Category Archives: Credit Card debt

interest rates, changes of terms, and cost of credit card debt

The Impact of Credit Report Collection Accounts

When applying for a mortgage, everyone knows that your credit report rating is of great importance. If you can lower the interest rate the lender charges you, you can save thousands of dollars each year on hundreds of thousands of dollars borrowed for your home purchase. In addition, as most of us know, the credit report will show your payment history on cars (and other installment loans), and it will also show your credit history on credit cards (and other revolving accounts).

Many do not know that the credit report also picks up the docket from local courts, and reports any judgments that have been filed against you. In addition, one more matter is reported by the Bureau, which is of great significance to those who have borrowed money: their accounts which are in collection.

“In collection” simply means a collection agent is attempting to collect on the alleged debt. This does not mean the debt is owed, or that a judgment has been entered by a court allowing for garnishment of wages. It simply means that the collector is trying to collect money on a debt he says is owed.

You may be “in collections” and not even know it. Nevertheless the rest of the world knows, and the obvious inference is that you’re unwilling or unable to pay your debts. This little known secret of the credit reporting agencies can have great significance when you’re attempting to secure an apartment or job, get a loan, or even get utilities turned on.

Surprisingly, statistics show that 35% of Americans currently have unpaid bills reported to collection agencies, according to an Urban Institute study conducted in the last few months. And it’s not just hospital bills, auto loans, and student loans. Even past due gym membership fees or unpaid cell phone contracts can end up with a collection agency.

And the collectors are always ready. The Federal Reserve Philadelphia bank branch estimate that in 2013 the collections industry employed 140,000 workers, to recover $50 billion of debt that year. Oddly enough, delinquent debt is overwhelmingly concentrated in southern and western states. Texas cities have a large share of their populations reported to collection agencies: Dallas (43%), El Paso (44%), Houston (44%), McAllen (52%), and San Antonio (45%). And the blight is not limited just to Texas. Almost half of Las Vegas residents have debt in collections, and other southern cities a large number of their people facing debt collectors: Orlando, Jacksonville, and Memphis, among others. But some cities fare better, with some demographic populations have low collection rates, just around 20% for Minneapolis, Boston, Honolulu and San Jose (California).

How do these differences come about? Some say this can be blamed on income disparities, and a stagnant economy. US Labor Department statistics show wages have barely kept up with inflation during the five-year recovery starting in 2009, and after-tax income fell for the bottom 20% of earners during that same period.

So what is the morale of the story? The wise consumer will make sure his debts stay out of collection. This practice will reap rich rewards when it comes time to buy a home or car, secure a job or apartment, or secure the lowest loan rates.

Chapter 13 vs Debt Settlement: Which is More Cost-Effective?

 Chapter 13 versus Debt Settlement: Which is More

Cost-effective?

Often  clients are forced with a choice between Chapter 13 bankruptcy or debt settlement, because they cannot qualify for a Chapter 7 bankruptcy. This can happen for several reasons: possession of assets which prohibit them from filing a Chapter 7, or income that is too high to qualify for a Chapter 7 bankruptcy.

Of course, if you have cash assets, creditors prefer debt settlement, as “cash is king”.  Often this method is best in the eyes of both creditors and debtors.

In counseling clients about this dilemma, I like to break it down to one simple question: which is more expensive?  In answering this question we can come up with a simplified understanding of comparative benefit, and decide which approach should be taken.

To begin, it’s useful to understand that debt is always settled as a percentage of a face amount. Whether you owe $5,000 or $15,000, to the creditor it’s all the same: “What percentage can I collect?”  Creditors generally have a huge number of accounts, and their main goal is to see how much of the money owed they will be able to recover.

Generally, a 40% to 60% settlement is quite a good deal for the debtor. A settlement at 80% to 90% of the original debt is often more than the borrower feels he can afford. Obviously a 80% to 90% settlement is optimal for the creditor, preferably paid immediately.

For ease of the discussion, I’ll discuss this in terms of percentages, not dollars. In other words, when we talk about debt settlement versus Chapter 13 bankruptcy the primary question I wish to address for my client is: “what percentage of the debt must be repaid?”

In a Chapter 13 bankruptcy, where the borrower has an annual household income of $80,000-$90,000, it is most likely that he will have to pay back 100% of the debt. Because there are trustee fees and legal fees attached to the proceeding, it is not uncommon that he would pay 115% of the debt. The advantage to filing a Chapter 13 is that you’re given a period of five years to pay off your debts, under a payment plan.

On the other hand, debt settlement may confer a clear advantage, especially if it can be accomplished at 2/3 of the debt (including attorney fees). However, in debt settlement taxes must be considered. Assuming the borrower owes another 13% of the debt in taxes (which will have to be paid within the next year) this means the debt settlement would be the least expensive option. Specifically, that debt settlement would cost the borrower 80% of the original amount owed, after consideration of taxes in calculating the total cost.

In comparing Chapter 13, (which has a total cost of 115%), versus the total cost of debt settlement at 80%, it is clear there is a difference. Specifically, that difference is 35%. In other words, the consumer can often save more than a third of the debt amount, simply by doing debt settlement instead of Chapter 13 bankruptcy.

So looking at the cost-benefit analysis makes it very clear that debt settlement can often be less expensive for the borrower. However, debt settlement is not a good alternative  when the borrower doesn’t have the cash to settle in full at the time the deal is struck. For that reason, Chapter 13 bankruptcy can be an excellent way to arrange over many months the settlement of debt, allowing five years of payments to liquidate the entire debt interest-free, and without the danger of collection lawsuits.

Which one is right for you?  The best advice I can give to you: give us a call at (317) 266-8888. We are happy to answer your questions, and give you sound advice on what can become a very complex matter if not analyzed thoroughly.

Budgeting

BUDGETING
The first step in budgeting is to create a spending plan. Using a spreadsheet program, such as Excel, is an excellent way to plan expenses and spending. It allows “what if” analysis; by simply changing the expense number, we can see immediately the impact on our finances.

Take a good hard look at your “discretionary” expenses. These are the only expenses which can be cut without strong lifestyle changes. The following expenses are easy to adjust: excess tax withholding, life insurance, 401(k) deductions which are not mandatory, clubs and recreational activities, cable TV expense, dining out, gambling, etc…

We must be careful to distinguish needs and wants. We all want many things, but need far less. Keep in mind that Money = Time, and Time = Money. The more you ‘want’, the more you will spend. The more you spend, the more time you must use to acquire, maintain, and pay for possessions.

Impulse buyers have more bills than they can pay, and have to spend more and more time working, just to stay afloat financially. They have little time for themselves or family. Health and relationships break down, just as possessions do if they are not maintained. The impulse buyer ends up tired and broke.

Don’t get distracted from your spending plan by retirement concerns or worries about health, rising expenses, changes in family situations, etc. A good plan is a good plan, no matter whatever else happens.

Realize that a spending plan is ultimately what you want, and what would be best for you and your finances. As we live in an imperfect world, it may take a while to get reality to match your plan. The plan can also be adjusted, as it merely establishes a target rate for spending. When in doubt, estimate income low, and expenses high.

How can we budget for variable expenses such as utilities? Use an average from the last year, and don’t forget to establish an emergency fund with a spending plan that allows a little bit of savings each month.

If you want a free excel budget spreadsheet, please do not hesitate to contact us. Take the time to create a budget…you’ll end up worrying less.

Recently I have posted on my blog a series of 6 videos which address the mechanics of budgeting. Interested? Watch the following: Planning part 1. If you feel that it’s helpful to you, go on to the next: Planning part 2. After, go on to part 3, part 4, part 5, and part 6.

Credit Reports (Part 2)

This is my second post on credit reporting, to explain how it works.  The attached clip explains “how it used to be”, in contrast to the numbers oriented style in vogue for the last 2 decades.  Often we wish:  “Why can’t it be just like it used to be”?  This series will explain how our modern system of credit reporting (and granting loans) started.

In understanding how our system evolved, we have a better understanding of why and how we got to the point where we stand today.

 

 

 

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Credit Reports (Part 1)

Years ago, it occurred to me that we all need to know something about credit, and how credit reports are made.  I put together a CD for clients explaining credit reports.  Now with advances in the web, I can get it to you without a CD! I hope this 12 part series is of use to you. Immediately thereafter, I will publish my 11 part series on credit report correction.

Here is the first audio clip.  Hope you can find the time to listen to the whole series.  There is a lot of good information in these old CDs from several years ago, still relevant today.

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Planning the use of money (Part 6)

By now, if you have reviewed the five videos in previous blog posts, you should have a fair idea of where your money is going, and where it needs to go. Now comes the hard part: actually making the necessary decisions.  Some expenses will definitely have to be modified.

Remember: every dollar saved is a dollar earned.  Indeed, the dollar saved is an “after tax” dollar, all of which you get to keep.  The dollar earned is a “before tax” dollar, and you will only get to keep 70 cents of it, at most.  So we can see that keeping expenses down definitely helps in money terms.

In personal terms, the stress that comes from unpaid bills is removed.  Family life is easier, and there is time for exercise and good diet.  Medical bills are less in the long term.  Although this is not true in every case, a simple budget can often help to organize and reduce stress in many other areas of life.

So make your life easier with a budget!  If you want the sample file I used to create these videos in MS Excel, just email me at
mike@mikenorrislaw.com
and I will be happy to send it with a reply.

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

 

Download This Episode

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Planning the use of money (Part 5)

This is the video that shows a full month of expenses for our sample consumer, who can now see how the month’s spending all adds up.  Is more income needed?  Can some expenses be cut?  Which expenses?  How much?

All of these questions are the ones a prudent consumer or small businessman must ask himself, in any case where he is late on paying bills.  There is an obvious reason he is late on paying bills:  he did not have the money!

When the money is just not there, go through a three step process.  First, track expenses.  Second, ask yourself: can I make more income?  If not, step three comes into play: expenses must be cut.

Hopefully, this series puts it in perspective for you.  As always, we are here to help, just call (317) 266-8888.

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

Download This Episode

PlayPlay

Planning the use of money (Part 4)

This is the fourth of six videos detailing how to keep track of the expenses, so you know when you are on “safe ground” with your spending.  In this video, we look at the daily and weekly expenses which occur, and which can be added up to get an overall picture of monthly income and expenses.  With this information, you can finally get an accurate picture of what is going on in your financial life.  With these tips, you can control the “ebb and flow” of your cash, as you gather enough information to predict with confidence.  When you find yourself able to predict that money will be left over at the end of the month, and that money is put into a modest savings account, you’re really getting the hang of it!

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

Download This Episode

PlayPlay

Planning the use of money (Part 3)

What does it take to live nowadays?  This question is hard to answer for today’s expenses, unless you know the answer already (and have been tracking your spending for the last six months).  So start the process now:  start saving cash and card receipts.  As you learn more and more on how to track income and expenses, you will have the records ready to plug into a worksheet.  And keep watching this series of videos as you learn how to track down dollars and cents.

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

Download This Episode

PlayPlay

Planning the use of money (Part 2)

So just how hard is it to be safe with money?  A plan will go a long way in creating security.  If you are wrong, you will know that “things did not go according to plan”.  If the plan is working, then you were right!  Remember, it’s just math.

What will the math tell you?  It answers the question:  “What are your habits?”  Once you know that answer, you can proceed to ask: “What do I want to be my money habits?”  Then a plan can be formed and carried out.  But first, observe what you are doing with your money every month.  Awareness of your habits is the most powerful tool you can use to change them.

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

PlayPlay

Planning the use of money (Part 1)

Does it make sense to plan the use of money?  All the experts say it does.  But how do we do it?  Simply put, tracking our spending allows us to predict how fast it our money will “go out the door”.  This short video is the first of 6, showing how to be aware of your use of money.  Remember: if you can track where your money has gone, you can predict where it will need to go in the future.  In addition, planning helps to distinguish between needs and wants, so you can sort the necessities from the luxuries.

I hope this video helps you to a prosperous future, free of financial worries!

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

PlayPlay

Is budgeting really worth it?

Quite simply in the opinion of this writer and most financial experts, it is always worth it.  Ask any college kid with student loans:  do they create a burden in his/her life?  The “buy now, pay later” mindset ends up leaving us exhausted.

What is the solution?  People need to start saving, as has begun to trend in recent years in the U.S.  We need to watch what we spend, and “make do” without always desiring more.  As we have learned in the last few years, a new trophy home is not always necessary.  

Do you want more control over your life?  BUDGET!  A good article on this topic by the President of the Sagamore Institute is attached, and I wish to give credit to Jay Hein for the clarity of his thoughts.  See the attached:   Jay Hein on Budgeting

Just think about it.  Every dollar saved is one more you don’t have to work for.  Just remember what Ben Franklin said:  A penny saved is a penny earned!

Does it all add up?

Can inaccurate credit reports be corrected?

Yes, they can.  The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act (FACTA), allows the consumer to question accuracy of reports, and furnish proofs to be considered in making corrections.  Several years ago, I taught a seminar just after a change in the law.  You can examine those seminar materials here:  Fair Credit Reporting and mortgage reporting, bky issues .  If you want to read the law yourself, you can access it here:  FCRA as amended by FACTA

In essence, those rules provide that you have the right to one free report each year, and you can apply for that report from each of the three credit reporting agencies (CRAs): Experian, Equifax, and TransUnion.  If you would like the form to use, you will find it here:  Annual Credit Report Request Form .  If you are turned down for a loan, you can get the credit report which was used to evaluate your credit, and it is also at no cost.

In order to dispute inaccurate (including incomplete) credit entries, you must contact the CRA with information showing the inaccuracy, and they have 30 days to investigate.  Hopefully, they will make the correction with no further effort on your part.

Review my attached writing to consider all the myriad ways a credit report can get inaccurate.  Frankly, it is amazing we have accurate reports.  A number of years ago, it was estimated that 40% of the reports have errors which will lead to denial of credit, and 80% of reports have errors in general.  With that in mind, looking at your report once a year is a good idea.

One common area of inaccuracy is the listing of debt discharged in  bankruptcy.  Often, the report is not updated after bankruptcy.  Even though debt is washed out in bankruptcy, the credit report is silent as to that issue, giving the impression that the debt is still owed!  Thus, it is always wise to review the credit report 6 months after a bankruptcy discharge.  If you continue to pay on debt after a bankruptcy, the creditor must continue to report your payments after bankruptcy, in order for the report to be accurate.

Why do credit counselors insist on bloated debt payments in consumer budgets?

So often, people come into my office to talk about debt, after talking to a “consumer credit counselor”.  The counselor has recommended a budget to them, lean on basics but heavy on consumer debt payments.  After a few months, the budget collapses under the strain of unrealistic expectations.  Why are these “counselors” so unrealistic about budgets?

This entire industry was studied in a Senate Report in 2005.  The title of that report is: “Profiteering in a non-profit industry: abusive practices in credit counseling”.  The U.S. Senate Homeland Security Committee was up in arms over “the marketing of debt management plans”, and the practices of the industry as a whole were examined.  See the Senate Report:   Credit Counseling, Senate report.

That report reviews that “credit counseling” was first started and funded by credit card companies in the mid-60s to stem losses from customers who did not pay.  The theory was that a “kinder, gentler” collector might increase yields for credit card lenders.  By encouraging the consumer to “tighten his belt” and use the lender’s “counseling service” to collect monies for credit card and debt payments, more money could be collected.

Of course, referrals to any third party source of information, such as attorneys, are actively discouraged, (which I’ve found in my experience).  The lender doesn’t want his collection agent to lose control over the consumer’s cash flow.

The arrangement is quite cozy.  The consumer is charged an extremely modest amount for the “credit counseling” service, say $15 per month.  Of course, the goal is not to raise funds from consumer fees.  The goal is to get as much of the consumer’s income as possible, for debt payments.  Modest changes in interest rate and payment are made with some lenders who use the collection service, other lenders refuse to alter any payment terms but will still pay the “counseling service” for collecting payments for them.  All the while, the consumer is told that this collection agent is “in his corner”.

And this is the key:  As long as the debtor doesn’t know that the credit counselor is actually a collector working on a percentage, then any payment plan seems to make sense.  But what the counselor rarely reveals, and the consumer who trusts his counselor doesn’t know:  the counselor is a collector working on commission, to be paid a percentage of what he collects.  Lenders who pay these collection fees understand that this is just another business expense, a cost of collection.  Why lower interest rates or payments? The more the counselor/collector collects, the bigger the payoff for all.

What are the percentage fees collected as a kickback?  See on page 33 of the report, footnote 164:  up to 30% of the monies collected is the kickback.  At this rate, everybody makes money…except the consumer.

It is no stretch of the imagination to believe that lenders have controlled the “credit counselors” they fund, and that they have done it for years.  See footnote 166:  “Some creditors also began issuing more detailed…standards, in effect becoming a regulator of credit counseling practices”.  Clearly, with the majority of credit counseling monies coming from lenders, this is an industry that has been “bought and paid for”.  Footnote 177 makes it clear that the credit counselor get the majority of his revenue from kickbacks, and is “obligated to comply with creditor standards”.

Wisely, the Senate Report insists in its’ last page on full disclosure of the “existence and nature of any financial relationship with a creditor of the consumer”.  Armed with information on kickbacks, any consumer would be well advised to steer clear of the conflicted consumer credit collector who portrays himself as a counselor.

Are collectors obliged to be polite?

From time to time, we get questions about the Fair Debt Collection Practices Act, and so I have posted it to this blog entry.  In essence, this federal law protects the consumer from harsh and abusive collection practices, allowing him/her to discuss debt issues without being threatened, harassed or humiliated.

This brief outline is hoped to be, for most consumers, a sufficient summary of the most relevant points.  Please bear in mind that I have not covered all of the law in its context; I am merely suggesting answers and statutory references for the questions I am most frequently asked in my practice.  For your reference, I have placed a highlighted copy of the statute here: Fair Debt Collection Practices Act

The first thing to remember is that only the debt collector is regulated.  The full time employee of a creditor does not have to pay attention to this set of restrictions.  See Section 803(6).

Collectors must call during normal hours, 8am to 9pm.  In addition, they may not call a consumer when they know he is represented by an attorney, or at the consumer’s place of business when such calls are prohibited.  See Section 805(a).

Further, all communication must cease if the consumer writes the collector, unless the communication is to notify the consumer of an impending lawsuit.  See Section 805(c).  These measures allow common sense structure to the phone contact with the consumer.  This is, in my opinion, good for everyone.

Certain obviously deceptive practices are forbidden, such as threats of violence, profanity, repeated calls to harass, and the failure to identify oneself.  See Section 806.

In addition, false and misleading representations are banned. Among those commonly  used statements are: exaggerating the amount or status of a debt, misrepresenting oneself as an attorney, threatening arrest, threatening a false credit report, or any other “deceptive means of collection”.  All of these misstatements are violations of the law.  See Section 807.

The collector cannot collect more than is owed, per Section 808.  The same section also puts some restrictions on postdated checks.  Read that section to become more acquainted with your rights.

Damages under the statute at Section 813 are realistically limited to $1,000 per occurrence plus attorney fees.  And the collector who can prove an innocent mistake will be absolved of fault, with no damages awarded to the consumer.  Nevertheless, this federal statute places significant limits on the abusive collector, who now must “mind his manners”.

Does this automatically curb all collection abuses?  Of course not.  But a polite reminder that you are aware of the statute will often lead to a more civil conversation.  A more polite conversation is often a more productive one.  Ultimately, this is often the best way to save time and money for all parties concerned.

Does Debt Settlement really work?

Lately, I have done a fair amount of lecturing to CPAs and others about debt settlement, illustrating the techniques used for handling debt with this bankruptcy alternative.  For a description of the relative advantages in comparison t0 Chapter 13 bankruptcy, I have composed a summary:Chapter 13 compared to Debt Settlement.

Of course, some will worry about tax issues in debt settlement, as well they should.  The good news is that an insolvent debtor can escape taxation on debt forgiveness, using the IRS insolvency rules.  Want to calculate if you qualify?  Use the Insolvency Worksheet.

If you are a professional who wants the best information, I would suggest IRS Pub 4681 , which details the rules in depth.  Also, the IRS website on this topic is useful:  Debt Forgiveness IRS websites .  In any event, those loaded up with consumer debt should consider debt settlement as a useful alternative to Chapter 13 bankruptcy, or other debt workout alternatives.

A radio show…….why bother?

Most Saturday mornings, I start the day with a warm cup of coffee while I read the newspaper, or maybe several different newspapers, if I haven’t yet caught up with the news of the week.  After immersing myself in reading for a while, I take some time to peruse the articles that I’ve arranged on the kitchen table in front of me.

As the “theme of the week” becomes clearer, I’m typically lost in thought while I organize the main “themes” and my presentation.  And before you know it I’ve got the topic for my weekly radio show.

Once done, I critique it. Was it compelling?  Lucid?  Relevant?

Why bother?  Just for the thrill of thinking out solutions to everyday problems in a world where people need someone to trust.  In the practice of law, communication is everything.  Let us start with building trust, based on reliable and solid advice.