November 2, 2008

Filed under: Credit Report, Free Credit Reports — Free Credit Report Editor @ 6:59 pm
Anyone who has had to declare bankruptcy will tell you that it was a last ditch effort to save themselves and their family from long term financial ruin. While it may have been chosen by those just trying to get out of paying their debt in past generations, the new bankruptcy laws have made declaration much more difficult and those who are awarded it are in dire financial need. Bankruptcy is not an easy choice; nor is it an easy thing to live with after the declaration has been made. In fact, a declaration of bankruptcy will stay on a consumer’s credit report for seven to ten years and can make the procurement of additional credit – including a mortgage – quite difficult.

But as credit improves year to year, consumers can take small steps to improve it further, including applying and being approved for small lines of credit that they do not use, or pay off on a month to month basis; responsible decisions that will positively impact their credit report and work to raise their credit score. And in terms of making sure that such progress is forthcoming and that the decisions that the consumer is making is being reflected on their credit report, it makes sense to periodically order free credit reports.

Free credit reports give consumers access to their three credit reports – one report each held by the three main credit bureaus that disseminate our financial information. By going online to www.annualcreditreport.com we are able to get the free credit reports we need from Experian, Equifax, and TransUnion – one free credit report within every twelve month period.

These free credit reports will certainly not wipe bankruptcy away; but they will help a consumer who has had to declare bankruptcy move on with his life in a positive direction.

When the FDIC seized mortgage giant IndyMac it was one of the biggest bank failures ever. Now the troubled lender just may lead us out of the housing mess.

By Amanda Gengler, Money Magazine writer
Last Updated: October 24, 2008: 4:44 PM ET
NEW YORK (Money) — The battered economy is in desperate need of a housing fix, and one failed bank just may have the answer.

On Thursday FDIC Chairwoman Sheila Bair told the Senate Banking Committee about the success her agency has had in helping struggling borrowers at IndyMac, which the FDIC took over this summer.

Bair, the nation's leading bank regulator, thinks this foreclosure prevention program can work for other banks.

“Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country,” she told the committee.

She's not alone. While individual lenders, loan servicers and non-profit foreclosure prevention outfits have been chipping away at the staggering housing crisis on a case by case basis, IndyMac, under the FDIC's leadership, became the first bank to establish a set protocol to modify home loans.

Speeding the process
“I think this is an appropriate way to go, and I would hope that more institutions would take it up,” said Michael Barr, professor of law at University of Michigan and a senior fellow at the Center for American Progress. “We need a systematic way to do this, we can't continue to do this on a one-by-one basis.”

Chris Kukla, senior council for government affairs at the Center for Responsible Lending, points out that this is precisely how Congress approached the recent Wall Street bailout.

“We aren't sitting down on an individual basis and figuring out who needs what,” he said. “The government is giving a piece to everyone because there is a recognition that we need to stabilize the financial markets. Well, we need to stabilize the housing market too.”

IndyMac services more than 60,000 loans that are either more than 60 days past due, in bankruptcy, in foreclosure or are otherwise not currently being paid. About two-thirds of those customers are eligible for the program, according to Bair, and more than 3,500 IndyMac borrowers have had their loans modified to affordable levels so far. Borrower payments have been cut on average by $380, she said.

Currently most lenders assess each loan on a case-by-case basis, which takes a tremendous amount of time and resources, and can hold up the process for months. Establishing set rules that a lender can apply to thousands of borrowers will speed the process, and help right the housing market more quickly

Under IndyMac's program, the lender modifies a loan so that the borrower's new mortgage payment, including insurance and taxes, eats up no more than 38% of their pre-tax income. This percentage, known as a debt to income ratio, topped 50% for some loans during the boom.

To achieve this lower payment, IndyMac can lower the interest rate, extend the life of the loan to, say, 30 or 40 years, defer some principal to the final years of the loan, or a use a combination of these strategies.

IndyMac is also trying to simplify the process for borrowers. It is overnighting loan forms to eligible customers with a signature required upon receipt. “It doesn't show up with your regular mail, coupons and junk mail, because the key is getting the consumer to open it,” said FDIC spokesman David Barr.

The papers clearly spell out a borrower's new loan terms, including the interest rate and monthly payments over the life of the loan. The borrower simply signs and returns the documents with the first lower monthly payment.

B of A follows suit
Bank of America (BAC, Fortune 500) launched a similarly systematic program earlier in October. That program, scheduled to start in December, came as part of a settlement with state attorney general offices that sued Countrywide, which B of A recently acquired, for predatory lending practices. It's expected to help 400,000 troubled borrowers and is actually slightly more aggressive than IndyMac's plan.

B of A will use a 34% debt-to-income ratio to calculate the affordable monthly payment for its customers, and may also write down the principal balance of some negative amortizing loans. IndyMac will not forgive debt, but instead will add principal to the final years of a loan if necessary.

Additionally, IndyMac's program is now being applied to many delinquent loans owned by Freddie Mac (FRE, Fortune 500), Fannie Mae (FNM, Fortune 500) and other investors, Bair said in her testimony Thursday.

Not everyone is convinced that Bair's brainchild should be the industry-wide template.

Thomas Lawler, a housing economist in Leesburg, Virginia, contends that lenders need to look at a borrower's other assets in addition to their debt to income ratio before working out a loan. “Otherwise, they will include people who shouldn't really qualify, and might exclude people who do,” he said. “That is one reason why mortgage lenders don't particularly like to have a very simple systematic streamlined modification, because it doesn't work.”

For example, a borrower with substantial additional assets and no other debt may have taken out a big mortgage that eats up 45% of his income. There is a risk that the program will aid this borrower, and not someone with a smaller mortgage and no other assets who also has student and car loans.

But the Center for Responsible Lending's Chris Kukla argues that the crisis is too severe to worry about helping people who don't deserve aid.

Indeed, earlier this month The State Foreclosure Prevention Working Group, a group of state attorneys general and banking regulators, sent a letter to nearly 20 of the largest servicers telling them that they were expected to implement a systematic approach to modify loans similar to IndyMac and Bank of America.

“We aren't getting push back yet, but we haven't gotten any firm commitments yet either,” said Iowa Attorney General and task-force chair Tom Miller. “But there is a willingness to talk.”

“This is the best idea out there to stop the bleeding in subprime lending,” Miller said. “We think it is the best thing we can do at this point.”

Faced with ballooning debt, more American families are filing for bankruptcy. Here's what you need to know.

By BRETT ARENDS
American families are now going bankrupt at the rate of 22,000 a week.

It is quickly becoming a part of American life. So far this year nearly three-quarters of a million individuals and families have filed for court-approved bankruptcy, according to the American Bankruptcy Institute, a professional trade group. That included more than 88,000 last month alone. The figure by year's end may top 1.1 million.

No one likes it. And those who have lived within their means and are repaying their debts may feel aggrieved that others get to wipe the slate clean. But that's the reality of the credit crunch. (Note, by the way, that many bankers who made these improvident loans got to walk away easy, with huge bonuses, thanks to limited liability).

Three years ago, Congress tightened the rules on who could file for bankruptcy, partly after lobbying by the banking industry. The main effect, say some bankruptcy attorneys, was to raise the costs and red tape.

Bankruptcy may offer you a way out of your debt nightmare. And the process starts with a lawyer. The National Association of Consumer Bankruptcy Attorneys will have the names of specialists in your area. If you're thinking of filing, the main question to ask is: Chapter 7, or Chapter 13? They are two very different types of bankruptcy.

Chapter 7 can also be called “liquidation” or a “short” bankruptcy. You're out of money, you can't make any payments, you go through the court system and wipe the slate clean, at least for unsecured debts such as credit-card balances. It takes a matter of months.

Chapter 13 is a court-supervised repayment plan. It lets you keep more assets, but can also help with some secured loans – including car loans and mortgages – that aren't typically helped under Chapter 7. The court will approve a plan under which you repay some of what you owe over a period of three to five years.

“In most cases, Chapter 7 will be preferable,” says Richard Nemeth, a bankruptcy attorney in Cleveland, Ohio. “You're finished in a matter of months. It discharges all the debt that is subject to being cancelled.”

There are a few debts it will not discharge. Among them: back taxes, student loans, child support and alimony.

The process? You meet your attorney, and you bring past tax returns, pay stubs, bank statements, and documents showing other assets and debts. You go through credit counseling as part of the process. You file with the bankruptcy court. The court should issue an automatic stay that stops creditors from doing anything – such as harassing you with phone calls or trying to seize assets. Within about a month you are likely to meet a creditors' trustee to review your situation. After this the court may wait another two months or so, to see if any objections are filed to your petition. You also need to take a credit education course. And then you should get an order discharging you from most of your debts.

Some assets are exempt from Chapter 7 bankruptcy, which means you can keep them even while turning out your pockets and saying you're broke.

The first is any qualified retirement plan. That includes an IRA or 401(k) as well as any company pension plan.

Many people, when they find themselves getting deeper and deeper into financial difficulties, may react instinctively by cutting back on “non-essentials” like pension contributions while they try to keep up with payments. But under current law this is exactly the wrong thing to do. If you are sliding deeper and deeper into the hole, you should make sure you contribute the maximum into your 401(k) or equivalent at work. You should also put the maximum – usually $5,000 – into your IRA each year. If you have a non-working spouse, give them $5,000 to put into a spousal IRA too. If you end up filing for bankruptcy, that money should be safe from creditors. But do it as early as possible. The court will take a very dim view of anyone deliberately socking money into a retirement account moments before filing for bankruptcy, as they consider it a dodge. The earlier you do it, the safer you are.

The second important asset that may be sheltered from creditors in bankruptcy is your home. This means only your primary residence. How much you can shelter varies from state to state. A few states – such as Florida and Texas – have an unlimited so-called “homestead exemption”. There are, however, some rules on how long you have to have lived there and owned the home for it to qualify. Other states only allow you to keep a home provided you have certain amount of equity.

Some other assets may also be sheltered, like your car and some personal effects. The limits here also vary from state to state.

Chapter 13 bankruptcies will make more sense for others. Instead of wiping out debts immediately, the court approves a schedule by which you pay back at least some of your debts over a long period, often three to five years. At the end most of the rest of your debts are forgiven.

So why would you pick this route?

“The main reason they file for Chapter 7 is to deal with secure debts like car loans, mortgages and the like,” explains Henry Sommer, a bankruptcy lawyer in Philadelphia, Pa. “In general, Chapter 7 doesn't affect them. In Chapter 13 you may have a right to modify your car loan, and you can ”cure“ a mortgage default – in other words, catch up on your back payments.” People should also consider Chapter 13 bankruptcy if they have property that they want to keep but which would not be protected in Chapter 7. There are a variety of rules about how much has to be repaid to each creditor.

As usual with the law, there are lots of loopholes, and loopholes within loopholes. Other types of bankruptcy filing include Chapter 11, which is common for corporations but rare and expensive for families, and Chapter 12, which is similar to Chapter 13 but specifically targeted for family farms. And bankruptcy lawyers sometimes talk about a “Chapter 20” reorganization. It's just a colloquial term for first filing a Chapter 7, to wipe out a lot of debts, and then filing a Chapter 13. There are benefits to this two-stage process for some.

Of course filing for bankruptcy is going to hurt your credit score and could make it harder for you to get a loan in the future. But the effect may not be as bad as you think. Most people who end up filing for bankruptcy already have poor credit scores. And bankruptcy, by wiping out debts, can actually help rebuild them. “Most people can rebuild their scores within one or two years,” says Jeff Tromberg, a bankruptcy attorney in Fort Lauderdale, Fla. “It's actually quite common for somebody who files a chapter seven bankruptcy to rebuild their credit scores back up to the high 600s (a reasonable rating), if not higher, within two years.”

TThe deepening financial crisis in the U.S. forces the neoconservatives to reverse their policies.
October, 26 2008

By Vijay Prashad
Source: Frontline

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Society has played out its stake; it is check-mated. Young men have no hope. Adults stand like day laborers idle in the streets. None calleth us to labor. The old wear no crown of warm life on their gray hairs. The present generation is bankrupt of principles and hope, as of property.... Behold the boasted world has come to nothing. Prudence itself is at her wits' end.

- Ralph Waldo Emerson, Journals, 1837.

(New York) — THE financial dam burst on September 13, 2008. A flood of capital swept out of the stock markets and went into government-backed bank accounts, where they remain, pooled up and inert. These bank accounts are the equivalent of hiding money in one's mattress. They are shelters from the turbulence of the financial storms. Governments from Japan to the United States struggled to take control over a vast continent of economic life that they had previously given up to the bandits of profit. To re-establish sovereignty over these regions has not been easy, and it has aged many of those who are trying to lead the charge.

In Washington, D.C., President George W. Bush has lost his swagger. Impetuous in front of the press, he now looks grave, grizzled even. Beside him, the members of his Working Group on Financial Markets look ashen-faced, stooped. Sheila Bair, whom Forbes called the second most powerful woman in the world (after German Chancellor Angela Merkel), runs the Federal Deposit Insurance Corporation. A few years ago, she wrote two books for children on sound money management; now she is in the position to act on her own advice. Beside her is Ben Bernanke, Chairman of the Federal Reserve and a former Princeton University professor of Economics (his colleague, Paul Krugman, won the Noble memorial prize in Economics this year). Towering above them is the U.S. Treasury Secretary, the dour-faced Henry Paulson, who studied alongside Bernanke at Harvard before building a fortune at the helm of Goldman Sachs.

This troika has been given the charge of handling the fast-changing economic landscape. There are few smiles from them any longer as they seek to lay their hands on the Wild West. Unwilling sheriffs, these are dyed-in-the-wool adherents of laissez-faire economics.

In 2002, Bernanke spoke at the 90th birthday celebration of Milton Friedman, the dean of free-market economics. Taking a cue from Friedman's co-authored book on the Great Depression, Bernanke saluted him, saying sorry for having allowed it to happen, and “thanks to you, we won't do it again”.

The principal lesson spelled out by Friedman, and underscored by Bernanke, was that the central bank must ensure a “stable monetary background” for the economy, keeping inflation low by properly regulating money supply. The other lesson is not an economic one per se but about leadership. Friedman's book noted that with the death in 1928 of the talented and influential central banker Benjamin Strong, the Federal Reserve was unable to assert proper control over private banks in a time of crisis. What is needed, Bernanke said in 2002, is “an effective leader”. His time is now on hand, as is that of Sheila Bair and Paulson.

Slide to bankruptcy

For the month after September 13, the topography of Wall Street changed radically. Bear Stearns (founded in 1923) had already collapsed in March, and was hastily acquired by J.P. Morgan (which later bought the ailing bank Washington Mutual). Lehman Brothers (founded in 1850) declared bankruptcy, and was swept up for a song by Barclay's Bank. Merrill Lynch (founded in 1914) folded alongside Lehman, to be picked up by Bank of America.

A few days later, American International Group (founded in 1919), the world's largest insurance company, went down the slope towards bankruptcy but was saved at the eleventh hour by an emergency infusion of $85 billion by the U.S. government (a few weeks later, the Federal Reserve provided an additional loan of almost $38 billion just as reports emerged that executives of the firm went off on a corporate retreat that included golf and spa treatments and cost $440,000).

The government-sponsored mortgage agencies Freddie Mac and Fannie Mae (created in 1970 and 1968 respectively) retreated from their autonomy into the embrace of the government. Finally, in mid-October, Wells Fargo Bank absorbed Wachovia Bank (founded in 1879). Meanwhile, J.P. Morgan (founded in 1824) and Goldman Sachs (founded in 1869) went from being investment banks to being bank holding companies (with Mitsubishi taking a stake in J.P. Morgan).

Turbulence on the stock market now resulted in a downward slide for the Dow Jones and, as a consequence, for the world's stock markets. By September 18, sellers flocked to the pits, asking for their money back, and put whatever could be made liquid into cash backed by governmental assurances. Credit markets seized up, which threatened economic activity outside stock exchanges, investment firms and their computer networks. The pulses of electricity now began to make inroads into the confidence of those who hire and fire, who make and break. It is no surprise that these events aged Paulson.

Bush unpopular

Bush and Paulson tried to put the best face on events, even as these escalated out of control. A year ago, as the mortgage crisis threatened the stability of the U.S. economy, Bush told the country: “The fundamentals of our economy are strong.... Job creation is strong. Real after-tax wages are on the rise. Inflation is low.” Each time he faces the country these days, the Dow Jones plummets. Nothing he can say helps, and his approval rating continues to go the way of the stock indices (around 22 per cent of the population now approves of him).

Until recently, Paulson also tried to put a cheery face despite the slide of the stock markets. In the spring of 2007, when all indications turned towards a major lurch downward, Paulson lectured the Shanghai Futures Exchange about the need for an open society: “An open, competitive, liberalised financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than government intervention.” Every once in a while Paulson tries to be optimistic, even as his body language is gloomy. He often looks as if he is searching for the nearest exit.

The Paulson plan

On September 19, Paulson proposed the Emergency Economic Stabilisation Act, which promised to put $700 billion into the credit market, mainly to purchase toxic assets off the books of the financial firms. No one knows the exact size of this toxic pool, and even Paulson admitted that the figure he chose was largely a guess (the Treasury Department said the number was “not based on any particular data point”, jargon for speculation). Asked what he might do if this plan did not work, Paulson responded, “We have nothing else.”

The plan was quickly attacked by right-wing Republicans who saw it as, in the words of Representative Jeb Hensarling from Texas, the “slippery slope to socialism”. They preferred a package that included a cut in capital gains tax and further deregulation. Sections of the Democratic Party found the plan objectionable because it gave Paulson unlimited authority, and did not constrain the way the CEO class in Wall Street do business or earn. Bush and Paulson threatened the Representatives with a wholesale collapse of the system, and even with the promulgation of some kind of martial law. Pressure from Wall Street on the mandarins of both parties finally moved Congress to pass the Bill.

The ambit of the $700 billion bailout was limited. It was designed to clean up the balance sheets of the financial firms and to restore the credit that flowed between banks and to the public. Paulson assumed that as this credit entered the system, normal economic vibrancy would pick up. In other words, the Bush team saw this as a solvency crisis created by bad loans made by irresponsible bankers and not as a wider problem of debt in American society.

Two bubbles

In the 1990s, the U.S. economy experienced a boom thanks in large part to two bubbles: one generated by the hype over the Internet and information technology in general and the other generated by consumer debt. The first bubble burst in 2000-01, when dotcom firms failed to live up to their overblown expectations. The second bubble shuttled back and forth between different areas of the consumer economy, from credit cards to mortgages. Disposable incomes, already curtailed, are being haemorrhaged toward debt servicing; more money goes to pay off debt than to buy food.

The household debt crisis erupted in the 1990s, largely because of the stagnation in real wages (more than a quarter of U.S. workers labour for wages below the poverty line). As ordinary people struggled to hold on to jobs, they turned to the generous credit markets to pay off their overpriced homes, their cars, their college tuitions and their everyday expenses.

The federal government kept interest rates very low to enable this expanse of debt, which was one easy way to maintain the illusion of the American Dream as U.S. manufacturing disappeared and pay packets in service jobs shrank. The total consumer debt in the U.S. is now about $2.6 trillion (22 per cent more than in 2000). Mortgage debt is around $10.5 trillion (in 2000 it was $4.8 trillion). This debt will not be written off by the bailout. It is indeed a major flashpoint for the next explosion.

Alan Greenspan, as head of the Federal Reserve, maintained interest rates to enable the large expansion of the 1990s. But that money did not go towards infrastructure development or investment in industry. Rather, it went towards the consumer debt bubble and to the vastly expanded market in financial commodities (such as the mortgage securities, the derivatives market and also the debt itself, now packaged as securities).

No one knows the exact size of the fictitious sector, but some estimate that the credit default swap market alone is about $62 trillion. The danger this poses to the financial architecture is considerable. This is particularly the case as the major banks and investment houses now consolidate into four companies (J.P. Morgan Chase, Citicorp, Bank of America and Wachovia Wells Fargo). The toxic fictitious sector and the equally unstable consumer debt bubble are within the balance sheets of these four entities. The bailout does not address this toxicity, which will inevitably corrode the remaining banks.

How the toxic assets came onto the balance sheets of the banks is a story that Wall Street, the Bush team and those who worked in Bill Clinton's Treasury Department want to ignore. Before the entire issue could be swept under the rug, presidential contender Barack Obama came out fairly strongly against deregulation as “a philosophy that views even the most common-sense regulations as unwise and unnecessary”.

It is true that since Bill Clinton's second term (1997-2001) and through the eight years of George Bush's presidency the entire legal framework for regulation of financial markets had been eroded. Whatever laws remained on the books could not be regulated as the Bush team studiously sliced the small remaining staff at the Securities and Exchange Commission, where the enforcement team is now 1,209 and will drop to 1,177 next year. (There are more lawyers on one floor of an investment bank than in the entire SEC enforcement division.)

The General Accounting Office reported that the SEC's budget is so meagre that it is forced to “be selective in its enforcement activities and... [this has] lengthened the time required to complete certain enforcement investigations”. In 2004, before he became head of the Treasury Department, Henry Paulson led a group of bankers to the SEC and lobbied successfully to exempt investment banks from holding reserves against losses on investments. The investment banks subsequently leveraged their fictitious investments beyond reason. The current bailout does not address this erosion of responsibility, even as Obama has made it a central part of his own plan were he to become President.

Bankers were not enthused by the bailout, which is why they did not renew lending to each other. The market was starved of credit, and so the $700 billion bailout seemed ineffective. The normally staid Wall Street Journal, a reliable free-market periodical, weighed in, with one of its seasoned columnists arguing that the “government needs to inject capital directly into banks”. In other words, the government needs to seize control of the banking industry.

The Working Group apparently paid attention to this, and on October 14, convened in the Cash Room of the U.S. Treasury to call reluctantly for the government to “purchase equity stakes in a wide array of banks and thrifts”. Paulson, who made the announcement, could not bring himself to say that the government had nationalised the banks. Indeed, his laissez faire carapace made him apologise for the action: “We regret having to take these actions.... Government owning a stake in any private U.S. company is objectionable to most Americans - me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop.”

Reasonable estimates suggest that the Treasury Department will have to expend about $2.25 trillion on this extended bailout. To this must be added the already significant national debt and the escalating military budget and war expenditure (the Iraq and Afghanistan war bills now total in the vicinity of $1 trillion).

In 2004 and in 2005, the International Monetary Fund (IMF) warned the U.S. about its big budget deficits and consumer spending. The U.S. economic engine, the IMF warned in 2005, was “fuelled by increasingly unsustainable fiscal stimulus, as well as housing prices that are ignoring the laws of gravity”. Unlike most other governments, the U.S. administration sneered at the report and its recommendations.

“We want to make sure that the way we address the imbalances maximises growth,” said a Treasury official, making it clear that the government wanted to ride the boom for as long as it lasted, regardless of the consequences. As September moved into October the Treasury Department did not adequately take the measure of its main creditors: Europe is in the doldrums, China did not respond with its considerable treasure, Japan fears a repeat of its own long-term stagnation, and the sovereign funds of the oil lands preferred to put their billions into their own fledgling stock exchanges rather than into Wall Street or Washington's coffers. In 2004, the IMF warned that “higher borrowing costs abroad would mean that the adverse effects of the U.S. fiscal deficit would spill over into global investment and output”. This has indeed come to pass.

Decline in spending

On October 15, the Federal Reserve released The Beige Book, its report published eight times a year on current economic conditions in the Federal Reserve districts. It showed that in September consumer spending had declined in retailing, auto sales and tourism.

This is the first formal indication of the impact of the crisis. Things are so bad that General Motors released a statement that “bankruptcy is not an option” for the company. The Labour Department announced that the U.S. lost 159,000 jobs in September, up from 73,000 jobs lost in August. The Wall Street Journal released its survey of 52 economists who pointed out that things can only be negative.

The leak from the fictitious economy to the real economy has begun.

More Wisconsinites being sued for defaulting on debts
By Lisa Sink of the Journal Sentinel
Posted: Oct. 26, 2008

A growing number of Wisconsinites are being sued for defaulting on credit card and other debts, another sign of stress in a weakening economy.

Large-claim money judgment lawsuits - debt collections exceeding $5,000 on credit cards as well as business, car and college loans, and medical and other bills - jumped 49% statewide in 2007, a review of circuit court data found.

They are on pace to increase 16% in 2008 statewide, with sharper spikes in some counties. Waukesha County is on pace for a 44% increase this year, after a 31% increase last year. Washington County is on pace for a 25% rise, after a 40% uptick last year. By contrast, Milwaukee County is on pace for a 14% rise.

By September, Waukesha County already had more money judgment cases filed than in all of 2007.

“This is your Main Street vs. Wall Street,” Milwaukee County Circuit Court Clerk John Barrett said. “I would think that those numbers are really the pulse of the economy. You can look at (these lawsuits) and see at a real micro level who can't pay their bills.”

Money judgment cases do not include foreclosures, which also have jumped across the state.

56% of cases in one week

Although it's difficult to track exactly how many of the money judgment lawsuits involve credit card defaults, a review of one week of such filings this month in Waukesha County found 56% were credit card collections.

In one week, 38 consumers were sued for defaulting on a combined $467,622 in credit card debt. The average card balance with interest and fees in these cases was $12,306; actual debt ranged from $5,402 to $56,320.

Among those sued was a Waukesha man accused of defaulting on two credit cards. Capital One said he owed $26,325 on one card and $10,075 on the other.

Other southeastern Wisconsin court clerks found primarily credit card debt collections when they scanned lists of their money judgment filings.

With people squeezed by stagnant or shrinking wages, rising food and energy costs and growing unemployment, it's no surprise that Americans are resorting to credit cards.

The credit crunch and declining home values have made it harder for consumers to tap home equity lines to manage credit card debt.

People who come in for help managing their debts are bringing along bigger credit card balances, said Kathryn Crumpton, manager of the nonprofit Consumer Credit Counseling Service of Greater Milwaukee.

For years, credit cards were easy to obtain from lenders, and in hard times, they get overused, she said.

“You have all these cards and you say, 'Oh, we're coming up a little short.' So you start charging your gasoline, or you start charging your medication, or you occasionally charge groceries. If you get into that, it doesn't take long for those cards to start snowballing. Then the payments are bigger each month, and it puts you even farther behind,” Crumpton said.

Some national financial analysts have warned that credit card defaults might be another blow to the economy. Bank of America cited a rise in card defaults this month when it cut dividends and announced plans to raise $10 billion in capital to boost reserves for future write-offs.

Stung by the subprime mortgage meltdown, banks are taking steps to manage risks in their credit card divisions, said Justin McHenry, research director for IndexCreditCards.com.

History is critical

Card issuers are lowering credit limits, raising interest rates and taking a closer look at the creditworthiness of cardholders, he said.

American Express is analyzing where cardholders live and shop, noting which consumers have subprime mortgages or simply live in areas of the country with the greatest dives in housing values.

“I think that what people are going to see is that their past credit history is going to matter even more than it did before,” Henry said. “If you have a good credit history, it's possible that this won't touch you at all.”

Bankruptcy rules a factor

Milwaukee consumer bankruptcy lawyer Peter Zwiefelhofer said he wasn't surprised that credit card debt collections were clogging state courts.

A revamp of federal bankruptcy rules that went into effect in October 2005 has made it more difficult to file for bankruptcy, especially the Chapter 7 version that allows credit card debts to be discharged, Zwiefelhofer said.

As a result, credit card companies have become more aggressive about debt collection.

$1 trillion: Credit card debt in U.S.

$11 trillion: Mortgage debt

Source: Federal Reserve

Waukesha County: 1 week of cases

• 38 residents were sued for defaulting on a total of $467,622 in credit card debt.

• The average card balance with interest and fees was $12,306; actual debts ranged from $5,402 to $56,320.

• The worst cases had required monthly payments as large as mortgage payments, with interest rates of 25% to 35% and over-the-limit fees adding thousands of dollars to balances.

• Most of the 38 live in apartments or homes valued from $146,300 to $359,400, according to tax records.

In 2001, President Bush and a Republican-controlled Congress enacted a law that greatly reduced and will eventually eliminated the federal estate tax. The catch is, the law sunsets after ten years, meaning that in 2011, the laws governing the federal estate tax will be as those laws existed in 2001. Since passing the 2001 law, the Republicans attempted on many occasions to pass a bill that would permit the permanent repeal of the estate tax. President Bush indicated that if such a bill made it out of Congress, he would sign the bill into law. I've written about this topic many times, as have many other commentators. What breaths new life into this subject is the fact that the Democrats now control the Congress, and Democrats have consistently indicated that the estate tax is an excellent way in which the federal government can raise revenue. You might think that being an elder law attorney-and a part of the general practice of elder law is estate planning - I want the estate tax to remain in existence. After all, if people are fearful that their estates will pay tax when they die, causing their children to receive less of an inheritance, then more people will come to me for estate planning. Well, that's somewhat true. I have plenty of clients who need to engage in estate planning whether the federal estate tax exists or not. So, with that little disclaimer, here are my thoughts on the federal estate tax and my opinion as to its future. As much as we all don't like it, a government raises money for the services that it provides one way, it levies a tax against its citizens. To some extent, all taxes are arbitrary. For instance, with regard to income tax, we have a graduated system where the more money you make the higher a percentage of your earnings you pay as income tax; however, that percentage caps at a certain amount of earnings and never increases. To most of us, this system of taxation seems somewhat fair; however, other countries place a much higher emphasis on sales and use taxes. What this shows is, governments can raise money through different forms of taxation and no one method is the correct method. [Read More!]

Appleton, WI 54912-8002 June 5, 2006

There is almost nothing that makes life more enjoyable than family and friends, but don’t rely on them for tax advice. After the death of her husband, a widow learned this lesson the hard way.

In a recent court case (Anne C. Snyder, T.C. Memo 2006-92), a woman settling her financial affairs following the death of her husband paid a heavy price in tax penalties because she followed hearsay gained through informal discussions with her widowed friends, instead of consulting a tax professional. The friends’ good-intentioned counsel claimed that death benefits were not taxable. They were wrong. The widow received a notice of deficiency for her 2001 taxes.

When the Internal Revenue Service (IRS) issues a notice of deficiency and accuracy-related penalties upon a taxpayer, the burden of proof falls to the taxpayer. In a court determination, the court seeks (1) a taxpayer’s reasonable effort to do what’s right, (2) the knowledge and experience of the taxpayer, and (3) the reliance on the advice of a professional.

In this case, the widowed taxpayer conceded that she did not seek advice of a professional, only acted according to information casually gathered from friends. She also claimed to have not received Form 1099s from three respective distributions, which was rejected by the court as incredulous. In the end, the taxpayer had nothing to justify her action in not reporting income she inferred was “death benefits.” The court found that the taxpayer’s case was without merit and that the taxpayer did not act with reasonable cause and in good faith. She was thus liable for the accumulated tax and penalties.
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Recovery Account Information


Introduction

The California Department of Real Estate is the agency within California state government that issues real estate broker and salesperson licenses and public reports to subdividers of California real property. The Department also has the authority to revoke or suspend a license for violations of the Real Estate Law (Section 10000 et seq., of the Business and Professions Code). In addition, the Department administers a victim's fund, known as the Real Estate Recovery Account.

How It Works

The Recovery Account became operative on July 1, 1964 and is funded from a portion of the fees paid by licensees. It enables a person who has been defrauded or had trust funds converted by a real estate licensee in a transaction requiring that license, and who satisfies specified requirements (California Business and Professions Code Section 10471 et seq.) to recover at least some of his or her actual loss when the licensee has insufficient personal assets to pay for that loss.

[Read More!]

Real estate tax fraud has been sharply increasing, but so are criminal prosecutions and prison terms for real estate wrongdoers, according to a new report from the Internal Revenue Service.

The IRS said last week that the number of real estate fraud cases opened by its criminal investigators has doubled in the past three fiscal years alone. The average prison term handed out by federal judges to convicted real estate fraud perpetrators also has soared during the same time period — from 27 months to 41 months. Last year's number of cases that produced jail time hit a new high — a stunning 92.3 percent incarceration rate for people convicted of real estate frauds and con games.

What types of schemes are IRS investigators focusing on most intently? The report identified three in particular:

* Double sets of settlement statements. This involves defrauding lenders by preparing one set of closing documents for the property seller — reflecting the true selling price and other transaction details — and a second set for the lender, with an inflated selling price. This typically causes the lender to fund a loan that exceeds the property's true market value, and allows the dishonest participants in the fraud to pocket the excess proceeds.

But just as Al Capone went to the federal pokey because he didn't report his ill-gotten gains to the IRS, so too do home-sale fraudsters risk jail time when they fail to report the income they earn from their con games.

* Property flips. The IRS is especially interested in transactions where real estate investors puff up appraisals to induce quick flips of properties, then fail to report their profits to the Feds.

* Fraudulent qualifications. This involves “real estate agents assisting buyers who would not otherwise qualify” to purchase a particular home because of their poor credit history or income problems.

As an example of this form of fraud, the IRS cited the case of California real estate agent Satish Shetty, who was sentenced to 15 months in prison and ordered to pay $37,478 in restitutions last December 20. In a plea agreement, according to the IRS, Shetty admitted that he “submitted applications to lenders that contained false information used to approve” mortgages. Through a network of companies he controlled, according to the IRS, Shetty “entered into escrows to resell properties to 'straw' buyers at inflated prices.” The straw purchasers were not qualified for the loans, and quickly went into default. Shetty, meanwhile, pocketed the proceeds.

The bottom line from the IRS to real estate investors, appraisers, and agents thinking about fraud: We are doing more criminal investigations than ever, we're getting more convictions, and more than nine out of ten are ending up behind bars.

Don't do the crime if you can't do the time.

Posted on Sun, Apr. 30, 2006

REALTY MAILBAG

Q: I am a real estate broker with an opportunity to obtain a listing on a beautiful house. But there is one problem. The seller says her boyfriend moved out about 15 years ago and she hasn't heard from him since. When I checked the official title records, I see the seller and the boyfriend (with different last names) hold the title. The seller says they were never married. Is there any way this house can be sold now? The seller has paid all the mortgage payments since the boyfriend disappeared 15 years ago.

A: As a real estate agent, you were wise to check the title before listing that house for sale. From your description, it appears the title is unmarketable unless the missing boyfriend can be found.

The legal solution is for the co-owner to bring a quiet title lawsuit. Depending on the facts, her attorney can best advise what legal steps to take, such as hiring an investigator and publishing legal notices of the pending lawsuit to clear the title. If due diligence is used to locate the missing boyfriend, and if the court is satisfied he is either dead, cannot be located or has no title interest in the house, then the court can order the title ''quieted'' in the seller's name so she can sell.

REALTY MAILBAG
Posted on Sun, Apr. 23, 2006

Q: I am thinking of selling my home to one of those ''we buy houses'' companies. They claim to buy ''as is.'' They ask the seller to inform them of any repairs needed, but they also say if the seller does not inform them of any necessary repairs, they presume repairs are necessary anyway. This firm offered me a very low price.

If the offer is accepted, they perform an inspection before the contract is final. Does the fact that they assume repairs are necessary and that they highly discount the sales price change the seller's legal liability for repairs?

A: Most states, including Florida, have laws requiring home sellers to disclose known defects of the residence in writing. Making an ''as-is'' home sale is not a method to avoid liability for undisclosed defects of which you are aware.

If you sell to those professional buyers at a price heavily discounted from market value, you should insist on a written waiver in the sales contract that you have disclosed all known defects, and the buyer has investigated and will not hold you liable for any hidden defects that might become evident later.

[Read More!]

A seasoned attorney, before filing a lawsuit, often conducts an “asset search” of the proposed defendant. The person filing the lawsuit will want to know whether it is worthwhile to sue, and whether a judgment would be collectible.

Information about you and your assets is readily available from public records. An investigative firm can quickly gather all sorts of information about you — the location of your real property, bank and brokerage accounts, ownership of automobiles and water craft, business interests, any bankruptcy petitions you may have filed, plus all kinds of other personal information for a surprisingly low fee. Thus an attorney will be able to tell if the lawsuit is worth taking, based upon the ability to collect the potential judgment. Be aware that this information is available to almost anyone who knows how to go about obtaining it.

One key to an asset search is your name. By changing the name of the registered owner of a piece of property, you can change the ownership records, and your property will “disappear” from your asset information. Simple changes, such as recording the name of the owner of a piece of real property from William Smith to Bill Smith, or putting a piece of property in your spouse's name is not good enough. However, more innovative name changes can keep the true identity of the owner confidential.

[Read More!]