Income Inequality Reality Check

For those of you who wonder why we need bankruptcy laws, there is an excellent essay about income inequality in today's Star Tribune by my colleague Ronald Lundquist.

I think we'd all like to live in a world where no one ever has to file bankrutpcy. We do need the bankruptcy safety net if we want to live in a society that encourages entrepreneurship and job creation (otherwise, it would be too risky to start a business). But the sad byproduct of delining wages and salaries is that we may be about to see an uptick in bankruptcy filings by regular, hard-working employees.

About the author: Dan Cooke

The Right Way to Monitor Your Credit

2014 was a banner year for huge consumer data breaches. From news of the Target attack in January to the massive Home Depot credit and debit card thefts, we all learned that identity and credit card theft is becomming a bigger and bigger problem for all of us.

Retailers commonly respond to data breaches by offering free credit monitoring services. Do they help? Maybe, but probably not as much as you think. They will help if it is too difficult for you to look through your own free credit report and make sense of everything listed in the report. While some of the services offer identity theft insurance, most of that coverage only duplicates coverage consumers already have, under existing laws or credit card zero liability rules.

The monitoring services normally do not tell you if a new wireless service has been taken out in your name, and they do nothing to monitor your bank accounts or retirement account transactions. They also don’t watch for fraudulent charges on your existing credit card accounts. And they don’t stop tax fraud, medicare fraud or Social Security fraud. The monitoring services will not alert you if a bad guy uses your social security number to nab your tax refunds.

In short, the credit monitoring services will only catch a small percentage of the crimes that can be committed with a consumer’s identity. And the free credit monitoring services might also give you a false sense of security, leading to further problems if you don’t take other basic steps to protect yourself.

So what can you do? By all means, review your credit card and bank account statements on a monthly basis. You should also check your own credit report every four months - it’s free. Make sure to clean up any errors you find. If you’ve been victimized in the past, you should also put a free 90-day fraud alert on your credit file. You can do this simply by filing a fraud alert — sometimes called a “security alert” — with any of the three major credit bureaus: Equifax, Experian, or TransUnion.

Another, even more secure option is to place a full security freeze on your own credit, which prevents anyone from opening a new account in your name (you can lift the freeze temporarily for your own needs with a PIN if you need to legitimately open a new account). The standards for placing a freeze vary by State - in Minnesota there is a $5 fee. Finally, consider opting out of unsolicited credit card or insurance offers to prevent mail thieves from using them. 

If you elect to have credit monitoring, there are free services available, such as Credit Sesame or Credit Karma. But remember that you cannot rely on credit monitoring alone.

Is some of this a pain in the rear? Sure. But once you get in the habit of checking your bank account statements, credit card statements (at least monthly) and credit reports (at least every six months), you’ll find that it’s an easy way to protect yourself.

About the author: Dan Cooke

Image credit: Simon Cunningham

Underwater Mortgage Lien Stripping Upheld

In a case originating in Minnesota, the Eighth Circuit Court of Appeals has upheld the legality of "lien stripping" wholly unsecured junior mortgages on residences in Chapter 13 cases. The decision follows earlier decisions in seven other federal appellate courts around the country, better settling the law for those of us who live in Minnesota. Congratulations are in order for local attorney Tim Theisen for his work on behalf of the homeowners in the case.

Homeowners with second or third mortgages that are underwater -- meaning the value of the residence is less than the amount owed on the primary mortgage(s) -- can rest easier in the knowledge that they can use a Chapter 13 reorganization plan as a means to removing those underwater mortgages entirely from their homes. For example, a homeowner who owns a home with a fair market value of $150,000 and a first mortgage with a principal balance of more than $150,000 could eliminate any additional mortgage debt on his or her home as part of a Chapter 13 filing.

There are, of course, other requirements that must be met before anyone with underwater mortgages can file a Petition under Chapter 13. But anyone with significant underwater mortgages on their residence may want to consider this avenue of debt relief, particularly if it means the difference between keeping and losing a home.

About the author: Dan Cooke

Image credit: Kevie

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