According to the National Association of Bankruptcy Attorneys, the student loan debt bubble is set to burst.  Last fall, student loan debt exceeded credit card debt for the first time in U.S. history topping out at $860 billion dollars.  The default rate on subsidized Stafford student loans rose to 8.8 percent in 2009 said a report issued by the Department of Education.   The problem is that this figure relates to those borrowers who defaulted in the first two years of their loans.  A majority of the borrowers don’t see their student loan payments peak until year four and beyond.  That means that we’ll be seeing record high double-digit default rates in the next one to two years.

What can you do?

• Item number one on your list is to contact your local Congressperson and Senator to express your concern and encourage him or her to take action to prevent the doubling of your federal student loan on July 1st.
• Talk up the #DontDoubleMyRate hashtag on Twitter and Facebook to encourage your friends and family to join the cause.
• If you are a parent of a high school student just heading into college, consider carefully the amounts your student will be borrowing and seek alternatives to traditional 4-year college programs. For example, it may make great financial sense to complete a 2-year degree at a local community college at more than half the tuition of a 4-year school.  Then attend a 4-year college to obtain the bachelor’s degree, thereby only incurring two years of higher tuition costs. There are also cost comparison tools available at the Consumer Financial Protection Bureau to help you make a more informed decision.

Even if you don’t have student loans or aren’t worried about the interest rate increase, the potential default for some 7.4 million young Americans who will not be able to keep up the increased payments will ultimately fall to you, the American taxpayer.  So in the end, we will all bear the burden of inaction.

They promise ‘hassle-free cash’ and short term money to help you through a rough patch and a fast answer to all of your personal cashflow issues.  What these predatory payday lenders don’t tell you is that they take advantage of low and low-to-middle income individuals by luring them with easy access to cash packaged with hidden interest rates that can exceed 400 (yes, 4-0-0) annual percentage rate (APR) interest on the loan.

Congress last week received a promise from the new Consumer Financial Protection Bureau director, Richard Corday to “use its power to wipe out illegal payday lending practices – such as unauthorized debits on a person’s checking account – while it works on a broader regulatory framework for the industry”  to investigate and put an end to these predatory practices.

Who is funding these high-cost loans?

According to a report from National People’s Action entitled, Profiting from Poverty: How Payday Lenders Strip Wealth from the Working-Poor for Record Profits, by Nicholas Bianchi America’s biggest banks including Bank of America, JPMorgan Chase and Wells Fargo underwrite some 42% of the loans to payday lenders.  There are big profits in funding payday vendors.  “Earning a record $1.5 billion in combined annual revenues,” the article indicates, it’s very difficult to turn those kinds of profits away. A majority of the profits result from the $3.4 billion in annual exorbitant fees packaged in the short-term loans.

Here’s how it works:

Joe’s truck is in the shop and he needs it to commute to his job some 45 miles from his home. In order to keep his job, he visits a payday lender in his town and takes out a payday loan for $500 to cover the cost of his truck repairs. The payday lender is happy to provide the loan with no documentation other than electronic access to his checking account to withdraw the loan amount and required fees upon his elected payday twenty days from the date of the loan. The payday lender charges $20 per borrowed $100, equaling $100 additional on the $500 loan. While the initial loan’s interest rate seems to be at a reasonable rate of 20 percent for the 20 days use, the problem arises when Joe cannot repay the loan with his next paycheck. Twenty days later, he receives his paycheck but has needed other basic living expenses and cannot repay the loan. Joe repays the amout he borrowed and immediately takes out another loan, assuming another $20 fee and the borrowing cycle begins. The continuous re-borrowing puts Jos’s loan at an annual percentage rate of 346.67 percent on his single 20-day loan!

Borrowers, with an average annual income of only $35,000, take an average of nine payday loans each year, typically in quick succession. According to the report, “Only a small fraction of the 17 to 19 million payday loan borrowers take out one loan per year, while a majority of payday loan customers are in effect longer-term borrowers who pay triple-digit interest rates on repeat loans for months at a time” (Bianchi,13).  The financial black hole that these individuals are creating is precarious and leaves them vulnerable to a cycle of poverty that often leads to default and ultimately, bankruptcy.

Of growing concern is the rising number of storefront payday lending locations and more recently, internet-based payday lending. 

The Evolution of Payday Lending

In the early 1980’s payday lenders were virtually unknown. As a decline in real income occurred, especially among lower income workers, many Americans faced an inability to meet monthly expenses without the use of credit, mostly in the form of credit cards.   As the subprime market continued to expand into the 1990’s, the banking industry started to take notice of record profits and the potential for even greater income from high-cost cash advance loans. One prolonged recession a decade later and the American economy is faced with a lending crisis. Americans demanding fair banking practices pushed banks to lower returned check fees and predatory credit card practices, leaving the most vulnerable segment of our population with little options for credit but the payday cash lender.

With the exception of seven states, a majority of these lenders are highly under-regulated.  Payday lenders can charge exorbitant fees and interest charges for even the most short-term loans creating a financial black hole from which borrowers cannot recover. The good news is that New Hampshire has started to crack down on payday lenders by drastically limiting the interest rates from the industry high of 450% to a lower 17% to 45% APR. Six other states have followed suit including Arizona, Arkansas, Colorado, Montana, Ohio and Oregon. Much still needs to be done.  With 33 other states still providing little or no legislation on payday lenders, the report goes on to say that “there are more payday loan stores in the United States than McDonald’s restaurants.”

Change is needed – NOW.

The power to stop these predatory lenders ultimately lies with you, the voting public.  By bringing these predatory payday lenders practices to light with local, state and federal government in the form of grassroots campaigns and then to legislatures to create new laws to prevent small dollar, high-interest lending practices, we can tell our representatives that these practices will not stand in our states. Not only do these payday lenders need to be addressed on the state level, but the federal government needs to address the issue of nationally chartered banking institutions and Wall Street lobbyists who support these high-cost payday loans.  

Stripping the Payday lenders of their loan-shark interest rates at a more reasonable 39% interest will rapidly reduce the number of storefronts and online providers. “Payday lenders typically cease operations in the state when significant interest rate limits on small loans become the law of the land” (Bianchi, 9).  Yes, there is a definite need for short-term consumer borrowing, but there also needs to be restrictions placed upon the payday lenders to not fleece those citizens most vulnerable to the financial impact of such heinous practices.

New Hampshire Payday Lending Laws

Payday lenders must be licensed in New Hampshire in order to make payday lending loans to New Hampshire residents. Additionally, payday lenders making loans to New Hampshire residents cannot charge more than 36 percent per year.

• Payday lenders cannot file a criminal law suit against borrowers who cannot repay their loans to the lender unless the borrower signed the loans with some fraudulent intent or activities.  Payday lenders can file a civil lawsuit against a borrower who is not paying off loans in time.
• There are no laws currently in place to cap the total amount of collection fees that can be charged on payday loan accounts that are in a collections process.
• An individual borrower cannot have more than one outstanding payday loan in his/her name at one time.
• Cooling-off period – Borrowers must wait 60-days from the date of last loan repayment before applying for another payday loan.
• The maximum cash advance loan amount in New Hampshire is $500.00 in principal.
• The payday lender cannot add interest owed to your outstanding balance for the purpose of adding interest on interest.
• The lender cannot require the borrower to set up automatic payments from his or her bank account.  The Electronic Funds Transfer Act prohibits financial institutions from requiring customer payment via electronic fund transfer.
• Payday loans cannot be refinanced, renewed or extended.
• You may cancel a loan request within 24-hours or the end of the next business day by returning the money borrowed to the lender.

More information can be found at NH State Banking Department at (603) 271-3561. View our white paper on the subject for additional information and statistics.

The CARD Act's hidden dirty little secrets

While most consumers celebrated the new changes brought about by the CARD Act beware of two loopholes that can catch unknowing credit card users in a costly mistake.

Banks vehmently opposed to the CARD Act put their collective heads together and devised ways to either circumvent the new law or put new fees in place in order to make-up the revenue differences.  The first of these attempts is the 45-day change in a consumer’s Annual Percentage Rate (APR).  While you may believe that this increase (the APR never decreases!) will only affect any new purchases made on the card, guess again.  According to advocacy group, Healthwithmybank.gov, “After 14 days, the new rate will apply to new transactions…and after 45 days, it can affect all balances on the account.”  That can mean significant interest rate fees may snowball into a sizeable debt – especially if you aren’t aware that the credt card companies are doing it.

The second area involves an increasing APR on all balances when the account goes over 60 days past due.  Not only will your entire balance be affected, but the credit card company can also retroactively hit your account with the interest rate increase effective 14 days from the date the notification is postmarked to you.   As of the 15th day, your credit card balance will be impacted by the higher rate and after the 45-day mark, your new interest rate will be in effect and the statement will reflect the fees retroactively applied to your entire balance. While some major banks like Bank of America have elected not to use this loophole for past due accounts, most of the major banks are operating under this rule. 

What can consumers do?

The moves made by a majority of the nation’s credit card companies are, sadly, entirely legal.  You have a few decisions to make once you receive notification of a new APR:

1.  Make plans to pay off the entire balance before the new APR takes affect and close the account.

2.  Make plans to pay off the balance as quickly as possible with lump sum payments and cancel the card.

3.  Talk with your credit card company about transferring the balance to a lower rate credit card.  If they don’t offer you this option, shop around for another credit card company that will.

4.  If you can’t repay the entire balance immediately, don’t use the card for any further purchases.

Unfortunately, the consumer is still at the mercy of the credit card company when it comes to changing APR and paying off the balance with the old APR.  Bear this in mind when you use your credit card and only charge what you can afford to repay in one month’s time.  Yes, emergencies happen, but know that whatever amount you charge to the card can soar to astronomical loan-shark rates at the whim of your card issuer.

Myth #1 – I will lose my home, car and other assets if I file bankruptcy.
Consumers keep their home, cars and other assets all the time in filing bankruptcy.  The law in New Hampshire and Massachusetts is generous in terms of protecting the homesteads of homeowners who have to file a bankruptcy.  Massachusetts has a $500,000 homestead exemption while a married couple in New Hampshire can protect $200,000 of equity in a home.  Given the real estate market, this means keeping a home in a bankruptcy is seldom a problem.  One of the purposes of an initial legal consultation is to ensure that you can keep everything you own.

Myth #2 – Bankruptcy law changes in 2005 did away with the right to discharge all credit card debt and it now needs to be repaid.  
The media articles reporting changes to the U.S. Bankruptcy Code in 2005 were less than clear, and many people concluded that the new law outlawed the right to file the simple type of bankruptcy called a Chapter 7 which gets rid of virtually all debt subject to some exceptions.  But this inaccurate.   While the lending industry spent $108,000,000 to lobby Congress to make it more difficult to file a chapter 7, most of my clients who qualified for a chapter 7 before the law changed would continue to be able to file one under the new law.   Chapter 7 bankruptcy remains the most common type of bankruptcy filed in the United States.   While you have to meet certain income standards to qualify, once you do, you still eliminate of all of your credit card debt.   There are still instances of non-dischargeable debt such as,  student loans, most taxes, and domestic support obligations.  Even if you don’t qualify for chapter 7, a chapter 13 bankruptcy doesn’t require full payment of all debt and it will stop the interest and collection fees from running on your cards as soon as it’s filed.  A chapter 13 is better than a debt management plan because the amount you pay per month is based on what you can afford, not on the amount your credit card companies want you to pay.

Myth #3 – Draining  a 401(k) or retirement account is a good way to pay off the amounts you owe to your creditors.
Make a hard decision before you liquidate pensions — not only for the obvious reason that you will need that money to retire, but also because if this doesn’t solve the problem, and you still have to file bankruptcy, you could have kept your pension in its entirety.

Myth #4 – It’s a good idea to pay my credit cards off by getting a home equity loan.
Avoid home equity loans. If you’re one of the lucky few who actually has home equity, taking out a loan to pay credit cards is rarely a good idea as it places your home in jeopardy if you default.   In New Hampshire, the first $200,000 of home equity for a married couple is exempt from creditors  in a bankruptcy,  so it is wiser not to choose to share it with them.

Myth #5 – A bankruptcy will eliminate your need to pay alimony or child support.
Nothing could be further from the truth!  If you have support obligations to an ex-spouse or to minor dependents, there is no discharge of these obligations in a bankruptcy proceeding.  It is possible to discharge property settlement obligations from a divorce in a chapter 13.  A competent bankruptcy lawyer can help you with the answer to whether you have a non-dischargeable support obligation or a potentially dischargeable property settlement.

A Reality Check
If you are finding yourself overwhelmed by credit card debt, medical debt, and collection calls and can see no financial solution, it is time to talk with a bankruptcy attorney to determine if filing bankruptcy will make a difference in your life.  Talk with us, we can help.

Attorney Gaudreau can be reached by calling (603) 893-4300 or emailing him at office@attorneygaudreau.com.

In its short three months of existence, roadblocks such as electronic database development and coordination between government programs, mortgage lenders, and nonprofit housing groups tasked with managing the application process, the program’s leadership found themselves frustrated and unable to help the nearly 300,000 thousand Americans who were struggling to keep their homes from the clutches of bank foreclosure. 

The program was faced with a litany of obstacles right out of the legislative gate and didn’t come online until June 2011.  With a mere six-week application period, the program saw tremendous interest and was forced to extend the deadline multiple times finally closing on September 29, 2011. Even after the extension, the guidelines responsible for selecting eligible homeowners were making it nearly impossible to find homeowners who could actually qualify. 

Passed in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the original intent of EHLP was to provide interest-free, forgivable loans to homeowners who either became unemployed or underemployed as a result of the economic downturn or suffered a serious illness (in the last year only) and could no longer make timely mortgage payments.  The homeowner would need to demonstrate a financial loss of 15 percent or more of their 2009 reported income and had to be at least 90 days delinquent in their mortgage payments and facing foreclosure proceedings.  Lastly, the homeowner(s) had to be able to show that s/he could actively resume payments on the loan should new employment be secured.  If all of the qualifications were met, applicants could receive up to $50,000 or 24 months of federal assistance whichever was greater. Another glitch in the requirements meant that those homeowners in high cost of living areas like New York City would almost certainly expense themselves out of the program because the value of their property and the amount of back mortgage payments far exceeded the $50,000 loan maximum available.  Applicants needing even $1 more than the $50,000 threshold were automatically excluded from the program.

The beauty of EHLP was that it was created to be a stop-gap program for those unemployed or severely ill homeowners who were falling through the cracks and did not qualify for other types of Federal assistance programs.  But the program fell substantially short due to filing obstacles, a very late roll out and inability for most applicants to qualify.  “No one could have anticipated how difficult the statutory requirements make it to reach homeowners,” says Lemar Wooley, a HUD spokesman in an interview with CNN Money. 

The enormity of this failure will ultimately result in more families on the brink of losing everything, tumbling off the rocky abyss into financial ruin.  The money allocated to the program has since been returned to the federal government leaving hundreds of millions of dollars on the table rather than going to those for which they were intended.

Sources:

Buckley, Cara.  (September 30, 2011). U.S. Mortgage-Aid Program is Shutting Down, With Up to $500 Million Unspent. NY Times. Retrieved from http://www.nytimes.com/2011/09/29/nyregion/emergency-homeowners-aid-ending-with-up-to-500-million-unspent.html

Luhby, Tami. (October 3, 2011).  Mortgage Help for Unemployed Disappears. CNN Money. Retrieved from http://money.cnn.com/2011/10/03/news/economy/mortgage_unemployed/?source=cnn_bin

It's never too early to start teaching kids about money management.

Every day in our practice, we see the devastation that financial insolvency creates not only for the client, but also the ripple effect that it has on the rest of the family.  One way to prevent financial disasters for the next generation is to teach our kids better ways to understand and manage money. We’ve gathered some of the best advice educators and financial experts have to offer to help you with the basics of teaching money management and budgeting to your kids.

Lesson #1 – Start Early

Your children see you handle money every day.  From simple decision making at the grocery store about sale products versus the family favorites to stopping by the bank to make a deposit, your children are learning about money and its use in daily living.  Make a point to help your children understand that using money is a cause and effect process.  As early as age three, “children begin to understand that objects have different values,” says the Sesame Street Workshop’s special magazine supplement, “Talking Cents.”  By age four, “children understand that coins have different values and that those coins can be exchanged for different objects.”  As you go through your daily activities like the grocery store remember that no opportunity is too small to start making a good impression about money with kids.

Lesson #2 – Encourage Your Child’s Business Sense

Children have a tremendous sense of entrepreneurialism and love to pretend.  Incorporate these concepts by encouraging business play themes.  Start by setting up a small grocery store in your kitchen or an auto repair shop in your living room.  Let your child’s imagination soar as he negotiates purchases and schedules repairs of your giant plastic buggy. As children mature, expand on these themes by allowing a lemonade stand or some other form of small business.  Give them simple tools like a notebook and a calculator to track expenses, sales and even calculate profits for their business.

Lesson #3 – Teach that patience pays off.

Impulse buying is big business in retail markets.  According to the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA), Americans spent approximately $10.3 trillion dollars in 2010 on personal consumption expenditures.  With industry estimates of 40% of all purchases being impulse buys, defined as those purchases that are unplanned or unnecessary, the simple math adds up to a staggering $4.2 trillion dollars on impulse purchases alone. Teaching our children to wait to make a purchase can provide a much-needed safety net allowing for more rational decision making.  For example, ABC personal finance correspondent Mellody Hobson recommends offering your 5-year-old daughter a Barbie doll today or $20 next week.  Which do you think she would choose?  “Explain that if she waits the week she could buy three Barbie dolls with the $20 instead of having just one Barbie doll today,” continued Hobson. The same lesson can be taught using a savings plan and real money where you might match her savings dollar for dollar over the course of a year. Lessons on delayed gratification can teach patience, financial planning, and how to save for bigger items.  These lessons are  necessary during the teen years and into adulthood when the financial stakes for major purchases such as college student loans, a car, or a home become even greater. 

Lesson #4 – Remember to give back.

Teaching money skills is also a great opportunity to teach generosity and build a sense of community.  Not only can you donate money to a cause, but you can teach your children that donation of time and talents also have value.  So often the latter two contributions are overlooked for the convenience factor of donating money to causes.  Ways to encourage community while still teaching money skills can include raising money for a local charity walk, working car washes, or even stocking items at food bank shelves.  All of these opportunities coupled with the ‘value’ of donating time and talents can add up to a great financial lesson in what it means to be a good community citizen.

Lesson #5 – Keep up the good work.

As you know with all other life lessons, teaching life skills to children isn’t a one-shot deal.  It takes time and repetition in order to make skills a permanent habit. If you have a component of fun mixed in with your lessons, they’ll be even more memorable ways to reinforce good behaviors.

How are you teaching your kids about money?

Rising healthcare and decreasing insurance coverage mean tough choices for many families.

A recent report came out a few days ago linking federal bankruptcy court records with cancer survival rates.  For many Americans the findings were shocking, but for those of us who work in bankrupcty, the numbers were not all that unexpected. 

“On average, bankruptcy rates increased fourfold within five years of diagnosis” of a life-threatening disease.  The study, by the Fred Hutchinson Cancer Research Center, went on to report that “compared to the general population, bankruptcy rates were nearly twice as high among cancer patients one year after diagnosis, and that the median time to bankruptcy was just two and a half years after diagnosis.”  That is not a prognosis that anyone suffering from a life-threatening illness wants to hear.  The good news – cancer cure rates are rising.  The bad news – if you’re a cancer survivor you’ll more than likely have to file bankruptcy just to make ends meet during and after the treatment regime.

Medically-related banktupcties have been on the rise since the mid 1980′s.  Catherine Arnst of Business Week reported in her story, “Study Links Medical Costs and Personal Bankruptcy” that “in 1981, only 8% of families filing for bankruptcy cited a serious medical problem as the reason.  In a 2001 study of bankruptcies, five states studies by researchers found that” illness or medical bills contributed to 50% of all filings.”

Reasons for the spike in medical bankruptcies are related directly to the proportion of costs now being thrust upon the insured rather than paid by the insurance company.  While medical premiums, coinsurance and copayments are at the highest levels ever, patients and their families are enduring a labrynth of legalese, loop holes, and paper work that leaves them confused about their coverage and fighting with insurance company voicemails, case workers, and appeals processes in order to have their claims paid – all while enduring countless hours of chemotherapy, radiation and the ill effects of their diseases.  Add to that the potential for job loss due to illness and subsequent loss of medical insurance, and you have the perfect storm of financial disaster.

Unless you are one of America’s billionaires, your family may be just one catastrophic illness away from bankruptcy, too.  Having health insurance is no guarantee that you’ll financially survive your disease either.  Families with private insurance (not Medicare or Medicaid) reported that the average out-of-pocket medical costs were $17,749 while uninsured families faced $22,658 in medical costs.  The current proposals to boost coverage to the uninsured is a step toward alleviating some of this damage, but still leaves the hard-working American holding the financial burden for financing a government medical plan as well as devising a way to pay their own medical expenses in the event of a serious illness.  That’s a heavy price and an even heavier burden to bear.

What happens next is something that we may have all considered when faced with a financial crisis – families begin to put the medical costs onto one or more revolving credit cards, which they cannot repay.  The debt continues to snowball until an avalanche strikes effectively wiping out the family’s financial house.  While this debt is difficult to quantify during a bankruptcy proceeding and is one of the reasons why so many in Congress and the Senate are able to deny the cause, we have seen first-hand how an illness serves as the impitus for a downward financial spiral resulting in bankruptcy.

Low Credit Score Cards Coming to a Wallet Near You?

If you’ve been struggling with the economic recovery, it may be very tempting to loosen your financial needs by signing up for one of the numerous low credit score credit card solicitations you’ve received.  But do a little research into what these cards offer and you may discover that they’re not such a deal after all.

Offered by the industry’s big boys like Citigroup, American Express and Capital One, low credit score cards arrive with all the bells and whistles of their lower-interest siblings but have a series of hidden fees, rising interest rates and dangers buried in the fine print.

Fifteen percent of your credit score is dependent on your past credit history. If you’ve had late payments, over credit limit balances or defaulted on a credit card, then a low credit score will be issued by FICO, the agency assigned to determine credit scoring.  The lower your credit score, the less likely you’ll be receiving offers for a respectable interest rate.  Now ask yourself, if I’m having difficulty paying off my current debt, is it really wise to assume more? NO!  Run don’t walk to your nearest trash recepticle and throw out those credit card offers!

If you simply cannot resist the offer placed before you, I advise that you ask the credit card company a few basic questions about the terms of their agreement:

1.Will the new credit card offer allow you to consolidate your current credit card debt onto a lower interest rate card?

2.Will the lower interest rate remain in effect indefinitely or will it expire after three, six, or nine months after which time the rate may skyrocket?

3. Will a default on another credit card trigger a higher interest rate, even if all of my payments with this card are current?

Make sure that you receive all of the terms of the credit card agreement in writing BEFORE signing.  All that dreaded fine print holds the key to interest rates, penalties for over the credit limit and late payment charges, due dates and a myraid of other hidden arrangements.  So pull out your magnifying lens and READ it.  Once you sign, you’re agreeing to these terms, whether or not you’ve read the fine print or even understood it.

Do yourself and your bank account a huge favor and sign up for only ONE charge card – not a credit card, but a CHARGE card.  What’s the difference? Charge cards don’t allow revolving balances – those purchases that roll from one month into the next.  Rather, charge cards must be paid in full at the end of each billing period.  That means that you have the convenience of a credit card for hotel reservations, car rentals and purchases, but you must pay off whatever you purchase within that timeframe and no longer.  This type of card, American Express GREEN for example, will help you to better manage your money and prevent you from spending friviously.

So tell me – are you recieving invitations for low credit score credit cards? What is the interest rate?  I’m interested to hear what these bad boys are charging.