Car Loans are the New Tickets to Bankruptcy

23% interest on a motor vehicle loan? Even with today's low interest rates? How about 100%?

Over the past few years banks have been targeting people who used to be denied for car loans. Now, these folks are getting multiple car loan offers in the mail promising "easy credit". It can be tempting to sign up for one of these loans when your existing vehicle is on its last legs.

The trouble is the cost. Auto lenders try to get you to focus on the monthly payment instead of the true cost of the loan. Paying a total of $15,000 with interest for a car you bought for $7,500 might work out, but the $7,500 car is likely to need repairs and maintenance over the next few years and may even quit running before your car loan is paid.

The new wave of easy but expensive auto loans is being driven by banks that cannot make risky home loans anymore. They've turned to auto loans instead. Mortgages are now heavily regulated so car loans are a much easier place for banks and car financiers to rip you off. And that can happen to anyone paying 23% interest on an older vehicle that's out of warrantee.

Even more devastating are title loans, the quick cash loans you can get using your current vehicle as collateral. These loans often require payments of over 100% interest. I've seen title loan contracts charging 300% in interest. Most States, including Minnesota, prohibit title loans with interest rates that high but they are legal in Wisconsin. Many Minnesotans -- often desperate for cash to pay their rent -- drive over the border to get a Wisconsin title loan.

As you might imagine, the title lenders are doing very well. You don't have to be a math whiz to realize that a 300% title loan can quickly cost you more than your car is worth. If you borrow $2,000 at 300% interest and it takes you 12 months to pay off the loan, you're paying $6,000 in interest, or $8,000 altogether. If your car is worth less than $8,000, you might be better off letting the lender repossess the car than paying them back.

So what do you do? When you're in the market to buy or replace a vehicle, ignore the car loan offers you receive in the mail. Those offers are almost all going to have outrageous interest rates. And ignore the pushy finance guy who tells you that the interest rate he found is the "best you're ever going to get." These days, you can often find a better interest rate yourself by calling around. You can start with your bank or credit union. If you have bad credit, taking steps to clean it up before you apply can often get you a much better interest rate. This can save you thousands of dollars over the life of the loan.

What about when you're stuck with a title loan? Thankfully, there is a remedy in bankruptcy to deal with title loans that allows you to compel the lender to accept a more reasonable interest rate. If you borrowed money on a title loan and you can't afford the payments, this remedy can give you a way to keep your car.

If you need help with bad credit, credit cleanup, or with a terrible title loan, give me a call. We can probably help.

About the author: Dan Cooke

Image credit: Misfit Photographer

How to Protect Retirement Savings from Creditors

Think your retirement savings are safe? If you are behind on bills, can your creditors take your pension or other retirement savings from you?

For the most part they can't. But there are some exceptions, at least in Minnesota. The key thing you need to know is whether your savings are in an ERISA-qualified plan.

ERISA is the federal "Employee Retirement Income Security Act." ERISA-qualified 401(k) and pension plans are protected by federal law. Creditors cannot garnish funds in ERISA-qualified plans, except in very limited situations (federal tax debts, debts related to federal crimes, and domestic support 'QDRO' orders to split retirement funds are the primary exceptions). How do you know if your plan is ERISA-qualified? Ask the plan administrator. This is normally the HR or payroll person if the plan was set up by an employer. You can also try running a basic search for your plan at the FreeERISA website. But you should still check with the plan administrator to make sure.

The problem is that not all retirement savings plans are covered by ERISA. Most IRA's, for instance, do not fall under ERISA protection (rollovers and employer-created IRA's can be covered but most IRAs are not created this way). It's uncommon, but some pension plans are also not ERISA-qualified.

For any savings you have that are not covered by ERISA, you're going to have to look for other laws to protect those funds. Minnesota has a law protecting retirement savings, but it only provides protection up to a present value of $69,000. And that's the combined value of all of your non-ERISA-qualified savings, not a per plan amount. This amount comes from Minnesota Statute Section 550.37, Subd. 24, as adjusted by the Minnesota Department of Commerce. The number doesn't change very often.

This means that an aggressive creditor could get every penny of your retirement savings, minus the first $69,000! So knowing whether your retirement plans are ERISA-qualified is critical.

This all assumes that you are not filing for bankruptcy protection. Bankruptcy is complex, but it can often provide additional protections for retirement savings. If you're at all concerned about losing your nest egg, give us a call. We can discuss your situation and talk about how bankruptcy might help.

About the author: Dan Cooke

Image credit: StockMonkeys.com

Why Banks Love Payday Loans. And Why You Should Hate Them.

Most of us know that payday loans are a bad deal for the borrower but a new study by the Consumer Financial Protection Bureau (CFPB) shows that they're even worse than we thought.

Payday loans are short-term, high-interest loans where the borrower promises to repay the loan from the proceeds of a future paycheck. So when the next paycheck comes, you have to pay. Meaning that you are more likely to want to take out another payday loan to stay on top of your expenses. You get caught in a vicious circle.

It would be bad enough if you only had to pay back the amount you borrowed. But what really keeps you stuck is the incredibly high interest rates lenders are allowed to charge on payday loans. Fees of 15% on a two-week loan are common. These are the kind of rates you see mobsters charge in movies and on TV.

The CFPB study reviewed 12 million payday loans over a twelve-month period. The study found that more than 80% of payday loans are rolled over or renewed, even in States that have laws that try to restrict roll-overs. And the average payday loan borrower is likely to stay in debt for 11 months or longer, meaning they're paying far much more in fees than the amount of the original loan.

It's a debt trap. At least the big banks are cutting back on the practice. But smart borrowers will take heed and stay away from the payday lender.

About the author: Dan Cooke

Image credit: Gilbert Gibson

Avoiding "Perpetual" Bankruptcy after College

Here's a scary story for you. "Phil" (not his real name) graduated with honors from a four-year university with $82,000 in public and private student loan debts. He found work in his field - and took on additional part-time work - but what he made wasn't enough to meet everyday expenses and pay off his student loans. Phil isn't a doctor or a computer programmer and wages in his field are slightly lower than the average wages in his area. But he found the work that best suited his skills and was a contributing member of society. He just couldn't afford to pay as much as his student loan lenders were demanding.

A couple of years later, one of Phil's private student loan lenders decided to sue and garnish Phil's wages. Left with the choice of not eating or not paying rent each month, Phil filed for Chapter 13 bankrutpcy relief, which lowered the monthly payment on his student loans and left him with just enough money to meet his other living expenses.

The bankruptcy helped. But when the payment plan ended, Phil still had lots of unpaid student loan debt left to go, some of it with very high interest rates. He tried various settlement options but found that the only solution was to file for bankruptcy relief again.

This is sometimes called "perpetual bankruptcy" and it is unfortunately all too real. 

Until the laws change to provide some more meaningful relief for honest, hard-working debtors who cannot afford their student loan payments (particularly the often more burdensome private loans), there is really only one commonsense approach to the problem: budgeting for the future student loan expenses before borrowing.

This means students and their families need to do some serious financial planning before signing the loan documents. There are options beyond simply borrowing the "sticker price" tuition rate offered by the school. One interesting program is the Loan Repayment Assistance Program, which works directly with a number of colleges and universities to help repay student loans for lower-income participants.

Shop around and budget for those future expenses. Otherwise, the only other alternative may be perpetual bankruptcy.

About the author: Dan Cooke

Image credit: 401(K) 2013

The Best Way to Clean Up Your Credit Report

Think paying your bills on time is all you need to do to ensure a good credit score? Think again.

More than one in every four credit reports contains some sort of error, according to a study by the Federal Trade Commission. And 5% of those errors, when corrected, placed the person in a different credit risk tier.

Every adult - and by that I mean everyone, not just those with debt issues - should check their credit reports once a year. It is incredibly easy to check your own report. It is also free if you check your report through the AnnualCreditReport website (steer clear of other "free" credit report sites that may try to charge you for other services you don't need).

Credit reports aren't that hard to read. If you find something on the report that looks like it might be an error, fix it right away. Here's the best way to do that:

1. Contact the Credit Reporting Agency. There are three major credit reporting agencies: TransUnion, Equifax and Experian. They all provide ways to dispute errors through their websites. But I've learned that contacting them in writing can be more effective. The FTC has a sample letter you can use. Include your full name and address and say exactly which item on your report you dispute. Include a copy of the report with the wrong item circled. You can also include a copy of any supporting documentation you have (such as a receipt or billing statement). The credit reporting agency must investigate your claim and report back to you with written findings (you can expect this to take two months). They'll also provide you with another free copy of your report if a change was made. They'll also tell you where the incorrect information came from, which you can use to...

2. Contact whoever provided the bad information. Once you know who provided the bad data that messed up your report, you should contact them in writing as well. Otherwise, they might make the same mistake all over again the next time they report your history to the credit bureaus. You can use the same FTC sample letter, just change the name and address of the recipient.

3. Follow Up. If the Credit Reporting Agency does not fix the error, you can ask that a statement of the dispute be included in future reports. The sad reality is that the big reporting agencies will sometimes deny a fix. If this happens to you, it may be time to call a lawyer who can help with Fair Credit Reporting Act (FCRA)violations. Hopefully you won't need this, but if you do I can offer a free consultation about your FCRA issue and your rights under the law.

The FTC also provides answers to some common questions about credit reports, which is a great place to learn more.

You want an accurate credit report not just so you can get loans and better interest rates. Your credit report might also be reviewed when you apply to open a bank account, rent an apartment, in insurance applications, or even by potential or current employers. So set aside a few minutes each year to get a free credit report and check it for errors.

About the author: Dan Cooke

Image credit: 401(K) 2013

Five Crucial Steps to Quickly Paying off Debt

Many of my clients with large and small debts who are making payments on their bills wonder, "how can I most effectively pay off my debt?"

When trying to pay down debts, there's a right way and a wrong way to do it. One size does not fit all. A consultation can help create a payment plan that specifically fits your needs and get you out of debt much faster. But let these general rules guide you in your quest for financial freedom:

1. Create a List. Write down your debts on a piece of paper or a computer spreadsheet. Next to each debt, write down the interest rate and the type of debt - credit card, medical bills, etc. If you don't know these numbers, check your credit report. You may not see all of your debts on the report but it's a good starting place. Setting aside secured loans - such as mortgage or car payments - and taxes, student loans, and other government debts, the rule of thumb will be to prioritize the loans with the higher interest rates. There's a temptation to pay the loans with the lower balances off first because there's some satisfaction in seeing a balance go to zero. But you'll get to the debt-free finish line faster if you focus on the higher interest rate loans first. Note that if you have significant tax or student loan debts, you will likely want to consult with a professional because there are more complex strategies that will go into how to handle the payment of those debts. You also should consult with an expert if any of your creditors have sued you or have a judgment against you.

2. Create a Budget. If you've never created a budget, it is much easier than in sounds. A budget is just a list of your total income and expenses over a given time period. Because many bills are paid on a monthly basis, most people use a sample month's worth of income for their budget. The income side is usually easier to figure out. Expenses can take a little longer. You don't have to add up every trip to the drive-through when estimating your food expenses so just do your best to estimate monthly food costs. But don't forget to write down things you might otherwise forget: such as occasional car and home repairs, clothing purchases, out-of-pocket medical expenses, haircuts, and recreational activities. Spend a sample month jotting things down and use that to test your estimates. Then look at how much you really have over each month for paying down debts. If this amount isn't enough to pay off unsecured debts within five years, think about ways to increase the income (part-time job?) or reduce the expenses. If this won't do the trick, it's a good time to talk to a professional.

3. Pay More than the Minimum. Credit card bills have a "minimum" payment amount to keep you current. This amount is often ridiculously low. Most of us know that if you only pay the minimum it may take a lifetime to pay the bill in full. Only pay the minimums if you are doing so to put more money into paying off other loans with much higher interest rates. Note that this tip also works with secured loans -- you can often reduce a 30-year mortgage to 20 years or less by making a surprisingly small additional principal payment each month.

4. Don't Borrow Trouble. If you can't pay off your bills in a given month, you're going to be tempted to take out an additional loan to make things work. Heck, your lenders will probably even send you a letter offering you a short-term loan to help out. This is almost always a bad idea and can add years to your repayment plan. So shred those checks the banks send you. And NEVER take out a payday loan. The interest rates on payday loans tend to be outrageous.

5. Don't Borrow from Yourself. You may be tempted to sell one of your most valuable assets: retirement savings. If you're lucky enough to have retirement savings, withdrawing it is arguably a worse move than taking out a payday loan because in this case the lender is you! Selling other unneeded assets is fine but your retirement savings is special, and is treated specially under the law. Depending on how you handle the withdrawal, you may have to pay significant taxes and penalties on the amount you borrow from yourself.

If you need help, I strongly recommend you call either a qualified debt-relief attorney or a non-profit credit counseling agency. NON-PROFIT is the key. There are many "debt settlement" agencies out there that will charge you an arm and a leg to get the same help you can get for much less money from a non-profit credit counseling service.

About the author: Dan Cooke

Image credit: Tax Credits