Against din of housing slump and unemployment, credit-card reform loophole exploited: subprime, pre-account fees

August 26th, 2010 by Mike Hinshaw

Let’s survey some ledes from around the country.

Housing, unemployment, bankruptcy

“Housing sales in July plunged to their lowest level in more than a decade, exceeding even the grimmest forecasts.”

That’s from The New York Times, Aug. 24.

Here’s another, also from the same edition of the Times: “The Dow Jones industrial average and the Standard & Poor’s 500-stock index ended lower Tuesday for a fourth consecutive day, unable to rebound from a disappointing report on existing-home sales.”

This one’s from the Wall Street Journal, Aug. 5: “More Americans filed for bankruptcy protection in July, reversing a trend of declining filings over the previous three months and highlighting the continuing financial struggles of many consumers.”

Highest rates since ‘reform act’ of ’05

“Long-term unemployment and small-business failures continue to propel personal bankruptcy filings,” reports an Aug. 22 article in the Tenneseean (our emphasis added), “with Tennessee in step with a national trend that shows the number of cases spiking in July for the first time after declining for three months.

From the Aug. 18 Economist, we get the following brief (and the following chart, as well, based on data from the Administrative Office of  the US Courts): “Bankruptcy filings rose 20% in the year to June 30th compared with the previous 12-month period, according to statistics released on August 17th by the Administrative Office of the US Courts. This takes quarterly filings to their highest point since tougher bankruptcy laws were introduced at the end of 2005. That change brought a spike of bankruptcies, as companies and individuals rushed to declare themselves broke under the more lenient old regime. The data suggest that an older trend is reasserting itself. This is could be more bad news for America—or it could just mean that creative destruction is alive and well.”

US-Bankruptcy historical chart

One recent blog mentions that the return to pre-2005 levels may “merely be” a statistical “reversion to mean.”

Election fodder?

That would be some mean-dang revertin’, all right, given that the credit-card lobby’s pure intent in getting the “reform act” of ’05  was to make it harder for people to file for Chapter 7 protection. They did, and it is–yet, Chapter 7 filings far outnumber Chapter 13 filings.

Perhaps cheekily, the blog ends with the admonition to watch for this chart as the election nears–with the rejoinder to see how many times it appears with the pre-2005 years left off the chart. But, really, that’s a good suggestion: Any candidate from any party who monkeys with the data should be immediately suspect.

Reform fail? Credit-card company hits loophole

Speaking of credit-card companies, it looks as though at least some are definitely reverting to mean. The credit-card reform legislation passed last year was supposed to rein in the heinous practices of the industry. But as this Aug. 21 piece in the St. Louis Post-Dispatch demonstrates, loopholes already are being exploited.

“When Congress passed the credit card reform act last year, it took aim at the sort of high-fee card that sat in Lynne Fischer’s purse until recently. There’s now some evidence that Congress missed.

“Lynne Fischer, 64, lives in St. Louis Hills on about $1,700 a month from a small pension and a disability check. She’s had problems paying some bills. ‘My credit history is not well,’ she says.

“Still, she wanted a credit card for emergencies: ‘What if my car breaks down?’ she asked. When the mail last fall brought an offer from First Premier Bank of South Dakota, she applied.

“It was a costly decision. . . .”

The article describes First Premier as using this business model: The company “offers cards for people with bad credit, and they charge significant up-front fees. They pitch the card as a way for customers to rebuild their credit by making on-time payments.”

The article also says that consumer advocates label such practitioners as predatory “fee harvesters,” a term we will probably see more often in the months to come. At any rate, and perhaps needless to belabor, she finally realized it was a stinky deal: “Fischer sometimes made only the minimum payment, and so she ended up paying interest on those fees. When she called to cancel the card this summer, she says the bank’s representative insisted that she pay $253 — an amount consisting mainly of the fees.”

Oh–but there’s more. The quote next at bat really, truly exhibits the depths of the ether-soaked depravity in which these companies are willing to traffic.

“As of last week, First Premier was offering a card with an annual fee of $75. That’s 25 percent of the $300 credit limit. But it also has a $95 ‘processing fee’ that must be paid before the customer gets the card.

“It’s perfectly legal, says First Premier. ‘The credit card act does not preclude fees charged prior to the account being opened,’ says Darrin Graham, the bank’s vice president for marketing. So, the $95 fee doesn’t count.”

Holy moly and Great Winged-Leaping Lizard-Bats! and whatever other mythical creatures that defy reason. Let’s look at that statement again, with emphasis added:

“The credit card act does not preclude fees charged prior to the account being opened.”

Just imagine if this becomes a trend: Utility companies guess where we’re going to move, then start billing us before we move in; Redbox and Netflix get predictive software, and charge us for movies before we select them. And on and on…

Perhaps First Premier is simply running interference for the rest of the industry, trying an end-around to see how much trouble such tactics will attract. Or perhaps they really are the junkies they appear to be, addicted to cash flow they pump from the least sophisticated, most vulnerable consumers they can bag. We’ll keep following and let you know what we find.

[Next time: Using credit cards under the new law and credit for college-age children.]

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

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

‘Moral failing’ comments strikes columnist wrong way; ‘rich and famous’ showing up with bankruptcies, foreclosures

April 21st, 2010 by Mike Hinshaw

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.)

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

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

As layoffs rise and home values drop, more turn to Chapter 7

January 28th, 2009 by Mike Hinshaw

As thousands of recession-fueled layoffs and job losses clamor for headline space, more homeowners faced with falling values are opting for Chapter 7 protection.

Although few would argue that workers (and their decreased spending power) benefit when hard-strapped businesses close their doors, others believe the nation will be better served by letting marginal companies jump off the Darwinian cliff. Regardless of the various opinions, it’s tough to argue with the numbers that are emerging.

Citing a new report, Associated Press economics writer Jeannine Aversa says that a “new survey by the National Association for Business Economics depicts the worst business conditions in the U.S. since the report’s inception in 1982.” In a Jan. 26 article carried by several papers (here’s one), Aversa says that 39 “percent of NABE’s forecasters predicted job reductions through attrition or ‘significant’ layoffs over the next six months, up from 32 percent in the previous survey in October. Around 45 percent in the current survey anticipated no change in hiring plans, while roughly 17 percent thought hiring would increase.”

Calling the recession a “job killer” that experts believe will continue into 2009, she writes: “The economy lost 2.6 million jobs last year, the most since 1945. The unemployment rate jumped to 7.2 percent in December, the highest in 16 years, and is expected to keep climbing.”

Companies showing up in the latest round of layoffs announced Jan. 26 ranged from presumed leaders to those widely known to be in trouble. Sprint Nextel, recognized as the nation’s third-largest wireless carrier, announced cuts of 8,000 jobs (as well as severe cutbacks for remaining workers) while construction-equipment giant Caterpillar says it’s letting go of 20,000 employees.
Read the rest of this entry »