Home » 2012 » March

Stop Listening to Suze Orman!

Wow, Suzie Orman really told an 81 year-old woman, who earns only a fixed $600 a month from social security, to make sure she protects her FICO score and continue to pay the minimum balances on her credit cards.   In the Oprah Magazine this month, Ms. Orman was asked, “After taking out cash advances on her credit cards, my 81-year-old mother is out $8,000. She lives on $600 a month from Social Security and cannot keep paying on this debt. Can you advise me on how to proceed? How do I get her out of credit card debt?”

In response to this question, where clearly the Debtor’s income was protected, and there was no reason to believe based upon the question that any assets would be attached, Ms. Orman responded: “It’s fruitless to try to talk your way out of this; the card issuer has every right to expect repayment.  To regain control of her debt, have your mom keep paying at least the minimum due on the monthly credit card bill. On-time installments are vital for protecting her FICO credit rating. That’s important because if her score is at least 700, she has a good chance of being able to transfer the entire balance to a new card with a lower interest rate. Many card issuers offer zero percent interest for the first year when you move your balance to their card. At CardTrak.com, click on Credit Cards, then choose Balance Transfer to find issuers offering the best deals. But only sign up for one card—multiple applications made at the same time can actually hurt her credit score.”

I would like to say that I cannot believe that Ms. Orman would give such bad advice, but in all honestly I can believe it.  I have watched her show on and off and read a few of her articles, many of which drive consumers to the same advice.  So Ms. Orman’s great advice is basically, try to make payments that you can’t afford at the expense of possibly not paying for medical bills or food, in the hopes that some other unsuspecting creditor will extend this woman more credit to transfer the balance and pay a lower interest rate for 6 months.  This is yet another example of why you should speak to a qualified consumer debt attorney who understands the legal ramifications of different courses of action, rather than a talk show host or even just friends.

Had this Debtor come to me, I would have reviewed her situation in a bit more detail before handing out any advice.  In all fairness, I understand Ms. Orman did not have that luxury, but even still if I believed the Debtor to be judgment proof, presuming she had no assets that could be liquidated by the Creditor, I would have advised her of several options, none of them though would have been to make minimum payments.  Trying to save your FICO score at 81 years old, just to abuse the system by taking out a new credit card, is absurd!

This woman could possibly file a Chapter 7 bankruptcy and discharge her debt.  If she did this, her income would be protected.  Another option would be to obtain third party funds and settle the debt for a small lump sum.  She may, frankly, stop paying and wait to go to Court and even be able to challenge the validity of the debt.  However, Ms. Orman did not feel it necessary to inform her reader of any of these options.

It just goes to show you why it is always better to speak to a licensed professional attorney who has an obligation to tell you about all of your options, then a talk show host or author who is more concerned with selling her books then looking out for the true interest of those who rely on her advice.

The History of Bankruptcy in the United States

When people hear the word bankruptcy, they often say to themselves, “what is it?”   Many people believe that the concept of debt relief is a new or modern topic, and often times, people view the term as a dirty word or with a negative connotation.  The truth of the matter is simply the complete opposite.  In fact, the idea of filing bankruptcy is as old as the United States of  America itself and a very interesting historical topic when viewed in its full context.

Taking a broad look at this topic, debt has been an issue for centuries.  In the distant past, it was a crime to not repay creditors, and as a matter of fact, in England in the middle-ages there were debtor’s prisons for those who were found guilty. The standard procedure back then was; if you couldn’t pay your debts, the King would throw you into jail.  Debtors would then stay in jail until they were able to repay their creditors, which of course stopped them from being able to work to pay off the debts.

Luckily, things have changed a little bit over the past few hundred years, throughout England and everywhere else, including the United States of America.  Looking back to the beginning of our country, bankruptcy was such a hot button topic when the Revolutionary War ended, that the right to file for bankruptcy protection was incorporated into the Constitution.   In fact, it is first seen in Article I, Section 8, Clause 4 therefore, as early as 1801, we had bankruptcy laws in the United States of America.  The concept of bankruptcy was so important to our Founding Fathers that they gave congress the power to create bankruptcy courts and regulations in Article I and Article III of the United States Constitution, the earliest legal document in our country’s history.   The Founding Fathers thought the right to bankruptcy was so important that they provided for it at the beginning of the Constitution, rather than burying it in the end of the document.

Debt relief is something that our Founding Fathers knew was going to be part of the economy.  It has been a part of our economy for years, it is not just something new in the last few decades when people started getting and using credit cards, but rather it has been around since the inception of our country.  Had the idea of debt relief been so appalling to those drafting our very first set of laws, it would not have been made a part of the Constitution.  If it was not so important, the Federal Government would certainly have removed it from the laws and not sponsored it again and again.  Congress would certainly not have amended the rules in 1978, or again in 2005 to add more complexities and protections to the law of bankruptcy, under Title 11 of the United States Code.

80/20 mortgage loan dilemma: How to avoid your second mortgage for life and save your home

Everywhere I go I hear someone complaining about their house being worth nothing at all.  They use the terms “underwater,” “worthless,” and “hopeless” to describe situations regarding their home.  It is a tough time right now for folks who purchase a home between the years of 2004-2007 and are trying to keep these homes.

Let us all face it; the prices at the time were just plain “CRAZY.” We all fell for it.  We did not care that the prices were ridiculous rather we only cared about getting a home.  Some of us, it was probably the only time we could get a home.  If traditional lending practices would have applied, a home loan simply would not be available to purchase a home.   The new trend home loan mortgage standards provided the opportunity to purchase a home for you to consider for the first time.

I do not blame anyone for taking advantage of purchasing a home during this period that would not have otherwise been able to do so.  However, the question is now I got this home and I want to keep it but with the increasing cost of fuel, energy and foods, “how do I do it?”  Maybe the question really is “is there anything I should consider to help me do so?”

Throughout the passing of time, the values of properties have gone up and gone down.  It is a trend that never changes.  We happen to be in a trend of downward values.  A downward value time does not need to be a bad time even for the homeowner who bought their house in an upward value time.  In fact, the part that you think is keeping you down is actually the answer to “how do I do it?”

The traditional home loans standards to purchase prior to 2004 would require a down payment on the purchase price of 10% or 20% by the buyer.  After 2004, the new trend was the 80/20 loan.  The Buyer no longer had to put up 10-20% of the purchase price instead the buyer used a 20 loan that second mortgage company would put up for the down payment.  First mortgage companies whether or not the second mortgage company accepted these 20 loans and provided a mortgage to the buyer.

It is these 20 loans that might be the main reason you are “underwater” on your home.  You might ask “why would they give me a 20 loan and drop the prices on this home?” Well, the reality is that the 20 loan gave you the ability to purchase a home when you were not able to because you did not have the cash to provide a deposit on the home.  So, the reason was to allow the buyer to get the home.

The question that we started our conversation on was to how to keep your home even if it might not be an ideal situation.  Also, we talk about what you should consider to help keep your home.  One possibility is a lien strip pursuant to 11 U. S. C §506.  What is a lien strip?  It is a process in a Chapter 13 bankruptcy case that will allow a homeowner to strip the second mortgage from their home.  In other words, the homeowner can get rid of the burden of paying on the 20 loan monthly as well as stripping the lien from the home.  So, if you have a $100,000.00 second mortgage aka 20 loan that you pay $250.00 a month on, you will not have to pay the $250.00 monthly payment nor the $100,000.00.

Yes, this is true.  Your federal government gave you the right to get rid of your second mortgage.  Many people do not know about this law or even consider it in 80/20 situation.  If you are struggling with your home that you purchase as a 80/20 loan combination, you should really take the time to look at your options at this time.  For as we know from the last couple of years, the property values that are down will go up eventually and an opportunity to lien strip could be lost.

What if your mortgage company doesn’t file a proof of claim?

There are numerous reasons why a person would file a Chapter 13 bankruptcy.  The most common reason, after earning too much money to qualify for a Chapter 7 case, is due to arrears on a homeowner’s mortgage.  If a homeowner has fallen behind on mortgage payments and needs to catch up, one option is to file a bankruptcy, stop a foreclosure sale, and be granted the opportunity to pay back the arrears.

After a Debtor files for bankruptcy, the Creditor (mortgage lender) has a duty to file a document called a “proof of claim,” which the Chapter 13 Trustee uses to determine who gets paid when, and how much each Creditor will be paid during the case.  One small problem that can arise in solving your arrears is that your secured creditor fails or simply forgets to file this proof of claim.  The good news is that you, as a Debtor, can file that claim for the Creditor too.  However, before you do that, it is a good idea to call the secured Creditor’s legal department and request they file a proof of claim within seven days.

Section 501(c) of the Bankruptcy Code also allows a Debtor to file a proof of claim on behalf of a secured Creditor who doesn’t timely file a proof of claim. “Timely” means within 90 days after the first date set for the Section 341 meeting of creditors, which itself is normally about 5 – 6 weeks after filing the case.   Additionally, Federal Rule of Bankruptcy Procedure 3004 gives the Debtor an additional 30 days beyond the claims deadline to file protective claims on behalf of Creditors.  However, it should be noted that the local bankruptcy rules often govern the deadline for filing proofs of claim, and can extend those deadlines.  Moreover, several districts do not apply the claims bar date to secured creditors at all.

If you have filed a bankruptcy on your own (”pro se”), and you are facing this type of situation, it would be wise to consult with an experienced bankruptcy lawyer who has handled Chapter 13 cases in the past, such as the Phillips Law Offices, or some other firm in your state.