Bankruptcy: After Christmas?

It's the time of the year where many people start buying gifts for others for the holidays. That, of course, is in addition to buying food, heat, electricity, telephone(s), gasoline, auto insurance, cigarettes (bad for health - bad for pocketbook), cable, clothes (don't forget shoes, socks, and underwear), and paying rent or mortgage and the car payment. Oh, and remember to buy the medications the Doctor prescribed.

Quite a list! How To Pay For It? Many people use CREDIT CARDS. Then comes February 1st and the bills flood the mailbox overwhelming the Letter Carrier's ability to carry all of the Visa, Mastercard, Discover, JC Penny, Sears, BestBuy, Fingerhut, QVC, Amex, Capital One, Orchard Bank, Bank of America et al BILLS.

When asked how they expect to pay, many will say "Well, I HAD to get those presents. I mean, it was Christmas (or Chanukah or whatever other holiday "requires" gift giving)". Says the lawyer at the first consultation about debt relief, "Okay, but how did you expect to pay the bills?" - the classic answer "I didn't think about that. I figured I be able to pay a little on each card, I guess." This response is typical from clients with sufficient income to pay the bill with minimum payments over the next 20 years, and from those who HAVE TO GO WITHOUT FOOD AND HEAT TO MAKE ONE PAYMENT!!

There are several problems here, actually many more than several. The biggest, in a sense, is that with debt that has accumulated over the past 3, 5, or 10 years there is no way ANY PAYMENTS are affordable. Then comes "Can I file bankruptcy?" The real question is "Can I file bankruptcy and still get rid of my bills (a discharge) even though I was foolish...?" There is no easy answer.

In order to eliminate/discharge debt, the Bankruptcy has to be filed in good faith. You cannot intentionally incur debt that you know you cannot pay. At a minimum, that debt cannot be discharged (made to go away). But wait...There's more! When the gifts were being bought and the plastic nearly melting from over-use, did the purchaser intend to repay the credit card company? The easy answer is "Yes, I always pay my bills!" But, is that the honest answer.

Many people just do not think about or know how to think about budgeting. People of all ages get caught up in the "I have to buy a gift for..." mode. So, what can be done for the honest but horrid money manager/giver?

Rule 1. Know how much you take home every month and how much must be spent on essentials, like the list above

Rule 2. If there is any extra, before deducting current credit card payments, be certain that it is truly disposable income immediately. Do not count the money you will save when you stop smoking.

Rule 3. Add up all of your credit card and other unsecured debt (debt not attached to collateral, like a car loan)

Rule 4. Multiply the amount of debt by 3% or 0.03

Rule 5. If the result after following Rule 4 is more than your "extra" (your disposable income) you should not incur more debt.

Rule 6. To figure how much unsecured debt you can support reasonably, DIVIDE your extra/disposable income by .03. So, if you have $200/month truly extra, the Most unsecured debt you can have is $6,000. And, remember that "extra" is what's left after paying all of the expenses listed in the beginning of this posting and any other NECESSARY expenses you have.

Even at the level shown, paying will be a bit of a struggle - things happen that cost money and are unexpected. Missing one month of the payment on any unsecured debt will make everything fall apart and you might never catch up.

If you have done those calculations, and after being careful you find that 6 months (I just picked a number) into the new year that you cannot pay because "Life comes at you fast!", then yes, you can file a bankruptcy with a clear conscience and peace of mind.

Author's Copyright by Richard I. Isacoff, Esq, November, 2011

rii@isacofflaw.com
http://www.isacofflaw.com

Credit Cards - Rep. Barney Frank's Frustration (Mine Also)

Rep. Barney Frank (D), Congressman from Western MA, wants to "push up" the effective date of the new Credit Card regulations. He is prompted by the frenzy of card issuers raising rates, cutting limits, changing terms, and adding fees, all to beat the starting date of the laws. The laws merely set limits on how and how often card companies can change the terms of the agreement you have with them, without prior notice.

The standard argument, that there is no contract unless both sides agree, is not able to be put forth, because in the agreement you signed originally you gave the company the right to make all of these changes, even to your detriment. Is it fair? NO!, Is it legal? Yes, but only until the first of the year.

Congressman Frank's frustration is understandable, especially if you have a card and have been "slammed" by the card company with rates and fees you never anticipated. That these same companies, CitiBank, Bank of America, Chase, all have Federal Money from the bailout is beside the point. As stated in an earlier post, this is how they were able to report record earnings last quarter.

Congress will not change the date to October as Congressman Frank wants, but at least the issue is again being discussed. Unfortunately, the Congressman may suffer a decline in his credibility with his colleagues, but he will have a boost from his constituents.

Right now, everyone should be examining his/her cards and statements to determine if the terms have suddenly changes, if rates are higher, credit limits lower. If you need a card try a local financial institution. If none issue cards, shop for a new one, if yours is not playing fair. Be certain that you read the "Agreement and Terms" disclosure that will be your contract, BEFORE you use the card. Do not hesitate to decline the card even after it is issued to you. Be certain however, that you follow the rules on terminating the relationship or you could find an open credit line, detracting from your credit score, all the while believing that the card account was closed.

To be safe about credit, whether it is cards, loans, mortgages, joint accounts, "authorized user" cards (where the credit is based on someone else who has given you a card to use), get at least one credit report every six months. They are free from http://www.annualcreditreport.com/ .

Check to be certain that only the cards you use are open. Close everything else. While there may be a slight drop in your credit score (see posts of 7/27/09 and 6/11/09), the risk is far less than if you have unused and unwanted open credit lines affecting your score and overall credit standing.

Author's Copyright by Richard I. Isacoff, Esq, September, 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

Get Protection from Creditors - But Wait, There's More!

"Protection from creditors" - just a euphemism for Bankruptcy? No, it is what filing Bankruptcy is and does. There are no more Debtors' prisons and no one has to walk around with a big scarlet "B" on his/her chest. Fine!, but what really happens, and who can file for protection? Before going any further, filing Bankruptcy WILL NOT force you to lose your house or car. In fact, it may help you to keep them.

My post of Monday July 27th discussed the need for completing a full personal budget for you and your family (if there is one to consider). Again, make a list of ALL regular living expenses, including cigarettes, gasoline, socks...EVERYTHING EXCEPT UNSECURED DEBT like credit cards and personal loans (Beneficial, CitiFinancial, HFC/HSBC etc. Then figure out your regular monthly income, including OT you ALWAYS get, bonuses you ALWAYS get, child support/alimony, pension, steady part-time jobs etc. then deduct all payroll taxes and insurance costs to get a net income. Next, if you are paid every 2 weeks, multiply the NET INCOME by 26 and divide that result by 12 to get a net monthly income.

THE MOMENT OF TRUTH - deduct your regular monthly expenses from your regular monthly income.If you have money remaining, is it enough to pay all of the minimum payments PLUS 1% of the principal for each card/debt? If the answer is yes, start by making a real month by month budget and start paying down each debt every month. Be sure to be on time, and that means the payments have to be in the mail at least 7 days before they are due, or 10 days before the start of the next billing cycle.

If you cannot make the payments and meet your expenses, then consider a bankruptcy consultation with an experienced Bankruptcy Attorney. You can find one on the web by going to www.nacba.org , which is the site for the National Association of Consumer Bankruptcy Attorneys, or by e-mailing me and we will get you a referral.

Bankruptcy is a RIGHT, not a privilege. The laws and rules are "spelled out" in Title 11 of the U.S. Code. It states clearly in Congressional intent and is sen again and again in cases, that the purpose of the Bankruptcy laws is to give Debtors, who cannot repay their debts, a "FRESH START". It is not punitive - it is a RIGHT.

For consumers, there are 2 sections of the Code that apply: Chapter 13, which is a way for people who have some money left over at the end of the month to repay a percentage of what they owe, be it 5%, 10% or 100%. The repayment period is up to 5 years, and the 30% interest rates stop immediately; and Chapter 7, where the consumer/debtor cannot make ANY payments for a 36 month period, or the amount of the payments would be so insignificant that the consumer really should keep the funds for emergencies.

Most good Bankruptcy lawyers will not charge for the initial consultation which is where she/he will help you determine if a Bankruptcy is the correct financial decision for you. The rules for filing are not that difficult to understand and the next Post will go into the details.

Author's Copyright by Richard I. Isacoff, Esq., July 2009
www.isacofflaw.com
rii@isacofflaw.com

Credit Cards Profit Margins Getting Larger

CREDIT CRISIS - BAILOUT - FINANCIAL MARKETS CRISIS - RECESSION

The Credit Card Crisis is getting closer and closer. Homeowners who mortgage payments got too high, have been using their credit cards to pay the bills. Additionally, it is the Christmas shopping season, when many shoppers use credit cards hoping to pay later for what they buy today. The Credit Card industry - BANKS - are raising their interest rates, at a time when they can borrow money from the Treasury for almost nothing, or possibly get part of the $700 billion TARP (bailout) handout.

Now, for a bit of background. To a Bank, a deposit account of any kind is a liability - it is actually borrowing money from depositors. At the same time, a loan it makes to a Borrower, with depositors money, is an asset. Traditionally, banks have based their profit margins on a 3%-5% spread or margin between deposits and loans. In fact, going back a number of years, a Savings Banker was known as a 3-6-3 Banker. Take it in at 3% (deposits) Lend it out at 6% (loans) and go home at 3 (pm). Strange, but we had gotten back to that formula, at least for mortgages made by Banks.

Banks got larger and felt that they could exploit the revolving credit market - Credit Cards. Here, the Bank (card issuer) give a credit limit that a card holder (borrower) can use and pay, use and pay etc. Because the amounts started out to be small and the debts were unsecured (no collateral), in comparison to a car loan or home mortgage, Banks charged a higher interest rate for Credit Card interest. But the spread began to increase so that Banks had gross margins (before losses and costs) of 8%-10%.

As the traffic would bear, the rates increased so that before the current crisis, it was not unusual to have a Credit Card Issuer (Bank) paying 2%-4% for deposits and charging 14%+/- for interest to average card holders. Sure, there were the promotions for 0% interest, but the majority of those "come-ons" ended with the Cardholder paying one day late, or the Credit Card issuer (Bank) holding a payment for a few extra days, so the Cardholder was charged a late fee of $39 AND HAD THE INTEREST RATE JUMP TO 19.99%-30.99%.

Now, Banks are trying to make up for bad loans in mortgages, in commercial loans, in investments for the Banks portfolio (Mortgage-Backed Securities come to mind), and financial uncertainty. So now even "good" customers are getting charged higher interest rates for keeping a balance on the Credit Card. CitiBank has just sent notices to the bulk of its Cardholders notifying them of a change in the rate. Regardless of the prior rate, the new rate is now the Prime Interest Rate (rates that the best borrowers pay to Banks) plus 8.99% WITH A MINIMUM OF 14.99%. Cardholders can opt-out of the change so long as they pay-off the card balance by the time the card renewal dates comes around. If one opts-out, at the renewal date, Citi will close the account and either demand payment in full or force the Borrower to pay the ten current rate on any balance.

Citi is not alone. If you pay regularly, but have a balance for more than 2 years, JP Morgan Chase will charge a monthly fee, and increase the minimum monthly payment from 2% of the balance to as much as 5% of that balance. The list of card issuers (Banks) goes on but the basic theme is the same: Borrow money from the Treasury or Federal Reserve Bank, paying .5%(1/2% ), or from depositors paying about the same rate, maybe .5% higher, AND LEND IT OUT TO CREDIT CARDHOLDERS FOR 15%-25%, while making the minimum payments twice what they have been. The Consumer portion of the Credit Market is going to pay for the commercial losses and bad investments - Main Street is paying for Wall Street. And do not forget about the Universal Default Rate - be late on one card, and the rest of the Cards can move your interest rate to its default rate.

This explanation is a bit over-simplified, but not much. Margins in the Credit Card business are at all-time highs. What will happen in February when all of the Christmas gift generated Credit Card bills come in? Who will be able to afford them? And, if the credit lines get closed by the Banks, how will the homeowner/credit card holders pay to live in the house?

This formula spells disaster for Cardholders (consumer and small business borrowers) and as a result will probably lead to a new round of mortgage defaults and foreclosures, and certainly a spike in Bankruptcy filings as more and more Cardholders find that a 5% minimum payment is so far out of reach that it makes no sense to even try. A good portion of my practice is in the fields of Bankruptcy and Debtor workouts, but I shudder when I think of the disruptions to families, losses of homes, the payment defaults will bring.

Congress could act to stop the gouging by Credit Card issuers (Banks), regulate the issuers which are not Banks, and provide the needed Mortgage Relief that would eliminate some of the need to use the Cards.

I encourage every Credit Cardholder to read carefully all of the information she/he receives to be certain the change, if there will be one, can be at least anticipated and plans made to deal with the "financial dislocations" (unpaid bills and blown budgets) which result.

Please feel free to e-mail through the website link at the bottom of this post if you need a calculation or advice. The service is free and the margin is less than 0% (My contribution to the cause)

Author's Copyright by Richard I. Isacoff, Esq - November 2008

http://www.isacofflaw.com/