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Tuesday, December 13th, 2011

How the Bankruptcy Double Standard Hurts Consumers

A recent article from The New Yorker highlights a troubling disparity in the way we view bankruptcy and loan restructuring in general in this country. As was evidenced in the recent bankruptcy filing of American Airlines, bankruptcy for corporate entities is generally considered part of an overall savvy approach to managing debts and investments.

While American could have continued paying its debts (it filed bankruptcy with more than $4 billion in the bank), it opted to take the bankruptcy route, which will allow it to restructure its debts into ones that make more financial sense. After the company filed its Chapter 11 bankruptcy petition, most analysts praised its decision, citing the success other airlines have had with reorganization bankruptcies in recent years.

For consumers interested in filing personal bankruptcy, though, the attitude of the general public is vastly different.

Bankruptcy as a Moral Issue

The current turmoil in the housing market highlights exactly how differently the general public views personal bankruptcy:

  • The housing bubble falsely inflated housing prices. Arguably, the analysts and economists who were equipped to recognize this bubble for what it was and attempt to prevent its burst did not. Also arguably, consumers might have recognized the bubble but were less likely to do so than those trained in economic fields.
  • Lenders and homebuyers took on risky debts, betting on rising home prices to pay them off. We now know that those debts were not so good.
  • Many banks lost millions or billions of dollars on bad home loans. Some of those banks benefitted from taxpayer-funded bailouts. Others have staunchly refused to refinance (on a significant scale) mortgage loans that have become untenable for their borrowers.
  • Many homeowners are underwater on their homes. Sources note that many Americans owe up to 50 percent more than their home’s value on their loan. The “smart move” financially for these people would be to walk away from their mortgage, to abandon their homes and stop paying their mortgages. Most don’t, though.

One of the major reasons more homeowners aren’t walking away from their unaffordable homes, even when such a move would be financially logical, is that nonpayment of loans has been morally stigmatized in the media.

Figures including the head of the Mortgage Banker’s Association have reportedly noted that defaults on home loans “send the wrong messages” to community and family members. Others have hinted that we would do well to bring back debtors’ prisons. The total effect, in other words, is that personal bankruptcy and similar moves (even when they’re financially savvy) have been labeled as morally deleterious.

The New Yorker article summarizes the problem in its closing paragraphs, noting that the prevailing attitude in the U.S. runs that individuals ought to “do the right thing” by honoring their debts, but that large businesses, banks, and corporations—who usually have much more capital at their disposal—can do whatever earns them the greatest profits.

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Friday, October 14th, 2011

American Airlines & The Long-Term Financial Benefits of Bankruptcy

The current financial situation of American Airlines serves as a lesson on how filing for bankruptcy can lead to long-term financial strength – and, perhaps more importantly for the airline, how avoiding bankruptcy can sometimes cause long-term financial struggles.

Of course, every individual situation is unique and the American Airlines model can’t be applied across the board. But for people teetering at the edge of their finances wondering whether personal bankruptcy could have any benefits down the road, the story of American Airlines is worth considering.

Avoiding Bankruptcy

In the months and years immediately after the terrorist attacks of September 11, 2001, Americans flew less and many airlines struggled to remain profitable. In the ensuing years, many of them (including Delta, Northwest, US Airways and others) filed for Chapter 11 bankruptcy protection, which allowed them to reorganize their finances and debts.

American Airlines did not choose bankruptcy; instead, the airline opted to negotiate benefits and salaries with its employees and managed to continue operating. At the time – and, according to some reports, even today – the airline’s CEO was proud of his company’s ability to stay out of bankruptcy court. But some analysts are questioning whether the decision made sense financially.

Today, American Airlines operates at a loss. In fact, sources note that the airline:

  • Has more than $12.1 billion in outstanding debts;
  • Is saddled with a pension liability (for which it has no funding) of about $7.9 billion;
  • Earned $11.6 billion last year but had a net loss of $716 million;
  • Is expected to report a $132 million loss for 2011’s third quarter; and
  • Recently took on a high-interest (8.75 percent) loan for about $726 million.

These numbers are particularly gloomy when compared with those of the nation’s other leading airlines, most of which are currently operating at a profit, according to sources. In fact, comparisons between American Airlines and its competitors show stark differences.

In addition to having the least fuel-efficient fleet of planes in the country (which sources estimate cost it as much as $400 million in extra fuel expenses per year), American pays its staff more per flight hour than other airlines. One analyst estimates that if American could cut its per-flight-hour operating costs to those of US Airways, the airline would save $2.2 billion per year.

So how have other airlines managed to do so well in a struggling industry? Most of them filed for bankruptcy – and reemerged as stronger, more profitable companies.

Emerging Stronger from Personal Bankruptcy

For corporations, Chapter 11 bankruptcy provides the rare opportunity to renegotiate contracts with venders, employees and unions. Most companies also sell of unused assets and devise a court-approved way to be able to make a profit while treating all of their creditors fairly.

Like airlines, individuals can use the power of the bankruptcy court to introduce positive financial change into their lives. Bankruptcy may offer several unique protections and opportunities not offered by common debt elimination alternatives, including:

  • Full discharge of certain debts, meaning that the court legally excuses filers from paying them;
  • A temporary halt to collection actions, which can give filers breathing room to take control of their finances; and
  • Financial management and credit counseling resources so filers can learn to establish and maintain financial habits that will improve their overall finances.
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Tuesday, July 26th, 2011

Borders’ Bankruptcy: Reorganization to Liquidation

The Borders bankruptcy case currently making headlines provides a helpful illustration of the difference between the two main forms of bankruptcy, reorganization and liquidation. Here’s a look at what we can learn about personal bankruptcy from the Borders situation.

Reorganization: Chapter 11 and Chapter 13 Bankruptcy

Reorganization bankruptcy is exactly what its name suggests: it allows filers to reorganize their debts and assets to catch up on overdue payments. When a business files for reorganization (usually under Chapter 11 of the U.S. Bankruptcy Code):

  • It continues operating. Some store branches may close and the company may “streamline” its operations to make itself leaner and more likely to turn profits when the bankruptcy concludes.
  • It repays creditors. Chapter 11 cases, like Chapter 13 cases, include a plan that allows the filing company to compensate its creditors at least in part for its debts.
  • It tries to emerge stronger. The goal of a business reorganization is to trim the fat and let the company get back on its feet with a more workable model.

The Borders situation, though, seems unable to benefit from a Chapter 11 bankruptcy. Sources suggest that this is because of a number of factors, including the weak economy, the changing face of books and the fierce competition it faces from online booksellers.

When an individual enters a reorganization plan (usually under Chapter 13 of the U.S. Bankruptcy Code), she also makes payments to her creditors. At the end of the repayment period (usually three to five years), her goal is to emerge debt-free and with financial habits that will keep her that way.

Liquidation: Chapter 7 Bankruptcy

When a company liquidates (under Chapter 7 of the U.S. Bankruptcy Code), it sells off its assets and ceases operations. In other words, if Borders does indeed file for Chapter 7 bankruptcy, it will no longer be around. Business liquidations usually:

  • Involve a sale: This might come in the form of an “everything must go” sale of merchandise in stores, an auction to other businesses, or some combination of the two.
  • Lead to partial repayment: The proceeds from the sales are generally used to repay in full or part any creditors to which the company owes money at the time of filing.
  • Mean job losses: In Borders’ case, the company would have to close its 399 remaining stores and likely lay off the more than 10,000 people it currently employs.

Individuals who file for Chapter 7 usually don’t have enough income to make repayments to creditors. The liquidation part of an individual bankruptcy filing involves the bankruptcy trustee selling a filer’s non-exempt assets to raise money to repay creditors in part.

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Wednesday, July 20th, 2011

Foreclosure after Bankruptcy

Chapter 13 bankruptcy is sometimes considered “famous” for helping people avoid or delay foreclosure. But it’s important to understand that filing for Chapter 13 (or even Chapter 7 bankruptcy) does not guarantee that you will avoid foreclosure.

Here’s a look at foreclosure laws and how foreclosure after bankruptcy works.

Preventing Foreclosure During Bankruptcy

Filing for bankruptcy temporarily stops foreclosure in most cases. Here’s why:

  • A legal protection called the automatic stay takes effect as soon as the bankruptcy case is filed. The automatic stay halts all collection actions, including creditor calls, repossession and foreclosure.
  • This protection typically stays in effect for the duration of the bankruptcy case. That could be as little as four to six months for a Chapter 7 case and as long as three to five years for a Chapter 13 case.

But the protection of the automatic stay only lasts as long as a filer sticks to the terms outlined by the bankruptcy agreement. In Chapter 13, that means making regular monthly payments according to the repayment plan.

If the filer can’t catch up on mortgage payments even with the help of bankruptcy, foreclosure might still be an option after the bankruptcy case ends.

Liens, Second Mortgages & Foreclosure after Bankruptcy

Things can get tricky, too, when filers have second mortgages or home equity lines of credit (HELOCs) when they file for bankruptcy. And thanks to the housing market that collapsed in 2007, many Americans currently do have multiple mortgages or loans attached to their homes.

Here’s how they’re treated by the bankruptcy court:

  • A HELOC in Chapter 13 bankruptcy: In Chapter 13, filers are required to make payments to their primary mortgage lender and to the bankruptcy trustee. The trustee distributes these payments among priority debtors. After the case concludes, the HELOC may be eliminated (discharged). The lender will have gotten a percentage of trustee payments during the case.
  • A HELOC in Chapter 7 bankruptcy: Chapter 7 may cancel the debt on a home equity credit line, but it cannot cancel the lien that creditor has on the house. In fact, a HELOC lender may still be able to foreclose on a filer’s house after bankruptcy is over (though if there’s no equity in the house, this would be unlikely). One way to avoid post-Chapter 7 foreclosure is to reaffirm payments to a HELOC lender in during bankruptcy.
  • Second mortgages in Chapter 13: Second mortgages that are no longer secured by a home’s value can be discharged in Chapter 13 bankruptcy. Underwater homes may have second or third mortgages that are not secured any longer by the house’s value (that is, the amount of the loans totals more than what the house is currently worth). However, discharging a second mortgage will not affect what a bankruptcy filer owes on a first mortgage.

Could You Face Foreclosure after Bankruptcy?

If you’re considering filing for bankruptcy as a way to escape foreclosure, it’s essential to speak with a bankruptcy lawyer to make sure you understand how your mortgage will likely be affected by a bankruptcy filing – and whether you might find yourself facing foreclosure after you get your discharge.

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Monday, May 23rd, 2011

Study: Bankruptcy Considered or Filed by One in Eight Americans

A study recently published by the web site Find Law indicates that a considerable percentage of the U.S. population (one in eight survey respondents, or nearly 13 percent) has either considered filing for bankruptcy or actually done so.

That figure may seem high, but in a nation of consumer debt, depreciating home values and a limited job market, perhaps it’s no wonder that so many of us are in need of serious the serious financial protection and debt relief that bankruptcy can offer.

Who Is Considering Bankruptcy?

The study breaks down potential bankruptcy filers in part by age:

  • Americans between 35 and 54 are reportedly the group most likely to consider bankruptcy as an option.
  • Americans 18 – 34 and 55 and older are, according to sources, half as likely as the middle age group to consider or actually file for bankruptcy.
  • Senior citizens (those 65 and older) are apparently the least likely group to consider bankruptcy as a debt relief option, at only seven percent.

How Have Bankruptcy Filing Numbers Changed in Recent Years?

Sources indicate that in 2010, 1.5 million Americans actually filed for bankruptcy protection. This number marks the highest annual total since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect and tightened the standards for those interested in bankruptcy protection.

Why Do So Many People Need Bankruptcy Protection?

While no two bankruptcy cases are alike, bankruptcy filers often note common triggers that led them to seek the protection of the bankruptcy court. These include:

  • Unexpected medical expenses: Illness and injury can both cause serious medical bills to build up, particularly for those people who are uninsured or underinsured. And even an otherwise happy event, like the birth of a child, can prove very expensive.
  • Change in family makeup: Divorce and death are difficult to deal with on their own, but are often compounded by the financial troubles they cause. Many families are forced to face unpleasant financial realities after divorce or death carries off a primary breadwinner.
  • Job loss or reduction: Even good employees are at risk of losing their jobs in the current economic climate, and even though layoffs have slowed in recent months, the unemployment rate remains high. It’s no secret that this type of financial burden can lead a household to seek bankruptcy protection.
  • Fear of foreclosure: Even those with good health and steady jobs may find themselves unable to keep up with their mortgage, and some families opt to file for bankruptcy in hopes of fending off mortgage foreclosure.

Considering the many factors that can contribute to a household’s decision to file for bankruptcy protection, it may be a wonder that only one in eight Americans has thought about personal bankruptcy!

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Monday, April 11th, 2011

Student Loan Debt

Student Loan Debt

Student Loan Debt

What You Don't Know Can Hurt You

Learn interesting student loan debt facts that aren’t as apparent as a student would hope. Did you know the difference in private versus public education for college equals $15,000 per year on average. For students, that’s a lot of cash that could be spent on other essentials (like food). Don’t wait until you are filing bankruptcy to find out the facts. Find out more trivia to share with your friends between classes in the infographic below.

Student Loan Debt: What You Don't Know Can Hurt You

School is expensive. You can start your financing plans by checking out available scholarships and grants.

The first step - experts recommend you check out federal loans. These have better terms than other borrowing options. Be sure to maximize federal loans before applying for private ones.

Some facts about student loan debt:

Since 1982, tuition increased by more than 400%.

Average student loan debt levels by state ranged from $13,000 to $30,000 last year. Highest levels were in the Northeast.

Average college cost - $13,000 for public school and $28,000 for private colleges.

Over the last 20 years the cost of private medical school has risen 165%. The cost of public medical school has risen 312%. Medical students graduate on average with $100,000 in student loans.

College student will be carrying more than just a heavy class load this fall.

Total student loan debt exceeds $875 billion. This number is increasing at the rate of $2,853 per second.

College seniors who graduated last year owed an average of $24,000 in student loan debt. Unemployment for recent graduates jumped from 5.8% to 9% in 2010, the highest annual rate on record.

73 colleges said more than 90% of the class of 2009 graduated with debt. According to CNNMoney, 85% of college grads move back home.

What can you do to hold down debt so you're not digging out of it for years after graduation?

Experts agree - you should know "the number" - what will you need each month for loan payments.

  • Your student loan debt: $30,000
  • Interest rate: 6.8%
  • You pay $350 a month
  • For 10 years
  • That is a total of $42,000

Defaulting on student loans has serious consequences.

If you default on your student loan:

  • Wages could be garnished
  • Loan turned over to collection agency
  • Liable for court costs and attorney fees
  • The default will effect your credit rating for up to seven years

If you are sick and tired of barely scraping by, here are some tips that may help.

The most important thing you can do is make your payments faithfully. Missing payments only increases your debt, and can wreck your credit rating.

  • Develop a budget
  • Contact your creditors
  • Manage other loans
  • Be wary of counseling organizations

If you can't make payments on your student loans, you may be able to get relief from making payments.

Deferring Student Loans. A deferment excuses you from making payments for a set period of time because of specific conditions in your life - such as hardship or unemployment.

Student Loan Refinancing. Consider student loan refinancing - especially if you have more than one loan.

Forbearance. This period provides time for those in debt, in order to give them time to pay on overdue bills.

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Wednesday, April 6th, 2011

The Truth About Bankruptcy: Report Shows Many Wages Unlivable

A recent press release from a group called Wider Opportunities for Women reveals what many families struggling to make ends meet already know: many families with breadwinners employed full-time are unable to earn enough money to ensure a basic standard of living.

The study (discussed more below) highlights the troubling economic reality that many Americans face and could potentially help to de-mythologize the reasons people are pushed to file for bankruptcyprotection.

The Basic Economic Security Test

Here’s some background about the study and its findings.

  • Data collected since 1995: Over the past fifteen years, WOW has gathered data from state and federal pools (including census reports) to attempt to determine how much income is required to establish economic security across the country. The study attempts to determine not what people can survive on minimally, but how much they need to earn in order to achieve stability without help from public assistance.
  • Economic security numbers: The study found that a single person would need to earn $30,012 per year (about $14 per hour), a single person with two children $57,756 annually (about $27 per hour), and a family of four $67,920 per year ($16 per hour for two workers) to establish economic stability.
  • Minimum wage not enough: Compare the above numbers to the federal minimum wage ($7.25 per hour) and to the income identified as poverty-level for those groups ($10,830 for an individual and $22,050 for a family of four) and it’s easy to see that current diagnostic standards for “poverty” are somewhat misleading. Sources report that more than 14 percent of Americans lived below the poverty line in 2009.

Financial Stability, Emergencies and Bankruptcy

Given these numbers, it’s no wonder that millions of Americans require help from the bankruptcy court each year. One essential part of economic stability, as the report highlights, is being able to save money for emergencies. And, on bankruptcy filing surveys, filers commonly cite as reasons they filed financial emergencies such as:

  • Illness or injury that led to high medical costs and/or job loss;
  • Job loss, layoff, or reduction;
  • Family events such as divorce, the death of a family member and the birth or adoption of a child;
  • Over-extension on credit (which can result from relying on credit to buy necessities); and
  • Unexpected expenses (like a car or home repair).

Recession Hurting Many Families

The study also showed that Americans with less education have the most difficulties finding jobs with livable wages, and that more low-income families than ever have reported not being able to afford basics like food within three months of losing their income.

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Monday, November 29th, 2010

Many Thriving after Bankruptcy

A recent article in the Wall Street Journal offers an interesting look at how a variety of American bankruptcy filers are doing in their post-bankruptcy lives. The findings are interesting and informative – and, if you’re among those who have filed for bankruptcy protection in recent years, they may save you some time and worry.

Here’s a look at some of the highlights of life after bankruptcy these days.

  • Credit checks & the job hunt: It seems that some people recovering from bankruptcy are finding that the job application process has an added difficulty: the credit check. While some states have made pre-employment credit checks illegal and the government prohibits public-sector employers from denying jobs on the basis of a bankruptcy filing, many private-sector companies are still running credit checks on applicants – and many apparently frown at bankruptcy filings.
  • Finding new housing after bankruptcy and foreclosure: Another hurdle many bankruptcy filers and foreclosure victims are reportedly facing is finding a place to live after their finances fall apart. While sources note that most people with bankruptcy and/or foreclosure in their past will have to work harder to find housing than someone with cleaner credit, it seems that many landlords are willing to take into account the circumstances surrounding a bankruptcy filing or foreclosure. In other words, if you were a victim of unexpected illness, injury or job loss (like so many bankruptcy filers), you stand a better chance of securing a new lease.
  • High auto loan interest rates: Many people have reportedly had great difficulty getting an affordable auto loan after a bankruptcy filing, especially in the current economy. Some people apparently choose to find housing close to their children’s schools and near public transportation; others managed to get high-interest loans on used vehicles and stay current.

General Tips for Life after Bankruptcy

The good news about recovering from bankruptcy in the current economy is that you are by no means alone, which means that more people are beginning to understand that bankruptcy provides, in some cases, the only viable option for people in financial distress.

Here are some general post-bankruptcy tips:

  • Make & keep a budget: Mindfulness is perhaps the most important part of staying within your means – it’s far too easy to overspend if you don’t know how much money you’ve got at your disposal.
  • Change your habits: Falling into your pre-bankruptcy financial habits will probably lead you back down the road to bankruptcy. So avoid payday lenders, pay off your credit cards each month and use cash if you can’t resist the urge to splurge on credit.
  • Make a cushion: Saving money is key to making sure another financial catastrophe doesn’t undo you again. Even a small emergency fund can mean the difference between disaster and stability.
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Thursday, August 12th, 2010

The Truth about Bankruptcy and Student Loans

College students and recent graduates are facing a particularly difficult financial landscape as they attempt to move from the classroom to the workplace: college tuition is more expensive than ever, meaning that most students rely at least in part on loans to cover their fees.

But, with the economy still sluggish, finding a job (and particularly a job that will allow them to cover their loans) is often a difficult feat.

And the scary truth is that student loans are very difficult to discharge in a bankruptcy filing. Here’s a look at what you can expect if you’re struggling to repay educational debt—and what your options might be.

Student Loans in Bankruptcy

In most bankruptcy cases, student loans constitute non-dischargeable debt, meaning that the bankruptcy court cannot legally forgive any money you owe. The exception to this rule is that if a filer can prove “undue hardship,” she might have her loans forgiven.

In order to demonstrate that paying back your student loans would cause you “undue hardship,” you must address the following:

  • Standard of living: You need to show the bankruptcy court that, if you made payments on your student loans, you would be forced to live below a minimum standard of living. This may vary depending on where you live, so be sure to consult with a bankruptcy lawyer to determine whether you might meet this criterion.
  • Duration of situation: You also need to prove that your current living circumstances (such as expenses and income) are likely to continue throughout the duration of your loans’ repayment period. In other words, you need to show that you’re not only poor now, but you’re likely to remain so for as long as you’d be making student loan payments.
  • Effort of repayment: Finally, you have to demonstrate that you’ve honestly attempted to repay your loans but have found yourself unable to continue doing so while maintaining reasonable living standards.

Clearly, these criteria are not easy to meet—and it’s likely you might not even want to meet them. After all, none of us want to think we’ll be having the same difficulty finding work ten years from now that we’re currently having.

Dealing with Student Debt

If you don’t think you’re likely to have your student debts discharged by a bankruptcy court, you may want to consider these options for repayment.

  • Filing for bankruptcy: No, that’s not a typo. If you’re stretched too thin by a variety of debts, filing for bankruptcy may allow you to discharge other debts (like those from credit cards) so you can funnel money to debts you have to repay.
  • Applying for forbearance: Most student lenders offer graduates periods of forbearance, in which they’re not required to make payments on their loans. If you expect to be employed (or be earning more money) in the near future, this option may give you some breathing room.
  • Negotiating: Finally, consider contacting your lender, explaining your situation and asking for altered loan terms that would allow you to make smaller monthly payments so you could stay on target.
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Saturday, June 12th, 2010

Bankruptcy: Separating Myth from Reality

If you’ve recently found yourself buried under a pile of debt, you’ve probably spent some time researching ways to dig yourself out. Most likely, filing for personal bankruptcy did not sound like the most appealing choice. However, like visiting the dentist or and eating spinach, filing for bankruptcy can actually be quite good for your health, financially.

Like most tools that aid in personal finance recovery, the more you learn about bankruptcy, the more comfortable you may feel wielding it as a debt-reducing tool.

The following are some important things to know about personal bankruptcy:

What Will the Neighbors Say?

While many people think bankruptcy carries some stigma, the fact is that more than 1.5 million Americans filed for bankruptcy last year. And these people stretched across all social strata—from doctors and corporate executives to plumbers and house cleaners.

In addition, according to the Orlando Sentinel, a recent Harvard University study revealed that most bankruptcy filers wound up in court as a result of job loss, divorce, or medical issues. So, if one of these problems led to your financial malaise, know that you are not alone.

Where Do I Start?

First, figure out if you can stay out of bankruptcy by reducing your household expenses, or adjusting the payment plans on the debts you owe. If such tactics dramatically reduce your debts, you may be able to navigate the road to financial recovery yourself.

However, if these strategies prove ineffective, consider filing for personal bankruptcy. See if it makes more sense to file for Chapter 7 or Chapter 13 bankruptcy. Each of these options comes with its own advantages. For example, Chapter 7 bankruptcy can help discharge your debts more quickly, while Chapter 13 may allow you to keep more of your assets.

Of course, both options are pretty complex, especially after the legislative overhaul of bankruptcy law in 2005. It is possible to file for bankruptcy yourself, but seeking legal advice from an experienced bankruptcy attorney is often worth the investment.

Caveat Debtor

Reportedly, some companies promising immediate debt relief peddle misleading, or outright wrong, information. Be wary of promises to drastically reduce your debt or painlessly repair your credit, especially if these promises come attached with large up-front fees.

Also, beware of pressure tactics from your creditors. One tall tale occasionally given by debt collectors is that the 2005 reforms banned bankruptcy altogether. This couldn’t be further from the truth. Personal bankruptcy is alive and well, and over a million Americans use bankruptcy every year to reduce their debt load.

Additional Resources

To learn more about your legal rights before and after bankruptcy, check out ConsumerLaw.org

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