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

Got Student Loans? Beware a Newly Exposed Payoff Pitfall.

Part of our government's response to the massive 2008 economic collapse (aside from the massive bailouts) was to pass new financial industry regulations to try and prevent another collapse. This included the creation of the "Consumer Finance and Protection Bureau," which is in essence a watchdog for big banks and other lenders.

The CFPB has a Student Loan Ombudsman who recently wrote an "Annual Report" that reviews a large number of complaints they have received over the past year. Guess what they found? Student loan payments aren't always being processed properly. Instead of applying additional payments towards principal reduction (as is often requried with other loans, such as mortgages) some banks are escrowing those funds as "advance payments" toward future month's bills. The result? Honest borrowers end up paying more to settle their student loans.

So the private student loan banks are applying payments in confusing ways so they can make more money? What a shocker. 

The takeaway? Take advantage of the government's attempt to help and use the resources provided to you by the CFPB to learn more about how to pay off your student loans as efficiently and as quickly as possible. And be sure to file a complaint when something goes wrong.

If you're still left with questions about your student loans, call us. We can go over your options with you.

About the author: Dan Cooke

Image credit: Bossi

Why Bankruptcy Doesn't Ruin Your Credit

I've heard it time and again: "I can't file bankruptcy because it will ruin my credit! Won't it?"

No. Life goes on after bankruptcy and you will almost certainly be able to borrow and finance consumer purchases or even business investments afterwards. Most folks receive credit card and car loan offers shortly after filing. It is not unusual to qualify for a home mortgage loan - or a refinanced home loan - within two to three years of filing. And the repayment terms on these post-bankruptcy loans can be solid if you can wait a couple of years before borrowing again, using that time to re-establish your creditworthiness.

Bankruptcy does not ruin your credit. Plain and simple, what hurts a credit score more than anything is not paying bills. And the remarkable thing about bankruptcy is that it makes the dischargeable bills go away. You cannot be late on a bill that has a zero balance. There are credit consequences to filing bankruptcy. But for people who need help with overdue or unpaid bills, bankruptcy normally ends up helping their credit scores in the long run.

Think about it this way. The banks that lend money have one primary concern. They want to know if you will pay them back. If you ask for a loan while you already have tens of thousands of dollars in debts the bank knows that any loan they give to you will be only one of many that you have. The bank does not want to stand in line with everyone else that you owe. If, on the other hand, you just filed for bankruptcy the bank knows that any of your prior discharged debts are no longer due, making it much more likely that your new loan will be paid. Plus, the bank knows that you cannot file bankruptcy again anytime soon, making it very unlikely that the new loan will ever be discharged in bankruptcy. This makes you a better credit risk AFTER you file than you were before you filed.

The record of your bankruptcy filing will be on your credit report for some time (current laws require a Chapter 7 to be removed from a credit report after ten years). But the report will also show how long ago the bankruptcy was filed. Lenders place less importance on an older bankruptcy IF you have been good about paying bills on time after your bankruptcy was filed.

With some careful post-filing credit repair steps, a FICO score in the high 600s or low 700s is achievable within 18 months to two years of a bankruptcy filing. Lenders differ on how they use FICO scores but many treat a score like this as a high or "A-level" rating. 

How do you repair your credit after bankruptcy? Simple. Pay your bills on time. As time passes you'll build up better creditworthiness. We work with our clients to give them guidance tailored to their situation to help them repair their credit after filing.

There are, of course, other factors that will play into the decision to file. But when making the decision it is important to know that a bankruptcy will not ruin your credit. Over time it can actually help.

About the author: Dan Cooke

Image credit: 401(K) 2013

Filing Bankruptcy - What to File (#2 in a series)

"I declare bankruptcy!" - Michael Scott.

When Michael Scott, manager of the Scranton, PA branch of Dunder Mifflin Paper Company ran into debt issues, he figured bankruptcy might be a way out. He was right about his options but he was dead wrong about what it takes. Standing up tall in public and saying that you "declare bankruptcy" ain't gonna cut it. (Michael Scott, if you don't know, is a fictional character from the U.S. version of the television comedy "The Office" & if you need a laugh you might want to check it out).

Unless you live in a smaller community or your local newspaper still lists recent bankruptcy filings, normally no one but your lawyer and your creditors will know that you filed. Trustworthy, confidential support is valuable when you're dealing with debt. But, thankfully, you don't have to declare your intentions to your friends or even your family if you don't want to.

What you really need once you've decided that bankruptcy is the right move for you or your business is a big stack of forms.

In most situations the most valuable thing a lawyer can offer a client is counsel. Clear information and guidance about the law and its impact on whatever the client is facing, delivered with respect for the client's needs and wishes, is a lawyer's most valuable commodity. But a close runner-up in the value department in a bankruptcy law office is an understanding of how to fill out the forms and supporting documents required to start a bankruptcy case.

The stack begins with the bankruptcy "Petition." This is a relatively short (usually three- or four-page) document that contains a series of elections and signature lines. After the Petition and any Exhibits attached to it comes a long set of "Schedules" that are required in every bankruptcy case. Each Schedule deals with a different aspect of your finances, ranging from assets owned, to household income and expenses, to a correct and complete listing of your debts, separated into appropriate categories. The opportunities for mistakes on your schedules -- particularly in how you list and exempt your assets -- are lurking everywhere. This can make filling out the Schedules somewhat stressful.

But let's say you wanted to try your hand at filling out the Petition and Schedules on your own. You can get blank copies of the forms from the bankruptcy court clerk's office in your federal district. The "Petition" and "Schedules" portions of the bankruptcy papers work out to being about ten times longer than a complex tax return. If the case is simple enough, someone might be able to complete the Petition and Schedules with reasonable accuracy in ten to twenty hours. If you're lucky you might not even make any crucial mistakes.

But the stack doesn't stop there. After the Schedules are completed, you have to fill out a series of "Statements" about your finances and your financial history, including the lengthy "Statement of Financial Affairs", which contains a set of compound and sometimes confusing questions. And there are more questions for those with past or current business ventures.

And it doesn't end there. Even if you get through those forms with any sense that you've done it right, you still have to work your way through the bankruptcy means test. This is perhaps the most confusing form of all, because it requires you to know a great deal about both the federal standards used to determine how your money is counted and compared with the applicable median and what the local district court clerks expect to see on the form.

After all of that, you'll still have to compile another set of supporting documents. In most districts this includes properly-redacted pay records, separate signature forms, properly-formatted electronic listings of your creditors, certificates, etc. It's more than enough to make your head spin.

My point? If you haven't figured it out yet, what I'm saying is that if you want to try to prepare your own bankruptcy forms you're in for a world of pain. And even then you're likely to make one or more big mistakes that may force you to pay more money down the road when you need to try to convince a lawyer to help clean up any messes, assuming they are the kind that can be cleaned up. Believe me, lawyers do not like doing this and many won't even touch a case that was filed incorrectly.

I'm obviously biased here but bankruptcy lawyers -- and their well-trained staffs -- are incredibly valuable when it comes to their knowledge and understanding of the complex and lengthy bankruptcy paperwork. Don't believe me? Our District's website provides some helpful information about the forms, which should be enough to give you a sense of the amount of work involved. And if you absolutely, positively cannot afford to pay a lawyer a nickel for help, there are other resources out there where you can start. Because when it comes to filing the proper documents, you really shouldn't go it alone.

Next up in the series: Who files?

About the author: Dan Cooke

Image credit: Carl Malamud