Generation gap + income gap = The Kids Aren’t Alright

 Bankruptcy, Consumer Law  Comments Off on Generation gap + income gap = The Kids Aren’t Alright
Nov 092011

We all know how hard it used to be for prior generations – struggling to get to school in the dark, through deep snow, uphill both ways  – you know the jokes.  However, what made that joke funny was the hope – nay, the knowledge – that the younger generation was going to have a better life than the one before, and that one’s assets and net worth would increase over time.  Now, those expectations are in real jeopardy. 

According to a new report from the Pew Research Center, the wealth gap between the older and the younger generations as stretched to the widest on record.  There are two aspects to this study: (1) how much wealthier each age group is as compared to the younger generations, and (2) how the wealth of each age group has changed over the past 25 years.  

Let’s start with (2) – same generations, different years.  After adjusting for inflation, the net worth of households, as a whole, increased by 10% from 1984 to 2009.  Not bad, right?  However, breaking that down by age group, the disparity of the changes between the groups is huge.  At the “top” end of the age spectrum (households headed by an adult 65 or older), the net worth increased by 42% from 1984 to 2009.  However, in that same period of time, the net worth of households headed by an adult under 35 decreased by 68%.  Households headed by those between 35 and 44 didn’t fare much better – their net worth decreased by “only” 44%.   At least there is still some net worth – in 2009, 20% of households had no or negative net worth (compared with 11% in 1984). 

Next, we look at (1) – the gaps between the generations themselves.  In 1984, the wealth disparity between the over 65 and the under 35 crowds was only 10 to 1.  In 2005, it was 22 to 1.  In 2009, it was 47 to 1.  And the numbers themselves cause concern – the median net worth for the under-35 crowd dropped from $11,521 to just $3,662.  That is only one medical emergency, one blown transmission, or one dead furnace away from having no net worth at all. 

Why is this?  I’m sure some of this related to the various save/spend policies of each generation – and each younger generation seems to focus more on the “spend” aspect (or maybe I’m just becoming one of those old fogeys).  However, other factors noted in the report include:

  • Declining home values, leading to decreased equity.  This has a greater impact on the those with newer mortgages with balances at (or more than) the home’s value. 
  • Delayed marriages and increases in single parent households.  Not sharing housing and child-rearing expenses with a spouse (or spousal equivalent) definitely leaves less $ available for saving for the future. 
  • Delayed retirement.  This not only increases the income (and assets) of those keeping their jobs, but also delays employment for the person that would have otherwise filled the vacancy caused by retirement. 
  • Higher debt loads – especially student loans.  And don’t forget that student loans are forever – if you can’t afford them, you can’t get rid of them in bankruptcy.  Ever.  Well, unless you’re dead.  Maybe. 

So, what to do? 

  • Tackle the student loan debt problem.  There are plenty of contributors to the problem – the schools who charge way too much for way too little, because that’s how they make money; the lenders who pass out loans like Halloween candy, knowing that the government will foot the bill, even if the student can’t; and the students who treat loans like “free” money or a substitute for a real income, with no understanding (or complete denial) of the impact these loans will have on their ability to build a post-school life.  If we make student loans dischargeable – or, at least, treat them like taxes (e.g., priority debts, and dischargeable after so many years have passed), then lenders will act like lenders and less like over-indulgent grandparents, and schools will be forced to evaluate prospective students for their ability to make a (real) living with the degrees the schools are selling, and control the costs of getting a degree.   And, at the very, VERY least, if student loans are SO important that they can’t ever be discharged, can we at least force students (and their co-signing parents) looking for student loans to get at least the same amount of “education” that we require those filing bankruptcy to get?  It may be the only real “education” some of these students actually receive. 
  • Allow for cramdown of mortgages on primary residences in bankruptcy.  Right now, if you owe more than your house is worth, you file bankruptcy, and you want to keep your home, the bankruptcy court can’t help you much.  Unless you convince the lender to reduce your principal (and good luck with that), you will be stuck with that ugly principal balance.  Even if you get a modification, the payment reductions come from reduced interest rates and longer terms, not a drop in the total amount owed.  Giving homeowners the power to reduce their principal balances in bankruptcy might get the mortgage lenders to start coming up with better modifications – before a homeowner has to resort to bankruptcy to survive. 
  • Another suggestion (thanks to Harry Holzer, a labor economist and public policy professor at Georgetown University) is to consider re-allocating at least some the federal government’s resources used for retirees’ to the younger generations, and to minimize (or reverse) cuts made to education and cash assistance for poor families.   Nice, but not likely to succeed under the current regime. 

 We’re not done yet.  These numbers will get worse before they get better (if they get better).  And if we, as the individual people whose actual lives go into these numbers, don’t take care of ourselves, who will?

Short Sales, Foreclosures, and FICO

 Bankruptcy, Consumer Law, Foreclosure, Indiana  Comments Off on Short Sales, Foreclosures, and FICO
Apr 272011

One of the various alternatives available to clients facing foreclosure is a “short sale.”  For those who either do not qualify for a loan modification, or who do not want to remain in the home (for whatever reason), a short sale can allow a homeowner to sell the property (albeit for less than the amount owed) instead of losing the home through foreclosure. 

Of course, most people also want to know what effect each of these alternatives would have on their credit scores.  Other than my typical response that they have more important things to worry about than a credit score – like how they are going to keep a roof over their heads and have enough money left over to put food on the table – I could only guess at what the Magic FICO Ball would have in store.

Recently, however, FICO did some research on how mortgage delinquencies affect credit scores.  What they found was that – well – it depends.  To determine the effects, FICO created three “representative” consumers, each with an active, current, “paid as agreed” mortgage.  Here’s what I took away from the charts:

  • Short sales with a deficiency balance are treated almost exactly the same as a foreclosure.  
  • BUT, once you fall behind on your mortgage payments, and you get a short sale without a deficiency balance, then then you’re not going to be penalized much more (if at all), and certainly not as much as a foreclosure. 
  • Using bankruptcy to save your home (or to get rid of a deficiency balance) has the greatest negative impact – for the short term, at least. 
  • If you’re looking to get back to a 780 credit score, it’s going to take a long time, but it is possible. 

In Indiana, lenders are allowed to pursue the (now former) homeowner for any deficiency (e.g., the amount left on the debt after the sale proceeds are deducted).  The only ways to avoid a deficiency are (a) an agreement with the lender, (b) bankruptcy; or (c) paying it.  Since most people in foreclosure don’t have the resources to pay a deficiency, we’re usually looking at the first two options.  A short sale may result in the deficiency being waived, or an opportunity to settle for a lower amount.  However, if there are more global problems (like a lot more debt than just the mortgage), then bankrutpcy may be the best option.  Of course, each of these options should be discussed with a knowledgable attorney before committing to a particular course of action.

One last thought on FICO:  FICO scores are a reflection of your ability to put yourself deeper into debt.  Too much debt is what brings people into my office.  Taking on more debt when you’re already drowning is not going to help.  Getting out of the burdensome debt, once and for all, is the real solution.  A good FICO score will only help if it allows you to refinance or consolidate your current debts so that you can actually pay them off within a reasonable amount of time.  If you can’t do that right now, then your FICO score is irrelevant.  Focus instead on what you need to do to survive and thrive, without relying on more debt.

Crawling Away from Your Indiana Home

 Bankruptcy, Consumer Law, Foreclosure, Indiana  Comments Off on Crawling Away from Your Indiana Home
Feb 072011

Last week, Ryan Grimm of the Huffington Post (you know, the online news channel that just sold itself to AOL) did a piece called “Learning to Walk: Fear, Shame and Your Underwater Mortgage” where he wrote about his conversations with people who were thinking about walking away from their homes and the mortgages dragging them under.  A year after the conversations started, of 58 initial homeowners he interviewed, only 8 were still paying on their mortgages, and 10 could not be found anymore (and I would posit that most them had moved away).  As for the rest of the homeowners, all of them were either in the process of walking away or had already done so.  Many said their interactions with their lenders left them feeling alone and powerless; others were left with just hostility towards their lenders.  Most felt a mix of relief and shame. 

Of course, there are ramifications for walking away (even if you are really just crawling away), and it ain’t just your FICO score.  Indiana’s laws make it darn near impossible to walk away from an underwater home without paying some penance or penalty.   Indiana is a “recourse” state, meaning that the lender can come after you for more money if your house sells for less than the amount you owe.  And, once the lender has that foreclosure judgment against you, the lender can either try to collect the judgment debt itself (plus interest at 8%), or sell that judgment debt to a third-party debt buyer.  Even after you home is sold, you can be hauled in front of a judge to tell the lender or debt buyer (and everyone else there) how much you make, what you own, and how you’re going to pay back this debt (this is called a “proceedings supplemental” – and if you don’t show up, the court can issue a warrant for your arrest).  Oh – and the collection efforts can continue to haunt you for the next 20 years (or more).  Plus, if you ever buy another home, that unpaid judgment might even attach to the new place.  Just walking away doesn’t necessarily mean you’re free. 

So, you want to get rid of this deficiency.  And soon.  There are ways, none of them pleasant:

  1. Pay it off.  The lenders prefer this method, and will continue to push for it as long as possible.  However, if you had the money to pay the deficiency, you probably would have paid your mortgage, or qualified for a modification. 
  2. Get a bankruptcy discharge.  A bankruptcy filing can be done before or after the foreclosure.  Determining whether bankrutpcy makes sense for a particular couple or individual requires assistance and counsel from a knowledgable bankruptcy attorney. 
  3. Negotiate a settlement with the lender (or whomever buys the debt).  This can be done before a foreclosure (through a short sale or a deed-in-lieu) or afterwards (just like settling an old credit card debt).   In certain circumstances (e.g., the HAFA program), the deficiency must be waived.  Otherwise, it’s up to the lender (or more likely the investor or the mortgage insurance company) whether or not to accept the house as “payment in full.”  The good news is, in Indiana at least, if the lender approves a short sale or deed-in-lieu and the agreement does not expressly preserve the lender’s right to sue you for the deficiency, you’re off the hook.  The lesson: if you do a short sale or deed-in-lieu, make sure that the lender can’t come after you for the rest later before you agree to it. 
  4. Die.  I really don’t recommend this method.  In addition, the lender may still try to collect from your estate, even after you’re gone.   

That said, walking away can, in many circumstances, still be the best thing to do.  I do have clients that, after running and scrambling on the HAMP-ster wheel for months on end, finally decided to get off and walk away (usually using bankruptcy to lock in this new-found freedom).  And yes, they also feel that mix of relief and shame.  However, as time goes on, the feeling of shame fades, and is replaced with more relief, and even joy – the joy of walking without the weight of unaffordable mortgage payments; the joy of knowing that their energy is no longer being drained from fighting with a nameless, unresponsive, and sometimes even abusive lender; and the joy of re-gaining their focus on their families, their faith, and planning for a new future.

Indiana Consumers in Distress, and on the Edge

 Bankruptcy, Consumer Law, Foreclosure, Indiana  Comments Off on Indiana Consumers in Distress, and on the Edge
Nov 192010

The Indianapolis Star is reporting that Indiana’s Consumer Distress Index (CDI) fell to 60.68 in the last quarter, from 62.61 in the previous quarter and down from 62.32 a year ago. The CDI is a quarterly measure of the financial condition of the average American consumer. A rating between 60 to 69 indicates that “the consumer is financially unstable and needs to take immediate action to address their problem.” A score below 60 indicates that “the consumer is in the midst of a crisis and needs direct intervention to regain stability.” And we’re almost there.

“Direct intervention” can mean working with a credit counselor, HUD counselor, bankrutpcy attorney, foreclosure or consumer defense attorney, or negotiating directly with your lenders and creditors to try to work something out. Unfortunately, the need for direct intervention can also make desparate individuals ripe for fraud and scams. There are a lot of ways an offer of help can be anything but. The best advice is the old adage: If it seems to good to be true, it probably is. And if somebody guarantees that you will be able to save your house / improve your credit / settle your debts for next to nothing, all for the “low price of $XXX,” be very, very wary. The only thing anyone should guarantee is that they will do the best they can to get the best result possible under your particular circumstances.

The CDI report is prepared by CredAbility, a consumer credit counseling agency in Atlanta. CredAbility uses publicly available data from government and private sources regarding employment, housing, credit, household budget, and net worth.

Bankruptcy – not your “last” resort!

 Bankruptcy, Consumer Law  Comments Off on Bankruptcy – not your “last” resort!
Sep 142010

Most people do not want to declare bankruptcy. It’s usually viewed as a last resort to stop wage garnishment, foreclosure on the family home, or harassing collection calls. However, many people who postpone filing until they don’t see any other way out actually miss out on many protections offered under the bankruptcy laws.

Jill Michaux at Money Health Central posted a list of six signs that you may have waited too long to see a bankruptcy attorney:

1. Your home has been sold or is about to be sold at foreclosure sale.
2. Your car just got repossessed by the lender.
3. Your paycheck or bank account is being garnished.
4. The IRS has filed a tax lien on your property.
5. Your paycheck is taken by payday lenders.
6. You are depleting your retirement account to pay general debts with no collateral such as credit cards and medical bills.

Don’t wait until any of these happen to you. Even if you don’t think you are – or ever want to be – at the point of “needing” to file bankruptcy, if you are experiencing financial difficulties, you should still understand what bankruptcy is, how it works, what protections it offers, and when it may be most appropriate for you. Consulting a local bankruptcy attorney sooner rather than later will give you more options and choices, and may allow you to protect even more of what you still have.