* _ * _  * _ *_ * _ * _  * _ *_ * _ * _  * _ *_ * _ * _  * _ *_ * _ * _  * _ *_ *

UPDATE from “Life After Bankruptcy, Part 4″ re: “Second-Chance Auto Loans”:

If your bankruptcy protection plans include keeping a vehicle that you’re paying off via an auto loan, make sure you understand about the reaffirmation agreement. Not understanding this crucial aspect can be a costly mistake later down the road.  Here’s three good links to columns about autos and reaffirmation agreements, one here, another here, and another here. Following is an excerpt from the second column:

A reaffirmation agreement is a legally enforceable contract filed with the bankruptcy court that states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case. Some lenders demand that you sign this agreement and will not send you statements or report payments to the credit bureau without the court-approved agreement. In many instances, lenders consider it a breach of the terms of your loan and will repossess the car if you fail to sign the agreement.

There are some lenders who will allow you to keep the car and continue to make regular monthly payments. Unfortunately, this also means that future payments might not be reported on your credit report. You will be able to pay off the car and eventually receive the vehicle title, but you might not see any benefit to your credit for all those payments.

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What are we to make of the Senate’s action to ditch the extension of unemployment benefits?

For the horde of folks facing foreclosure, unemployment, bankruptcy–and God only knows what else in this misnomer of a recovery–the partisan voting lines and continued reliance on the stealth filibuster must taste something awfully like betrayal.

The Socialists, or more accurately, at least one Socialist Web site blames the Democrats in the Senate and President Obama, pinning the following headline atop its coverage of the vote that leaves more than one million unemployed staring down the double barrels of a 12-gauge economic threat:

Senate Democrats and Obama abandon the jobless

Here’s the first two grafs from that June 26 account:

“Senate Democrats gave up efforts to extend unemployment benefits for millions of jobless workers after the third vote on overcoming a Republican filibuster failed. The final vote Thursday was 57 to 41, three votes short of the 60 necessary to cut off debate, with one Democrat, Ben Nelson of Nebraska, joining a unanimous Republican opposition.

“Senate Majority Leader Harry Reid, whose home state, Nevada, has the highest unemployment rate in the country, indicated there would be no further effort to revive the unemployment benefit extension unless one or more Republican senators expressed willingness to change their position. ‘We can’t pass it unless we get some Republicans,’ Reid told reporters. ‘It’s up to them.’ “

Reading thus far, one wonders if the headline writer simply bonked out…or purposely jumped the fence. For instance, here’s the June 24 hed and lede covering the same event by the decidedly capitalist Bloomberg BusinessWeek:

Republicans Kill Unemployment Aid, Buyout Tax Boost

“Senate Republicans killed legislation to extend unemployment benefits, provide aid to state governments and increase taxes on buyout fund managers, saying the bill would add too much to the federal deficit.

“Today’s vote was 57-41 in favor of the measure, with 60 needed to advance it. Democrats repeatedly cut the bill in an effort to win over lawmakers who objected to its cost. The latest version version would have added $33 billion to the budget shortfall, a fraction of previous proposals; Republicans said the cost-cutting didn’t go far enough.”

But, no, apparently the hed writer at the Socialist site was working from the writer’s copy. In the fourth graf, the writer all but ignores the concerted GOP effort to kill the benefits extension–and blames the Democrats while glossing over the fact that 60 votes are needed for the cloture to overcome the filibuster:

“While the Democrats, who control the Senate by a 59 to 41 majority, whine about Republican opposition, some 200,000 unemployed workers are losing extended benefits each week. The total number cut off benefits since June 2, when the last such extension expired, reached 1.2 million Friday.  Assuming the deadlock continues, a total of 5.7 million workers will lose extended benefits by the time the program expires completely in November.”

So what are the Dems supposed to do? Beat ‘em up? Egg their cars? It’s obvious they can’t be shamed into caring about economically ravaged consumers. Remember, it was basically this same Senate that refused to budge last year when they could have passed reforms allowing bankruptcy judges to modify terms of loans on primary residences.

According to the BusinessWeek piece, Senator Baucus hopes for pressure from the public to launch support for a benefits extension as a separate, stand-alone measure: “Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said he didn’t know if lawmakers would try to pass an unemployment benefit extension as a separate measure. The bill derailed yesterday would have continued some extended jobless benefits through November.

“ ‘We’ll have to take stock and see,’ Baucus said. ‘I hope frankly that enough people in the country realize what’s going on here and call members of the Senate on the Republican side and say, “Hey, we need some help here.” ‘ ”

On the other hand, maybe the Dems could force the balky mules to go through the pain of an actual filibuster–the stealth filibuster has got to go.

CNBC.com has picked up a story from The New York Times that echoes many warnings we have discussed several times about so-called debt-settlement firms. Our most recent peeks under the hood of this industry were in a four-part series beginning here and ending here.

McCaskill fires warning shot?

Although we covered the GAO study mentioned in the Times piece, we may have left out a nugget that the Times includes–well, even if we did mention it, it bears repeating, especially Sen. McCaskill’s parting shot:

Consumer watchdogs point to another reason customers wind up confused and upset: bogus marketing promises.

In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a “national debt relief stimulus plan.” Several claimed that 85 to 100 percent of their customers completed their programs.

“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.

At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose its membership.

“The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list,” Mr. Ansbach said.

“Probably a genuine concern,” Senator McCaskill replied.

Employment up or down–which is it?

Another point we made recently  (in our preceding post) had to do with confusion over interpretation of reported unemployment rates. A June 18 AP story in the  Times reinforces our point about the much ballyhooed recovery in general–and about our longstanding concern regarding confusion over the “official unemployment rate” in particular.

The hed reads: “Most State Jobless Rates Fall,” but the lede belies the headline: “Unemployment rates in a majority of states dropped in May. But the widespread declines were mainly because people gave up looking for work and were no longer counted.”

Here’s a subsequent graf about job gains: “Forty-one states and the District of Columbia saw a net increase in jobs. But that reflected national data showing a huge gain because of government hiring of temporary census workers.”

Senate stuck in filibuster mode

Also unchanged since last we posted is the Senate’s position on helping those unemployed who have reached the end of their benefits–with no significant change in the jobs picture. On June 19 the president reacted to yet another filibuster that creates roadblocks where instead we need an express lane.

In a MarketWatch.com report, Obama is quoted thusly: “”I was disappointed this week to see a dreary and familiar politics get in the way of our ability to move forward on a series of critical issues that have a direct impact on peoples’ lives.

“”Unfortunately, the Republican leadership in the Senate won’t even allow this legislation to come up for a vote.”

In other words, if filing for bankruptcy protection made sense last week, it also makes sense this week–nothing has changed, and nothing seems likely to change anytime soon.

Get informed

In that vein, here’s some tips to use when considering the benefits and drawbacks of bankruptcy protection.  Following are some highlights derived from a list at a June 6 Orlando Sentinel piece.

1. Review the many resources offered by the “official” Web sites of various federal and state agencies:
   • U.S. Department of Justice
   • American Bankruptcy Institute
   • United States Courts
   • Bankruptcy law, state-by-state
   • National Association of Consumer Bankruptcy Attorneys
2. Consider non-bankruptcy options such as consumer-credit counseling–but be sure to avoid the “debt-settlement” or “debt-repair” firms described in the GAO report.
3. Take informed action before using up all your savings or retirement funds.
4. This one is word-for-word from the Sentinel: “Don’t try to ‘game the system’ by running up credit-card charges for jewelry or other luxuries just before filing for bankruptcy — you’ll likely still be on the hook for such debt.”
5. This tip condenses three separate points from the list: Be aware that because of the financial crisis, waves of consumers are turning to the bankruptcy code for protection, and so bankruptcy law is “hot” right now; accordingly, you want to make sure you get trained, seasoned professional counsel; furthermore, such firms will often provide a free consultation to begin–this is your chance to evaluate the firm to avoid a “mill”-type operation.
6. Do not rely on creditors (credit-card companies, bill collectors, etc.) to tell the truth about the legal system or bankruptcy protection.

(mis)Leading myths about bankruptcy

In fact, misinformation is so common that certain “myths” about bankruptcy have arisen, a sort of urban legend. This attorney’s page answers each of the following myths, none of which is true:

1. Bankruptcy relief is no longer available (False: the 2005 “reform” act changed some things, but protection is still available for those who need it.)
2. You can’t file bankruptcy if you have a job (False: In fact, reliable income is a necessity to service a Chapter 13 filing.)
3. Medical bills can’t be discharged in bankruptcy (False: medical debt can be addressed, as can credit-card debt, and even personal loans.)
4. Chapter 13 plans require repayment in full of debt (False: unsecured creditors may receive payments that total 100 per cent of the debt–or zero per cent–each case is different, depending on the unique variables.)
5. People who file bankruptcy can’t get credit for 10 years (False: Although true that bankruptcy will remain on credit reports for up to ten years, many people’s finances are in such disarray that receiving bankruptcy protection can be the start of improving one’s credit score.)
6. You lose everything you own in bankruptcy (False: a small percentage of filers will liquidate a significant amount of assets, but exemptions provide for retaining “tools of the trade” and more–most filings result in little to no loss of assets, and some assets can’t be touched.)
7. Bankruptcy is a sign of personal or moral failure (False: The bankruptcy code is designed to offer a restart, a second chance, for those who have been devastated by events beyond their control such as job loss or medical emergency. See a “typical profile,” based on research by Elizabeth Warren.
8. Bankruptcy costs our society too much (False: This myth is directly traceable to a credit-industry lobbyist.)
9. There is a minimum amount of debt required to file bankruptcy (False: No minimum is necessary.)
10. Married couples must file together (False: Confusion arises most often because of states with community property laws–although it may be in a couple’s best interest for both spouses to file, each can file separately, or not all. This is best decided in conjunction with a trained, experienced bankruptcy attorney.)

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

We keep hearing that the Fat Lady has sung and exited, stage right. That, of course, would be the Fat Lady of the 1) Great Recession 2) Great Panic 3) economic crisis, or 4) however you like to refer to run-amok unemployment, home-value crashes and ongoing waves of bankruptcy filings.

However, we still don’t hear much convincing news about the Phat Lady of the Recovery.

Sustainable for whom, exactly?

From a June 11 Dow Jones’ piece in The Wall Street Journal, “With a sustainable economic recovery now underway, policy makers will soon have to start thinking about pulling back their monetary stimulus to ensure inflation stays low and inflation expectations remain well-anchored, Philadelphia Federal Reserve President Charles Plosser said Friday.

“While complete healing from the deepest downturn since the Great Depression will take time, Plosser said the recovery is becoming more ‘broad based,’ which should leave the economy to grow by around 3.5% this year and next, somewhat stronger than the underlying trend growth rate of the economy, which he believes to be about 2.75%.

” ‘I believe the economic recovery is on a sustainable path, and I expect further progress even as we unwind the accommodative monetary and fiscal stimulus put in place during the crisis,’ Plosser said.”

He said he expects the business sector to begin buying both equipment and software and looks for improvement in consumer spending, residential investment and hiring–although employment “will take some time to return to its long-run level.”

He makes some other prognostications about Fed policy, financial problems in Europe and fed-funds’ interest rates–all with an eye toward keeping “uncomfortable and costly” inflation at bay.

Late in the story, he is credited with at least acknowledging the continued, bleak unemployment rates.

May numbers ’somewhat disappointing’

“Plosser called May’s employment numbers ’somewhat disappointing,’ as all but 41,000 of the 431,000 jobs added in the month were government jobs, mostly reflecting the hiring of temporary census workers. While he doesn’t give one month’s number that much weight, Plosser said, developments must be watched closely in the coming months, which could be marked by more big swings in the numbers before a more accurate picture of the underlying employment prospects emerges.”

This June 10 report from The Washington Independent seems to have a better grasp of the situation than Plosser does.  Using an ex-employee of  J.P. Morgan Chase as a focal point, the piece describes the plight of a class of the unemployed known as “99ers.” These are “the long-term unemployed who have exceeded the maximum number of weeks of benefits,” and Cindy Paoletti, it says, is merely one in a million of them. The 58-year-old woman worked in payroll at the megabank for 23 years. “In December 2007, Paoletti was let go in a wave of layoffs that eventually shuttered the entire Syracuse operations center. ‘My job went to India,’ she sighs.”

Ezra Klein, blogging for The Washington Post, weighs in on Paoletti’s story with an observation about the relation between her mortgage and her income:

“There’s a lot going on in Paoletti’s story, but I’d note one part in particular: She’s underwater on her mortgage. That is to say, the drop in housing prices means she now owes the bank more than her house is worth. So there’s no upside to selling. And that means that unless she’s willing to walk away from her mortgage, there’s no real way for her to leave her economically-depressed town and move to a place where jobs are more plentiful.”

99ers beset on all sides

But as the Independent points out: “Paoletti and other 99ers are afflicted by a constellation of problems.” Chief among those problems, of course, is the unprecedented depth and length of unemployment.  “Of the 15 million unemployed in America, over 7 million have been out of work for more than six months, nearly 5 million for a year and over 1 million for two years — the worst statistics since the government started keeping count in 1948. The proportion of the unemployed out of work for more than six months has doubled in the past year, to more than 46 percent. The jobseekers-to-jobs ratio, which tells how hard positions are to get, remains around 5.6 to 1.”

Bright spots, dim bulbs

The seekers-to-jobs ratio, however, is among the few bright spots in this picture. At 5.6 to 1, the ratio has improved since its high point in November 2009, when it was 6.2 to 1. By way of comparison, in December 2000, the ratio was 1.1 to 1, according to this report from the Economic Policy Institute.

Another bright spot might seem to a casual reader to be the rate of bankruptcy filings.  Here’s the headline from a June 2 report in The Wall Street Journal: “Decline in Bankruptcy Filings May Be Temporary.”

Except, whoops–there’s no meaningful decline.

Sure, the numbers fell about 6 per cent from April to May of this year. But the May filings are still higher than those from this time last year.

But here’s the lede from the actual report: “The 136,142 consumer bankruptcies filed in May represented a 9 percent increase nationwide over the 124,838 filings recorded in May 2009, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the May consumer filings represented a 6 percent decrease from the 144,490 consumer filings recorded in April 2010. Chapter 13 filings constituted 26 percent of all consumer cases in May, a slight increase from April.”

To be fair to the WSJ, their article quotes the bankruptcy institute’s director and qualifies the month-to-month improvement: ” Despite the improvement, ‘I think the overall arc is up,’ said Samuel Gerdano, the Bankruptcy Institute’s executive director, and he predicts they will continue to rise.”

Balky Senate schedules one hearing

Back to Paoletti and the question of  getting the U.S. Senate to help the 99ers, the Independent says “. . . the Senate as a whole is less than willing. Sen. Max Baucus (D-Mont.), the chairman of the Senate Finance Committee, has indicated that he will not vote for a fifth tier [of unemployment benefits], as have others. ‘You can’t go on forever. I think 99 weeks is sufficient,’ Baucus told Bloomberg News. Sen. Byron Dorgan (D-N.D.) likewise dismissed the idea. ‘There’s just been no discussion to go beyond [99 weeks],’ he said. And the Senate leadership, without explicitly shooting down a fifth tier, has nodded in agreement.”

Paoletti, perhaps naively, is pinning at least some hope on a hearing scheduled for this Thursday.”Rep. Jim McDermott (D-Wash.), the head of the subpanel on income security and family support for the House Ways and Means Committee, is holding the first hearing on policy responses for long-term unemployment. ‘Our first step to respond to long-term unemployment is obvious — continue the emergency federal unemployment programs to prevent millions of workers from losing their benefits,’ McDermott said in a [June 3] statement. “If we can afford wars, tax cuts and bank bailouts, then we can certainly afford to maintain programs for workers who have lost their jobs through no fault of their own. An increasing number of Americans who have worked hard and played by the rules are now finding themselves with no job, no savings and no support. We must not abandon these workers and their families.”

Astonishingly, the biggest slap is not the palliative (”We must not abandon these workers. . .”). No, the big slap is the delay in working out a solution. The Senate, who arguably dragged the entire country through a tortuous year of health-care pain, not only blew a chance last year to help consumers with reform of the bankruptcy reform act but also took two recent breaks rather than work on the jobless crisis.

And now we learn that Thursday’s hearing is “the first hearing on policy responses for long-term unemployment”? Makes you wonder what it is they do work on, doesn’t it?

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

[Editor's Note: This is the final part of a four-part series on Life After Bankruptcy: Part One is here; Part two here; Part three is here.]

Geoff Williams is a successful columnist, blogger, business journalist and personal-finance writer.

You’d think he’d have known better, but years of mismanaging his own finances left him in a deep hole, with more debt than he could handle. In other words, his crisis was not a sudden emergency event, but a pernicious series of events. Finally,  in 2008, he decided to file for bankruptcy protection.

Went bankrupt, wrote a book

Later, a peculiar thing happened: He got asked to co-author a book . It’s called Living Well with Bad Credit: Buy a House, Start a Business, and Even Take a Vacation No Matter How Low Your Credit Score and is available from Amazon.

There’s a tremendous Jan 28 interview with Williams at WalletPop.com, where he usually writes about personal finance. In this Q&A, entitled “Life After Bankruptcy: Living Well with Bad Credit,” he answers questions from a fellow writer about “coming out” to family, friends, and readers about his own bankruptcy. He explains the genesis of the book deal, describes the slippery slope to bad credit–including signs that should raise red flags–and discusses both the effects of and returning from bad-credit purgatory. It’s a good piece, well worth a full read, but here’s some excerpted highlights:

Friends are still friends

Responding to a question about the stigma of bankruptcy, he says, “As for what our neighbors, my friends and others think, well, I’m in the process of finding out. My parents wish I’d have kept my mouth shut and had written about anything else, but I’ve talked about my book on my Facebook page, so I know that some of my relatives know about the book and may know about my financial history. And some friends have learned about it and are still my friends. I haven’t shied away from my bankruptcy, but you know, it’s not like I go to my daughters’ parent-teacher conference and say, ‘But before we discuss how Lorelei’s coming along with her reading and how Isabelle is faring in social studies, I really should tell you all about my financial history…’ ”

Asked how people wind up in debt trouble, he mentions singular, tragic events, “For some people, bad credit really is out of their control. They’re stricken with cancer, for instance, . . .  [o]r there’s a divorce . . . .

“But with most people, it begins with one mistake” that “snowballs,” such as buying a car that’s too expensive for one’s income, which leads to not paying off credit-card balances–which is now two blunders. “You’re paying too much for a car every month, and you aren’t paying down your credit card debt. At some point, you realize what’s happening and become concerned about the credit card debt, so you pay it down more, which is great, but because of that, instead of cutting back on your entertainment budget, you stop putting money in your savings account. And now every month, you’re making three mistakes.”

Be creative

Asked about living well with bad credit, Williams says flat out that “Living well with bad credit is harder than living well with good credit.” He mentions having  “more hoops to jump through, and more hassles to deal with.” Examples include renting an apartment and booking hotels and rental cars for a vacation. But none of those are impossible: “You can [get an apartment] . . . . But you’re going to have to look longer and harder for one and be more creative in the way that you look for an apartment.”

As far as taking a vacation, “. . .things get trickier because many hotels and rental cars treat debit cards differently from credit cards. If you book a hotel for one night with a debit card, the hotel might hold enough money to pay for an extra night and then not release that money until several days later.”

‘Light-bulb’ moments

The single-most telling Q & A, however, may well be the following, quoted in its entirety:

WalletPop: Having started out with good credit, and then living well with bad, what have been some of your “light bulb” moments?

How to think about new loans

In a May 3 piece for WalletPop, “How to file bankruptcy and still get a loan,” Williams addresses home mortgages, auto loans and personal loans.

Now, this is critical to bear in mind. Often critics of bankruptcy harp on the length of time that bankruptcy lingers on a credit report. However, often overlooked are two important considerations:

1. the equal or longer amount of time a poor credit rating will hang on for someone who keeps making minimum or no payments to creditors, and
2. the relatively short period required for a bankruptcy to be discharged.

So, yes, a Chapter 7 filing remains on your record for 10 years, and Chapter 13 for seven; but the Chapter 7 is normally discharged within 60 to 90 days from the meeting with creditors; the Chapter 13 discharge follows the payback period, normally three to five years, with the discharge papers arriving anywhere from a few weeks to a few months after the final payment.

What this means is that a Chapter 7 filer could receive credit-card offers within months of the initial filing, a Chapter 13 filer might get similar offers within four years. The important thing to keep in mind is to zealously, relentlessly focus on what caused the problems–if credit-card mismanagement was the culprit, a cash-only lifestyle might be in order. Certainly, creating–and sticking with–a budget will be crucial.

Higher interest rates, but still obtainable

Now, what has Williams learned about home loans? The biggest pill to swallow is that you’ll pay higher interest rates than someone without  a bankruptcy on record. The silver lining is, home loans can still be possible. Williams indirectly quotes a senior vice-president of a company that operates in 25 states: “if you’ve had a bankruptcy, it typically takes five years to get a conventional home loan and two years if you’re going for an FHA loan.

“But it’s possible to get one sooner, if you aim for an unconventional loan, like a lease-option, where you rent a home while saving up the money for your down payment and biding your time until your credit score goes up.”

The main thing is “to get back in the game” by starting immediately to rebuild your credit record and FICO score. One tool is the secured credit card, described at this bankrate.com article as something you go for after establishing “good financial habits”:

Using secured credit cards

” ‘A general guideline would be six months [after your discharge],’  says Whelan, a bankruptcy judge for 12 years.”You’ll put money in an account and the credit card company will give you a credit limit of that same amount. When the bill comes in, you pay it, as you would a normal card. You get the deposit back only when you close the account or switch to an unsecured version. Some card companies may also be willing to give you a credit limit higher than your actual deposit, says Curtis Arnold, founder and spokesperson for Cardratings.com. Tip: Look for a card that reports to one, and preferably all, of the credit bureaus.

“The good news: Many secured cards report as unsecured cards, says Arnold. ‘And assuming your account’s in good standing, once you’ve had it for a year you should start getting halfway decent offers on on unsecured cards.’ ”

Taking care of fundamentals

Another thing–even if you eschew a credit card, even the secured version, do keep impeccable records. And no matter what, pay all bills on time. Doing those two things and saving up a personal emergency fund will go a long way to demonstrating to lenders that you’re taking financial responsibility.

As far as auto loans go, Williams recounts a tale of having his car go kaput and being able to get financing for a “fairly new car, a 2006 Subaru,” even though he was self-employed. “I suspect anyone with a steady income — and especially if you have a place of employment — will be able to get a car, even if your bankruptcy was yesterday. Granted, my story is just one example, but I’ve talked to enough experts over the past few years to come to this conclusion: Loans are tight, but the car industry, frankly, wants very much for you — and everyone under the sun — to buy a car. So they will do what they can to make a sale happen.

“That is, again, if you have real proof of income and if you can stomach a higher interest rate than what the sticker and commercials are promising.”

‘Second-chance’ auto loans

Also, there are companies that specialize in sub-prime auto loans. Some of them use bankruptcy discharge filings to solicit new customers. Once again, there is a difference between Chapter 7 and Chapter 13 filers. The following is from an April 27 post at autocreditexpress.com:

“A Chapter 7 bankruptcy is fairly short and is usually over in a matter of months. A Chapter 13 bankruptcy can last either 3 or 5 years. If you are currently in a Chapter 7 bankruptcy, you will need to wait until it has been discharged.

“If you are currently in a Chapter 13 bankruptcy, you will need to contact the Trustee and have him request an order to incur additional debt from the court. Since your Chapter 13 bankruptcy is based on your income and expenses, you need to get permission from the court before you take on any significant additional debt, such as a car. If the court approves the request, they will furnish you with the document. Make sure you have this document when you apply for a car loan, because you will need this as proof that the court will allow it. The order also states the maximum amount the court will permit you to borrow.”

Notice, however, none of this applies to a dismissed bankruptcy, which means the filer has failed to follow the terms of the court (most commonly by not making required payments). “If your bankruptcy has been dismissed, no bad credit lender will approve you for a second chance car loan.”

UPDATE: Please see more info about auto loans, bankruptcy and “reaffirmation agreements” here.

Personal loans

As for personal loans, Williams indicates that anything is possible but in most situations it will be a challenge until your credit score has improved. He says Hale Walker, the mortgage company VP, advises that the worst thing to do is “hunker down and hide . . .with every passing day, as you start restoring your credit, that bankruptcy becomes a little less significant.

” ‘And if you’re working on your credit and can show lenders you’ve been paying your bills, they might be able to put together a package that makes sense,’ says Walker. ‘You’re going to have much better luck if you pay your bills and live your life than if you do nothing and just wait for a magical two years to have passed and then start trying to get a loan.’ ”

To re-emphasize, the experts are in agreement:

• Keep steady income; work two jobs if necessary, or get part-time, supplemental work.
• Rectify past behavior or money management issues.
• Create–and stick with–a budget.
• Maintain good records to be able to show to a lender.
• Get pumped up about rebuilding your credit record: Be persistent.

Additional resources

Related links:

April 4, New York Daily News: There is life after bankruptcy; Credit could thaw in 18-24 months

August 16, 2009, Parade: How to Bounce Back from Bankruptcy

August 4, 2009, “The Smarter Wallet”: How to Build Good Credit and Clean Up Bad Credit

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

[Editor's note: Mike Hinshaw blogs about bankruptcy, workmen's compensation and disability issues in the United States. With a background in journalism and textbook publishing, he is neither an attorney nor credit counselor nor SSI/SSDI advocate. The following is third part in a four-part series on considerations to make before filing for bankruptcy protection and specific steps to take during Life After Bankruptcy. Part One is here and Part Two is here.]

In years past, filing for bankruptcy protection was tantamount to stamping a scarlet “F” on your forehead, publicly admitting that you’re a failure.

Investopedia warnings

In certain quarters, that attitude remains. For example,  after first noting that, among many other celebrities, “Mark Twain, Walt Disney, Donald Trump and Henry J. Heinz all filed for bankruptcy at some point in their lives,” this article at Investopedia.com warns that “For the individuals who have declared bankruptcy, the recovery process is long and difficult.”

In a subsequent paragraph, the article says: “Getting a loan of any kind will be extremely difficult for the next couple years, although it is possible to regain a better score and even some types of loans after only a year. However, the lenders that will finance you will probably be from finance companies that charge exorbitant rates of interest. In some cases, it may not be possible to get credit at all for major purchases, such as a car or home. These issues will remain for the next 10 years under a Chapter 7 bankruptcy.”

Well, yes and no–but we’ll address these issues more in a minute, and then more fully in the final, fourth part of this series. The Investopedia piece also references a page on the site of Dave Ramsey, contemporary radio’s King of Cash. Indeed, Ramsey’s “no-credit” approach may well make sense for most folks–especially those who consistently have trouble managing credit cards.

Buying a house Dave Ramsey’s way

Now, Ramsey does grant that buying a home via a good mortgage makes sense. Oh, sure, says paying cash is best, but he knows that’s an ideal situation, out of range for the ordinary consumer. Here’s his bottom-line, best tips on using a mortgage:

• “Before you consider buying a home, you should be debt-free and have three to six months of expenses saved in addition to your down payment (more on that later). Being debt-free with money in the bank will keep you from losing your home in the event of a job loss or illness.
• “Also, if you’re married, you should be married for at least a year before you buy a home. Don’t add the stress of a home purchase to a brand new marriage, and never buy real estate with anyone you’re not married to.
• “If you can’t postpone the purchase until you can pay cash, buy a home with a down payment of at least 10% on a 15-year (or less) fixed-rate mortgage. Limit your monthly payment to 25% or less of your monthly take-home pay.”

For anyone emerging from bankruptcy, securing a home will probably be high on the list. If so, then, together, these guidelines represent the “gold standard” for homeownership. Of course, securing and keeping an income is job #1; depending on where you live, having a reliable vehicle is the next priority, if for no other reason than getting to and from work.

Ramsey hates bankruptcy

But back to Ramsey’s take on bankruptcy. In short, he hates even the idea: “That word sends chills up the spine. If you’re facing the prospect of bankruptcy or in the middle of it right now, you know it’s a living nightmare. It can devastate your job, destroy your marriage and steal your peace of mind.”

Following that opening, Ramsey cites a case of young woman whose soon-to-be ex-husband will be taking the brunt of their financial problems. (Unfortunately, that’s not the case for most people who need bankruptcy protection.)

Then Dave writes: “Bankruptcy is not something I recommend any more than I would recommend divorce. Are there times when good people see no way out and file bankruptcy? Yes, but I will still talk you out of bankruptcy if given the opportunity. Few people who have been through bankruptcy would report that it is a painless wiping-clean of the slate, after which you merrily trot off into your future to start fresh.”

So on the one hand, he more less concedes that bankruptcy can be a viable business decision, but then props up the straw horse that bankruptcy filers do so “painlessly” then skip off “merrily.”

Comments offer alternative viewpoint

True, bankruptcy protection does offer a chance to start over. But no qualified, experienced counselor will tell you to expect painless merriment. Also,  by the way, at least a couple of comments following Ramsey’s piece have a few bones to pick with ol’ Dave. One, from “Jen” (May 5, 9:08 am) mentions “two friends who recently had their bankruptcies discharged” and were able to protect some nice jewelry and “everything else they own.” Now, remember, this comment could be from anybody with any sort of agenda, but can’t you just hear the regret as she writes: “My husband and I just finished paying off 45,000 in student loan and home equity loan following the Dave Ramsey plan, but we had to sacrifice and do without. Sometimes, I am jealous because these two families eliminated all their debt without having to sacrifice anything.”

Again, that’s probably an inaccurate account and a too-rosy picture.  But if we can take it at face value, “Jen” not only gets caught up in the myth that bankruptcy filers get off “scott free” but also she expresses some remorse for buying into Dave’s tirade against filing for bankruptcy under any circumstances.

Here’s some highlights from another comment, this poster using the nick “Regretful” (April 27, 9:38 am): “I wish Ramsey would address those who don’t make a lot of money—$30K or less each year who find themselves in financial trouble. I have one of his workbooks, but it seems like all of his subjects make $40K or more. I’m in the process of filing ch 13 because I’m sick of never getting out of debt. I will probably never get a good paying job, so I’ve given up. My neighbor up the street is a Ramsey fan, but she works like two days a week as a home health care giver and maybe 2-3 weeks as an electrician, and she refuses to file for bankruptcy. Maybe if her house is threatened, she’ll change her tune.”

“Regretful” goes on to say that she is trying to protect her home before a credit-card company can go to court and “put a lien” on her house. Then she says,  “A friend and former co-worker filed for ch 13 and she said it’s not really that bad. Yeah, it stays on your record, but with the economy the way it is, a lot more people have filed for bankruptcy, and because of that, bankruptcy will not have the stigma that it once had.”

Looking forward to being debt free

She expresses more regret over having mismanaging credit cards and the poor outlook for jobs and then displays a pretty good take on her future as she works through her Chapter 13 repayment: “It will be a lean next three years, but after that, I’ll be debt-free and I will sock away money after that.”

To end her comment, “Regretful” had a very specific suggestion for approaching bankruptcy and coming out in better shape when emerging on the other side. We’ll take up those specific points in Part 4.

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It’s true that the bankruptcy reform act of 2005 changed many aspects of the law for those needing protection and also for attorneys who practice bankruptcy law. If you’re considering filing for bankruptcy, it’s important to receive counsel from not only trained bankruptcy attorneys but also from experienced bankruptcy attorneys. Bankruptcy offers many consumers powerful tools for starting over, but it can be a complex process–and timing the submission of your petition can be crucial to your ongoing success, for years to come. We have background information available as well as a simple form that will get you started today. Please notice some terms seem similar on your first reading, so don’t hesitate to click back and forth to get a feel for the terminology and the distinctions between different programs.

Perhaps debt elimination is best for you. If so, start here.

Maybe debt consolidation is better for you: In that case, start here.

If you already have exhausted the preceding information, you may be ready to consider invoking protection from the bankruptcy code–if so, read here.

If you need immediate help, you can complete a short form at the bottom of this page.

If your credit rating is already shot, the hit from bankruptcy may be negligible. It might fall some more, but if it’s already too low to qualify for good loans, then it may also be low enough to cause problems in a job search. (Remember, though: potential employers are supposed to ask permission before running a credit check. Furthermore, legislation is being proposed that would restrict such practices only to certain, appropriate jobs and industries.) In such cases, gaining bankruptcy protection may be the quickest way to start rebuilding your credit score.

As mentioned in Part 1, when considering your options be especially wary of advertising and offers from so-called Debt Settlement companies. The problems of that “industry” have become so widespread that a U.S. Senate committee recently held a hearing, which produced deeply disturbing testimony.

GAO reports to Senate committee

A full archived version of the April 22 hearing, “The Debt Settlement Industry: The Consumer’s Experience,” can be heard here, in an archived file of the U.S. Senate Committee on Commerce, Science & Transportation, chaired by John D. Rockefeller IV (D-WV). [NOTE: The video does not start until the 23:02 mark; start it, then move the slider to avoid waiting.]

In 2009 the committee asked the Government Accountability Office (GAO) to investigate industry practices and report findings to the committee. The result was a covert operation beginning in November,  in which GAO agents posed as distressed consumers and contacted what they thought were 20 different companies: However, in at least one case, the companies were linked in mysterious fashion that would not be apparent to the average consumer.

The summary of the GAO report describes its methodology: “To achieve these objectives, GAO conducted covert testing by calling 20 companies while posing as fictitious consumers; made overt, unannounced site visits to several companies called; interviewed industry stakeholders; and reviewed information on federal and state legal actions. GAO did not use the services of the companies it called or attempt to verify the facts regarding all of the allegations it found.”

Highlights of report

In the same summary, the GAO highlights its findings: “GAO’s investigation found that some debt settlement companies engage in fraudulent, deceptive, and abusive practices that pose a risk to consumers. Seventeen of the 20 companies GAO called while posing as fictitious consumers say they collect fees before settling consumer debts--a practice FTC has labeled as harmful and proposed banning–while only 1 company said it collects most fees after it successfully settles consumer debt. (GAO was unable to obtain fee information from 2 companies.) In several cases, companies stated that monthly payments would go entirely to fees for up to 4 months before any money would be reserved to settle consumer debt. Nearly all of the companies advised GAO’s fictitious consumers to stop paying their creditors, including accounts that were still current. GAO also found that some debt settlement companies provided fraudulent, deceptive, or questionable information to its fictitious consumers, such as claiming unusually high success rates for their programs–as high as 100 percent. FTC and state investigations have typically found that less than 10 percent of consumers successfully complete these programs. Other companies made claims linking their services to government programs and offering to pay $100 to consumers if they could not get them out of debt in 24 hours.”

Once tracked down, the company making the “24-hour offer” backed off that outrageous claim, saying it was “a typo” that should have read “24 months.”

The full GAO report is available, as well as audio tracks of the undercover phone calls. Frightening stuff.

News accounts, ‘affinity scams’

Also available are worthwhile news accounts: from The Washington Post and the Los Angeles Times, which includes a very noteworthy statement from Gregory Kutz, the GAO’s lead investigator, who told the committee that consumers not only get swayed by exaggerated claims of success but that “after paying big up-front fees, often running to several thousand dollars, many consumers end up deeper in debt than they were before seeking help.”

Another striking aspect picked up by the Times indicates that sometimes the shady companies operate as “affinity scams.”

“Also ‘particularly despicable,’ Kutz said, was that three of the companies used Christianity to target customers. Investigators visited one of those companies, A New Beginning Financial located in a strip mall in Orange, where an agent told them that it was a nonprofit ministry, with profit funding missionary trips overseas.”

Debt-settlement myths

Another story about the hearing,  from a personal finance writer at the San Francisco Chronicle’s online site, is actually more valuable for a link it provides to an article titled “8 myths about settling credit card debt.” Here’s their eight myths, with our takeaway for each.

• Myth No. 1: Anyone can get their credit card balance cut in half: the takeaway is that, yes, you can call and ask, but you’ll “get in line,” and the bank will want documentation of your particular hardship.
• Myth No. 2: I have to pay someone to help me settle my credit card debt: No you don’t, and neither do you “have to pay” someone to file bankruptcy. The difference, of course, is that bankruptcy involves the federal bankruptcy code, which is more complex since the 2005 reform act (which was passed at the urging of banks and credit-card company lobbyists).
• Myth No. 3: All debt settlement companies are the same: No, it’s possible to find legit companies–but red flags include their demanding large up-front fees, counseling you to stop paying–and pay them instead. Also, beware two statements here: “You won’t be asked to do that if you choose a TASC member. They never handle, manage, or otherwise control their client’s funds, to avoid even the appearance of impropriety.” That’s been claimed, but not proven. The TASC sent no spokesperson to the Senate hearing.
• Myth No. 4: The money I send to the debt settlement company is safe: No. As the article says, “You’re taking a big risk. They could mismanage your money or make an offer that is not in your best interest.
• “There goes your money and your credit score, and you have nothing to show for it.”
• Myth No. 5: Debt settlement won’t hurt my credit score: No. Again, quoting: “The truth: Debt settlement can hurt your credit score almost as much as bankruptcy would.”
• Plus, you could wind up owing more than when you started, subject to actions from the original creditors and the debt settlement company, too.
• Myth No. 6: Using a debt settlement company won’t cost much: Quoting: “The truth: It will cost more than you think by the time you finish paying the settlement company and you pay a higher cost for credit in the future.”
• Myth No. 7: Debt settlement or bankruptcy are my only options when I can’t make my credit card payments. Credit-card companies may work with you, given proof of hardship. There’s also nonprofit credit counseling agencies if all you need help with is vigorous budget control.
• Myth No. 8: When the negotiations are done, I’ll be out of debt. No–you could wind up with a new creditor: the debt-settlement company.

In part 3, we’ll take a look at the point of view that bankruptcy is always a bad idea, no matter the circumstances.

******************************************************************

It’s true that the bankruptcy reform act of 2005 changed many aspects of the law for those needing protection and also for attorneys who practice bankruptcy law. If you’re considering filing for bankruptcy, it’s important to receive counsel from not only trained bankruptcy attorneys but also from experienced bankruptcy attorneys. Bankruptcy offers many consumers powerful tools for starting over, but it can be a complex process–and timing the submission of your petition can be crucial to your ongoing success, for years to come. We have background information available as well as a simple form that will get you started today. Please notice some terms seem similar on your first reading, so don’t hesitate to click back and forth to get a feel for the terminology and the distinctions between different programs.

Perhaps debt elimination is best for you. If so, start here.

Maybe debt consolidation is better for you: In that case, start here.

If you already have exhausted the preceding information, you may be ready to consider invoking protection from the bankruptcy code–if so, read here.

If you need immediate help, you can complete a short form at the bottom of this page.

Last time we looked at reaction to the “moral failings” argument of critics opposed to people filing for bankruptcy protection. Besides the idea that bankruptcy is how deadbeats game the system, we often hear dire warnings such as, “You’ll ruin your credit score,” or “Bankruptcy stays on your record for ten years,” or “You’ll never get a decent job again.”

Quite often, the people or companies using these scare tactics are pitching products or programs of their own. If you read something along the lines of bankruptcy will “ruin your life,” be sure to investigate what course of action or product is being offered as an alternative to bankruptcy. (As we’ve noted before, be particularly wary of so-called “debt settlement” companies that offer the moon while demonizing the bankruptcy process–more about this in Part 2.)

FTC and credit counseling

For instance, legit credit counseling agencies do exist. Here’s the Federal Trade Commission’s page called “Information About Credit Counseling and Debtor Education,” a thorough overview of the credit-counseling aspect of bankruptcy that also includes a link to “list of approved debtor education providers at www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm or at the bankruptcy clerk’s office in your district.” The page also features a good list of crucial questions to ask of any debt counseling agency or service.

One thing that pops out, though, concerns fees and up-front costs: The FTC says the cost for the initial session should “generally be about $50, depending on where you live, the types of services you receive, and other factors.” Furthermore, “If you cannot afford to pay a fee for credit counseling, you should request a fee waiver from the counseling organization before the session begins.”

Now, if counseling or other research indicates that bankruptcy protection is not for you, then don’t pursue it–and certainly don’t use the protection frivolously.

Bankruptcy ruins credit-rating?

That being said, however, many of the horror stories are just that, scary stories that don’t bear up under research. For example, will bankruptcy ruin your credit rating? Unfortunately, that’s not a yes-or-no answer. True, bankruptcy is the single largest hit a credit score can take. Here’s a recent comparison  (not exact, due to the vagaries if the FICO equations) from CNN.Money.com, showing various effects of mortgage delinquency, foreclosure and bankruptcy: clearly, at a range of 130 to 240 points, bankruptcy is a huge hit.

If you’re 30 days late, expect your rating to drop 40 to 110 points; 90 days late, 70 to 135 points–but if you lose your home, it’s somewhere in the 85 to 160 range. And that’s regardless of whether the loss is through foreclosure, short sale or deed-in-lieu.

For a homeowner, the primary concern often becomes the tradeoff between saving the home (usually through Chapter 13 protection) and the lowered credit rating: If losing the home results in major credit-rating downgrade, what’s been accomplished?

Another consideration involves the “weighting” of the FICO analysis. The way it works is someone with a high credit rating has more to lose, according to the CNN piece:

“Some borrowers will fall much more steeply than others for the same payment problem, according to Maxine Sweet, vice president for public education at Experian, one of the nation’s main credit bureaus.

” ‘If you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more,’ she said. ‘For me, one missed payment would just be a blip.’

“The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.”

This comes into play for many who have been struggling for a long time; that is, their credit ratings may already be in tatters.

Making a business decision

The cold, hard business decision, then, becomes “What’s the best way to start over, and begin rebuilding?”

Again from the CNN article: “Despite the problems a poor credit score can cause, Experian’s Sweet recommends that people who are in financial dead ends, like totally unaffordable mortgages, it’s better to recognize that and cut your losses quickly; don’t prolong the problem.

” ‘You need to do what you need to do to get your finances back in order,’ she said. “Don’t worry about your credit score.”

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If you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, please know the laws have changed recently. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

Not to beat a dead(beat) horse ourselves, but the “myth of the deadbeat” comes up fairly regularly when researching bankruptcy topics. We most recently this phenomenon a few weeks ago here, where we mentioned that at least one news outlet has quit covering weekly info on personal bankruptcies because, well, it’s just not newsworthy.

Yet, with every new round of data concerning bankruptcy rates, it seems like somebody, somewhere  has to trot out this old, tired pony and flog it around the arena of “shame-on-you.”

The latest, apparently,  is a woman named Mary Hunt, who runs some sort of debt-control Web site called DPL, short for “Debt-Proof Living.” Her regimen looks kinda like Dave Ramsey’s: there’s a “boot camp,” a repayment plan,  and a component for building emergency funds. She offers a free newsletter, and paid members get access at various monthly subscriptions (three months for $10, six for $18, a year for $29, etc.).  Today’s home page offers such tidbits as “Five Quick and Easy Tricks with Bacon”; a method for “Quick Bathroom Cleanup”; and “Mary’s Thought for the Day” for anyone who might “Feel Like a Failure” (if so, keep persevering…like Abraham Lincoln did).

Which, of course, is all good: if she can make a buck by helping folks get debt under control–hey, why not?

‘Moral failing’

But in at least one columnist’s opinion, Hunt went over the top in a recent version of her blog. Writing April 17 at the Minneapolis-St. Paul Star-Tribune, John Ewoldt says: “Everyday Cheapskate” columnist Mary Hunt wrote recently that bankruptcy is a moral failing. Hunt’s opinion isn’t a random swipe — it is based on personal experience after she slowly clawed her way out of a $100,000 credit card debt without declaring bankruptcy. Since then, she has written many books about using credit wisely.

“Hunt’s ‘moral failing’ comment was in response to a personal finance expert who wrote that if you can’t get out of your financial mess in two years, consider filing for personal bankruptcy.

As Ewoldt says, people need to be accountable.  No competent professional will say otherwise. In fact, anyone who downplays the gravity of filing for bankruptcy protection is neither competent nor professional.

But “moral failing” ? That’s simply ridiculous.

Have unscrupulous people ever dodged debt by playing the system? Undoubtedly. But for most–especially nowadays, in this economy, in this crisis–it’s simply a business decision.

Well, don’t buy GM cars, then

Ewoldt asks: “Where’s her column that no one should buy a vehicle from General Motors because it needed a bailout?”

Indeed. In fact, upon reading her background story, one suspects Hunt might be projecting qualities from her past–behavior from years ago–onto jammed-up debtors of today.  According to Hunt, her early years of marriage were characterized by her impulsive, compulsive spending and abuse of every credit card she could lay hands on, mail-order catalogs and even the checkbook–issued from the bank where her husband was a manager. No doubt that caused some friction at home.

Having hit bottom, the pair eventually turned things around. She writes: “It took us 13 years to pay back more than $100,000 in unsecured debt, plus all the penalties and interest. Had I known then what I know now, we could have paid it back in six years or less. But, that’s not important now. What matters is that we did it … we persevered and we are so much better for having gone through it.”

That’s nice. But what really matters is they learned their lesson, and she quit committing credit abuse.

But most folks fighting to keep their homes, fending off harassment, looking for work or dealing with a medical emergency are not guilty of the types of out-of-control acquisition that Hunt concedes afflicted her.

Medical bills, job loss, divorce

According to Ewoldt, “More than 60 percent of people who declare bankruptcy are in over their heads due to medical bills, according to a 2007 study published last year by the American Journal of Medicine. While Hunt and others personalize bankruptcy as people spending willy-nilly or gambling away the farm, about 90 percent of personal bankruptcies result from medical bills, job loss or divorce, said Henry Sommer, the former president of the National Association of Consumer Bankruptcy Attorneys.”

And from the Big Huff herself, at Huffington Post (Apr. 5), we see a reference to a study that’s gaining traction around the Web, in a piece in which Huffington writes: “The consequences of our failed financial system are everywhere you look.”

Huffington, whose larger point is the pressing, critical need for deep, meaningful reform of the financial system, writes: “A study by Elizabeth Warren and Ohio University’s Deborah Thorne, entitled ‘The Vulnerable Middle Class: Bankruptcy and Class Status,’ found that the personal bankruptcy surge is being led by former members of the middle class.

“According to the report, the proportion of bankruptcies filed by those who had attended college went from around 46 percent in 1991 to almost 60 percent in 2007. And, ominously, the data for the report was compiled before the economic crash. ‘I’m almost afraid to look at the data now,’ says Warren.”

Rich and famous

An April 9 article in The Wall Street Journal, headlined “Foreclosures Hit Rich and Famous,” informs us that “Big borrowers are more likely to default than ordinary people, according to data from First American CoreLogic. Its loan database, reflecting more than 80% of the overall home-loan market, includes 1,700 loans with balances of $4 million or more. About 14.8% of those loans were 90 days or more overdue at the end of January, compared with 8.7% for all home loans tracked by First American. Sam Khater, a senior economist at First American, said the bigger borrowers may be more prone [than smaller borrowers] to stop making payments when they have lost all their home equity.”

And, yes, it raises eyebrows to learn that actor Nicholas Cage had “a Tudor mansion in Bel-Air” that “was in foreclosure auction . . . [but] reverted to the lender.”

Even more telling, though, is the case of a formerly high-flying exec at Merrill Lynch, Richard Fuscone, whose 14-acre estate in Westchester  was on the foreclosure block. “Mr. Fuscone, Merrill Lynch’s one-time head of Latin America, put his mansion up for sale in November, asking $13.9 million. But he couldn’t find a buyer.

The court had scheduled a foreclosure auction for Thursday for the 18,471-square-foot mansion—with two swimming pools, two elevators, six fireplaces, 11 bathrooms and a seven-car garage.”

But Fuscone took action and got the foreclosure process stalled. How’d he do that?

He filed for bankruptcy protection:

“The personal bankruptcy filed in U.S. Bankruptcy Court Wednesday temporarily freezes the foreclosure process.

“Reached by phone, Mr. Fuscone declined to comment. Brokers and real estate tracking companies say that his home is one of the most expensive properties to face foreclosure proceedings yet.”

Well, at least he was reached.

Ewoldt says he e-mailed Ms. Hunt but received no reply.

“Hunt,” he writes, “who didn’t reply to an e-mail outlining these concerns, should quit picking on the little guy.”

(Editor’s note: In the next installment, Mike Hinshaw will take a look at life after bankruptcy.)

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

From The New York Times (Apr. 2), we see that creditors are increasingly reaching out and tapping alleged debtors’ bank accounts via wage garnishment.

“One of the worst economic downturns of modern history has produced a big increase in the number of delinquent borrowers, and creditors are suing them by the millions.

“Concern is mounting in government and among consumer advocates that the debtors are not always getting a fair shake in these cases.”

The NYT says national stats are not kept, but that such seizures are up 30 per cent in Cleveland from the past year to this; 55 per cent in Atlanta since 2004; and 121 per cent in Phoenix since 2005.

Phony paperwork

Sometimes the creditors are able to sneakily grab the dough: “Some consumers do not even know they are being sued; the people who are supposed to serve them with formal notice have sometimes been caught skipping that step and doctoring the paperwork.”

Anyone lucky enough to realize that their bank account is being targeted should definitely take notice and appropriate action. Often the creditors instigating the action can’t even prove up on the debt, hoping instead to bully their way to a favorable judgment, via the ignorance of the individuals being sued–or the courts’ lack of recourse when the individual mounts no defense.

“In far more cases, consumers are served but still do not offer a defense. Few can afford lawyers; others are intimidated or confused. In their absence, judges can offer little relief.

“In the rare event that a consumer battles back, creditors frequently lack the documentation to prove their claim, and cases are dropped.”

As the article mentions, filing for bankruptcy protection can help, despite the restrictions in the law that the banking-and credit lobby got passed in 2005.  A Chapter 7 filing can discharge many debts, and Chapter 13 protection offers a structured repayment plan. Both will stop harassment and lawsuits from unsecured creditors and debt collectors.

When defendants don’t show, creditors win by default

Still, it’s imperative to be proactive because some states “allow creditors to charge high interest rates for years after a lawsuit is decided in their favor. In others, creditors can win lawsuits by default and seize wages and bank accounts without a case ever appearing before a judge.”

One example from the article cites a case that “shows how punishing the system can be. In January 2001, a Mr. [Casey] Jones, 45, a maintenance worker from California Crossroads, Va., took out a $4,097 personal loan from Beneficial Virginia, a subprime lender now owned by HSBC, the big bank.

“He fell behind, and Beneficial sued. Mr. Jones did not appear in court.”

By not appearing in court, Jones virtually guaranteed Beneficial of winning a default judgment, resulting in an award of “$4,750, plus $900 in lawyers’ fees, with the debt accruing interest at 27.55 percent until paid in full. The bank started garnishing his wages in March 2003.

“Over the next six years, the bank deducted more than $10,000 from Mr. Jones’s paychecks, but he made little headway on his debt.”

But only $134 applied to principal

By the spring of 2009, Jones still owed “$3,965, a sum nearly equal to the original loan amount.” He finally got an attorney, who discovered  “that all but $134 of his payments had gone toward interest, fees and court costs.”

The bank finally stopped once Jones got a lawyer, which saved him nearly four grand–but by then, he had already paid more than double the original loan.

Student loans up to $56 billion

On another front, a Reuters piece posted at CNBC (Apr. 1) rings an alarm bell about increasing levels of student loans, saying the “unprecedented number of loans . . .[has]negative long-term implications for the housing and auto markets.”

The Great Recession has taken a chunk from the rate of bank-backed credit cards, both in apps submitted and in apps approved. Meanwhile,  however, Equifax told Reuters that outstanding student loans total $56 billion, a rise of “about 50 percent since 2007.”

The news service quoted Dann Adams, president of Equifax’ U.S. Consumer Information Solutions: “This generation of students will be less able to buy their first home given their debt load. Their largest payment will be their student loan.”

Here’s something to keep in mind, though: Even though the recent changes to student-loan law include upper limits on the size of payments to service the loan (10 per cent of discretionary income versus the current 15 per cent), the bankruptcy code offers very little protection regarding student loans.

Hardship exemption

Basically, the only relief through bankruptcy court is obtaining a ruling that repayment of the loan represents an extreme hardship. It’s not impossible, but it is difficult. Here’s a site that offers a pretty good rundown of the process, including guidelines for both Chapter 7 and Chapter 13, along with some “case-study”-type examples.

(Note: For a good summary of the student-loan changes, see this April 8 post at the San Francisco Chronicle’s Web site, via Ivestopedia. Oddly enough, there’s also an Investopedia link to a slideshow “The Top 5 Reasons why People go Bankrupt,” listed as medical expenses; job loss; poor/excess use of credit; divorce/separation; unexpected expenses such as loss through theft or catastrophes.)

******************************************************************

It’s true that the bankruptcy reform act of 2005 changed many aspects of the law for those needing protection and also for attorneys who practice bankruptcy law. If you’re considering filing for bankruptcy, it’s important to receive counsel from not only trained bankruptcy attorneys but also from experienced bankruptcy attorneys. Bankruptcy offers many consumers powerful tools for starting over, but it can be a complex process–and timing the submission of your petition can be crucial to your ongoing success, for years to come. We have background information available as well as a simple form that will get you started today. Please notice some terms seem similar on your first reading, so don’t hesitate to click back and forth to get a feel for the terminology and the distinctions between different programs.

Perhaps debt elimination is best for you. If so, start here.

Maybe debt consolidation is better for you: In that case, start here.

If you already have exhausted the preceding information, you may be ready to consider invoking protection from the bankruptcy code–if so, read here.

If you need immediate help, you can complete a short form at the bottom of this page.

Late last month, we discussed slightly encouraging reports showing that unemployment may be starting to turn around.

But now we see that bankruptcy filings are rising again.

“More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash,” says an April 1 piece in The New York Times.

Today Time magazine reports, “There were 158,141 U.S. bankruptcy petitions filed last month — a 35% increase over February’s figure, according to data compiled by Automated Access to Court Records (AACER). This was a 19% increase over the number in October 2009, the last record-high month,” .

Bankruptcy filings called less newsworthy

In fact, so many people have been pushed into seeking bankruptcy protection that at least one local news outlet has changed its reporting policy. In an April 4 brief, the Peoria (Ill.) Journal Star says it has quit publishing weekly reports on personal bankruptcy:

” ‘We have taken a careful look at the publication of this information and have come to the conclusion that, in today’s economy, publicizing personal bankruptcies no longer holds the news value it may have a few years ago,’ Journal Star Managing Editor John Plevka said.”

The Journal Star said that it “still may report on personal bankruptcies involving prominent Peoria-area residents and will continue to report significant bankruptcy filings of local businesses and corporations.”

As might be expected, the decision drew a cross-fire of comments–by about 1 a.m. today, the post had elicited 29 comments, (with more combined words than in the original post) ranging from schadenfreude-laced skepticism about the Journal’s real  reasons (“Too much work?? If bankruptcies no longer hold news value, neither do DUI’s and property transfers.”) to those questioning the intent of readers who followed such news (“In my experience the only people interested in reading the bankruptcies are nosy old women with nothing better to do than glean some misguided satisfaction at the expense of those less fortunate. . . .”).

AACER President ’suprised’

The Time account compares the rate of filings in about a quarter of the states, from the first three months of this year to last year’s monthly averages, and quotes the AACER president as expressing surprise: “In the first quarter of 2010, the rate of personal bankruptcy filings in a dozen states increased by double-digit percentages over 2009’s monthly averages. ‘What is surprising is that there are still hefty increases in states like Arizona, California and Florida,’ says AACER president Mike Bickford, referring to the fact that it might seem that the worst would be over in states hard-hit by the housing bubble. ‘Intuitively, you would think there might be some leveling off in these states, but that is not the case. In addition, there were large increases in bankruptcy filings in the Midwest, especially Michigan and Illinois.’ ”

The NY Times also quotes Bickford, in reference to what many consider the irony of the astounding numbers of filings, given the credit-card lobby’s apparent success in 2005 when it persuaded Congress to pass the Bankruptcy Reform Act: “ ‘Even with the restrictive new law, we’re back up over where we were before the law changed,’ [said Bickford] . . .  in a phone interview Thursday from his headquarters in Oklahoma City. He faulted the stagnant economy, saying a surge in bankruptcies generally follows economic contraction by 6 to 18 months, and he pointed to March as a historically busy month for bankruptcy filings.”

Longtime “Bankruptcy Corner” readers won’t  be surprised to learn that Chapter 7 filings are way up, despite the credit-card lobby’s intent; we’ve been covering the topic for more than a year.

The Time piece also addresses the myth of “the deadbeats” who hide behind bankruptcy laws to game the system.

Myth of the deadbeat

“Katherine M. Porter, a bankruptcy expert at the University of Iowa and the University of California, Berkeley’s Boalt Hall Law School, says people typically ’seriously struggle’ with their debt for two years before turning to bankruptcy.

“The statistics show that Chapter 7 bankruptcy filings are rising faster than the more complex Chapter 13 filings. While the latter requires individuals to repay a substantial portion of their debt and prevents banks from foreclosing on their homes, Chapter 7 bankruptcy allows a debtor to wipe out his or her debts entirely and get a fresh start. ‘It is very fast and very deep debt restructuring,’ says Porter. Since 2005, Chapter 13 filings have dropped from about 35% of all personal bankruptcy filings to 25%, she says. ‘Systemically, that’s a big change.’ ”

What’s she’s addressing is that Chapter 13 is usually the choice for filers who wish to save their homes from foreclosure, while Chapter 7 can involve liquidation of assets but a much quicker discharge from bankruptcy and into a fresh start. However, it’s not written in stone that a Chapter 7 bankruptcy always results losing the home: Depending on your state law and your unique financial situation, filing Chapter 7 might allow to keep your home–that’s why it’s so important to discuss your situation with a trained, experienced bankruptcy attorney.

Chapter 7 filings now ‘73 per cent’ of consumer bankruptcies

The NY Times says that “[s]tatistics from the United States Trustee Program . . . show that Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Of the 158,141 bankruptcy filings in March, 118,505, or 75 percent, were Chapter 7s and 38,241 were Chapter 13s, the Aacer report says.”

Both pieces agree that the indications are that more people are choosing to walk away from so-called “underwater mortgages.”

Like Bickford, Porter was also quoted in the NY Times: ” ‘We think that means fewer and fewer families think they’re really going to save their homes,’ Professor Porter said. ‘They don’t have any equity, so why try to keep up with their home payments?’ ”

Reform the reform?

From this point, the Time piece circles back to the reason why the Bankruptcy Reform Act should, itself, be reformed. Again quoting Porter: “Under current bankruptcy law, Porter says, bankruptcy courts have ‘no tools to reduce the principal, stretch out the payments or adjust the interest rate’ — that is, since judges can’t adjust mortgages to make them easier to pay, people end up ditching them instead.”

The inequity of the bankruptcy code’s inability to protect a primary residence–although it does allow loan mods for luxury items–has been decried by consumer advocates (here’s some thorough background from the AARP) and scholars alike. Here’s our coverage of work done by Adam J. Levitin,  first posted here, expounded upon here and revisited here.

So even though it took a special report to outline serious shortcomings of Team Obama’s HAMP plan, and banks such as Bank of America have finally realized the common sense approach to reducing mortgage principal, the latest bankruptcy rates seem to indicate that our largest institutions simply move too slowly, and arrive with help too little, too late.

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”),  bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing  financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13