In America, our entire economy is based upon the credit system.  Without it, we would not be able to operate as we always have.   That is exactly what is happening right now: the credit freeze has effectively stopped the economy from moving, and everyone is suffering.  Because of the monumental losses that many businesses and individuals have sustained in the credit and housing markets, a wave of foreclosures and bankruptcies are occurring all over the country.  Even individuals who invested wisely and planned carefully are seeking the protection of a Chapter 7 or Chapter 13 bankruptcy, or simply handing the house keys back to the bank and walking away.  If you are considering either option, knowing how a bankruptcy or foreclosure will affect your credit is a strong move toward making a rational financial decision.     Let’s face it- if you are considering filing bankruptcy, or are in danger of a foreclosure, you have probably already examined and tried a number of reconciliatory actions.  How much of a concern should the impact of a bankruptcy or foreclosure on your credit be?  Well, in most cases, the only other viable option is to continue struggling and falling farther behind- damaging your credit all the more.  So what makes more sense- to file bankruptcy or foreclose now, or continue letting serious delinquencies and collections activities farther damage your credit for some time to come?  The fact of the matter is that, after a foreclosure or bankruptcy, the only direction your credit can go in is up.  It certainly cannot get worse after filing a bankruptcy- unless you are blatantly irresponsible with your finances.  Which, if you’re reading this blog, then you’re probably not.     In plain terms, a bankruptcy has a substantial impact on your credit.  While the effects will change and lessen over time, a bankruptcy will appear on your credit file for not more than ten years.  It tells future lenders that at one time your debts were insurmountable, and that some companies probably lost money as a result.  However, a bankruptcy is hard, and it is a lot of work.  Therefore, it also tells a future lender that you took drastic steps to liquidate and discharge your debts legally and fairly in a federal bankruptcy court.  Under certain circumstances, this can be viewed favorably, and that coupled with the fact that you cannot file bankruptcy again for eight years can get you a loan immediately after a bankruptcy.   According to Sperling’s BestPlaces, an online population and demographics data provider, homes in Suffolk County, New York depreciated in value by more than one half percent over the last year.  With trends like that, it’s no wonder that so many homes in Suffolk & Nassau County and elsewhere are going into foreclosure.  And just how badly will the credit of those that face foreclosure suffer?  Unlike a bankruptcy or a settlement, a foreclosure’s effect on credit is subjective.   Often, banks will lend a mortgage to someone who has experienced a recent foreclosure.  Generally speaking, a reduction in credit score of up to one hundred points can be expected.  However, a foreclosure is deemed to be outdated information after it has reported to the credit bureaus for seven years.  After this time, the foreclosure will be removed from your credit files, although it will still appear in public records.     One consideration that is easily missed is that, if you are on the brink of bankruptcy or foreclosure, you are probably not going to be rushing out and attempting to procure new credit anyway. So, why let that be a major concern?  While maintaining good credit is an important issue, you should remember that, even if damaged, credit can be easily repaired with good financial decisions and patience.  Bookmark this blog to learn how!       –

 

 

  To many, bankruptcy is like a cuss word- only to be uttered by the unscrupulous and irresponsible.  Our society attempts to surreptitiously teach us that bankruptcy is the last option of a desperate, helpless person.  In reality, this is not the case. In fact, all we really need to do is look at the term bankruptcy itself, as applied in a legal setting: bankruptcy protection.  That’s right- bankruptcy is meant to protect a person from financial collapse.  Let’s face it- sometimes, even the best made plans can fail, and even the most financially responsible people can suffer from bad luck…or worse.  Whatever the cause, most people and businesses seek bankruptcy protection when it has already become their only option.  However, a better way to approach this might be to educate ourselves on the matter, so that at the very least we have an understanding of a major contributing factor to the financial chaos that is brewing throughout the country.   In simple terms, a bankruptcy is a way to begin anew financially.  This can be accomplished by discharging or restructuring debt with the legal blessing of the federal government.  A person or business must present a case before a bankruptcy court that substantiates severe financial distress.  This can be as the result of a divorce, a failed business, exorbitant medical expenses, or many other financial stressors.  Some of the earliest proceedings and requirements in a bankruptcy case are for the debtor to attend credit counseling and bankruptcy education.  However, to expect a person or business to be fully versed in the many complexities and inconsistent regulations that permeate bankruptcy rules is not realistic.  In fact, under no circumstances should a person attempt to litigate their own bankruptcy.  Filing for bankruptcy protection is a serious undertaking with potentially disastrous results if not done correctly.  For this reason, seeking the advice of a highly qualified bankruptcy attorney is absolutely imperative.     In general, there are two types of bankruptcy for individuals: Chapter 7, and Chapter 13.  Broadly speaking, a Chapter 7 bankruptcy seeks to liquidate non-exempt assets, if any, (usually you are allowed to keep your home) to repay creditors a token amount.  The remaining debts are discharged and released forever through the bankruptcy.   Some debts, such as student loans or child support, can never be included in a bankruptcy, and with good reason.  Alternatively, a Chapter 13 bankruptcy is for people who have a steady income and want to pay their debts, but simply cannot pay them all.  Through the Chapter 13 proceedings, an individual can be allowed to restructure their debts to make it easier for them to pay.  This often involves creditors accepting terms that are favorable for the debtor, such as low or no interest, reduction of amounts owed, and special payment amounts.        According to AACER, a bankruptcy information management company, there were 37,868 bankruptcies filed in the State of New York in 2007.  73% of these were Chapter 7.  However, bankruptcy is a peculiar phenomenon.  Some communities, like Long Island, actually saw a decline in bankruptcies during 2007, while foreclosures there increased greatly.  This is a testament to the fact that bankruptcy is a tool that is originated under and applied for specific unique individual circumstances; it cannot easily be trended or predicted.  People from all walks of life have gone bankrupt: celebrities, politicians, the extremely poor, the extremely wealthy, accountants, grandmothers, teachers- it can happen to anyone.  Education is essential to not only understand bankruptcy, but to prevent it overall.       In summary, bankruptcy needs to be viewed in a different light.  Within a capitalist economy, a bankruptcy should be considered healthy when compared to what the alternative would normally be: to drown in debt.  When people are overburdened with debt, they are forced to stop spending-choking the economy rather than fueling it.  Furthermore, financial obligations become alarmingly delinquent, driving down the value of common stock of financial institutions, and giving rise to predatory lending habits.  What makes more sense for a person in this situation: to let them destroy themselves, or to wipe the slate clean and allow them a chance to become contributing members of society again?  Given these choices, bankruptcy can often make the best of a bad financial situation.  

 

 

How will this affect bankruptcies and foreclosures?

    Critics of the federal Bailout plan are many in number, and are ever more ferociously shouting their opposition.  Even to those who know nothing of financial matters, it can be clearly seen that the United States Government is treading in dangerous territory.  Essentially, the government has agreed to buy the sick and troubled assets of institutions that neared or fell into collapse as a result of those assets.  How does that make any sense?  Treasury Secretary Henry Paulson tells us that the purchase of these unhealthy assets will allow banks to distribute capital in the form of credit and other types of loans.  The idea is that the outflow of this credit will move the economy forward again, which will in turn increase the value of the assets held by the government, which can then be sold or returned to the issuing institutions.     While there is a possibility that this plan will work, it will in all likelihood only be for a short period of time.  What the bailout plan does not allow for is the fact that the troubled assets were troubled before the crisis began.  In fact, they were troubled because the borrowers themselves were in danger of defaulting.  Is it any wonder?  Subprime loans are exactly that- substandard.  American borrowers- be they individuals or businesses, carry far too much debt.  That simple fact is the cause of most of our current financial woes: we are over-burdened with debt, and as a whole will never be able to pay back what we owe.  Now, that being the case, how can buying the bad loans of banks so that they can make more loans to people who already could not repay the original loans solve the crisis that has rapidly turned global?  The answer is simple: it can’t.      Many critics of the bailout plan are in support of an alternative plan- one not likely to occur, that would aid the borrower as opposed to aiding the institution.  It makes absolute sense that by alleviating the current debt load of borrowers, there would be an immediate rise in spending, which would mean a rise in the production of goods and services- the healthiest type of stimulation an economy can receive.  Instead, the bailout plan seeks to do nothing more than continue the current status quo; and we have already seen where that will lead us.     So is there a “Plan B?”  Other than theories that will be posted everywhere in frustration and never attempted, the answer is no.  Nevertheless, for some, taking control of their own debt eradication comes in the form of a foreclosure or a bankruptcy.  In many cases, a borrower is better off financially by letting the bank foreclose on their home, rather than owing on a mortgage that is higher than the value of the home.  Bankruptcy is also an increasingly popular option to wipe debts clean and start over financially.  In many cases, bankruptcy even allows the owner to keep their home.  One thing is for certain- in these most trying of times, we should allow all options to remain open, because the only thing we can say for sure is that we cannot continue to do things the way we have been.   As Mike Bergeron from Nassau County, New York, put it:

        “We need a Plan B, C, and D- and they all need to be in action at the same time…”

  Agreed.  Now how exactly should Main Street communicate that to Wall Street and the Fed?                –

 

Can it Help Me Prevent Foreclosure or Bankruptcy?

  The bailout plan has passed, and we can all breathe a sigh of relief.  Or can we?  The uncomfortable fact of this matter is that most Americans do not even understand what the bailout plan is, never-mind how it will supposedly work.  The real truth is that this decision was out of the hands of the public anyway.  Driven by precisely marketed fear, our politicians approved the bailout, and we must now deal with it.  So what exactly does that mean, and why do we need the bailout in the first place?   In order to even begin to understand the bailout plan, a working comprehension of banking in general is necessary.  In order to achieve this, let’s take a look at banking on a sixth-grade level- the reading level most newspapers are written in.  We will start with Bank 1.  Bank 1 has 10 customers, who each have $100 in deposits.  Bank 1 now has a total of $1000 in deposits.  Of those 10 customers that Bank 1 has, 3 of them apply for loans totaling $3000.  Bank 1 uses its $1000 in deposits and borrows $2000 from Bank 2 to fund the loans.  Unfortunately, Bank 1 provided these loans to people with substandard credit conditions, and the loans went into default.  Consequently, Bank 1 fails.  Now Bank 2 has lost $2000.  It seeks to borrow money from Bank 3, but Bank 3 won’t lend any money because it is afraid that what happened to Bank 1 will happen to Bank 2.  So now banks in general stop lending to each other.  This means that when “Joe Plumber” or “Mary Real Estate” requires money to improve their businesses, buy more products, or for any other business need, the banks are not making loans.  This freezes spending, and when that happens, the economy dives into a recession.     While the preceding is a fairly easy scenario to try to imagine, that idea of it needs to be extrapolated many times over in order to understand what actually happened.  Thousands of consumers defaulted on obligations, and thousands of banks stopped lending.  That defines the credit crunch: when liquid credit markets that enabled the flow of currency to occur literally stopped.  This affected every part of the economy: banks failed, insurance giants disintegrated, the dollar lost value dramatically, and there was the sense of impending panic worldwide.  Thankfully, the Feds stepped in, bullied the bailout plan through congress, and here we are…   While our leaders are touting the bailout plan as providing relief for the everyday American citizen, this is not entirely accurate.  In fact, the plan is to be paid for by American taxpayers at a time when they can least afford it.  The plan does call for interest rates to be frozen on qualifying mortgages; however, this will only help an estimated 300,000 homeowners for about five years- if the plan moves along as originally intended.  So who is the plan really helping, and where is $700 billion dollars going?   First, the bailout plan does not mandate that $700 billion must be spent.  The plan allows up to that amount, which is a balanced projection of what it might cost to get us out of this financial mess.  What the Federal Government intends to do with the money is to invest in the securitized assets of banks that are in trouble, and have frozen or substantially slowed their lending.  Yes, that means that the United States Government will then own the same troubled and unhealthy assets that caused the meltdown in the first place.  This will allow banks to clear up their ledgers by removing risk-laden debt, and theoretically will provide the incentive banks need to start lending again.  This way, Joe Plumber spends money by growing his business, the bank profits from his loan, credit remains liquid, and the economy flows once again.  The most pressing question that remains now is whether or not the banks will swallow their fears and start lending again.  In addition to that query, and perhaps an even more vital question, is exactly what the Federal government plans to do with all those unhealthy assets they intend to buy with our money.  Bookmark this blog to find out.   –

 

When you model an economy on Vegas principles, you’re bound to lose.  That is precisely what we have done.  Americans gambled by borrowing and living beyond our means, and our banking systems gambled that we would somehow miraculously find a way to pay it all back.  Well, we didn’t find a way, and so here we are- scalding in the lava of a financial meltdown.   Furthermore, if history is any indicator of what to expect, this situation will potentially worsen before it gets better.  To minimize the damage and rebuild what we have lost, we must gain a unilateral understanding of how we got into this mess.  First and foremost, we need to accept some responsibility, and recognize that we all played an important part in this crisis.   In 2007, the debt to income ratio for Americans was 130%.  This means that we were spending all the income we generated, and then some.  In plain terms, we spent nearly a trillion dollars more than we earned.  Because of the housing boom and liquid credit markets that existed since the late nineties, we assumed challenging mortgages, purchased investment and vacation homes, demanded high-energy vehicles, and maxed out our credit cards- assuming the boom would continue and we would meet all our financial obligations.  Who did we turn to in order to finance all this?  That’s right- American banks.   Would you lend money to someone whose debt to income ratio was 130%?  Well, our lending institutions in this country did exactly that.  Banks made what are called subprime loans.  Subprime loans are issued to people whose credit is substandard.  These types of loans carry high interest rates and thus are profitable, but they also carry high default rates, and thus are considered risky.  Banks leveraged this risk by securitizing mortgage payments and credit portfolios and selling them to investors; turning an enormous profit in the meantime.  The most important of these are known as Mortgage-Backed Securities (MBS), and they are an integral part of the global marketplace.   Risk often means great rewards to investors; the riskier the investment, the higher the return.  American investors purchased the MBS, betting that more borrowers would pay than would default, and that the housing boom would continue.  However, as we all know, the housing boom did not continue.   Eventually, homeowners began to default on their loans.  The predatory lending practices that were widespread during the housing boom were starting to have an effect as teaser rates and other favorable terms expired, and homeowners found their interest and payment sometimes doubling or more.   Investors began to flee mortgage-backed securities too late, while banks simultaneously either failed altogether, or greatly tightened lending requirements.  In fact, the tightening of credit not only applied to mortgages and credit cards, but banks also stopped lending to each other.  This resulted in the credit “freeze”.  The credit freeze has made it nearly impossible for most companies and businesses to perform or procure work; resulting in layoffs, closings, sell-offs, and one of the highest unemployment rates in American history.   As homeowners defaulted on their loans and abandoned their properties, this coupled with the great surplus of homes built during the preceding few years served to drive the price of existing homes downward dramatically.  For many, homes were devalued to the point that they were worth less than the mortgage itself.   Thousands of people lost more than just money- they lost their life-savings and their livelihoods.  The personal wealth of Americans in general plummeted.   It certainly didn’t help that, during all of this, we also experienced an oil crisis.  Because of this, we are paying more for literally everything; from daily commuting expenses to groceries.  For the first time, Americans as a whole have begun to feel the strain of an economy gone astray.   We can see now where we have gone wrong: we as individuals gambled our personal wealth and spent beyond our means.  Our banking institutions gambled by looking the other way and ignoring pertinent information while making us loans that they should not have made.  Investors gambled that just the right amount of people would pay, and that just the right amount would default.  We all gambled that the housing boom would continue, and we all bet that our prized American lifestyle could not be interfered with.  But this is one bet that we lost- so far to the depressing tune of $700,000,000,000.   The question now is: “What are we going to do about it?”  Well, some tottering steps have been taken.  Six months ago Americans received an economic stimulus package.  Recently, our government rescued several organizations, and assumed a great deal of unhealthy mortgages.  Last week, we passed the “bailout” legislation.  But what more is the financial sector doing to solve these problems, and what will all this mean as we move toward 2009?  Bookmark this blog for clear, accurate answers!     –