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Friday, October 21st, 2011

Tough Economy Pushing More Businesses into Bankruptcy?

A recent report from Reuters.com highlights a growing trend of business bankruptcy filings in the U.S. While personal bankruptcy filings have actually decreased in recent months, some lawyers are predicting that 2012 through 2014 will see upticks in business bankruptcy reorganizations.

Some lawyers, it seems, have already reported an increase in clients.

A Double-Dip Recession?

One factor some analysts are watching is the U.S. economy’s ultimate move toward or away from a double-dip recession. First, a quick look at where the economy is now: though unemployment remains high and the housing market has still not recovered from the rash of foreclosures that touched off the Great Recession, the U.S. is technically not in a recession right now – probably.

A recession only occurs when the country’s gross domestic product (GDP) recedes, or shrinks over successive quarters. In other words, when there is a decrease from one measurement period to the next, the country is in a technical recession.

The problem is, there’s no way of determining whether an economy is in a recession until after the fact – that is, we can’t measure this month’s data until next month.

Recessions & Business Bankruptcies

During economic recessions, bankruptcy filings tend to rise. That’s led some insiders to point at recent numbers reported on BankruptcyData.com:

  • Ten companies worth $100 million or more filed for bankruptcy in September of this year. The $100 million mark is often considered the threshold for a “large” company.
  • September had the highest rate of business bankruptcies since April, when 17 large companies filed.
  • Business bankruptcy filing rates have not been so high since 2009, when the country was in the thick of the recession.

Still, business bankruptcy numbers alone cannot establish the presence or absence of recessionary conditions. But businesses do tend to need bankruptcy protection more often when the economy is receding than when it is growing.

In 2008, for example, the beginning of the recession touched off the United States’ biggest bankruptcy ever. Lehman Brothers, a company worth $639 billion, filed for bankruptcy protection and caused a number of financial ripples for its customers - and the global economy.

On the other hand, a recession alone will not automatically trigger a business to file for bankruptcy. Banks’ willingness to lend money, consumers’ behavior, and developments in foreign markets could all impact future business bankruptcies in the U.S.

And often (as the airline companies have demonstrated), filing for bankruptcy can let a business restructure to emerge as a stronger entity than it was before. That’s because in bankruptcy court, businesses can eliminate debt, renegotiate costly labor contracts, modify lease agreements and otherwise take important steps to ease their financial burdens.

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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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Monday, June 6th, 2011

Housing Prices Hit Eight-Year Low

The latest figures from Standard & Poor’s Case-Schiller Index show that the double-dip in the housing market many economists feared is now a reality. In other words, according to sources, housing market prices have taken another nosedive and home values are now near the same level they were in mid-2002.

How much of a dip is this second downward spike? Reports indicate that:

  • The first quarter of 2011 saw a 4.2 percent decline in home prices.
  • In the final quarter of 2010, prices dropped 3.6 percent.
  • Home prices are currently 5.1 percent lower than they were this time last year and, according to Standard & Poor’s, have reached a new low even for the recession.

If all this sounds like bad news, the kicker is that the cycle of foreclosures and lowered home values seems unlikely to end any time soon.

Gloomy Outlook for the Housing Market

Consider these troublesome figures.

  • About 1.9 million homes in the U.S. are currently in some stage of foreclosure, according to RealtyTrac, a company that keeps track of such things.
  • Housing prices fall when supply is greater than demand (that is, when there are more homes available than people looking to buy).
  • Right now, supply is skyrocketing: empty foreclosure properties are common sights in many states, and apparently nearly two million more are about to follow.
  • Unfortunately, demand is also fairly low: many Americans are still skittish about their employment situation and unwilling to take on the burden of a mortgage. Further, many banks have tightened lending standards, making mortgage loans harder to come by even for those interested in buying.
  • On top of all this, sources note that as many as 28 percent of U.S. homes are currently underwater, meaning that the owner owes more on the mortgage than the home’s current value. Underwater homeowners may find themselves in foreclosure down the line, whether by strategically defaulting or by being unable to make payments.

Can Chapter 13 Bankruptcy Help?

In the past, Chapter 13 bankruptcy has often been heralded as a way to stave off or prevent foreclosure for some filers. The question of whether Chapter 13 could help some of the millions of Americans who might have mortgage foreclosure in their future is a complex one.

Chapter 13 may work for some people facing foreclosure, but only if those people have sufficient income to make regular payments according to the repayment plan. In other words, if you’re in danger of losing your home because you lost your job, Chapter 13 may not do the trick.

One interesting note, though, is that some sources have reported bankruptcy judges ruling for mortgage cram-downs in Chapter 13 cases, despite laws that prohibit such rulings.

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Monday, February 28th, 2011

Personal Finance Taking a Hit as Banks Close in Poorer Areas

A recent report from the New York Times highlights a troubling change in the banking industry: according to the Times, banks across the country have taken to closing branches in middle- and low-income neighborhoods even as they maintained or opened new branches in wealthier areas.

Personal finance experts of all stripes are understandably upset about the shift – fewer available banks could have disastrous consequences for the financial health of families in affected areas.

The High Cost of Being “Unbanked”

Here’s a look at some of the potential ramifications closing banks in poorer areas.

  • Increased reliance on payday lenders and check cashers: Without nearby bank branches, families in effected communities will be pushed to rely for their financial needs on so-called “predatory” lenders such as payday loan stores, cash advance outfits and check cashers. Such organizations can contribute to a cycle of poverty by charging high interest rates and fees for their services without offering clients a vehicle for saving their money.
  • Diminished saving incentives and opportunities: Without ready access to savings accounts, people living in communities without brick-and-mortar banks have a slimmer chance at reaping the benefits of opening a savings account (including earning interest on their money). In the long term, this can make financial emergencies particularly devastating, and can lead to bankruptcy filings.
  • Damaged credit and decreased ability to get loans: One thing that a savings account does is to bolster a person’s credit rating – when lenders run a credit check, they can view the status of a potential borrower’s bank accounts. Those with accounts in good standing who have a cash cushion available to them are considered better credit risks than those without any cash reserves. This can affect interest rates a borrower pays and thus determine how expensive or inexpensive a loan is.

A Look at the Numbers

So how dramatic was the shift toward closing banks in lower-income areas in the last two years? Here’s a look at the numbers, as reported in the Times:

  • More closings than openings: 2010 reportedly marked the first year in a decade and a half that more banks closed their doors in the U.S. than opened them.
  • Number of closings: In 2009, the country boasted 99,550 bank branches; last year, that number had fallen to 98,517 branches, nearly a 1,000-branch drop.
  • Number of unbanked Americans: It seems that as many as 30 million Americans rely primarily or in part on “non-traditional” financial institutions like check cashers and payday lenders – that’s about 10 percent of the country.
  • Big banks participating: While some smaller banks reportedly closed branches as part of consolidation moves to survive serious debt, it seems that Bank of America also closed 25 branches in communities with moderate income levels and opened 14 in richer places.

So why is this happening? On proposed reason is that the Community Reinvestment Act, meant to improve financial opportunities in poorer areas, is being insufficiently enforced.

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Tuesday, February 15th, 2011

A Look at Consumer Debt Where You Live

Though the U.S. economy is certainly not in top health just yet, a number of indicators suggest that we may be pulling out of this recession – but that may be a mixed blessing for many consumers.

Two recent reports (one from the Federal Reserve and one from CareOne Services) suggest that Americans have started spending more, which may be good for the economy overall, but could be a bad thing for individual debt loads.

Consumer Debt, State by State

The CareOne Services report examined 135,000 people across the country who were active in some sort of debt management program in 2009 or 2010 and found that, among that group, the average debt load was more than $10,000 in every state.

Here’s a look at the top of the heap for unsecured debt in the U.S.:

  • Delaware: Average consumer debt is $20,233, spread over seven creditors.
  • Rhode Island: Average consumer debt is $20,130, spread over seven creditors.
  • Maine: Average consumer debt is $19,454, spread over six creditors.
  • Alaska: Average consumer debt is $19,225, spread over six creditors.
  • Colorado: Average consumer debt is $18,811, spread over six creditors.
  • South Dakota: Average consumer debt is $18,707, spread over seven creditors.
  • North Carolina: Average consumer debt is $18,536, spread over six creditors.
  • Connecticut: Average consumer debt is $17,334, spread over six creditors.
  • Wisconsin: Average consumer debt is $16,903, spread over five creditors.
  • Alabama: Average consumer debt is $16,591, spread over seven creditors.

The ten states that had the lowest debt totals for those seeking debt settlement or debt management services are:

  • California: Average consumer debt is $12,801, to five creditors.
  • Michigan: Average consumer debt is $13,328, to five creditors.
  • Mississippi: Average consumer debt is $13,512, to six creditors.
  • Vermont: Average consumer debt is $13,707, to five creditors.
  • Missouri: Average consumer debt is $13,737, to six creditors.
  • Indiana: Average consumer debt is $13,945, to five creditors.
  • Kentucky: Average consumer debt is $14,028, to six creditors.
  • Iowa: Average consumer debt is $14,099, to five creditors.
  • Virginia: Average consumer debt is $14,194, to five creditors.
  • Tennessee: Average consumer debt is $14,222, to six creditors.

Increased Spending, Increased Debt, Increasing Need for Debt Relief?

During the holiday season, many economists seemed cheered by the increases in consumer spending, but personal finance advocates may find the same numbers troubling. The Fed’s report shows that our nation’s revolving debt (which basically means credit card debt) rose by 3.5 percent in December of last year.

Further, though our total amount of revolving debt apparently dropped in 2010, it dropped by a smaller amount than in 2009. This could mean that people are optimistic about the job market and the economy in general, but it could also mean they’re turning to their credit cards for necessities they can no longer afford thanks to rising prices or decreased income - and risk taking on more debt than they can handle and heading towards bankruptcy.

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Wednesday, February 9th, 2011

The Latest on the Foreclosure Crisis

Since the housing boom of the early 2000s, the housing picture in the U.S. has changed dramatically, as anyone struggling to make mortgage payments each month already knows. But exactly what is the state of mortgages and foreclosures right now in the country? Here’s a look at some indicators that say a lot.

Lowest Homeownership Rate In More than a Decade

Recent data released by the Census Bureau show that home ownership in the United States has dipped to its lowest level since 1998:

  • In the fourth quarter of 2010, 66.5 percent of Americans reported owning their own home.
  • In 2009, 67.2 percent of the nation claimed homeowner status; the drop reflects the continued effects of the recession on income and ability to make mortgage payments.
  • At its peak in 2004, as many as 69.2 percent of Americans reported owning a home.

Just as subprime loans were found to disproportionately affect non-white home buyers, it seems that foreclosure rates are currently higher among that segment of the population: in 2007, the number of African Americans that owned a home was reported at 48 percent; a year later, the number had already fallen to 44.8 percent. Similarly, among Hispanic families, 50 percent reported homeownership in 2007, but only 46.8 percent did in the last quarter of 2010.

Perhaps the most troubling aspect of these numbers is their apparent explanation: while the first wave of foreclosures resulted largely from the resetting of subprime loans, this wave seems to be more a result of long-term job loss hindering homeowners’ ability to make their (otherwise affordable) mortgage payments.

Homeowners on their Own to Fight Foreclosure?

In a related story, The New York Times recently reported that, more and more, Americans are having to fight the foreclosure of their homes without legal representation or outside help. According to the article, areas of the country with high foreclosure rates are holding how-to workshops for individuals and couples interested in contesting foreclosure in the courts.

New reports apparently show that foreclosure is shifting its face in the court system: what was once a process that involved mostly paperwork now, it seems, involves more and more people actually visiting the court to make their case for keeping their homes.

How Can I Fight Foreclosure?

Whether you’re struggling from job loss, job reduction or an unaffordable mortgage loan, you may be able to fight foreclosure with the help of a Chapter 13 bankruptcy filing. Thanks to its three- to five-year repayment plan, Chapter 13 helps many homeowners catch up on their mortgage payments by rearranging the amount and type of debt they’re responsible for paying each month.

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Wednesday, November 24th, 2010

Your Life after Foreclosure

If you, like millions of other Americans, are currently in some stage of the foreclosure process, you’re probably wondering what you can expect from life after foreclosure. The bad news is that losing a home to the bank will almost certainly have a negative impact on your credit – the good news, though, is that the current foreclosure glut means that mortgage foreclosure might not be quite as bad as it used to be.

What to Expect from Credit, Jobs, Cars and More

So which areas of your life might be affected by foreclosure action? According to a recent studies, a lot.

  • Your credit: As with a bankruptcy filing, a mortgage foreclosure will remain on your credit report for seven years – but the overall impact it has on your score and the way creditors view you should decrease with time. Because you likely won’t be able to open any new credit cards in the months and years directly following your foreclosure, it’s a good idea to keep up with payments on whatever cards you have now. Credit cards can play a central role in helping you rebuild your credit and thus qualifying for loans in the future.
  • Your career: Though some states have outlawed pre-hiring credit checks, many states still permit it, and plenty of employers take a peek at applicants’ credit histories as part of the screening process. If you’re looking for work, it’s important to be realistic and understand that your foreclosure might prevent you from getting jobs in economic fields.
  • Future purchases and loans: As mentioned above, a mortgage foreclosure will ding your credit rating in a pretty serious way, so you shouldn’t expect to qualify for a car loan or a new mortgage for a while. But that doesn’t mean you’ll be stranded on an island without any options for moving forward. The WalletPop.com post mentions one option called a “lease purchase,” wherein a person can agree to make regular rental payments to a landlord and decide, at some future point, to put those payments toward the purchase of the house.

On the Bright Side: Greater Understanding

The bright spot in all this foreclosure gloom is that, because so many Americans are currently struggling with foreclosure-related problems, more people are aware of the sorts of extenuating circumstances (like death, divorce, serious illness or injury, job loss, etc.) that can lead otherwise responsible financially individuals into mortgage foreclosure.

So, suggests the post mentioned above, don’t underestimate the power of explaining your situation to potential lenders or sellers. And, of course, don’t ever give up on rebuilding and maintaining your credit to demonstrate that you’re a good credit risk.

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Friday, July 16th, 2010

Credit Scores in the U.S. at Record Lows

A recent report from the Associated Press notes that Americans’ credit scores have dropped to all-time lows, with 25.5 percent of the country scoring below 600. Here’s a closer look at that figure and what it might mean for future borrowing.

Credit Scores & Borrowing

When you apply for a loan, most lenders review your FICO credit score, which can range from 300 to 850 and is based on the information in your credit report. Higher scores qualify borrowers for larger loans and loans with more attractive terms (like lower interest rates); lower scores indicate that a borrower might be a greater risk to a lender, and so qualify borrowers for smaller loans and ones with higher interest rates.

The recently released data on credit scores reportedly show the following figures:

  • Scores of 599 and below: The number of people in the “low” range of credit scores has apparently jumped since the Great Recession hit—while a typical year finds that about 15 percent of those with active credit (about 25.5 million people) fall into this category, currently 25.5 percent (about 43.4 million people) reportedly score in this range.
  • Scores in the middle range (650 – 699): Sources indicate that this group traditionally comprises about 15 percent of active credit users, but has fallen to 11.9 percent in recent years. The shift suggests that those most likely to take out home and car loans might now be deterred from doing so because of lowered credit scores and thus more costly loans.
  • Scores in the high range (800 and above): The good news, it seems, is that the number of people with very high credit scores have increased: while the typical average hovers close to 13 percent, recent research found the group to comprise 17.9 percent of credit users.

So what does this mean for individual consumers and the larger economy?

A Slow Recovery?

Sources note that much of the economic growth in the boom years before the Great Recession was fueled by borrowing—also known as debt. While Americans were spending plenty of money, much of it was money they didn’t actually have (in the form of credit cards, mortgages, car loans, etc.).

The sky-high foreclosure rate and steadily climbing number of personal bankruptcy filings suggests that we’ve learned a lesson or two about debt as a nation, which may mean two things: first, that lenders will be a bit more discerning when issuing loans; and second, that borrowers will be a little more cautious when applying for them.

This could translate to a slow recovery, as we pare back our spending in favor of building up safety nets.

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Tuesday, April 27th, 2010

Looking for Work? More Companies Looking to Hire, Survey Says

As the weather warms up around the country, a new survey shows the job market may be starting to thaw.

A survey by the National Association for Business Economics released yesterday revealed the most optimistic job outlook in several years.

Business leaders said they expect to lay off fewer employees and hire more new workers in the coming months.

The survey was conducted from Mar. 25 to April 10, and spanned business leaders and members of the NABE, said the Associated Press in their report. Some numbers from the survey:

  • 22 percent of companies said they planned to increase payrolls, up from just 13 percent in January.
  • 37 percent expected to add employees in the next six months.
  • 13 percent expected to lay off workers. From the same survey in January 28 percent of companies expected layoffs.
  • More than half saw stronger demand in their industry.

Add these up and the job market looks much better than it did just a few months ago. Big industries like finance, insurance and real estate all said they had plans to add more new hires in the next few months than they were in previous quarters. Meanwhile, a mere 3 percent of survey respondents predicted "significant" layoffs, and many companies reported having more merchandise and materials on hand than previous quarters.

So if you're among the unemployed or underemployed it may time to dust off the resume and give it a workout, because companies have plans to hire more workers soon. It's unclear how much of an immediate impact this could have on bankruptcy filing rates.

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