for the acquired business’s debt. If these laws apply, Bank of America may not need bankruptcy for Countrywide.
  • Consolidation transactions: But there’s a chance the limited liability laws won’t apply in Bank of America’s case. That’s because the bank apparently engaged in a series of complicated transactions upon its acquisition of Countrywide to transfer its profits and debts to various subsidiaries.
  • Acquisition of notes and debt: In addition to the consolidation moves, Bank of America also reportedly took on some of Countrywide’s debt and assets. This further complicates the question of whether or not Countrywide remains separate enough from Bank of America to qualify for bankruptcy on its own.

Many of the complex manipulations between Bank of America and Countrywide came to light when insurance giant AIG filed a lawsuit against the bank insisting that it is liable for the mortgage lender’s debts.

At its heart, the question of bankruptcy is one of separation and commingling. Think of it this way: Countrywide’s financial distress could have been, to Bank of America, like a frostbitten limb. If amputated in time, the rest of the body could have been saved.

But because Bank of America reportedly allowed its healthy parts to mix with the troubled parts, separating the bad stuff from the good stuff might not be so simple. Many analysts have suggested that, because of the complexity of the maneuver, bankruptcy for Countrywide is an unlikely option.

Mortgage-Related Bankruptcy for Individuals

Unfortunately, the potential bankruptcy of Countrywide holds no real poetic justice for those who turned to bankruptcy because of unaffordable subprime mortgages. Rather, the financial faltering of an entity as large as Bank of America is just another symptom of a woebegone economy whose problems started in the housing market.

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Monday, August 22nd, 2011

How Can Social Media Affect Bankruptcy?

Most of us have heard warnings about how social media can affect our lives in unexpected ways (e.g. robberies that occur when people post their out-of-town status on Facebook), but the effect of social media on bankruptcy filings is less well known.

Here’s a look at how your online presence might affect your bankruptcy case (and why it’s so important to avoid bankruptcy fraud).

Social Media: Assets, Spending Habits, Income

The bankruptcy petition all filers must complete and submit to the bankruptcy court requires a lot of information about the state of the filer’s personal finances. Putting incomplete or incorrect information on a bankruptcy petition could result in charges of bankruptcy fraud (which can come with jail time and fines of up to $500,000) or the dismissal of a bankruptcy case.

When you’re filing out your bankruptcy paperwork, keep in mind that social media can affect all of the following.

  • Asset list: You may not think of Facebook as a place where you catalog your possessions, but pictures from birthdays and holidays (and even shots around the house) often include our stuff. If you fail to mention new electronics, jewelry or other valuable items in your bankruptcy petition, a savvy trustee could comb through your Facebook pictures and find evidence that your paperwork was wrong. This could prevent you from getting your discharge or mean you have to pay for the non-exempt portion of those assets.
  • Luxury expenses: In Chapter 7 bankruptcy, credit card debt is usually dischargeable (i.e. the bankruptcy court can eliminate most credit card debt). The exceptions to this rule include credit card purchases for luxury goods or services made within 90 days of filing the bankruptcy petition. So pictures online of you and your family on vacation just before you filed for bankruptcy could raise some uncomfortable questions with your bankruptcy trustee. And if the vacation was on a credit card and was within three months of submitting the bankruptcy petition, there’s a good chance you’ll have to pay those debts.
  • New jobs: In Chapter 13 bankruptcy, filers are required to make repayments to their creditors over a period of three to five years. Those payments are calculated based on a filer’s disposable income at the time of the filing, although if that income changes during the course of the repayment plan, the amount of the monthly payments should change too. So if you get a raise or a great new job and tweet about it or post about it on Facebook but don’t tell your bankruptcy trustee, you could still end up having to pay more to your creditors.

Privacy in Social Media

Even if you keep your social media profiles private, you aren’t in a “protected” zone. That’s because the bankruptcy court can subpoena your online information and thus uncover anything you’ve posted online.

Bottom line: don’t lie on your bankruptcy forms. And don’t post anything online you don’t want your bankruptcy trustee to know.

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Monday, August 15th, 2011

How the Debt Deal Might Affect Student Loans

Media attention to the fallout from the Congress’s last-minute decision to raise the debt ceiling has mostly gone to the downgrade in America's debt rating by credit rating agency Standard & Poor’s. But another potential side effect may have a more direct impact on some American consumers.

As part of the debt compromise, Congress agreed to cut nearly a trillion dollars in spending – and one casualty was federal subsidies for student loans. That means that people interested in borrowing money for higher education may see a higher price tag for that privilege in the near future.

Student Debt & Bankruptcy

So why is an increase in the cost of student loans a big deal? For a few reasons:

  • Student debt in the United States has already topped $800 billion and analysts estimate that it will reach $1 trillion by the end of 2011. That’s more than our credit card debt, which was estimated at $793 billion in May 2011.
  • The job market has been slow to recover since the recession hit, especially for younger job seekers. Nationally, unemployment is hovering at about 9.1 percent, meaning that finding a job after graduating is tougher than it once was. And the average college graduate hits the job market with about $24,000 in student debt.
  • Student loans are not dischargeable in bankruptcy. That means that borrowers are legally obligated to repay their student loans no matter what (though some rare exceptions exist).
  • For-profit universities have recently faced new sanctions that require them to meet certain requirements in order for their students to receive federally subsidized student loans. The measure was put in place because of evidence that showed students were borrowing money to pay for these schools that they were unlikely to earn back based on income projections upon graduation.

In other words, educational debt in the U.S. has already proven cause for concern from many consumer advocates. An increase in interest rates will mean an increase in the amount of that debt.

Change to Student Loan Rates

As of now, federally subsidized Stafford loans come with an interest rate of 3.4 percent. What’s more, under the current system, the government covers interest that builds up while a student is actively pursuing her education.

When the debt ceiling-related changes go into effect next year, though, that interest rate will double to 6.8 percent and the interest waiver for active students will disappear. Further, the new law removes certain rate reductions that are currently used to incentivize on-time payment.

Student lending is an interesting sector of the U.S. economy: unlike most other loan products, student loans are offered freely, without much regard for a person’s credit history. Because of this, it’s far too easy for young adults to take on more debt than they realize – and entirely possible that they’ll get in over their heads.

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Posted in Bankruptcy News and Events, Economic News: How Are We Doing? | 1 Comment »

Monday, August 1st, 2011

What Happens When a City Files for Bankruptcy?

Bankruptcy has been in the news a lot lately, and not just because individuals are seeking bankruptcy protection. Thanks largely to the economic strain in much of the country, municipalities are now considering bankruptcy in large numbers.

But what happens when a city, town or county files a bankruptcy petition? Here’s a look.

Chapter 9 Bankruptcy: For Municipalities Only

Individuals can file for bankruptcy under Chapter 7, Chapter 11, Chapter 12, Chapter 13 of the U.S. Bankruptcy Code. When cities file, though, they must do so under Chapter 9, a type of bankruptcy designed during the Great Depression to help municipalities in distress.

Here’s a look at how Chapter 9 bankruptcy works.

  • Two main reasons cities file: According to insiders, municipalities that choose Chapter 9 protection tend to do so for one of two reasons. Either they’re faced with a one-time catastrophe that prevents them from repaying their creditors, or their financial structure is fundamentally unsound and unsustainable. Cities with the former problem may move into and out of bankruptcy more quickly than those with the latter problem, which may spend more time negotiating with creditors and considering bankruptcy alternatives.
  • Eligibility for bankruptcy: Not all municipalities are legally permitted to file for bankruptcy. Eligibility is regulated by state laws, and in some states no district can seek Chapter 9 protection. Elsewhere (as in California), any municipality has the bankruptcy option and in still other places, judges decide on a case-by-case basis whether or not a town can file.
  • Chapter 9 capabilities: Once a town enters bankruptcy protection, Chapter 9 gives it the ability to negotiate labor contracts that might otherwise have been off-limits because of union laws. In some cases, negotiating pension terms or other benefits allows the city to seriously cut costs in a way that it couldn’t have done without the protection of the bankruptcy court.
  • Pre-filing negotiations: In some cases, the mere threat of a Chapter 9 bankruptcy is enough to convince creditors and other groups to negotiate with a municipality. Because bankruptcy can mean that creditors lose a significant amount of the money they invested in a town, many are willing to accept a deal to prevent the town from filing a petition.
  • Chapter 9 frequency: Despite the threats of municipal bankruptcies that pepper newspapers, actual Chapter 9 filings are fairly rare. This is partly because once towns recognize bankruptcy as an option, they and their creditors have lots of non-bankruptcy alternatives available, including raising taxes, raising fees, cutting costs, negotiating payment terms and more. Plus, politicians are often reluctant to have a municipal bankruptcy on their record, which can look bad in future elections.
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Monday, July 18th, 2011

Can Caring for Parents Lead to Medical Bankruptcy?

These days, the rising cost of health care is a serious worry for many Americans. Bankruptcy filers often cite high medical bills as one factor that led them to seek protection, leading analysts to coin the phrase “medical bankruptcy.”

But one less-discussed phenomenon involving medical debt and bankruptcy revolves around this issue of elder care. The truth is, though, that taking care of aging parents or family members may lead to bankruptcy. Here’s a look at the problem and some methods to prevent it.

The Cost of Aging

Various studies have shown that long-term care for older people can be shockingly expensive. Sources report that:

  • After Alzheimer’s diagnosis, the average patient spends $400,000 for medical care.
  • On average, nursing homes come with a price tag of $7,000 per month.
  • Assisted living facilities cost a monthly $3,300 on average.
  • An average couple that retires at 65 in 2011 can expect to fork over $230,000 in medical costs during the course of their retirement.
  • As many as 65 percent of people over 65 will need long-term care at some time in the future and there’s a 75 percent chance that one member of a retirement-age couple will.

Because many people don’t save enough money to cover these expenses, the burden of providing long-term care may fall to other family members (particularly those who are still working).

Protecting Yourself & Your Loved Ones from Medical Debt

Filing for bankruptcy can provide relief from medical debt. But if you take some precautionary measures, you may be able to keep yourself out of bankruptcy court while still keeping your aging family members in good health.

Insiders recommend taking the following steps:

  • Buy long-term care insurance. This is a kind of health insurance exclusively for those who end up needing long-term care. The earlier in life you begin paying into the system, the lower rates you’re likely to get. Sources recommend doing some research on long-term care insurers, though: the costs and services vary widely and you can save yourself money by getting insurance tailored to your likely needs.
  • Understand the Medicaid option. While retirees have access to Medicare, that program doesn’t cover long-term custodial care. It is possible to qualify for Medicaid as a retiree, though, a program that does offer long-term care. Talk with a healthcare professional about your potential to qualify.
  • Don’t drain your retirement account early. During tight financial times, the temptation to drain a retirement account or 401(k) may be hard to resist. But it’s important to remember that using money from those accounts before they’ve “ripened” will result in serious tax penalties. Plus, the money can’t be replaced. Further, retirement accounts are protected in bankruptcy court, meaning that even if you file for bankruptcy, you’ll get to hang on to your future funds.

Medical costs can be frustratingly high, especially for those who need intensive or persistent care. Taking action while you’re healthy can save you serious money when you get sick.

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