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Wednesday, September 15th, 2010

What You Need to Know about Debt Collectors

WalletPop.com recently published an interview with a journalist who decided to spend some time working at a debt collection agency to research whether or not the company complied with federal guidelines for debt collectors (as outlined in the Fair Debt Collection Practices Act).

His findings (which are detailed in the book Fight Back against Unfair Debt Collection Practices), are summarized below.

What to Expect from Debt Collectors

While federal law specifically states that debt collectors must follow various guidelines that basically add up to treating debtors with respect, various reports have suggested that many collectors regularly break these guidelines—and most consumers don’t realize they have rights in the matter.

Here are some classic maneuvers to watch out for and speak up about if you encounter:

  • Trainees don’t count. It seems that some collection agencies excuse illegal behavior from employees by identifying them as “trainees,” meaning that they haven’t been fully instructed on how to behave according to the laws. To counteract this potential argument, make sure you document any threatening or rude calls from debt collectors: get their name, employee number, the date and the time of the call.
  • Tapes and lawyers come in handy. Apparently, debt collectors will play by the rules if you notify them that you are recording the conversation or that your lawyer is handling your debt collection calls. Be warned, though, that professional collectors have worked with a lot of debtors and you’ll actually need to have a lawyer retained if you claim you do.
  • Don’t give permission. In order to contact you outside the hours of 8:00 am and 9:00 pm, debt collectors need your express permission; however, it seems that some debt collectors will essentially lie about getting such permission by fudging their notes about a call. This reinforces the importance of taking notes about such phone calls yourself to use in cases of harassment.
  • Collectors probably know your credit history. One reportedly common tactic is for a collector to refer to other debts you may be current on when trying to collect a debt on which you’ve fallen behind. This means that you should be checking your credit report regularly to make sure you know at least as much as they do.
  • Get settlements in writing. If you and a collector agree to settle a debt for a partial, lump-sum payment, be sure to get the agreement in writing before making any payments. The agreement should have the original amount of the debt, the agreed settlement amount and the terms of the repayment. If you’re communicating with a collector over the phone, insist on an emailed PDF or a faxed copy of the agreement before making any payment.

Protect Your Rights from Debt Collectors

If you think your rights have been violated, you may want to contact a bankruptcy lawyer in your area to see what your options are for moving forward.

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Wednesday, July 28th, 2010

Bankruptcy: BP’s Worst Case Scenario?

Six month ago, the idea of the oil giant BP going bankrupt was an unthinkable proposition. Now, although still difficult to imagine, isn’t so far-fetched.

Despite the improbability of a BP bankruptcy, there is a common question that people what been asking themselves: What does the worst case scenario for BP look like?

An article from the New York Times indulges into this hypothetical situation.

Already, the price of BP’s stock has plummeted over one third of its pre-spill price.
There is some speculation by legal minds that BP might consider filing bankruptcy and separate the cost of cleanup and potentially up to billions of dollars in legal claims into a separate corporate entity.

But according to Tony Hayward, BP’s ousted chief executive, BP will be capable of weathering the storm. Just last year BP turned a profit of an astounding $17 billion.

It is this extreme amount of cash flow that will allow BP to fully compensate those wrongfully injured by the company and pay for the cleanup costs, claims Howard.

Despite the incredible profits the company has made in the past, a $40 billion tab on the clean up and damage coverage isn’t of the realm of possibility in the area. If BP was forced to shell out this much money, then another Texaco situation might not be out of the question.

In 1987, the oil giant Texaco filed for Chapter 11 bankruptcy because it was unable to pay a $1 billion jury award to rival Pennzoil. What’s amazing is that the $1 billion award was actually less than 10 percent of the original judgment of $10.53 billion.

That was an interesting case where Texaco was found liable for jumping the planned merger between Pennzoil and Getty Oil, a move which allowed the jury to award triple damages for Pennzoil.

There is a cap on BP’s liability for so-called ‘economic devastation’, at only $75 million. The only problem with that cap is it becomes irrelevant if it is found that BP has violated safety regulations—and the latest presumption is that BP has in fact violated safety regulations.

It is possible for BP to fight and win any potential large judgment against them- a move which could save the company. When the now infamous Exxon Valdez spilled, the original judgment against Exxon was $5 billion. But after several appeals and fights which made it all the way to the Supreme Court, the final judgment was cut down to a more manageable $507.5 million.

A senior fellow at the Manhattan Institute, Robert Bryce, seems to sum up the main thought about BPs overall stability well when he says that, “BP is financially sound now. It is unlikely to go bust near term… instead, BP will spend the coming decades circling the drain, mired in endless litigation, its reputation irreparable damaged and its finances weakened.”

This is far from a great outcome, but it seems to be far more likely than bankruptcy.

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Thursday, July 8th, 2010

Consumer Bankruptcy Filings Reach Five-Year High

According to a research by the American Bankruptcy Institute, consumer bankruptcy filings for the first half of 2010 were considerably higher than any six-month period since 2005.

The Wall Street Journal recently highlighted some of the key findings of the Institute’s study:

  • Raw figures: During the first six months of 2010, consumer bankruptcy filings rose to 770, 117, which represents a 14 percent increase over filings made in the same period last year.
  • Rise despite legislation: This figure for 2010 represents the highest number of bankruptcy filings since the Bankruptcy Abuse Prevention and Consumer Act was passed five years ago.
  • More to come: The American Bankruptcy Institute anticipates at least 1.6 million bankruptcy filings before the end of the year.
  • Debt in the desert: Sources indicate that the average national filing rate was 6,800 filings per million households. Nevada had more than double the national filing rate, coming in at 15,000 filings per million households. A partial explanation for this high figure is that Nevada also has the highest unemployment rate in the country.
  • Bucking the trend: Places as diverse as Washington, D.C., Alaska, and South Carolina had the lowest filing rates, each falling below 40 percent of the national average.

While the last six months as a whole showed rising bankruptcy filings, there are also contradictory signs that bankruptcy filings may be on the decline.

In June, bankruptcy filings totaled 127,000, which is a seven percent drop from the number of filings in May. Moreover, total filings dropped in June for the third consecutive month.

Of course, this could be a blip in the large scheme of things, according to the National Bankruptcy Center. While June filings were down from this May, they still represented an 8 percent increase in filings compared to June of 2009.

What Caused the Rise in Filings?

According to Bloomberg Businessweek, the rise in bankruptcy filings is largely attributable to the combination of rising consumer debt and low savings rates.

As consumers spend more and save less, the potential for crippling debt rises significantly. Moreover, if consumers do start spending less, this may have a negative impact on investments in business, another key factor in economic recovery.

Poor consumer spending habits are further exacerbated by the shaky employment situation. Sources indicate that the employment rate was further affected by the loss of 225,000 temporary workers who had helped conduct the 2010 census.

Additional Resources

If you might be one of the expected 1.6 million bankruptcy filers this year, consider contacting a local attorney to help you with the bankruptcy process.

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Wednesday, July 7th, 2010

New Student Loan Laws Take Effect

For the millions of parents trying desperately to help their child pay for college (even though they may be facing bankruptcy, themselves)—an institution that is becoming increasingly difficult to afford—some hope may be insight. A new law that went into effect last week relegating private lenders to a smaller role in educational loans may make affordable federal loans easier to get, according to a recent article in the Wall Street Journal.

The new student loan legislation, which was signed this spring as an amendment to the health-care overhaul bill, cuts out the private-sector middlemen from offering federal loans as of July 1st, while increasing the federal grant programs.

As a result, borrowers should have a clearer distinction between federal and private loans, especially because many banks previously offered both.

The short term result of this change is more competition among private lenders, which could lead to better terms for borrowers. Wells Fargo demonstrated this when it recently dropped rates on two of its private student loans, including a new loan for parents launched in May.

One long term result may be a much needed break for students. The average debt among college students in 2008 is up to $23,200, nearly $5000 more than students graduating in 2004.

Some key tips to keep in mind if you or your children are planning on applying for students loans in the fall.

Maximize the federal loans first. Federal loans have fixed rates that won’t rise with interest. The fixed rates vary from 4.5% for students with a demonstrated academic need, to 6.8% for those who aren’t need based.

Also, federal loans offer a very flexible repayment plan, which can be important if you or your recent graduate are struggling to find a job that can pay the bills.

There are other kinds of federal student loans that can help save money, when compared with private loans, that you can look into to see if you qualify for.

The other key point to think about is finding the deals on private loans.

Credit unions are increasing their business in the field, with around 150 credit unions joining the Credit Union Student Choice program, a group that helps credit unions offer non-federal student loans with an average rate on existing loans of 6.25% with zero origination fees.

There are also more regulations on the radar for Congress. There is a financial-regulation bill in Congress that calls for the formation of a Consumer Financial Protection Bureau that would have oversight over private student loans and other financial products to give borrowers more protection.

Hopefully these trends continue and allow all the emerging college students to have some freedom and flexibility to merge into careers that they want to, instead of selling their soul to the first job that will pay off their debt and get them out of the house—assuming there are any jobs when they graduate.

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Wednesday, May 12th, 2010

Proposed Law Would Place Restrictions on Debt Settlement Companies

Two senators have proposed new regulations that may drastically change the way debt settlement companies do business.

The amendments are part of a larger financial reform bill currently being discussed and were jointly proposed by Senator Charles Schumer of New York and Claire McCaskill of Missouri, the Associated Pres reports.

The laws propose some major changes to how debt settlement companies collect fees, operate and the damages for which they are liable. The main points of the law include:

  • No fees could be collected until a settlement is reached
  • A cap on fees charged. Most companies charge consumers a percent of their debt for the service. Some companies may charge 20 percent of the debt, but the proposed cap would likely be much lower.
  • More disclosures from companies to consumers, including costs and services to be performed
  • No monthly fees
  • Consumers would be able to cancel a debt settlement contract and receive a complete refund of fees
  • More regulatory powers of the industry for the Federal Trade Commission
  • Companies would be subject be subject more punitive damages liability during civil lawsuits

As of right now, these are only proposals for a bill that has not yet passed, and changes could be made. The proposals would not affect any bankruptcy laws.

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Monday, April 26th, 2010

Proposed Bill Would Change Role of Student Loans in Bankruptcy

Student loans have become infamous for rarely being discharged in bankruptcy. However, before 2005, only government-backed student loans were protected—private student loans could be forgiven in bankruptcy.

The Chicago Defender reported that several U.S. lawmakers have proposed a piece of legislation that would allow bankruptcy courts to once again discharge student loans issued by private lenders.

The legislation, which is still in its earliest stages, would address what its sponsors (including Rep. Danny K. Davis, Sen. Sheldon Whitehouse, Sen. Dick Durbin, Rep. Steve Cohen and Sen. Al Franken) see as an unrealistic burden of debt many students have upon graduation.

Indeed, the statistics cited by the Defender and a press release from Senator Durbin’s office are eye opening:

  • Until the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect in 2005, private student loans were treated like other loans in bankruptcy; now, they can only be discharged if a filer can show "undue hardship."
  • Congress recently ended a $6 billion subsidy to private student lenders, thus eliminating one advantage they had over other lenders. This student lending reform was signed into law as part of the health care reform legislation. The sponsoring legislators argue that the restoration of dischargeability will further level the playing fields.
  • Private student loans have increased in both popularity and cost in recent years, some coming with interest rates at and above 15 percent.

If the new bill becomes law, its sponsors contend, it will give students wishing to pursue higher education a certain peace of mind, as they will have the option of discharging the associated debts should they encounter unexpected financial hardship.

The Current Law

As it stands now, BAPCPA permits individuals who file for Chapter 7 bankruptcy protection to receive a full discharge of many unsecured debts (that is, filers are excused from paying these debts); however, some debts cannot be discharged in a Chapter 7 filing. These include:

  • Spousal support (alimony)
  • Child support
  • Student loans
  • Most tax debt

Supporters of the new bill apparently believe that student loans don't fall under the same category as the other non-dischargeable debts, as they do not contribute directly to someone's wellbeing.

But the bill will likely have obstacles to overcome in Congress. Opponents are likely to point out that making private student loans dischargeable in bankruptcy decreases lenders' security when issuing these loans and could lead to increased interest rates and fees to compensate for potential lost income.

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Sunday, April 11th, 2010

Bankruptcy Filings at Post-2005 High

Bankruptcy filings among American individuals and businesses rose to record levels in March of this year, according to a report by Reuters. Here’s a look at the numbers and what they mean for bankruptcy in the U.S.

  • 158,141 bankruptcy petitions were filed in the U.S. during March, 2010, according to numbers released by Automated Access to Court Electronic Records (AACER).
  • This number represents a 35 percent increase from February, 2010, and a 20 percent increase from March, 2009.
  • Prior to March, the most filings during a single month since the implementation of the new bankruptcy law in 2005 occurred in October 2009, when 133,393 cases were filed.
  • Of the total cases filed, 149,979 bankruptcy petitions were from individuals and 8,162 petitions were from businesses.
  • Nearly three-quarters of all petitions filed were under Chapter 7 of the U.S. Bankruptcy code; the remainder were mostly Chapter 13 cases, with a few Chapter 11 cases as well.

These numbers are significant for a number of reasons.

BAPCPA and Filing for Bankruptcy

The nation’s bankruptcy laws were overhauled in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Because the law was expected to make bankruptcy protection more difficult to get, filings soared just before the law passed as people sought protection under the old law.

In 2005, a record year for bankruptcy filings, 2.08 million cases were filed, with both individuals and businesses filing at higher rates than usual.

After the late-2005 rush to file, there was a lull, but in the years following, filings have increased steadily. Last year, 1.47 million bankruptcy cases were filed in the States, the highest since the law’s passage, and March’s numbers suggest that this year could have an even higher number.

Morals of the Story

The lessons here are important:

  • You’re not alone: Many people delay filing for bankruptcy because of the stigma associated with it. These figures clearly show that significant numbers of Americans are struggling with debt.
  • Bankruptcy isn’t out of reach: Many people feared that, with the BAPCPA laws in place, qualifying for bankruptcy protection would be almost impossible. Again, millions of Americans have been helped since the new law took effect, showing that much of the fear was unfounded.
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Saturday, March 27th, 2010

Community Group ACORN Nearing Bankruptcy?

The Washington Post reported recently that the community organization ACORN (Association of Community Organizers for Reform Now) may be on the verge of filing for bankruptcy.

The group has, since its founding in 1970, devoted itself to helping low-income Americans find housing and to bringing voters from under-represented groups to the polls. Last fall, though, things took a turn for the worse for the group. Here’s what happened:

  • Rising criticism: In the months after President Obama’s election, critics of ACORN apparently accused the group of fraudulent registration of voters and even internal embezzlement. And the bad press got worse once Obama took office.
  • Video embarrassment: Last fall, two conservative activists posed as a pimp and prostitute and got advice from an ACORN counselor about how to hide their line of work from the government so they could buy a house for business purposes. They recorded the incident with hidden cameras and released them to news outlets, which caused serious controversy over ACORN’s aims and methods.
  • Dried-up funding: After the video’s release, many of ACORN’s donors (including larger organizations and the government) reportedly withdrew much of their financial support, leaving ACORN underfunded.
  • Withdrawal of state chapters: The Post notes that some of the bigger state chapters of ACORN (notably New York and California) have broken off from the parent organization and formed individual community support groups without the ACORN name.

Though representatives of ACORN itself have apparently not made any public comment about bankruptcy plans, a glance at the events of the past few months leaves little doubt that such a step would not be entirely surprising.

Effect on Consumers

Sources indicate that ACORN plans to continue dedicating itself to aiding and advocating for low-income Americans; however, they may do so under a new name and organization, both of which could be established during the bankruptcy process.

And if you’re worried about finding guidance through the home buying process, there’s no need to panic: the reorganization of ACORN leaves plenty of other groups and organizations available.

If you’re interested in becoming a homeowner but aren’t sure how to begin the process, visit the government’s Department of Housing and Urban Development (HUD) page for links to helpful resources and information on how to get moving toward your goal.

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Thursday, March 25th, 2010

Obama Sees Bankruptcy Drop in Health Reform Victory

This weekend, the U.S. House of Representatives passed a healthcare bill that could lead to substantial changes in the nation’s healthcare system. In an email to supporters sent Sunday evening (via Organizing for America), President Obama noted that the new regulations could prevent "families and businesses from plunging into bankruptcy."

So how is healthcare reform linked to personal bankruptcy filings?

The Tipping Point

Many Americans who file for bankruptcy don’t decide to do so over night; for many, it’s a drawn out and even painful process. Often, people wait until they have no choice but to file for bankruptcy, meaning that their savings and retirement funds are depleted and they have few other options.

Consider this:

  • In 2001, a study found that medical costs contributed to 42.6 percent of all bankruptcy filings in the U.S.
  • In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect and tightened the requirements for those wishing to file for bankruptcy.
  • In 2007, a new study showed the number of "medical bankruptcies" rose to a startling 62.1 percent.

Understanding "Medical Bankruptcy"

High medical bills alone may not force otherwise financially healthy individuals to file for bankruptcy. But, as the 2007 study points out, medical problems and expenses can harm individuals and families in a number of ways:

  • Income loss: Injuries and illnesses that cause people to take significant time off work often mean significant pay loss as well, which can lead to unpaid bills of all stripes.
  • High bills: The 2007 study indicates that, of those who were pushed into bankruptcy for medical reasons, a whopping 92 percent had bills that totaled more than $5,000 or 10 percent of their family’s pretax income.
  • Loss of safety net: Even those who have enough money to cover medical bills are at risk: expensive procedures that drain savings accounts can set you up for financial disaster if any other financial roadblocks spring up.
  • Limited future: Some injuries and illnesses leave permanent damage and can affect a person’s ability to find and keep work in the future, meaning that options for getting out of debt can be severely limited.

As the Obama Administration has pointed out, the introduction of more comprehensive healthcare coverage could eliminate or correct many of the problems currently linking medical expenses to bankruptcy filing.

To better understand how the healthcare reform might affect you and your family, check out this post.

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Tuesday, January 26th, 2010

Elliss Bankruptcy a Riches to Rags Story

Financial lessons are often best learned in retrospect, which can make it difficult to tell when you're going down the wrong financial path. Luckily, we can always learn from the mistakes of others.

The Detroit News reports that former Detroit Lions lineman Luther Elliss was forced to file for bankruptcy thanks to a series of bad investments and debts.

While the story is frustrating to hear—Elliss reportedly earned more than $11 million in a five-year period—it is surprisingly common. So how do the once fantastically rich manage to end up in bankruptcy court? Often enough, simply by making some bad decisions.

Elliss, it seems, got sucked into the real estate bubble and ended up with two homes worth less than what he owed on them. Last summer, he and his wife reportedly filed for Chapter 7 bankruptcy to receive a discharge from their debts.

Taking the Long View on Your Finances

While most of us will never command the kind of salaries professional athletes can expect, we would do well to look at how quickly a fortune can disappear.

  • Nothing is guaranteed. If the current employment situation has taught us anything, it’s that no job is permanent, but many of us act as if our life circumstances are not subject to change. When making major purchases (homes, cars, schools, etc.) remember that a stretch now could easily become a financial impossibility if your salary changes.
  • Listen to the right people. In the Tribune article, Elliss notes that he didn’t listen to suggestions from his wife or adviser—and that it cost him in the long run. Unfortunately, nobody is guaranteed to have your best interests at heart except you, so be very wary when people ask for financial commitments and promise unrealistic returns. On the other hand, know who honestly cares about your well-being and take their advice to heart.
  • It's a marathon, not a sprint. Remember that you're in this thing called life for the long haul. There will always be great investments around, so make sure you learn all you can about one—and feel totally comfortable committing to it—before sinking in your hard-earned cash. It's true that you can't win if you don't play, but you also cannot lose.

There's an old bit of financial wisdom that summarizes pretty much every other guideline for handling money: spend less than you make and save the rest. It's easy to get drawn into upgrades and status symbols and all the rest, but at the end of the day (or the lucrative career as a professional athlete), financial stability is often worth the sacrifices of getting there.

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