Bankruptcy Law A Disaster

The idea of the 2005 bankruptcy "reform" law was that it would stop abusive filings and as a result everyone would be better off, except the shameless few who were abusing the system. We were sold this bill of goods so effectively that many of us who are usually quite compassionate felt the reforms probably made sense. After all, shouldn't it be difficult to file for bankruptcy?

The resulting mess was legislation that bankruptcy judges are calling a colossal failure.

• "Unquestionably, this is the most poorly written piece of legislation that I or anyone else has ever seen," U.S. Bankruptcy Judge Keith M. Lundin of Tennessee (31 years of experience) is quoted as saying in an article on bankruptcy reform published by In These Times.

• "It's such a poorly thought out piece of legislation," says Henry E. Hildebrand, a U.S. bankruptcy trustee in Nashville, Tennessee in the same piece.

• U.S Bankrupcty Judge Frank R. Monroe published an opinion that essentially accused the credit industry and Congress of colluding "to make more money off the backs of consumers in this country."

Bankruptcy attorneys everywhere are expressing tremendous frustration in their ability to help consumers suffering from the perfect storm of bad mortgages, credit card card debt, stagnant wages or unemployment, and rising food and fuel prices.

For the credit industry, a word to the wise: Sometimes you don't get what you paid for. They wanted fewer bankruptcies  (more money) but filings are still rising, even with the new law. All predictions are they will reach the one million mark this year – a number not seen since the bankruptcy law was changed in 2005. As for making money as a result of these changes, apparently that's also a fantasy according to bankruptcy researchers. (I wonder if the credit industry has recouped the millions spent lobbying for it yet?)

Clearly the bankruptcy law is broken, and needs to be fixed. An overhaul is not likely at the moment, but there is an immediate issue that can and should be addressed: helping consumers save their homes by allowing loans to be modified in bankruptcy.

The Center For Responsible Lending says that by lifting the ban on court-supervised loan modifications for qualified homeowners in bankruptcy, Congress can help communities retain an estimated $89 million in tax revenues and save at least 600,000 homes from foreclosures.

HR 3609, the "Emergency Home Ownership and Mortgage Equity Protection Act"  would enable bankruptcy judges to allow these modifications in cases where it makes sense. Essentially, a bankruptcy judge would be able to order a lender to modify a loan if he or she determined the homeowner could afford keep his or her home. (Additional guidelines would have to be met.) This solution will cost taxpayers nothing, and in the end will likely save lenders a tremendous amount of money they would otherwise lose through foreclosures, short sales, and a continuing decline in home values. (What many people don't realize is that some loan servicers can't modify loans even if they want to help homeowners avoid foreclosure!)

Unfortunately that legislation has been "put on hold" but my sources say it's not a dead issue by any means. So let's do something about it.

While bankruptcy reform may not save every home, it's the single best commonsense way to help the greatest number of homeowners at one time, without costing taxpayers anything, Kathleen Day at the Center for Responsible Lending explained to me. I agree.

So speak up! Are you worried about keeping your home? Did you lose your home to foreclosure, or do you know someone who has or will? Is your neighborhood, county or state at risk of being hurt by foreclosures, and the corresponding loss in home values and tax revenues? Write to your Congressional Representative and Senators, the Presidential candidates, and even your local newspaper.

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author (with Mary Reed and attorney John Ventura) of the forthcoming Credit.com book, Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts.

Good News at the Gas Pump...In a Few Months

Come this fall, you'll be able to breathe a little easier when you use your Visa debit card at the gas pump. In October, excessive holds that freeze consumer's available funds for a day or two (or three) will become a thing of the past.

Currently, using your debit card to pump gas can be risky if you are living paycheck to paycheck as many people are. That's because when you use your debit card at the pump to pay for gas, a preauthorization request is made to your bank to make sure the card is valid and that there are sufficient funds in the account.  The problem is this preauthorization request also places a hold on an additional amount on your funds.  But that hold isn't lifted until the hold and the purchase amount are matched up by your bank, which can take about three days.

This means you may have bought $30 in gas, but also have a hold for $75 on funds. So the $45 difference is essentially "frozen" until your gas purchase clears the bank.

A new real-time authorization system that goes into effect this fall will cut that hold time to anywhere from about 15 minutes to 2 hours when a Visa debit card is used. MasterCard hasn't announced similar plans yet, but it's a good guess that they are working on something.

This is welcome news for consumers, but of course, we are presuming that gas stations will still welcome payment with plastic at the pump by then. In an effort to cut costs, some gas stations are banning credit cards, while others are offering discounts for those who pay with cash. And still others limit the amount you can spend at the pump if you use a credit card.

Funny Money Friday: Bridal Party Economy

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

Is the rough economy putting a damper on your plans for a lavish wedding? Here's a novel way to make some money...sell a spot in your bridal party to the highest bidder! A story earlier this week revealed that a hair stylist in Virginia Beach had posted an ebay listing offering a spot to be a bridesmaid in her 2009 wedding:

"As weird as it sounds, I just think somebody might be interested," she said. "Somebody who's never been in a wedding and always wanted to, or somebody who does weddings and wants to help out."

Gray said she hopes the auction brings in enough to cover the $18 she paid in eBay fees, the cost of the winner's dress and shoes - and then some."

There are currently four bridesmaid opportunities for sale on eBay, with prices ranging from $5 to $5,000.

What's next? A seat at the bris? A can't-miss pallbearer opportunity?

Emily Davidson – Credit.com's financial expert and former TransUnion credit bureau insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Piling On

I'm sure that you remember watching a football game where the ball carrier was tackled, was down on the ground, the play had been whistled dead, and yet four more players jumped on the pile. That sure seems to be happening with Countrywide.

You will recall that another lender, Ameriquest, was accused on similar improprieties, alleging that they had taken advantage of consumers. Before it was all over, the Attorneys General of 49 states and the District of Columbia had joined in the suit! Talk about piling on!

In the end, in one of those "we didn't do anything wrong but whatever you say we did we promise not to do again" type settlements Ameriquest paid $300 million into a fund to reimburse wronged borrowers and paid another $50 million to the states to reimburse them for legal costs. Another result of the action was that Ameriquest then started the process of closing their operations, shuttering some 229 retail offices.  The company basically does not exist today.

We all know that if the Bank of America acquisition goes through, Countrywide will also cease to exist as a brand name.  Bank of America is acquiring the company at about $2 per share, down from a top of $45.  My calculations of the value of their loan servicing portfolio is many times the acquisition price, but a big question is the extent of the legal liabilities that BofA will also assume.

There are a number of suits that have been filed, including one by employees who lost money tied up in their retirement accounts, money that was invested in Countrywide stock. They sued the company and the executives who, they said, misled them too.

In the latest action, the States of Illinois and California have filed suits that will become suits against BofA.  Top Countrywide executives are variously named in the suits also.  You can count on this being a long, drawn out legal battle. The allegations in the suit are ones you have heard before, all practices they engaged in to sell unsuitable products to borrowers who didn't understand what they were getting into. 

From all the people I know in the industry who tell me what was going on at Countrywide and similar lenders, it is likely that the allegations are all true. But someone has to prove a lot of things before there is a settlement, and you can rest assured that the cost will be a lot more than $325 million. What ultimately happens is a matter of conjecture, but if you are an aggrieved Countrywide borrower, I would not hold my breath.

Tell the Fed to Protect Seniors and Stop Unauthorized Overdrafts

Seniors who are heavily dependent on Social Security pay nearly $1 billion a year in fees on unauthorized bank overdrafts. Overall, Americans who are 55 and older pay $4.5 billion in overdraft fees – $1.65 in fees for every $1 a lender advances them.

These are some of the key findings in “Shredded Security: Overdraft Practices Drain Fees from Older Americans,” the latest report from the Center for Responsible Lending (CRL) on the sorry state of the nation’s current overdraft system. It costs people of all ages some $17.5 billion a year, at an average fee of $34 for every overdraft, often with additional daily fees – even though they never agreed to this “protection.”

Isn’t 18% Enough for a Bank to Make?
There’s a case study in the new report about "Mary," who paid $448 in overdraft fees for $210 in credit from her bank. The bank repaid itself from her Social Security check, leaving her $20 to live on and putting her further in debt every month. Instead, if Mary had an 18% line of credit for overdrafts, she would have paid only about $1 in fees.

I don’t know about you, but 18% seems like plenty of interest to me – especially since the bank can re-pay itself from future deposits, which are guaranteed to come from Mary’s Social Security. What a rip-off!

Let’s Put an End to It
While the news here is not good, the timing is excellent: The Federal Reserve is considering changes to the overdraft rules. Unfortunately, the Fed doesn't go far enough, only calling for banks to let customers opt-out of pricey overdraft programs. Along with the CRL and over 80% of Americans, I believe banks should ask customers if they’d like to opt-in.

The vast majority of us want to be warned when an ATM withdrawal or a debit card purchase would put us in the red. That way, we can decide for ourselves what to do. The Fed should require it.

I also want to see the Fed put an end to the way banks maximize their overdraft fee income -- by subtracting the checks with the highest dollar amounts first, regardless of the order in which they were received, and by holding deposits longer than necessary. All of these practices put customers deeper into the red when they may not even know they have a problem.

If the bank has hit you, your parents, or your grandparents with unfair overdraft fees, the Center for Responsible Lending wants you to tell the Fed about it. I want you to speak up even if you haven’t been victimized by this unfair system.

Sealed with a Kiss
This is what I sent to the Fed:

Please protect our seniors and their Social Security checks from the excesses that leave too many of our elderly with hardly any money, thanks to their overdraft “protection.” I call on you to require lenders to:

1. Ask customers if they’d like to opt-in to the bank’s overdraft program.
2. Show how much the overdraft fees would be in terms of an annual percentage rate.
3. Warn people before they go into the red.
4. Stop “gaming the system” to increase overdraft fees by picking and choosing when checks and deposits clear. 

Feel free to copy and paste my message to the Fed here!

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com. 

Is a Credit Inquiry the Same if You're Approved or Denied?

A reader wrote in this week with the following question about credit report inquiries:

I was wondering: when a person is applying for a credit card and a hard inquiry is done on your credit file, does your FICO score go down even if are approved or does it go down only if you are denied? Curious??!!

The credit inquiry impact on your credit score does not change if you are approved or denied. Basically, all an inquiry does is record the fact that your credit was pulled for the purpose of a credit application. There is no record with the inquiry of you being approved or denied for the credit card or loan.

Inquiries are used in credit scoring formulas to track how frequently you apply for new accounts. Too many applications for credit and you are considered to be a greater credit risk. Applications for credit add instability to your credit and credit scores hate instability.

Damaging hard inquiries only occur when you apply for a credit or loan account. You'll receive a soft inquiry when you check your credit yourself or when your credit is checked for a pre-approved offer. Soft inquiries don't hurt your credit score.

Ironically, your credit score will likely be more damaged if you're approved for the account than if you're denied. If you are approved, you'll have the damaging hard inquiry plus some damage in the credit age category resulting from having a newly opened account. Your credit score will improve as you use the new account responsibly.

You can learn more about inquiries in this expert article from FICO insider, John Ulzheimer.

Emily Davidson – Credit.com's financial expert and former TransUnion credit bureau insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Tales from the Mortgage Trenches

I get a lot of calls from people who find my name and hope I can help them with a mortgage problem. Frankly, it is sad to hear from so many who are in dire straits and for whom solutions are not available. Here are a couple of recent stories.

Tale 1 – a lady, not a previous client, has an Option ARM that she got several years ago when she bought her home in Northern California. She had hoped to flip it in a couple of years, but of course the market has not allowed her to do that. In fact, the property is worth a little less than she paid for it and although she still has some equity, it would largely disappear in sales commissions should she sell it.

She enjoys the home, wants to stay there but her loan has become toxic. She could still afford an Interest Only loan and could afford a fully-amortized loan if the interest rate were reasonable

But her rate has just risen to over 7.5% and she cannot afford it. Neither can I arrange a refinance because she cannot document her income. Bottom line, she loses big if she sells her home and she loses if she stays there with her current toxic loan.

I suggested she call her lender to discuss a way where they could modify the terms of her loan to something that she could afford. Their response? We can't [read won't] help you unless you have missed a couple of payments. She has FICO scores in the high 700's and is unwilling to start missing payments just to bring her lender to the negotiating table.

Tale 2 – Several years ago we arranged financing for a nurse. We fully documented her income and it was a good loan. However, she lives in an area that has suffered more than most with declining real estate values.  Her home is now worth less than the loan balance. It is a 5/1 ARM that will adjust next year to market rates.

Her current rate is 5.625% and she can afford the payment. She would like to refinance at the current market rate for, say, another 5 years. Of course, this would require a loan greater than 100% Loan-to-Value which is not available today. Her lender said that they were unable to help her and to call back in 2009 when it was closer to the reset deadline. 

Bottom line, I keep reading stories about how many homeowners are benefiting from work-out plans with their lenders, but I am having trouble believing them. At one end of the spectrum, hundreds of thousands of people have lost their homes. They certainly didn't benefit from any renegotiation program. And there are others like the ones above, folks with good credit scores who are willing to stay in their homes and make payments and who seem deserving of some relief. I think they will never be served either.

It makes one think that the Public Relations Departments are making a lot of this up. Indeed, someone sent me a press release from FannieMae that indicated that they would be able to refinance homes up to 120% LTV. But that release has disappeared from the FannieMae website and no lender I talked with had ever heard of it. 

Pretty sad.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

The Responsible Choice Plan: A "Win-Win" for Lenders and Borrowers with Excessive Credit Card Debt

While detailing and exposing the problems are certainly important contributions, what Dr. Manning is working on now has the potential to dramatically change the way people with substantial debts can get back on their feet. His timing couldn't be better, given how universal default, the subprime mortgage mess, the credit crunch, the resetting of adjustable mortgage rates, and the recession are wreaking havoc with so many of our wallets.

Far too many hard-working families are in very serious financial trouble. Although most want to do the responsible thing and pay all their bills, many are $20,000 to $60,000 in credit card debt and can no longer make ends meet. If Dr. Manning has his way, far fewer of these folks will go into bankruptcy, and many more will be able to keep their homes.

Math Like You Wouldn't Believe

Manning has developed an algorithm, a very complex formula, known as the "Responsible Debt Relief Grading System (RDR)" that calculates how much of their outstanding debts people can realistically afford to pay back – depending on:

· What their total household income is.
· Whether they rent or own, live alone, have dependents, etc.
· Where they live and what their local tax liabilities are.
· What their employment status is.
· What they're left with after taxes, based on how many dependents they have and whether they itemize their taxes or not.
· What the US Bankruptcy Court mandates for household budgets/cost of living expenses in their specific locality.
· How the current bankruptcy rules and regulations would apply to them.
· What they owe – and more!

(If you're wondering how Manning could possibly figure all of this out, he's a professor at the Rochester Institute of Technology (RIT) and Director of its Center for Consumer Financial Services.)

Now, he's in the process of applying this grading system across the country to help both borrowers and creditors move forward realistically, by identifying who will benefit from consumer credit counseling services, who can only repay a small fraction of what they owe and unfortunately, will be best off filing for bankruptcy – and who is "near bankrupt" or only able to pay back between 20% and 60% of what they owe.

As Manning puts it, people can "get a free assessment and they don't have to worry about rip-offs." More technically, he explains:

"Based on the score and their cash flow/debt situation, consumers are referred to: (1)  our national CCCS partner InCharge (over 80% net repayment), (2) our Hope Financial "Responsible Choice" program (if consumers can repay 20% to 60% of their unsecured debt), and (3) our Debtor Attorney Network (if they cannot repay at least 20% of their unsecured debts). As a result, anyone with a debt problem will be able to find a debt management/resolution program that best suits their situation."

While CCCS programs typically take five years to complete, the Responsible Choice program is expected to last for three years, with Hope Financial managing the payments to creditors at a 40% to 80% discount. Manning adds:

"This is a win-win situation for all – people strapped financially can avoid bankruptcy; creditors will receive regular payments to offset their losses, and thousands of households will retain their homes."

In a Nutshell

Here's the way the Hope Financial site explains how the program works:

1. We objectively figure out what you can pay.
2. We fairly document why that is all you can pay.
3. We assist you through your payment plan over 36 months.

Sure sounds good to me! As of now, Hope Financial is taking on clients in Ohio and also in Texas, Florida, New York, Utah, and California, with other states soon to follow. Check it out and let us know what you think.

By the way, in the interest of full transparency, I am proud to say that I serve on the Advisory Board for RIT's Center for Consumer Financial Services. The center is truly one-of-a-kind and is really helping to facilitate positive change for consumers.

Curtis Arnold - Curtis is the CEO/Founder of CardRatings.com, a website that provides credit card ratings and reviews of over 20,000 offers.  He is also the author of How to Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line (FT Press, 2008).

Giving Credit Where Credit’s Due: Three Cheers for Richard Cordray

Richard Cordray, the Treasurer of Ohio, has been spear-heading a drive to get Ohioans to take a stand in favor of the proposed changes to the credit card regulations that are being considered in Washington. He hopes to gather between 5,000 and 10,000 comments by August 4th, when he'll submit them to the Federal Reserve, as well as to the Office of Thrift Supervision and the National Credit Union Administration, the other two agencies that are pondering cardholder-friendly provisions.

Cordray is asking Ohioans to join with him "to let the federal government know that we support these proposed changes that will help to end some of the worst practices of 'gotcha capitalism' by credit card companies." Specifically, he is calling for an end to:

• Unfair time constraints for consumers to make payments.
• Unfair allocation of payments among balances with different interest rates.
• Unfair application of increased annual percentage rates to outstanding balances. 
• Unfair fees for exceeding the credit limit solely because of a hold placed on an account.
• Unfair balance computation method.
• Unfair financing of security deposits and fees for issuance or availability of credit.
• Deceptive firm offers of credit.

"The proposed rules are just that: proposed, but not yet final," as Cordray puts it. "No doubt the opponents will be making their voices heard. … and we want them to hear a strong response from people who favor these rules."

In addition to busily promoting his credit card initiative in Ohio, Cordray is trying to get other state treasurers to do likewise. To encourage your treasurer to undertake a similar campaign against unfair and deceptive credit card practices, start out at the National Association of State Treasurers, where you can get the correct link for your state. I think every single one of them ought to follow Cordray's lead. Do you agree?

Would you rather speak out to the Feds directly? I recommend a quick visit to Consumer Action, which makes it easy to add your send in your comments. Any way you do it (and even if you don't agree with some proposals), I think it's important to let your feelings be heard!

Curtis Arnold - Curtis is the CEO/Founder of CardRatings.com, a website that provides credit card ratings and reviews of over 20,000 offers.  He is also the author of How to Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line (FT Press, 2008).

Driving Less? Tell Your Insurer and You Could Save

If the high price of gas means you're spending less time behind the wheel, you could save an average of 5% to 15% on your car insurance – between $47 and $142 – according to the Consumer Federation of America (CFA), which crunched the numbers. Believe it or not, you may be eligible for an immediate discount on your auto policy, and one phone call may be all it takes to get it.

Why? "Auto insurance rates are partially based on how much you drive and how you use your car," said J. Robert Hunter, Director of Insurance for CFA. "We encourage all Americans to act now to save money by calling their insurance company or agent and asking if they qualify for an immediate rate reduction."

If you used to drive to work or school, but have now switched to mass transit or car-pooling, ask your insurer to change your classification from "Drive to Work" to "Pleasure." CFA says your savings could be 10 to 15 percent. Even if you continue to drive to and from the train or bus station , you could still save between 5% and 10%.

It's Not Just Commuters Who Can Save
Insurance companies charge different rates depending on the number of miles you drive. Even if all you've done is consolidated a few chores to cut back on your driving by 10% -- from 200 to 180 miles a week – it adds up – in this case, to over 1,000 miles a year. You could easily go from driving over 10,000 miles a year to under it, and that can save you between 5% and 10%, according to CFA.

"Many consumers would receive a lower rate in this situation, because insurers often use 10,000 miles as a key 'break point' in setting rates," explains Hunter. "Simply explain the actions you are taking to drive less and estimate how many fewer miles you are driving a month."

Who Will Save the Most?
It may surprise you to learn that CFA believes the savings will be greatest for people who pay higher car insurance rates, for example, younger drivers and urban dwellers. Talk about a silver lining! The expectation is that folks who only pay a few hundred dollars for auto insurance, say, an adult living on a farm, will save less.

Wherever you live, no matter how old you are, if you're driving less, call your insurer today!  Please let us know how you make out.

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.