Life Events, Pay Down My Debt

Practical Advice For Those Facing Bankruptcy, From Someone Who Has Been There

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Mixed Race Young Female Agonizing Over Financial Calculations in Her Kitchen.

My journey to bankruptcy began in 2003 after I was in a major car accident that left me unable to work for several months. Injured and unemployed I was forced to move back home with my mother, younger brother and three foster brothers. As I slowly began to regain my financial independence our family was dealt another blow.

In December of 2004, after what should have been a routine knee replacement surgery, my mother contracted a MERSA staff infection and became gravely ill. Needing around the clock care and help with my four younger brothers, I became a full-time caretaker while my mother fought for her life. It took her over a year to win back hear health. Unfortunately Murphy’s Law was not done with its assault on our family just yet.

In the spring of 2006 I had just gone back to nursing school when I had an emergency appendectomy, which left me with an additional $15,000 of debt. Having no insurance I was responsible for the entire amount due. This surgery was the tipping point in which my debt became too much for me to handle and I had to begin looking for a different solution.

I spent the next several months educating myself on how to handle harassing debt collectors, ways to work with your creditors and how to rebuild your credit score. After struggling to send my creditors every spare penny I had I finally came to the conclusion that filing for Chapter 7 bankruptcy was the best solution for my situation.

Walking into bankruptcy court was one of the most nerve-racking things I had ever gone through, but I am so glad that I did.

If you find yourself at a crossroads contemplating bankruptcy there are a few important things you need to take into consideration in regards to your own situation.

Evaluate Your Financial Habits

Before you file for bankruptcy you need to take a long hard look at your finances, your spending habits, and any other situations your currently facing that is causing you financial hardship. Until you know how you wound up in the situation you can’t have a clear plan on how to fix it. This is also the time to decide if going bankrupt is really the right thing for you to do.

[When Should You Consider Bankruptcy?]

Gather All Your Information

Once you have decided to move forward you need to spend some time gathering all of your information. This will include: all of your bank accounts, retirement accounts, your personal property and other assets. Having this information will help you figure out which type of bankruptcy for which you qualify.

Know Your Options

It is very important to know your bankruptcy option and what each will mean for you.

A Chapter 13 bankruptcy does not wipe out your debt. Instead the court will calculate your disposable income and use that number to make a payment plan for you. Over the course of three to five years you will be required to make payments on your debt until it is paid in full or to the agreed upon amount.

A Chapter 7 bankruptcy wipes out your debt completely. There are however a few specific debts that cannot or rarely can be eliminated with a Chapter 7 including back taxes and student loans. It is also important to note that you must qualify for a Chapter 7 bankruptcy. You must prove that you are unable to pay off your debt either because your income level is below the state median or your living expenses are so high that you simply cannot repay your debt.

[8 Steps for Discharging Student Loans Through Bankruptcy]

Find A Reputable Lawyer

There are many websites out there suggesting that you can file for bankruptcy on your own, and that there is no reason to pay a lawyer. What those sites fail to mention is if you make a mistake on your paperwork you may have to start the process over. You may even find that some of your debt was not included in your bankruptcy leaving you responsible for the payments regardless of what type of bankruptcy you filed.

While hiring a lawyer does increase the expense of filing for bankruptcy it is his or her job to make sure that everything is in order and goes as smoothly as possible. Speaking from personal experience having a lawyer by your side during your proceeding can also help you feel more confident when facing the judge.

Have an After Bankruptcy Game Plan

There is a life after bankruptcy, while it may not feel like it in the moment things will get better. You however need to have a plan for how you will handle your finances from this point on. If you do not make a conscious decision to change the way you have been handing your money you will find yourself right back in the financial mess you have just escaped.

Going bankrupt can seem like the end of your financial life, and you may be wondering how you will ever recover from it. The good news is that you can. If you learn from your mistakes and make the decision to move forward with good money habits it is possible. I went from being financially devastated to a credit score of 740 in just a few short years. It took hard work and dedication to my financial health but I did it and so can you!

Tennille Flowers |

Tennille Flowers is a writer at MagnifyMoney. You can email Tennille at tennille@magnifymoney.com

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College Students and Recent Grads, Life Events, Pay Down My Debt

8 Steps for Possibly Discharging Your Student Loans Through Bankruptcy

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Students throwing graduation hats

Student loans are the one type of debt you can never discharge through bankruptcy. Or are they?

For years that’s been the case, largely because of a court ruling from 1987 that set an almost impossible standard for student loan borrowers to meet. But the student loan landscape has changed dramatically since then, and in recent years there have been some signs that borrowers in tough spots may in fact be able to find some relief.

If you’re struggling under the weight of your student loans, read on. In this post you will learn:

  • What the current (and strict) criteria are for having student loans discharged through bankruptcy.
  • Commonalities from recent cases where individuals were successful at having their student loans discharged.
  • A step-by-step process for getting on track with your student loans and improving your chances at discharge.

The Current Standard

Individuals hoping to have their student loans discharged through bankruptcy typically have to show “undue hardship” by passing the three-part Brunner test. This test was born from a court ruling in 1987 and it requires the individual to:

  1. Show that he or she has made a good faith effort to repay the loans.
  2. Show that he or she cannot maintain a reasonable minimum standard of living while paying back the loans.
  3. Show that this condition is expected to last for most of the repayment period.

It’s that third criteria in particular that has made student loans so difficult to discharge. After all, how can you convincingly demonstrate that your prospects aren’t likely to improve, especially when student loan repayment periods can extend for as many as 30 years?

It’s proven challenging, but a few recent rulings can give borrowers hope and may even provide a road map for at least opening up the possibility of discharging your student loans through bankruptcy.

Two Commonalities Between Successful Student Loan Discharges

Looking at a few high-profile stories of borrowers who successfully discharged their student loans, there appear to be two big commonalities that may show the path forward for others:

Time: In two cases of successful discharges from 2013, the student loans were 10 and 15 years old. Clearly these were not recent grads at the beginning of their repayment journey.

Significant current hardship: One woman had been unemployed for almost a decade and was caring for her elderly mother. Another woman was 64, on Social Security, working multiple jobs, and cited mental and physical ailments.

In other words, they seemed to be struggling with some of the same factors you might consider when filing bankruptcy for any reason. Which means that if you’re struggling with your student loans and your financial situation in general, it may in fact be possible to have them discharged through bankruptcy as a last resort.

With that in mind, here are some steps you could take to put you in the best situation to either repay your student loans or to successfully have them discharged so you can hit the reset button.

Step 1: Get Organized

Get a complete list of all your debt, both student loan and otherwise, in one place so that you know exactly what you’re dealing with. The most important information you need to know for each type of loan is:

  • The amount you owe
  • The interest rate
  • The minimum payment

For student loans specifically, you will also want to know the type of loan and when it was issued, as that information may impact your repayment options.

You can collect your student loan information from the national student loan data system, and information on your other debts from annualcreditreport.com.

Step 2: Pay the Minimums on All Debts

This one is for both you and the courts.

For you, this will keep your credit history in good shape and keep your debt from spiraling out of control.

For the courts, this is one step towards showing a good faith effort at repayment.

Step 3: Look into Income-Driven Repayment Plans

Just like the previous step, this will both help you immediately and help if you eventually move to bankruptcy.

In the short-term, income-driven repayment plans may help to lessen the burden of your student loans by decreasing your monthly payment. They can even provide a path to eventual discharge without bankruptcy.

And if you do end up in traditional bankruptcy, this will serve as more evidence that you have made reasonable efforts to repay.

Step 4: Track Your Expenses

Tools like mint.com and You Need a Budget will help you stay on top of where your money is going now so that you can make more informed decisions about how you want to use it going forward.

Many of my clients, when they sign up for a tool like this for the first time, are shocked to find out how much they’re spending in certain categories and can quickly find some big ways to cut down on their monthly expenses. If you can find one or two of those big wins, you may find that your loans become a little easier to handle.

Step 5: Create a Repayment Plan

Creating a repayment plan for your student loans will not only give you a better shot at repaying them in full, but will give you another thing to point to if the courts want to see that you’ve made a strong effort to repay.

Hopefully you’re able to enroll in one of the income-driven repayment plans mentioned above, but if you have any extra money available you should consider how you want to prioritize it. That is, which loans should you put your extra money towards first? A thoughtful strategy could save you a lot of money in the long-term.

Don’t forget to keep other financial goals in mind here. For example, taking advantage of a 401(k) employer match or setting up a starter emergency fund could be better uses of your extra money, depending on your situation.

Step 6: Find Ways to Free up Cash

There may be some relatively easy ways to free up cash that could either help with your regular living expenses or help you pay down your loans even faster.

Things like switching to a lower cost cell phone provider, cutting cable, or even bringing lunch to work are relatively small changes that could reduce a significant amount of financial burden.

Step 7: Find Ways to Earn More Money

It doesn’t have to be all about cutting costs. Could you negotiate a raise at your job? Could you start a side hustle? Even a small amount of extra income could give you a lot more breathing room.

Step 8: Consider Bankruptcy

If you’ve been doing all of the above for a number of years and your student loan debt still feels like too much to overcome, it may be worth considering bankruptcy.

Keep in mind that there are some real, negative consequences to bankruptcy, so it’s not a cure-all. And it’s likely still a long shot that you could get your student loans discharged.

But for many it can be a huge relief to hit the reset button on their financial situation, and as recent court cases have shown it is possible to have your student loans discharged. If you’ve been diligently taking the steps above, you’ll have a strong history of attempting to pay them back that the courts may look favorably upon and it may be worth giving it a shot.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt at matt@magnifymoney.com

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Life Events, Mortgage, Pay Down My Debt

Getting a Mortgage After Bankruptcy

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Purchase agreement for house

Whether you’re drowning in loans, unemployed, racking up medical bills, or guilty of too much online shopping, one thing’s for certain — we all hate debt. And when debt becomes impossible to pay back, bankruptcy may seem like the only way to escape.

While filing for bankruptcy may be the right solution, it can negatively affect your finances for years to come. But, fortunately, life moves on. And despite this financial setback, you may want access to credit in the future. Without it, large purchases like a home can be difficult. It’s not impossible, but applying for a mortgage post-bankruptcy means working through a particular set of challenges. Prepare yourself by knowing these important guidelines.

Know the Difference: Chapter 7, 11, & 13 Bankruptcies

We constantly hear about bankruptcies in the media, but what does filing for one actually mean? Bankruptcy is a legal procedure that can help you wipe out or repay debt under the protection of the United States bankruptcy court.

Chapter 7 and Chapter 13 are the main types of consumer bankruptcies. But what are the key differences?

Chapter 7 is typically the preferred type of bankruptcy because involves liquidation and eliminates all your eligible debt. This means your nonexempt property will be sold and the proceeds will be distributed to your creditors. Exempt property varies from state-to-state, but part of your property may be subject to liens or mortgages, promising it to other creditors. It’s important to know Chapter 7 bankruptcies may, but not frequently, result in a loss of your property. You may lose your home outside of bankruptcy to foreclosure if you fall behind on your mortgage payments.

It is much harder to be eligible for Chapter 7 bankruptcy. If your income is above the median in your state and you prove you have sufficient cash flow to service some of the debt, then you’ll likely be forced to file Chapter 13.

Chapter 13 bankruptcy allows you to keep property, adjust debt, and to pay it back over time. This is a long process as the repayment period is typically three to five years. If you’re behind on mortgage payments, it may be easier to keep your home in Chapter 13 because you may be able to make up payments in your repayment plan.

What about Chapter 11 bankruptcies? If your business is a corporation, partnership, or you own a small business, Chapter 11 may give you a chance to reorganize. Chapter 11 also can help restructure debt so it can be paid back over time.

Unfortunately, bankruptcies may stay on your credit report for up to 10 years. Because of this, many people incorrectly assume bankruptcies ruin your chance at homeownership. This definitely isn’t the case, but it does mean the path to purchasing a home will take more time. 

The Waiting Period After Bankruptcy

Even if bankruptcy stays on your credit report for 10 years, you’re not expected to wait that long before trying to buy a home. However, Fannie Mae knows a bankruptcy increases your likelihood of a mortgage default. Despite this red flag, Fannie Mae encourages lenders to investigate the cause of these issues, make sure sufficient time has passed, and verify an acceptable credit history has been re-established. So, how long do you have to wait? The waiting periods begin upon the completion, discharge, or dismissal date of your bankruptcy.

Both Chapter 7 and Chapter 11 require a four-year waiting period. However, if you have documented extenuating circumstances, it’s possible it may be reduced to two years.

Chapter 13 bankruptcy requires either a two-year or four-year waiting period, depending on what step of the procedure you’re on (discharge or dismissal). If you’ve had more than one bankruptcy within seven years, a five-year waiting period is required. But remember, this time period kicks in after the Chapter 13 bankruptcy is complete, so that’s two to four years on top of the original three to five years working your repayment plan. It could be up to nine years total before you’re eligible.

If you’re anxious to start the home buying process, these waiting periods may feel inconvenient. But they offer a fantastic opportunity to clean up your credit and reduce your debt-to-income ratio before re-applying for a mortgage.

The Importance of Your Credit Score and Debt-To-Income Ratio

As soon as your bankruptcy case has been discharged and closed, it’s time to take a detailed look at your finances. Chances are, you have a lot of room for improvement. Luckily, Fannie Mae’s mandatory waiting period gives you the chance to prepare.

Here’s what you need to do:

  • Improve your credit score. First, get a copy of your credit report and a view of your credit score to see what work needs to be done. AnnualCreditReport.com offers a free report every year, but this does not come with a credit score. You can find more information about how to access your score here. Do you know what steps to take next? 35% of your score is based on payment history. That means you need to pay every single bill on time. If you no longer have access to any lines of credit, then consider getting a secured credit card in order to rehabilitate your credit. Start doing this right away and you’ll see improvements. Going forward, you need to monitor your credit report regularly. Remember, your credit score will also affect what interest rate you’ll be able to secure, and consequently, which mortgages you’ll be able to afford.
  • Pay down outstanding debts. After the dust settles from your bankruptcy, do you still owe any money? Try to repay these debts as quickly as possible. Debt-to-income ratio is the single most important factor in getting approved for a mortgage. Looking for your best chance at approval? Aim for a debt-to-income ratio of 40% or less. Also, make sure you don’t take on any additional loans during this period of time.
  • Stick with your Chapter 13 repayment plan. Did you file for Chapter 13 bankruptcy? If so, don’t miss any of your court-ordered repayment requirements. Diligently follow exactly what you’ve agreed to.
  • Save as much as you can. Do you have an emergency fund? A health stash of cash reserves can help keep your debt repayment plan on track as unexpected expenses pop up. Don’t forget, you’re also going to need a chunk of change for your mortgage down payment.

Bankruptcy doesn’t have to create a barrier to homeownership. But bouncing back may take time. Whether you’ve filed for Chapter 7, 11, or 13, Fannie Mae’s mandatory waiting periods offer an opportunity to get your finances back on track. Use this time wisely by committing to improve your credit score and reduce your debt-to-income ratio. Save as much as you can. And when the time comes to reapply for a mortgage, be upfront with your lender. Be honest about your setbacks, show how much progress you’ve made, and explain how you’ve learned from past mistakes. Remember, bankruptcy was never meant to be a life-long penance; it’s a chance for you to start over.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Pay Down My Debt

When Should You Consider Bankruptcy?

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Young couple calculating their domestic bills

If you’re drowning in debt and having trouble keeping up with your payments while still handling your living expenses, you may have at least begun to consider filing for bankruptcy.

Bankruptcy certainly has its benefits, potentially allowing you to wipe the slate clean and start anew.

But there are a lot of things to consider before making a decision, from the negative consequences of filing to whether bankruptcy would even provide relief for your specific situation.

This is a big decision that requires a significant amount of due diligence before moving forward, and in this post we’ll go over some of the key points to help you get started.

Are You Eligible?

There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13.

There are some significant differences between the two programs, but here’s a high-level summary:

  • Chapter 7 allows you to completely discharge your debts, with some exceptions (such as student loans, certain tax obligations, and child support). But you may be obligated to sell some of your property to settle some of your debt obligation.
  • Chapter 13 allows you to create a payment plan to repay some or all of your debts over a 3-5 year period. So your debts are not discharged, but you will also not be obligated to sell any property in order to make your payments.

Either one could be more or less beneficial depending on the specifics of your situation. But the very first question is whether you qualify for either one, and each has its own set of criteria.

Chapter 7 bankruptcy has what’s called the “means test”, which is meant to ensure that only people who truly can’t afford their debt payments are allowed to file. There are two different wants to pass it, and therefore qualify for Chapter 7 bankruptcy:

  1. If your monthly income is less than the median monthly income in your state for your family size, you pass. You can find current median income numbers by family size here.
  2. If you don’t pass #1, you’ll have to go through a complex calculation to see whether your disposable income after subtracting out certain expenses is enough to satisfy your debt obligations. At this stage it would probably be best to talk to a professional who could help you navigate the process.

Eligibility for Chapter 13 bankruptcy is a little more straightforward. Here’s how it works:

  1. As opposed to Chapter 7, you need to prove that your disposable income is high enough to afford a reasonable repayment plan.
  2. Your secured debt (mortgage, auto loan) can’t exceed $1,149,525, and your unsecured debt (credit cards, medical bills, etc.) can’t exceed $383,175.
  3. You must have filed both federal and state income taxes each of the last four years.

There are some other requirements for each, but those are the major ones. Assuming you qualify for at least one of them, there are a few other things to consider.

What Kinds of Assets and Liabilities Do You Have?

Depending on the specifics of your financial situation, one type of bankruptcy may be preferable to the other. Or it may be that neither would actually be particularly helpful.

As an example, neither type of bankruptcy would likely help you all that much if your primary debts are student loans. They wouldn’t be discharged in Chapter 7 bankruptcy. And while your required payments might be reduced over the 3-5 year repayment period in Chapter 13 bankruptcy, once that was over you would have to continue paying them back as usual.

The type of assets you own and their value also matters, particularly if you’re going through Chapter 7 bankruptcy. During that process your bankruptcy trustee is allowed to sell your property in order to settle your debts, but certain property is protected.

For example, your house and car are protected up to certain limits. Employer retirement accounts like 401(k)s and 403(b)s are fully protected, while IRAs are protected up to about $1 million. But other accounts, such as checking, savings, and regular investment accounts may not have the same protections.

The rules here vary by state, and having a strong understanding of which assets you might be able to keep and which you might end up losing will help you make your decision.

What Are Your Alternatives?

Bankruptcy can have the big advantage of erasing your debts and allowing you to start anew. But there are also some serious consequences, such as a hit to your credit score and a mark on your credit report for up to 10 years. So it makes sense to evaluate your other options before making a decision.

One option may be to call up your lenders and see if you negotiate a lower interest rate, a reasonable payment plan, or a settlement for a smaller amount.

You could also work on making some changes to your spending habits, cutting out certain expenses and possibly selling certain possessions to make room for your debt payments.

If you have student loans, you should look into income-driven repayment plans as a way to decrease your monthly obligation and potentially have some of your debt forgiven down the line.

You could also look into getting some 1-on-1 help from a credit counseling company. Just make sure to stick with reputable companies like The National Foundation for Credit Counseling and to avoid the late-night infomercials promising to wipe your debt away.

Make the Best Decision for You

Filing for bankruptcy is a big decision, and in the end you’re the only one who will know what’s right for you.

Do your research, evaluate all of your options, and then make the decision that most helps you reach your personal goals.

 

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt at matt@magnifymoney.com

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College Students and Recent Grads, Pay Down My Debt

Can You Discharge Student Loans in Bankruptcy?

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Students throwing graduation hats

Student loans have been a hot topic in recent news and for good reason. The level of student loan debt in the United States has grown substantially over the past several decades. As of 2014, the balance of student loan debt reached $1.2 trillion. Students burdened with debt have one option when it comes to repayment: pay the debt. However, in extreme circumstances, it may be possible to completely discharge student loan debt in bankruptcy.

How to Discharge Student Loans in Bankruptcy

The U.S. Department of Education website provides four cases in which federal student loans may be discharged. Those include:

  1. Closed school discharge
  2. Total and permanent disability discharge
  3. Death discharge
  4. Bankruptcy discharge

There are a few more options for partial discharge with qualifications. The website lists bankruptcy as an option in rare cases.

“If you file Chapter 7 or Chapter 13 bankruptcy, you may have your loan discharged in bankruptcy only if the bankruptcy court finds that repayment would impose undue hardship on you and your dependents. This must be decided in an adversary proceeding in bankruptcy court. Your creditors may be present to challenge the request.”

The U.S. bankruptcy court will use the three-part Brunner test to determine if the student loans are eligible for discharge in bankruptcy. To show hardship you must show that:

  1. If you were forced to repay the loan, you would not be able to maintain a minimal standard of living.
  2. There is evidence that this hardship will continue for a significant portion of the loan repayment period.
  3. You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).

If you are unable to satisfy any of the three requirements, the loan will not be discharged. However in a study published in the American Bankruptcy Law Journal by Jason Iuliano, 39% of those who applied were granted at least some discharge.

For example, if you are 30 and your student loan payments make up a significant portion of your total income, and you can prove that this hardship will continue for many years you might be able to have your student loans included in your bankruptcy.

But if you just started making payments and have not attempted to use available programs such as income-based repayment, then you may have a harder time discharging your student loans.

If you feel that bankruptcy is for you, consult a lawyer and consider including your student loans.

[Struggling to pay back private student loans? Learn about loan modification here.]

Ramifications of Bankruptcy

Choosing to eliminate your student loans using bankruptcy is a difficult path. Moreover, you will mark your credit report for 7 or 10 years with a bankruptcy filing. This could prevent you from purchasing a home, opening new lines of credit, and benefiting from the best rates to borrow money. It could also prevent you from getting a job with credit pre-screening.

Options So You Can Avoid Bankruptcy

If you would rather avoid bankruptcy, here are more ways to eliminate your student loan debt.

Reduce or Halt Your Current Payment

Determine if you are eligible for deferment or forbearance. A deferment is a period during which repayment of the principal and interest of your loan is temporarily delayed. Depending on the type of loan you have, the federal government may pay the interest on your loan during this period.

If you can’t make your scheduled student loan payments, but don’t qualify for deferment, a forbearance may allow you to stop making payments or reduce your monthly payment for up to 12 months.

[Miss a student loan payment? Learn how to find help here.]

Choose a Reduced Payment Plan

For federal loans, there are a few repayment plans that can help you manage your student loan repayment. Choose one of the following:

  • Income Based Repayment Plan – Payments are calculated based on your discretionary income and can extend up to 25 years of repayment.
  • Graduated Repayment Plan – Payments start off small then increase every two years for a maximum of 10 years of repayment.
  • Extended Repayment Plan – Payments can extend up to 25 years of repayment.
  • Pay as You Earn Repayment Plan – Payments are calculated based on your discretionary income and can extend up to 20 years of repayment.
  • Income-Contingent Repayment Plan – Payments are based on your adjusted gross income and can extend up to 25 years of repayment.
  • Income Sensitive Repayment Plan – Payments are based on your annual income and last for a maximum of 10 years; however, you will pay more over time versus the standard 10-year repayment plan.

[Read about Student Loan Forgiveness Programs Here.]

Career Based Discharged

You can also have your student loans discharged if you take a certain career path and your loans are: Direct, FFEL Program, or Federal Perkins loans. Private loans are often not eligible for forgiveness programs. As an eligible public service employee you can have 100% of your loan balance forgiven after 120 consecutive payments; this assumes that you maintain your status as an eligible public service employee while making those payments. If combined with one of the reduced payment plan options that could mean a substantial reduction in total repayment balance.

Check out our Student Loan Refinance table to compare your options.

 

LaTisha Styles
LaTisha Styles |

LaTisha Styles is a writer at MagnifyMoney. You can email LaTisha at LaTisha@magnifymoney.com

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News

When Bankruptcy Makes Sense

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The word “bankruptcy” usually gets an emotional response from anyone who hears it. Lawyers, advertising it on television, sell bankruptcy like it is a flat-screen television. Radio talk show hosts often call it immoral, telling you to live on beans and toast for 10 years before you break your vow of repayment and walk away from debt.

At MagnifyMoney, we think the truth lies somewhere in between. For certain situations, bankruptcy is the single best solution. For others, it can’t help them. And for some, who can actually afford to repay their debt, it does raise serious ethical questions.

And this isn’t just our opinion. The Fed just recently released a report, showing that bankruptcy can be an excellent solution for some people. And it also showed that the 2005 reform, which made it harder to file bankruptcy, has harmed individuals who stopped filing for bankruptcy. Not filing has condemned them to a life of chronic debt, with daily calls from collection agencies, low credit scores and reliance upon payday lenders for any future emergencies.

In this article, we will:

  • Help you figure out if you should consider bankruptcy
  • Explain how it works
  • Show the cost of not filing for bankruptcy
  • Talk about how to avoid filing again

Is Bankruptcy for Me?

Bankruptcy should only be considered if you are in financial crisis. Although financial crisis can have different meanings to different people, we think the following can be a good way to answer the question:

  • Do you find it impossible to make all of your basic monthly payments? Do you struggle to cover mortgage/rent payment, auto payment, insurance payments and credit card minimums?
  • Is your total debt (excluding mortgage) more than 50% of your gross annual income?

If you answered yes to either (or probably both) of those questions, you are likely in an unsustainable situation. For example, someone who makes $40,000 before tax and has $30,000 of credit card debt in addition to a mortgage will likely never get out of debt, unless he is able to significantly increase his income. That person has a net monthly income of about $2,000 (may vary by state and cost of healthcare and other deductions). Just the minimum due on $30,000 of credit card debt would be over $1,000.

In our example, that individual would work incredibly hard to stay in debt for over 30 years. During those 30 years, he would pay over $50,000 of interest alone to the credit card company. In addition, because of the high credit card balances (and the high likelihood of missing payments whenever there is an emergency), his credit score will remain incredibly low, making everything else in life much more expensive. A low credit score will result in more expensive auto loans, auto insurance, mortgage re-finance and every other type of borrowing.

It makes no sense for that individual to just keep paying the minimum due. He will be stuck in a life of poverty, unless he can increase his income.

Bankruptcy is not for you if:

  • All of your debt is in student loans. It is virtually impossible to discharge your student loan debt in a bankruptcy.
  • All of your debt is with your mortgage or your auto loan. Secured debt is not considered as part of the bankruptcy. (However, you may have the opportunity to get your auto loan balance reduced as part of a bankruptcy. The process is called a cram-down, and the amount of the loan that is greater than the value of your car can be forgiven if you negotiate properly).
  • You can afford to repay the debt. Beyond the moral issues of walking away from debt, there is now a means test and you may not be able to file bankruptcy if you have sufficient assets or income to service the debt.

How does Bankruptcy Work?

There are 2 types of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 is a true “fresh start.” In most cases, all of your unsecured debt (credit cards, personal loans) will be discharged. That means creditors will no longer be able to do any form of collections. The phone calls stop. The wage garnishment stops. The lawsuits stop. There is a record of the debt discharge on your credit report, and it will stay there for 10 years. However, for most people the recovery from bankruptcy is remarkably rapid. If you are in debt crisis (as we defined above), a bankruptcy can help you recover in as few as 2-3 years, compared to a lifetime sentence of poverty. 70% of all bankruptcy filings are Chapter 7. We should warn you: for the full 10 years, you will still have some limitations. Some lenders will never lend to someone with a bankruptcy on their credit report. Some employers will not hire employees with former bankruptcy. And, in the military, filing bankruptcy can result in the loss of intelligence clearance, which could cost you your career. All of these factors need to be considered before filing.

In Chapter 13, you do not have all of your debt discharged. Instead, a portion of your debt is written off, and a payment plan is created for the remainder of the debt. It takes longer to recover from a Chapter 13 bankruptcy, and for most individuals a Chapter 7 is preferable. The main reason people end up in Chapter 13 is because they fail to qualify for Chapter 7 (because they have too many assets or too much income relative to their debt to qualify for Chapter 7).

You should speak to your lawyer, but in most cases for people in debt crisis, a Chapter 7 makes the most sense and will certainly lead to the fastest recovery.

Just remember: Chapter 7 and Chapter 13 generally can not help you with mortgage, auto and other secured debt or student loans.  The only way it will help is by eliminating other debt, helping you to make payments on your mortgage.

The Cost of Not Filing for Bankruptcy

In 2005, bankruptcy “reform” was passed. It did 3 big things:

  • Introduced a means test. If you household income is above the median, you have much higher hurdles to cross before having your bankruptcy petition approved
  • Increased the cost of filing. The cost of filing for bankruptcy has increased by 44%, from an average of $697 to an average of $975. As you can imagine, higher costs make it more difficult for those with the least amount of money to afford the filing.
  • Made student loans off limit. Student loan debt is now a protected bubble, and it is virtually impossible to have that debt discharged.

As a result of these changes, the number of people filing for bankruptcy declined significantly. The Fed has looked at the impact of this decline in bankruptcy filings, and the results are startling. They clearly show that many people would have been much better off had they filed. Here are the findings:

Because bankruptcy now costs more, the poorest people are least likely to file. (And they need it the most)

The Federal Reserve tracked the likelihood of people to file for bankruptcy before and after the change to the law. People with higher incomes continued to file for bankruptcy, whereas those with the lowest incomes filed at a much slower rate. The Fed concludes that “liquidity constraints” kept people from filing. In other words, people were too poor to file for bankruptcy.

People who file for bankruptcy recover much quicker than people who don’t file.

People who file for bankruptcy see a much quicker improvement in their credit score than those who don’t. Why? People who don’t file bankruptcy (but are in financial crisis) continue to struggle to make minimum payments. They continue to deal with accounts in questions. They continue a life of chronic debt.

The table below (from the Fed) shows that people who file bankruptcy could get a score of 620 within a year of filing.

BK score

The top 2 lines show people filing for bankruptcy (3 months and 12 months after filing). The lines at the bottom show people who remain in chronic collections, but don’t file for bankruptcy. Their credit scores stay in the low 500s.

In addition, the ability to open new credit accounts (like an auto loan or mortgage) is severely restricted for people who can not file bankruptcy, but remain in collections. The chart below shows the number of new accounts opened by those stuck in default, versus those who filed bankruptcy:

Quarters

You can see on the red line that people who don’t file bankruptcy, but stay in collections, are unable to open any new form of credit. If they do need to borrow, they will be forced to payday lenders, title loan companies or worse.

How to Prevent Future Bankruptcies

There are 2 criticisms against bankruptcy that we agree with at MagnifyMoney. First, some people have abused the system historically. They enjoy spending the money that they borrow, they can afford to repay, but they use bankruptcy as a way to walk away from debt. In addition to the moral questions, it also drives up the cost of borrowing for responsible people (because they have to pay for the people who don’t pay back through higher interest rates).

Second, people use bankruptcy as an easy way out of debt, but they never fix the core problem. As a result, 5-7 years later they are back in the same situation.

The bankruptcy reforms of 2005 did introduce a means test. If you income is below the national medium, you can file for bankruptcy easily. If, however, you income is above the median, you will have to pass a means test. That makes it difficult for people who have assets and income to walk away from debt.

The second issue is trickier. We believe that before filing for bankruptcy, everyone should truly understand why the problem happened, and deal with the root cause. In the Self-Assessment chapter of our free ebook (which you can download here), we dig deep into your budget. You should look to understand:

  • Are your fixed expenses too high? When mortgage and car payments eat up a big chunk of your monthly income, you can very quickly end up borrowing on credit cards to get through the month. Although difficult, selling your home or car and downsizing could be the difference between avoiding debt, or ending up back in the same place you started.
  • Can you control your discretionary expenses? Can you actually live within a budget? Do you even have one?
  • Do you have health insurance? So many big medical expenses were the result of no health insurance. With Obamacare, most Americans can find a health policy that can at least protect against massive medical bills.

If your fixed expenses are too high, and you can’t live within a budget, you will likely end up in bankruptcy again. You should do the hard work now to make sure bankruptcy is a tool that you only use once.

Final Thoughts

For many people, bankruptcy is the fresh start that they deserve. Too many people stay in a chronic state of debt, when bankruptcy would be the right answer. However, the decision should not be taken lightly. And everyone (whether you have filed for bankruptcy or not) should be taking the necessary steps to build a secure financial future.

 

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Debt Guide: When to File Bankruptcy

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Below is an excerpt from our Debt Free Forever Guide. Be sure to download the free guide to help dump debt for good.

For some people, bankruptcy may be an appropriate option. In a bankruptcy, you may be able to eliminate some or all of your debts. However, debt forgiveness does not come lightly. Chapter 7 (where all eligible debt is eliminated) stays on your record for 10 years. Chapter 13 stays on your report for 7 years. And, during that time (especially in the first 3-5 years), you may find it virtually impossible to apply for any new credit. And credit is not limited to mortgages and auto loans. It can even include pay-as-you- go mobile phone packages. If you work in the financial services sector, you may find that bankruptcy will make it impossible to get a job. So, this decision should not be taken lightly.

However, for some people, this may be the only option. I will give a few examples of people whom I have met, where bankruptcy made complete sense:

  • A hardworking man had a medical emergency. Unfortunately, he did not have medical insurance. The total bill was over $500,000. And his annual salary was $40,000. There was no chance that he would ever pay off that debt. Bankruptcy made perfect sense.
  • A married couple unfortunately did not plan for the future. They had no life insurance, no savings and credit card debt. The husband was a professional, and the wife stayed at home with the children. The husband died unexpectedly. Between the funeral, the credit card debt from before the marriage and the costs of the transition, the widow had over $75,000 of debt. She was able to get a secretarial job for $25,000. It made sense to eliminate the debt with bankruptcy.

The biggest reasons for bankruptcy are medical and divorce. We always try to work with people to help them prepare for the worst. Everyone should have medical insurance, even if that means paying for a high deductible (low premium) policy that at least insures against bankruptcy. If someone depends upon you (like the husband in the story above), term life insurance is necessity, and it doesn’t cost much. In medicine, it is always better to prevent (via a good diet and exercise) than to fix after something goes wrong. The same is true in financial matters. However, if you are now in the emergency room, a bankruptcy may be the right option.

What can a bankruptcy do for me?

A bankruptcy gives you the opportunity to eliminate a significant portion of your debt. The bank has to write off the debt, and is no longer able to collect on the debt.

In Chapter 7 bankruptcy, all of the eligible debt is eliminated. It takes about 3-6 months to have the bankruptcy discharged.

  • Most or all of your unsecured debt will be erased. Unsecured debt would include things like credit card debt, personal loan debt, medical bills, mobile phone bills and other debt.
  • Certain types of debt are usually excluded from bankruptcy. These include student loan debt, tax obligations, spousal support, child support and some other types of debt can not be eliminated.
  • Some of your property may have to be sold to pay off your debt. However, in most cases, your primary property is exempt.
  • For secured property (like an auto loan), you will be given a choice. You can continue to pay, you can have the property repossessed, or you can make a lump sum payment (at the replacement value).

If your problem is with credit card debt and/or medical debt, than Chapter 7 makes sense. All of that debt will be wiped out. You continue to pay (and keep) your mortgage and auto loan.

In a Chapter 13 Bankruptcy, you are not able to eliminate all of your debt. Instead, you will be forced to make regular monthly payments towards your debt before it is completely eliminated.

Chapter 7 or Chapter 13?

If given the choice, most people would choose Chapter 7. From a credit score perspective, they both have equal (negative) impact on your score. In fact, here is what FICO says:

The formula considers these two forms of bankruptcy as having the same level of severity and, for both types, uses the filing date to determine how long ago the bankruptcy took place. As with other negative credit information, the negative effect of a bankruptcy to one’s FICO score will diminish over time.

So, if you get the same penalty, but in one form of bankruptcy all of your debt is wiped out, and you still have to pay back some debt in the other form, then you would probably choose Chapter 7. And most people did, until the law was changed in 2005.

Note: there may be some instances when you will want to file Chapter 13 instead of Chapter 7. For example, if you are behind on your house payments and want to keep your house, Chapter 13 may make more sense. Why? In Chapter 13, you can put your past due mortgage payments into your repayment plan, and pay them back over time. In Chapter 7, your past due mortgage payments may be due right away.

However, in the majority of cases, Chapter 7 is more favorable to the borrower than Chapter 13.

There are now some “means tests” required to see if you can file for Chapter 7. Here are some very basic rules:

  • If your family income is below the median income of your state, you will probably be able to file Chapter 7. The income used is the average of your last 6 months income. You can find the median incomes here.
  • If your income is above the median, you may still be able to file bankruptcy. However, you will have to pass a means test. Your income and expenditures will be looked at, to see if you have the ability to make payments towards a payment plan over 5 years towards the accumulated debt.

In addition, if you tried to be clever, you will likely be caught. Any recent cash advances on your credit card, and any recent luxury purchases can be exempt from the bankruptcy completely.

It used to be very easy to file for Chapter 7 and have all of your unsecured debt eliminated. That is no longer the case. But, if you have low income, you can still proceed. And, if you have a very difficult situation, you can still find a path towards eliminating a significant portion of your debt.

How to Proceed

As part of the bankruptcy legislation, you need to meet with a non-profit debt counselor before you are allowed to file for bankruptcy. So, whether you are thinking about negotiating settlements or filing for ?bankruptcy, it makes sense to meet with a counselor. You can find a list of the approved agencies here.

For further reading on bankruptcy, we recommend this website (NOLO) – they have an excellent library of information.

In Summary

If you are in too deep, bankruptcy may be the only remaining viable option. I have met many people who filed bankruptcy, and went on to live very fulfilling and prosperous lives. Companies file bankruptcy all the time – and I believe that people should have the same legal protections that companies have.

You just need to be realistic about what bankruptcy can and cannot do. If you have student loans, tax liens, spousal support or child support – you will not be able to use this tool. You need to find a way to pay back your debt.

But, if you have been hit with a big medical bill, or your credit card debt is just too large relative to your income, bankruptcy could be the best option. It will be a very difficult 2 years. By Year 3, things will look a lot better. And, 7 years later, your score will reflect the person you have been in the last 7 years. A very good friend of mine had filed bankruptcy. He now has a home (purchased with a mortgage at a low rate). He has a car (purchased with a 0% car loan). And he has a rewards credit card (that he pays off in full every month). His score is high. It was a rough couple of years, but it made sense. Otherwise, he would have been making minimum payments for 30 years and still wouldn’t be out of debt.

Weigh your options carefully. Meet with a non-profit counselor. We are always available at MagnifyMoney to talk as well (just email us at info@magnifymoney.com).

Good luck with your decision.

Download our Debt Free Forever Guide! It’s FREE and will help get you back on track.

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Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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How the “Financial Choice Act” Could Impact Your Wallet

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A plan to repeal major aspects of Dodd-Frank — legislation enacted to regulate the types of lender behavior that contributed to the 2008 economic crisis — crossed its first major hurdle last week when the U.S. House passed the Financial Choice Act.

The bill still has to pass the U.S. Senate and be signed by the president before becoming a law. However, if it does, significant changes would be made to some regulations that might require consumers to pay more attention to their financial decisions.

“[The Financial Choice Act] stands for economic growth for all, but bank bailouts for none. We will end bank bailouts once and for all. We will replace bailouts with bankruptcy,” Rep. Jeb Hensarling (R-Texas), House Financial Services Committee chairman, said in a press release. “We will replace economic stagnation with a growing, healthy economy.”

What’s at stake with the Financial Choice Act, and how does it impact your finances? We’ll explore these questions in this post.

What did the Dodd-Frank Act do, anyway?

Bailouts: After it was implemented in 2010 by President Barack Obama, one of the law’s main pillars was enacting the “Orderly Liquidation Authority” to use taxpayer dollars to bail out financial institutions that were failing but considered “too big to fail” — meaning their collapse would significantly hurt the economy. In addition, Dodd-Frank created a fund for the FDIC to use instead of taxpayer dollars for any future bailouts.

Consumer watchdog: Dodd-Frank also created the Consumer Financial Protection Bureau, an independent government agency that focuses on protecting “consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”

In one of its most high profile cases to date, the CFPB in 2016 fined Wells Fargo $100 million for allegedly opening accounts customers did not ask for.

The CFPB’s actions against predatory practices in a number of industries, including payday lending, prepaid debit cards, and mortgage lenders, among others, have won the agency many fans among consumer advocates.

“In fewer than six years, [the CFPB has] returned $12 million to over 29 million Americans, not just harmed by predatory lenders or fly-by-night debt collectors, but some of the biggest banks in the country,” says Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group, a Washington, D.C.-based nonprofit that advocates for consumers.

And how would the Financial Choice Act change Dodd-Frank?

No more bailouts: The Financial Choice Act would replace Dodd-Frank’s Orderly Liquidation Authority with a new bankruptcy code. So financial institutions would have a path to declare bankruptcy in lieu of shutting down completely.

Fewer regulations for banks: The act will provide community banks with “almost two dozen” regulatory relief bills that will lessen the number of rules small banks need to comply with, making it easier for them to operate.

A weaker CFPB: It would convert the CFPB into the Consumer Law Enforcement Agency (CLEA) and make it part of the executive branch. The Financial Choice Act also gives the president the ability to fire the head of the newly created CLEA at any time, for any reason, and gives Congress control over it and its budget. These changes will take away much of the power the CFPB holds to monitor the marketplace and pursue any unfair practices.

“It not only took the bullets out of [the CFPB’s] guns, it took their guns away,” Mierzwinski says.

Specifically, he says the CFPB would no longer be able to go after high-cost, small-dollar credit institutions, such as payday lenders and auto title lenders.

However, some experts see benefits from taking the teeth out of the CFPB.

“I personally think that’s a good thing because I think the way that the CFPB is structured is fundamentally flawed,” says Robert Berger, a retired lawyer who now runs doughroller.net, a personal finance blog. “You basically have one person with very little meaningful oversight that can have a huge impact on the regulations of the financial industry.”

The bill also would roll back the U.S. Department of Labor’s new fiduciary rule, which isn’t part of Dodd-Frank, but requires retirement financial advisers to act in their clients’ best interests. It went into partial effect on June 9.

What does this mean to consumers?

If the Financial Choice Act becomes law, opponents say it could mean that consumers will have to be even more careful with their financial choices and who they trust as a financial adviser because there will be less government oversight.

“If you’re a consumer, you’re going to have to watch your wallet even if you have a zippered pocket with a chain on your wallet,” Mierzwinski says.

If the bill passes the Senate, it could still face some hurdles. Any changes to Dodd-Frank regulations would need to be approved by the heads of the Federal Reserve System and Federal Deposit Insurance Corp. and the Comptroller of the Currency.

Jana Lynn French
Jana Lynn French |

Jana Lynn French is a writer at MagnifyMoney. You can email Jana Lynn here

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This Family Spent $6,000 to Save Their Home and Still Wound Up Facing Foreclosure

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Lageshia Moore of Far Rockaway, N.Y. says her family spent $6,000 in hopes it would save them from foreclosure. “Some people might say, ‘OK, just get a new house.’ But it wasn’t that simple,” says Moore.

When Lageshia Moore and her husband found their home in 2006, they thought it would be a perfect place to raise their family. The $549,000 Far Rockaway, N.Y., duplex even had future income potential if they could find a reliable tenant and rent out one half of the house.

In order to purchase the property and avoid primary mortgage insurance, the couple took out two mortgages to cover the costs.

Like millions of Americans who purchased homes at the peak of the housing bubble, their timing could not have been worse. Moore, a teacher, left her job in 2007. It soon became impossible to meet their $4,000 total monthly mortgage payments. By the summer of 2008, they were deep in default, and the recession sent their home value plummeting.

They were officially underwater on their house, and the family was living solely on Moore’s husband’s income as a driver. Eventually, they were notified that their lenders had begun the foreclosure process.

“Some people might say, ‘OK, just get a new house.’ But it wasn’t that simple,” Moore said. “This was the house where we were raising our family. My husband is very proud and homeownership means a lot to him — so we weren’t going to just let it go.”

Instead, Moore and her husband did what many families facing foreclosure do: They began looking desperately for “foreclosure relief” companies, law firms, and groups who promised help. A nonprofit connected them to a court-appointed attorney, but it didn’t stop the foreclosure process. So they turned to companies that advertised foreclosure relief on radio stations and online.

Over the course of six years, the family handed over thousands to a handful of relief groups they thought could stop the foreclosure. “We were desperate, and we thought, ‘OK, we’ll hand over this money to someone and they’ll just fix it,’” Moore said.

One of those foreclosure relief companies was Florida-based Homeowners Helpline, LLC. In 2015 the family gave the company a total of $6,000: an initial $2,000 down payment, and then $1,000 in four monthly installments. By that time Moore had found a new job, but the family hadn’t paid the full mortgage amount in years.

Moore shared the contract with MagnifyMoney, in which Homeowners Helpline says it will “perform a mortgage loan review and audit,” including actions like sending a cease-and-desist letter and a “Qualified Written Request” for information about the account to the family’s lenders.

Here’s what Moore says happened: Homeowners Helpline connected her family with a New York City lawyer who “kept asking for endless paperwork, month after month after month,” and who eventually stopped answering their calls, she claims. They finally got in touch with him just before the house was set to go up for auction, she said, and he told them the efforts to stop the auction had failed.

“We were horrified,” Moore said.

Homeowners Helpline told MagnifyMoney a different story. Sharon Valentine, a processor at Homeowners Helpline who worked on Moore’s husband’s case, said the family was slow to hand over needed paperwork and “unrealistic about their expectations.”

Crucially, Valentine said, the family didn’t tell Homeowners Helpline the house was actively in foreclosure until they mentioned the auction. “And then it was like, ‘Wait, what?’” Valentine said. The company would have taken different actions had they known about the foreclosure proceedings, she added.

“We can’t help you effectively if you don’t give us all of the information and the paperwork,” Valentine said. “In general, some clients come in and they hear their friend was able to get a 2% [mortgage] rate or cut their payments in half, and it’s like, ‘Well, that’s a very different situation.’ We try to help educate, but sometimes you can’t change that expectation.”

The Best Help is Free

But there is a free resource to educate panicked homeowners about expectations and provide foreclosure assistance — as well as help them avoid scam companies that will steal their money. NeighborWorks America runs LoanScamAlert.org, which aims to be a one-stop shop for people with questions about or problems with their mortgages.

The Loan Modification Scam Alert Campaign launched in 2009, when Congress asked NeighborWorks America to educate and help homeowners. LoanScamAlert.org offers resources including information about how to spot and report scams, and lists of trusted authorities who can help. Its main goal: Drive people to call the Homeowner’s HOPE Hotline, at 888-995-HOPE (4673), which is staffed 24 hours a day by counselors who work at agencies approved by the U.S. Department of Housing and Urban Development (HUD).

“We provide them with a single, trusted resource,” said Barbara Floyd Jones, senior manager of national homeownership programs at NeighborWorks America. “It gets confusing when you see companies with all of these similar names advertising on the radio or TV, and then you have to research them. We want to let people know they don’t have to pay a penny for assistance.”

Anyone — regardless of income or other factors — can contact the counselor network to receive free advice and help. Homeowners aren’t always aware of the myriad government-affiliated groups that can provide assistance, or of the federal and state programs created to speed loan refinances and modifications, Floyd Jones said.

“We can never promise that everyone will be able to save their home; there are a variety of circumstances,” Floyd Jones said. “But we can promise a trusted counselor will listen, take a look at your paperwork if you want, and tell you all of your options.”

In fact, if a homeowner grants permission, the counselor can contact the mortgage lender directly to discuss options to stop the foreclosure, modify the terms of the loan, or otherwise make a deal. If need be, homeowners will also be connected with vetted legal assistance — although Floyd Jones noted not every situation requires a lawyer.

True to LoanScamAlert.org’s name, the hotline counselors also take complaints about mortgage-related scams: third-party companies that take the money and run, or slip in paperwork that unwittingly gets homeowners to sign over the deed to the house.

The Federal Trade Commission received nearly 7,700 complaints about “Mortgage Foreclosure Relief and Debt Management” services in 2016 — down from almost 13,000 in 2014, but still a significant figure.

“Stopping phony mortgage relief operations continues to be a priority” for the FTC, said spokesman Frank Dorman.

Both the FTC and LoanScamAlert.org offer tips to avoid scams — and to make sure you’re taking advantage of all federal and state programs that could help.

Red Flags:

  • They ask you to pay before any services are rendered.
  • Pressure to pay a fee before action is taken, sign confusing paperwork, or hire a lawyer off the bat. As with any scam, fraudulent mortgage relief services rely on high pressure to push vulnerable homeowners into taking action. Companies shouldn’t ask for “processing fees” or “service fees” early in the process, Floyd Jones said, as early foreclosure-stoppage efforts don’t cost anything. Be wary of signing any document, as you could unwittingly surrender the home’s title or deed to a scammer.
  • They make promises they can’t keep. 

    Promises or guarantees they’ll save your home from foreclosure — or even claims like “97% success rate!” No one can guarantee results.

  • They say they’re affiliated with the U.S. government. 

    Companies that claim to have an affiliation with a government agency. Some scammers may claim to be associated with the government, charging fees to get you “qualified” for government mortgage modification programs like Hardest Hit Fund. You don’t have to pay for these government programs — and lenders, particularly big banks like Wells Fargo and Bank of America, may be able to offer you their own modification options directly.

  • They want you to send your mortgage payments to them.

    Companies that tell you to start paying your mortgage directly to them, rather than your lender. They may promise to pass the money along, but they could pocket it and disappear.Companies that ask you to pay them through unconventional methods: Western Union/wire transfers, prepaid Visa cards, etc., instead of a check. They’re trying to get your money in a way that’s hard to trace.

As for Lageshia Moore and her husband, the family ultimately filed for bankruptcy — a move that can stop the foreclosure process, but only temporarily — and are now working with a law firm on a loan modification she hopes will reduce their payments to a manageable monthly sum. In giving advice to others, she reiterates the simplest but most important tip: “Just do your research.”

“You’re panicked, but you have to do your due diligence,” she added. “Really sit down and weigh the pros and cons: foreclosure, short sale, etc. What does this process or contract really mean? It’s an emotional time, but you have to try to keep the emotion out of it. That’s what I would tell myself.”

What to Do if You’re Facing Foreclosure:

  • Call a HUD-certified counselor at 1-888-995-HOPE. You’ll get advice and help for free, and while counselors can’t ever promise to save a home, they’ll be happy to take a look at any paperwork or information about your case, contact your lender about options if you grant permission, and connect you with vetted legal assistance if need be.
  • If you’re not facing foreclosure yet, but you’re worried that you’re about to run into trouble, contact your mortgage lender’s loss litigation department. They may be willing to work with you. Your lender can also tell you whether you’ll qualify for government programs.
  • Overall, don’t let desperation stop you from taking the time to research any potential actions, including signing on with a relief company. Explore the company’s background and track record. Check online for reviews from other homeowners — and be sure to look up phone numbers too. Many scam companies simply shut down, reopen under a new name, and retain the same phone number.
Julianne Pepitone
Julianne Pepitone |

Julianne Pepitone is a writer at MagnifyMoney. You can email Julianne here

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How Plastc Customers Can Use the 540-Day Rule to Get a Credit Card Refund

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Thousands of consumers were left holding the bag — and out about $150 – when all-in-one cardmaker Plastc announced recently it was never shipping a product.

Is there any chance consumers can get their money back?

Yes. Even those who’ve already been told by their credit-card issuing banks that the charge is too old to dispute. Read on to learn about a little-known rule that gives credit and debit card customers up to 540 days to file a dispute in some situations. Even if you aren’t a Plastc victim, there’s a powerful consumer lesson to be learned here.

To refresh your memory, starting about four years ago, several firms announced products that promised to thin out Kramer-sized wallets everywhere — a single, digital credit card on which all other plastic cards could be loaded. New technology would let the makers of Plastc, Coin, and several others rewrite the magnetic stripe in real time, eliminating the need to carry around multiple credit cards. Optimistic buyers raced to preorder the gadgets. One by one, they were all disappointed, as so far, no all-in-one card has proved viable.

During a Facebook Live chat on Sept. 29, 2016, Plastc CEO Ryan Marquis apologized for production delays. Less than 7 months later, the company announced its bankruptcy.

The makers of Plastc sure tried, however. At least, they said they did. Back in the fall, Plastc CEO Ryan Marquis took to Facebook to claim the firm had raised $9 million from 80,000 “backers,” and once again promised that success was around the corner. On April 21, Plastc gave up, announcing it was declaring bankruptcy. That left thousands of consumers wondering what would become of their preorders.

For the earliest backers, like Andrew Goodman, there’s probably very little hope.

“I’ve been a backer since April 2015 and certainly have no delusions of getting my money back,” said Goodman, who lives in West Chester, Penn. “I was given a flat ‘no’ from both Amex customer service and the third party they refer you to for complaints on purchases older than 12 months.”

[Read more: The Unfulfilled Promise of ‘Smart’ Credit Cards]

The 540-Day (or 120-Day) Rule

But others, who gave Plastc their money a year or so ago, shouldn’t give up hope, even if they are initially rejected by their bank. A little-known rule governing most credit card transactions — so little known that even many in the banking industry don’t know it — means many consumers are eligible to dispute their transactions up to 540 days after they were initially posted.

Reddit threads and Facebook pages set up for disgruntled consumers are full of conflicting information, with some saying they’d managed to get a refund, while other say their card-issuing bank denied one, citing a 120-day time limit for disputes.

There is a 120-day time limit for disputes, but there is confusion over when that 120-day clock starts. The answer for Visa users, however, is quite clear on a document that sits on Visa’s website called “Visa Core Rules and Visa Product and Service Rules.” In a section titled “Chargeback Time Limit — Reason Code 30,” Visa tells participating banks and merchants that the clock doesn’t start until the purchased merchandise was supposed to be delivered — with a limit.

“If the merchandise or services were to be provided after the Transaction Processing Date, 120 calendar days from the last date that the Cardholder expected to receive the merchandise or services or the date that the Cardholder was first made aware that the merchandise or services would not be provided, not to exceed 540 calendar days from the Transaction Processing Date.”

Since customers were only told their orders wouldn’t be filled April 21, that rule suggests the 120-day clock starts then, not on the date of the transaction. In other words, while some banks have been telling Plastc buyers they can’t dispute their charge if it was processed earlier than January of this year, that Visa rule says folks who ordered as far back as November 2015 still have the chance to dispute. That’s a big difference.

So for clarification, I called Visa.

“Your read of the rule is correct,” said Visa spokeswoman Sandra Chu. “It’s 120 days from (the notification of non-delivery).”

Chu advised consumers who are told otherwise by their Visa-issuing bank to have a link to the Visa service rules handy and point customer service agents to that section. The rules, she said, are required for any credit or debit transaction that is processed on the Visa network.

What about other credit card issuers?

Mastercard did not immediately return my call for comment, but its “Chargeback Guide” contains similar language. In a section titled “Time Frame,” the criteria is listed as “15 to 120 days from the delivery/cancellation date of the goods or services.” Another section mentions a 540-day overall limit.

American Express media relations did not offer an answer to the question, and I was unable to find official documentation online. An old response from the firm’s official Twitter account hints that consumers – at least back in 2011 – had a long time frame to file disputes over purchases they never received as promised.

“For non rcvd orders u can disputed even after 65 days from charge.U are given 60 days from promise date of delivery 2 dispute,” the account said at the time. That contradicts the explanation Goodman received, however; if MagnifyMoney gets clarification, we’ll update this story.

Discover didn’t immediately respond to a request for comment.

Meanwhile, some consumers with even older-than-540-day transaction dates say they’ve received goodwill refunds for Plastc from their banks.

So the moral of the story is: Always call your bank and ask. And if you get no for an answer, don’t assume that’s the only answer.

Bob Sullivan
Bob Sullivan |

Bob Sullivan is a writer at MagnifyMoney. You can email Bob here

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