As unemployment creeps upward, credit card delinquencies are rising too. According to the most recent data collected for the Fitch Credit Card Index, credit card delinquencies – those accounts that are more than 60 days past due – have risen 36 percent in the past two quarters. An executive at Fitch Ratings says that this level of loss for credit cards is "unprecedented."
In February 2009, credit card write-offs increased to nearly 9 percent, a 20-year high. Many analysts fear that job losses will reveal consumers whose debt loads are so high that traditional means of debt reduction won't be very effective in helping them get a new start.
Standard repayment plans may ask the consumer to repay 2-3 percent of their debts off each month in exchange for more favorable terms like lower interest rates or frozen account balances. With consumers who carry an extremely high level of debt, even these comparatively low payments may exceed their earning capacities.
With changes to the bankruptcy laws in the US, which took effect in late 2005, consumers are now waiting much longer to seek help. While the average household carries about $11,000 in credit card debts, the average consumer looking for assistance commonly has balances that exceed $25,000.
These overwhelming credit card debts are leaving consumers looking for better repayment options, as well as options that can help them cope with job losses and reduced incomes.
There are no easy fixes in place. In April, President Obama lobbied credit card industry executives personally at White House meetings, where they were told that Congress is preparing additional regulations that are consumer-friendly. Proposed changes include requiring cardholder agreements to be presented in "plain English"; limiting or prohibiting sudden or unmotivated interest rate increases; simplifying interest rate calculations; and curbing the issuers' ability to increase minimum payments without sufficient notice to the cardholder.
Stiffer regulations for credit card issuers have already been passed by Congress, but don't take effect until July 2010. The pending legislation would make some of the approved reforms effective immediately.
Tuesday, May 12, 2009
Monday, April 13, 2009
Retirement Saving In Recession: It Still Makes Sense
No one is going to argue that times are tough these days. Most people need to stretch their dollars as much as possible to squeeze in all of the necessities. Wages have been largely stagnant for the better part of the last decade, meaning that there are fewer discretionary dollars available for spending.
There's no law that requires you to save for retirement, though many employers now require participation at some level in company-sponsored retirement savings plans. Most companies that have a 401(k) plan offer some kind of matching incentive. In the past year, some big-name corporations have suspended their 401(k) matching grants, but in all 99% of companies that were matching last year at this time are still matching this year.
Under the circumstances, should you continue to save for retirement? Probably. Most 401(k) investments are based in stocks or a mixture of stocks and bonds. Historically, the stock market has risen in value over time. At the moment, the decrease in the value of retirement funds and investments may mean a loss for your past investments, but also represents an opportunity to buy investment-grade securities effectively at a discount.
Moreover, your only opportunity to save for retirement is during your working years. Ideally, you should start saving while you're in your prime. If you need to slow down at work as you get older, or experience health or other issues that prevent you from working to your full potential, your retirement savings will continue to work and generate income for you.
If you wait until you're in your mid-30's, 40's or later to start saving for retirement, the likelihood that you'll be able to amass enough cash to carry you through your retirement is slim. Regardless of the state of the economy, you should continue to save for retirement no matter what the economic circumstances are and how much you can put away. Something is always better than nothing.
One caveat: consider creating a broad retirement portfolio that includes a mixture of tax-deferred and taxed assets. One thing you'll want to avoid is being completely dependent on tax-deferred retirement assets. If you maintain some portion of retirement assets that are taxed, you'll have more choices available to you if you need to retire early or withdraw the money for some other reason.
There's no law that requires you to save for retirement, though many employers now require participation at some level in company-sponsored retirement savings plans. Most companies that have a 401(k) plan offer some kind of matching incentive. In the past year, some big-name corporations have suspended their 401(k) matching grants, but in all 99% of companies that were matching last year at this time are still matching this year.
Under the circumstances, should you continue to save for retirement? Probably. Most 401(k) investments are based in stocks or a mixture of stocks and bonds. Historically, the stock market has risen in value over time. At the moment, the decrease in the value of retirement funds and investments may mean a loss for your past investments, but also represents an opportunity to buy investment-grade securities effectively at a discount.
Moreover, your only opportunity to save for retirement is during your working years. Ideally, you should start saving while you're in your prime. If you need to slow down at work as you get older, or experience health or other issues that prevent you from working to your full potential, your retirement savings will continue to work and generate income for you.
If you wait until you're in your mid-30's, 40's or later to start saving for retirement, the likelihood that you'll be able to amass enough cash to carry you through your retirement is slim. Regardless of the state of the economy, you should continue to save for retirement no matter what the economic circumstances are and how much you can put away. Something is always better than nothing.
One caveat: consider creating a broad retirement portfolio that includes a mixture of tax-deferred and taxed assets. One thing you'll want to avoid is being completely dependent on tax-deferred retirement assets. If you maintain some portion of retirement assets that are taxed, you'll have more choices available to you if you need to retire early or withdraw the money for some other reason.
Monday, April 6, 2009
Can You Stop Foreclosure?
If you're a homeowner in financial trouble, and your mortgage is one of the many that will slip into foreclosure this year, you may be looking at strategies to stop the foreclosure process. There are just a few ways to stop foreclosure, but the process is stoppable, sometimes even after a house has been sold.
The most effective way to stop foreclosure is to bring your mortgage payments current. The bank cannot foreclose on a mortgage in good standing, so bringing your payments current is a sure-fire strategy to stop foreclosure. Unfortunately, if you're experiencing unresolved financial troubles, this may not be possible. The loss of a job, a reduction in income or an increase in the amount of the mortgage payment may put your house out of financial reach for you. Before letting your house slip into foreclosure, talk to the mortgage holder to see if they can offer some type of modification that will make paying your mortgage easier.
Another way to stop foreclosures is to sell the property. The sale of the property will satisfy your obligation to the bank, provided that the sale price is sufficient to cover the amount owed. In today's tight real estate market, getting your asking price for a property can be tough, and in some cases downright impossible. If you're "upside down" on your mortgage – that is, you owe more than the property is worth – a short sale may provide you with an opportunity to sell the property at a reduced price and receive some loan forgiveness from the mortgage holder. There are many intricacies to negotiating a short sale, so you'll want to consult an expert if this is the route you plan to take.
Bankruptcy will also temporarily halt a foreclosure proceeding, but declaring bankruptcy to avoid foreclosure is a clear-cut case of jumping out of the frying pan and into the fire. When everything is said and done, the bankruptcy court can still order the sale of your home under certain circumstances, so keeping your home in bankruptcy isn't a given.
After the lender has foreclosed on a home, most states permit the homeowner to "redeem" or reclaim the property for a certain period of time. Only a few states have "strict foreclosure" rules that don't permit redemption. The redemption period varies by state, but if your lender has foreclosed on your property, and you can come up with all of the money you owe, you can reclaim ownership on the property. Redemptions can and do happen, but most homeowners don't redeem foreclosed properties.
The most effective way to stop foreclosure is to bring your mortgage payments current. The bank cannot foreclose on a mortgage in good standing, so bringing your payments current is a sure-fire strategy to stop foreclosure. Unfortunately, if you're experiencing unresolved financial troubles, this may not be possible. The loss of a job, a reduction in income or an increase in the amount of the mortgage payment may put your house out of financial reach for you. Before letting your house slip into foreclosure, talk to the mortgage holder to see if they can offer some type of modification that will make paying your mortgage easier.
Another way to stop foreclosures is to sell the property. The sale of the property will satisfy your obligation to the bank, provided that the sale price is sufficient to cover the amount owed. In today's tight real estate market, getting your asking price for a property can be tough, and in some cases downright impossible. If you're "upside down" on your mortgage – that is, you owe more than the property is worth – a short sale may provide you with an opportunity to sell the property at a reduced price and receive some loan forgiveness from the mortgage holder. There are many intricacies to negotiating a short sale, so you'll want to consult an expert if this is the route you plan to take.
Bankruptcy will also temporarily halt a foreclosure proceeding, but declaring bankruptcy to avoid foreclosure is a clear-cut case of jumping out of the frying pan and into the fire. When everything is said and done, the bankruptcy court can still order the sale of your home under certain circumstances, so keeping your home in bankruptcy isn't a given.
After the lender has foreclosed on a home, most states permit the homeowner to "redeem" or reclaim the property for a certain period of time. Only a few states have "strict foreclosure" rules that don't permit redemption. The redemption period varies by state, but if your lender has foreclosed on your property, and you can come up with all of the money you owe, you can reclaim ownership on the property. Redemptions can and do happen, but most homeowners don't redeem foreclosed properties.
Monday, March 23, 2009
Debt Settlement Can Achieve Permanent Debt Relief
If you've lost your job, had a medical emergency that your insurance didn't cover (if you were insured at all) or for some other reason now face a growing mountain of debt, the promises of a debt settlement company might look very attractive. But are they for real?
When considering debt settlement, it's important to keep your expectations realistic. Be wary of debt settlement companies that promise you a specific percentage reduction in your debts. Ask for statistics on the average settlement the company negotiates in both percentages and dollar amounts. Also understand that each negotiation will be different. Some creditors will be eager to settle a debt; others will hold out for a higher payoff.
Your credit report will likely reflect some negative information regarding the settlement. In all likelihood, the debt will be reported as settled, rather than paid as agreed. This isn't the worst thing in the world. This information will become much less relevant over time, if you resume (or develop) good credit habits. These include paying bills on time; keeping your debts proportional to your income; and resisting the urge to ask for more credit over time. Your credit report will heal faster than you think.
This is an important distinction between settlement and bankruptcy. Bankruptcy can stain your credit report for ten years. Financial trouble, followed by a period of stable payments and responsible use of credit, will rarely cause trouble for more than a few years. Creditors are far more interested in what you have been doing recently than they are in punishing you for past troubles, especially those that have been resolved. In addition, these negative marks must be removed from your credit report after seven years, meaning that all evidence of trouble is erased.
Debt settlement can and does produce a permanent reduction in the amount of money you owe a creditor. Once the bill is settled, the remainder of the debt is wiped out, and you can begin to create your new financial future.
Your creditors will not come back to you at a later date to seek repayment of the forgiven debts. You will be expected to pay taxes on the forgiven amount, however. For tax purposes, forgiven debt is considered taxable income. Keep this in mind when you negotiate your debt settlements. If possible, work to spread your settlements out over multiple tax years. This is especially important if you are seeking a substantial forgiveness. If you are not able to spread your settlements across more than one tax year, work with the IRS to create a tax payment plan you can afford.
When considering debt settlement, it's important to keep your expectations realistic. Be wary of debt settlement companies that promise you a specific percentage reduction in your debts. Ask for statistics on the average settlement the company negotiates in both percentages and dollar amounts. Also understand that each negotiation will be different. Some creditors will be eager to settle a debt; others will hold out for a higher payoff.
Your credit report will likely reflect some negative information regarding the settlement. In all likelihood, the debt will be reported as settled, rather than paid as agreed. This isn't the worst thing in the world. This information will become much less relevant over time, if you resume (or develop) good credit habits. These include paying bills on time; keeping your debts proportional to your income; and resisting the urge to ask for more credit over time. Your credit report will heal faster than you think.
This is an important distinction between settlement and bankruptcy. Bankruptcy can stain your credit report for ten years. Financial trouble, followed by a period of stable payments and responsible use of credit, will rarely cause trouble for more than a few years. Creditors are far more interested in what you have been doing recently than they are in punishing you for past troubles, especially those that have been resolved. In addition, these negative marks must be removed from your credit report after seven years, meaning that all evidence of trouble is erased.
Debt settlement can and does produce a permanent reduction in the amount of money you owe a creditor. Once the bill is settled, the remainder of the debt is wiped out, and you can begin to create your new financial future.
Your creditors will not come back to you at a later date to seek repayment of the forgiven debts. You will be expected to pay taxes on the forgiven amount, however. For tax purposes, forgiven debt is considered taxable income. Keep this in mind when you negotiate your debt settlements. If possible, work to spread your settlements out over multiple tax years. This is especially important if you are seeking a substantial forgiveness. If you are not able to spread your settlements across more than one tax year, work with the IRS to create a tax payment plan you can afford.
Tuesday, March 17, 2009
Debt Relief v. Bankruptcy
An overabundance of debts may be leading you to think about declaring personal bankruptcy. While that is one option, there are other ways to reduce your overall debt load and secure permanent debt relief.
Debts can be secured or unsecured. Secured debts are those that are "backed" by the value of the asset being purchased. Homes and cars are typically considered secured debts. Other similar purchases, like vacation homes, boats and recreational vehicles, would also fall into this category. If for some reason, you can no longer make the payments on these assets, you can sell the asset to repay the loan. You could also find another purchaser willing to take over the payments on the asset. Finally, you could return the asset to the creditor and allow the creditor to liquidate it to settle the debt.
Other debts, like credit card bills, utility bills (in most cases), medical bills, and personal loans are considered unsecured. The borrower has offered no collateral to back up his promise of repayment. Instead, the creditor has accepted the borrower's promise to repay in exchange for the loan. Unsecured debts typically have higher interest rates and shorter repayment terms than secured loans. They are also "unprotected" in bankruptcy proceedings, and are often discharged as a complete or near-complete loss by the creditor.
Student loans represent a special kind of debt. While the debt itself is unsecured, there are stiff penalties for failing to repay student loans. Bankruptcy proceedings do not discharge these loans. The law does provide a mechanism to discharge student loans, but the process is long and difficult, and the success rate is extremely low.
If you have less than $10,000 in unsecured debts, your best bet is to work out a payment plan that will discharge your debts in the space of about 3 years. Enroll in credit counseling and take advantage of debt reduction workshops and budgeting courses to help put your debt back into proportion with your income.
If you have more than $10,000 in unsecured debts, you may benefit from a combination of credit counseling and financial education programs, and some type of negotiated debt settlement. Much of your final strategy will depend upon your overall debt load, the stability of your income, and your plans for the next 3-5 years.
If your unsecured debts exceed $25,000, debt settlement should be a cornerstone of your approach to reducing your obligations. You may not be able to discharge all of your debts, but in working with your creditors, you may significantly reduce the balance you owe.
Filing for bankruptcy should be a last option. This strategy should be reserved for individuals who have no viable income, no prospects for meaningful income in the future, and who have significant unsecured debts that cannot be negotiated, settled or discharged in any other way.
Debts can be secured or unsecured. Secured debts are those that are "backed" by the value of the asset being purchased. Homes and cars are typically considered secured debts. Other similar purchases, like vacation homes, boats and recreational vehicles, would also fall into this category. If for some reason, you can no longer make the payments on these assets, you can sell the asset to repay the loan. You could also find another purchaser willing to take over the payments on the asset. Finally, you could return the asset to the creditor and allow the creditor to liquidate it to settle the debt.
Other debts, like credit card bills, utility bills (in most cases), medical bills, and personal loans are considered unsecured. The borrower has offered no collateral to back up his promise of repayment. Instead, the creditor has accepted the borrower's promise to repay in exchange for the loan. Unsecured debts typically have higher interest rates and shorter repayment terms than secured loans. They are also "unprotected" in bankruptcy proceedings, and are often discharged as a complete or near-complete loss by the creditor.
Student loans represent a special kind of debt. While the debt itself is unsecured, there are stiff penalties for failing to repay student loans. Bankruptcy proceedings do not discharge these loans. The law does provide a mechanism to discharge student loans, but the process is long and difficult, and the success rate is extremely low.
If you have less than $10,000 in unsecured debts, your best bet is to work out a payment plan that will discharge your debts in the space of about 3 years. Enroll in credit counseling and take advantage of debt reduction workshops and budgeting courses to help put your debt back into proportion with your income.
If you have more than $10,000 in unsecured debts, you may benefit from a combination of credit counseling and financial education programs, and some type of negotiated debt settlement. Much of your final strategy will depend upon your overall debt load, the stability of your income, and your plans for the next 3-5 years.
If your unsecured debts exceed $25,000, debt settlement should be a cornerstone of your approach to reducing your obligations. You may not be able to discharge all of your debts, but in working with your creditors, you may significantly reduce the balance you owe.
Filing for bankruptcy should be a last option. This strategy should be reserved for individuals who have no viable income, no prospects for meaningful income in the future, and who have significant unsecured debts that cannot be negotiated, settled or discharged in any other way.
Monday, March 2, 2009
Will Homeowner Plan Be Enough?
As President Obama has taken the wraps off of his plan to stave off foreclosures, some analysts are wondering if the latest proposal will be enough. The new federal funding is expected to help 7 million to 9 million homeowners in the next few years, but experts are predicting that there may be as many as 10 million foreclosures in the same time period. That number doesn't include the number of homeowners who are not in foreclosure, but who would benefit from mortgage assistance.
Another concern is the number of adjustable rate mortgages that are set to adjust in the next two years. More than $1 trillion of adjustable rate mortgage debt is on the line and analysts believe that many of these mortgages will end up in foreclosure as property values continue to decline.
While mortgage lenders have been somewhat receptive to provisions that make mortgage loan modifications easier, they're almost universally against the "cramdown" proposal, which would allow bankruptcy judges to modify mortgage agreements. The current cramdown proposals include giving bankruptcy judges the power to write off portions of the principal on a property included in bankruptcy petitions, or convert mortgage debt to unsecured debt when the value of the property drops below the value of the property's mortgage(s).
Right now, bankruptcy judges have the ability to write down or write off unsecured debts, but lenders fear that mortgage cramdowns will lead to an increase in the amount of consumer debt that is written off in bankruptcy proceedings. Details of how the cramdown proposal would work have not yet been worked out, but modifying the power of the bankruptcy court would require Congressional approval.
Another concern is the number of adjustable rate mortgages that are set to adjust in the next two years. More than $1 trillion of adjustable rate mortgage debt is on the line and analysts believe that many of these mortgages will end up in foreclosure as property values continue to decline.
While mortgage lenders have been somewhat receptive to provisions that make mortgage loan modifications easier, they're almost universally against the "cramdown" proposal, which would allow bankruptcy judges to modify mortgage agreements. The current cramdown proposals include giving bankruptcy judges the power to write off portions of the principal on a property included in bankruptcy petitions, or convert mortgage debt to unsecured debt when the value of the property drops below the value of the property's mortgage(s).
Right now, bankruptcy judges have the ability to write down or write off unsecured debts, but lenders fear that mortgage cramdowns will lead to an increase in the amount of consumer debt that is written off in bankruptcy proceedings. Details of how the cramdown proposal would work have not yet been worked out, but modifying the power of the bankruptcy court would require Congressional approval.
Monday, February 23, 2009
Loan Modification Programs For Homeowners Who Are Still Making Payments
Sub-prime mortgages, interest-only mortgages and adjustable-rate mortgages have all been implicated in the current mortgage meltdown. There is a class of homeowner, however, that is still making payments on a mortgage and hasn't yet fallen behind on the payments, but may still be looking for a way to lower monthly payments.
Homeowners looking for a way to hang onto a home whose payments are too high have focused on loan modification, but homeowners who aren't in trouble on paper are also looking for loan modifications to reduce monthly payments or avoid problems that may be looming.
In many cases, the problem isn't the monthly payment at all. Instead, property values have dropped thanks to local foreclosures, a sagging real estate market and the soaring number of properties available for sale. Homeowners may find themselves making payment on homes whose values have sunk by 20 or 30 percent. In some markets, the decline in property value has been even more severe.
Homeowners can't seen making payments on a property in which they have little or no equity, or have little chance of recovering the property's value in the foreseeable future. In a normal market, a homeowner could refinance to get a better interest rate, or lower monthly payment. With the decline in value, refinances for many homeowners are all but impossible, leaving the homeowner to pay more than the property is worth, or to turn the property back over to the bank.
The Homeowner Affordability and Stability Plan (HASP), introduced last week, may offer some new hope for homeowners who are in a similar situation. Sheila Bair, Chairman of the FDIC said last week that voluntary loan modification options hadn't worked, in part, because mortgage lenders are reluctant to risk being sued by investors who bought securitized mortgages as an investment.
HASP reduces mortgage payments to 38 percent of a homeowner's monthly income, and is available for homeowners whose loans are guaranteed by Fannie Mae or Freddie Mac. Bair counsels homeowners who have previously been turned down on a refinance to check with their mortgage lender again. Final details of the HASP plan will be released to the public on March 4. Until that time, many of the nation's largest mortgage lenders have agreed to a moratorium on foreclosures.
Homeowners looking for a way to hang onto a home whose payments are too high have focused on loan modification, but homeowners who aren't in trouble on paper are also looking for loan modifications to reduce monthly payments or avoid problems that may be looming.
In many cases, the problem isn't the monthly payment at all. Instead, property values have dropped thanks to local foreclosures, a sagging real estate market and the soaring number of properties available for sale. Homeowners may find themselves making payment on homes whose values have sunk by 20 or 30 percent. In some markets, the decline in property value has been even more severe.
Homeowners can't seen making payments on a property in which they have little or no equity, or have little chance of recovering the property's value in the foreseeable future. In a normal market, a homeowner could refinance to get a better interest rate, or lower monthly payment. With the decline in value, refinances for many homeowners are all but impossible, leaving the homeowner to pay more than the property is worth, or to turn the property back over to the bank.
The Homeowner Affordability and Stability Plan (HASP), introduced last week, may offer some new hope for homeowners who are in a similar situation. Sheila Bair, Chairman of the FDIC said last week that voluntary loan modification options hadn't worked, in part, because mortgage lenders are reluctant to risk being sued by investors who bought securitized mortgages as an investment.
HASP reduces mortgage payments to 38 percent of a homeowner's monthly income, and is available for homeowners whose loans are guaranteed by Fannie Mae or Freddie Mac. Bair counsels homeowners who have previously been turned down on a refinance to check with their mortgage lender again. Final details of the HASP plan will be released to the public on March 4. Until that time, many of the nation's largest mortgage lenders have agreed to a moratorium on foreclosures.
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