Tag: debt

Student Loan Deferment for Cancer Treatment Snag

Posted on by Dawn Kennedy

There have been comments on one of my email Listservs regarding the Department of Education Act, 2019 provision allowing federal student loans to be put into deferment during a borrower’s active cancer treatment. President trump signed this bill in September of 2018, and it was supposed to be effective “immediately.” Unfortunately, borrowers hoping to receive this relief have faced obstacles.

The primary problem is that the Department of Education still has not provided the application for borrowers to apply and to be given a deferment. If granted the forbearance, the student loans are on “hold” during active treatment, and then for an additional six months after treatment has ended. Instead, many borrowers have received “forbearance” from their servicers. The loan status of “deferment” is incredibly important (as opposed to forbearance) because in some instances the interest on the loans won’t continue to accrue on the balance. The Department of Ed has a webpage for the loan typeswithout interest accrual.

The most important thing, from my perch anyway, is that under many circumstances, an adjustment to an Income Driven Repayment Plan (IDR) may be a better long-term option for borrowers going through treatment. Putting loans in deferment, versus adjusting to a lower or “zero” payment, may be much more expensive in the long run, and the non-dischargeable status of these loans in bankruptcy has been confirmed over and over recently by the courts. For Parent Plus Loans, which do not receive an interest free deferment unless the parent also has other student loan where they are the student, placing them in Income Contingent Repayment(ICR) may be the better option for the future.

Of course, if you or a loved one are going through a cancer treatment plan, the LAST thing to worry about is student loan garnishment or tax intercept- so make sure you get them handled quickly. You can download my free eBook on Federal Student Loans, “Do You Have the Right Student Loan Payment” for step-by-step guidance on getting your options.

Guest Blog: To Pay or Not to Pay? That is the Student Loan Question Facing Thousands in PSLF

Posted on by Dawn Kennedy

By Mitch and Cheryl Ekstrom

There’s a great deal of conversation swirling around the possibility of creating a big-government loan forgiveness program to end the student loan crisis. Call us cynical, but the current student loan crisis originated as a big-government program. But is it cynicism or is it experience? You decide – because there just already happens to be a big-government Public Service Loan Forgiveness (PSLF) program.
“Great!” you say. “How’s that working out?” you say.

Here’s where the experience part kicks in: “Terrible!” we say! Less than one-half of one-percent (0.005%) of all PSLF program applications have been approved. By the way, there have been over 41,000 applications and only 206 have had their loans forgiven!.

We’ve seen it in our coaching practice. One of our clients is an attorney for a non-profit who is 6 years into her 10 year loan forgiveness program. She has been hearing from peers who are a few years ahead of her that many of them are being rejected on technicalities. So big-government doesn’t mind messing with lawyers. Hmmm… that’s what we call a telling sign.

Between articles like the one above and our client’s experience, we generally recommend that people in PSLF programs be exceptionally attentive to meeting every detail of the repayment requirements. Servicers have misapplied payments or put people in forbearance “for a month or two”, meaning the borrowers do not have the required 120 “on time” payments”. But based on the actual numbers (the first PSLF borrowers were eligible for forgiveness in 2017!) people are taking a big risk in PSLF and they’d better have a plan B for paying it off – over years beyond the 10 years it takes to get to that supposed forgiveness point. However, that is a general recommendation for everyone in the program, the specifics must be personal to the circumstances surround the debt, the income, future increases in earnings, and other existing debts.

To get to a specific recommendation, we must assess the client’s overall financial situation, risk tolerance and goals. Below is a recent, real-world scenario in which we walked a client through two options for paying off their $106,000 of student loans, with the first payments starting this coming December. Everyone has a different scenario, and not everyone has this much student debt, but this illustrates HOW someone can reduce the risk of having student loans follow them around for the rest of their lives if the PSLF program goes away (and it could at any time).

Option 1:Starting in December, make 10 years of minimum monthly payments totaling $654 per month on each of 10 or 12 different student loans (they didn’t know exactly how many or what kind of loans, but they did know the minimum total payment) then hope against hope the remaining balance will be forgiven under the PSLF program. This is the option many people are counting on.

Option 2: Based on current income, projected income and all debt; pay off all non-mortgage debt, including their student loans, in 60 months and invest like they mean it the other 60.This is the option people in PSLF have a hard time with, but you’ll see the math- it’s the better option for long term finances!

Unpacking Option 1:
The 2018-2019 federal student loan interest rates are currently 5.05% for undergraduate loans, 6.60% for unsubsidized graduate loans and 7.60% for direct PLUS loans (2). Based on this, we used an average of 6.5% across their loans and derived the below calculations from this amortization schedule.

Using the June loan balance of $105,969 provided by the client, by the time they start paying on their loan 6.5% in December, it will have grown to $109,839.
In ten years of $654/mo. payments, they will pay $78,480 on the loan. And remember, Congress sets interest rates so it could easily change over 10 years. But let’s say it stays the same, and they pay the 120 payments at $654/mo. After all those payments, the balance on the loan will be $100,009. That’s right, people! $78,480 of payments over 10 years only reduced the loan amount by $9,830. But, they could have the $100,009 loan balance forgiven. THEY PAID $78,480! They just have to be one of the less than 0.005% who are approved. What could possibly go wrong!?

After all, let’s face it: $100,009 is a big windfall for the lender. So, one can see why they would be looking for ways to disqualify people. Might this contribute to why the terms and conditions of compliance with the numerous student loan agreements are really hard to understand and follow? But that’s probably just being cynical! So let’s just go ahead and assume they will have the loan balance forgiven without a hitch.

Unpacking Option 2:
Using this calculatorif they paid off the student loan in 5 years and invested the $654 per month at 12% (1); they would earn $53,946 over and above their student loan payoff. The faster you pay off those loans and the balances are reduces the loans are less subject to the interest they add.

However, there is another important piece of this client’s puzzle. They make a good salary and can pay off to pay off almost all of their other non-mortgage debt quickly, before the student loan payments start in December. The payments on that other debt alone is $1280 per month! Once those debts are gone, they free up that $1280 to add to the $654 minimum student loan payment. Their four wall budget won’t change, because the they’ve been paying debts every month with that money. Added together, they would throw $1934 per month at the student loans and pay them off in less than 65 months. And all of this math is before ANY of their soon-to-be-received significant pay raises this year (over $30K total); let alone any future pay raises over the five years (2).

Hypothetically, in the ten years they would make the large student loan payments, but only enough to pay it off in 60 months, but then invest their $1,934 for the next 60 months. They would have $159,529. In cash. In the same ten year span as someone waiting for the PSLF program to approve them.

So making minimum payments for 10 years while gambling on the long-shot of having the loan balance forgiven — instead of getting focused on paying off all debt in 5 years and investing the income they weren’t living on anyway because they were servicing all sorts of debt — while being exposed to multiple years of risk with way less cash reserves – is at least a $59,520 mistake.

Inevitable Math – 1
Servicing Debt – 0

But there’s one more factor which makes this early debt retirement and accelerated investment scenario even better: They have cut 5 years of financial risk out of their lives from a $100K+ loan hanging over their heads; a loan that can’t even be cleared by a bankruptcy! And, as frequently cited by one of America’s most trusted sources of financial wisdom, the nationally syndicated radio talk show host and multiple New York Times best-selling author, Dave Ramsey: In any 10-year period you have an 80% chance of experiencing a financial setback. So this risk factor is real and that makes it a big deal!
So, as you assess your own total debt load and options for getting your money back to work for you instead of the lenders, we hope this real-world scenarios helps. And if you want help assessing all the myriad details of your situation, consider contacting a Ramsey Preferred Coach. They are professionals with a mission to help you win with money.

(1) Based on the average return of the S&P 500 since its inception in 1926 of 11.69%.
(2) Given projected income increase, they could easily pay it off much faster than 60 months. But for the purposes of the illustration, we kept it to the more conservative 60 months of growth.

About the Authors:
Mitch and Cheryl Ekstrom celebrated their 41st anniversary in December and their first great-grandbaby is on the way; due July 7th. Mitch spent more than 30 years of active duty in the U.S. Coast Guard and is now an IT professional on the largest financial system of its kind in the world. Cheryl manages money for the Physics Department at the University of Maryland. Prior to that, she managed multiple bank branches. As a young couple, they made babies faster than money; so they borrowed — a ton of it — which led to real-world money struggles. But they have been living out, teaching and coaching the Financial Peace University (FPU) principles since Sep of 2009 and it has changed everything!

They have led 70 of Dave Ramsey’s classes — not just Financial Peace University — and have taught and coached over 850 couples, singles, teens, co-workers and family members. They’ve held classes in churches, at companies, on military installations, in Mitch’s office and in their home; sometimes three at a time. In addition, they have run numerous financial wellness seminars and budgeting workshops, given talks on money and relationship issues at marriage conferences, and delivered corporate training to reduce financial drama in the lives of the workforce — all by word of mouth. They’re happily so busy; they haven’t bothered to create a web-presence.

Closer to home, they’ve been blessed to see five generations of both their families achieve dramatic improvements in their finances and most every relationship in their lives. So no one can tell them this doesn’t work. It’s not a theory. They are multi-generational practitioners who are passionate about helping others experience the same strength and hope.

They can be reached at:

Mitch and Cheryl Ekstrom
Ramsey Preferred Coaches
Dollar$ense, LLC
301-466-7194
mecaekstrom@aim.com

DOLLAR$ENSE
Eliminate debt. Build wealth.
Gain financial speed going uphill.

Should Debt Collectors Call YOU if You Don’t Owe Them Money?

Posted on by Dawn Kennedy

I hope everyone is having an amazing summer! Can you believe July 4th has passed us already? Since we are now into July, I suspect that back to school ads and sales are coming soon. I need to let you know about a proposed rule that the Consumer Financial Protection Bureau (CFPB) released regarding debt collection.

Under the rule, even if you don’t owe any money to any collection agency, the CFPB is proposing that the collection agencies can contact friends and family to leave limited contact messages. Yup. One of the proposed rule changes will allow the collectors to contact you if anyone you know owes a collection account. This not only violates the privacy of the person with a debt in collections, but how about your privacy and peace?

The proposed rule has other issues, but that one is going to affect people who do not owe any debt. Here are some rule provisions for people who do have a debt in collection.
The Proposed Rule would allow debt collectors to:

1. Call seven times per week, per debt, and allow one contact per week, per debt. Have five student loans? 35 calls allowed. Three medical debts? 21 more calls. And on and on.

2. Allow unlimited text messages and emails to consumers.

3. Allow legally required notices to be embedded in emails as links, which consumers have been warned NOT to “click” because of the virus and malware dangers.

4. Require the consumer “opt Out” of electronic communications, with no clear procedure to do so, may be required by snail mail. We have to wait and see.

5. Allow collectors to “DM” consumer social media accounts.

6. Allow the collector to violate privacy by leaving “limited contact messages” with friends, family, and neighbors.

7. Not prohibit debt collectors from “tricking” consumers into restarting the statute of limitations on time-barred debts by making any small payment.

8. Has other impacts that may not directly affect local consumers, but may, for example, by allowing collection attorneys to violate the FDCPA with “safe harbor” protections against liability.

As someone who had an account in collection in the past, I personally find this intrusive and stressful. You want to DM my social media accounts? My SOCIAL MEDIA ACCOUNTS? And there doesn’t appear to be a limit- so Facebook, Instagram, and Twitter all a few times a day? Seems like that’s okay under this rule. Sure, they cannot post anything to your page, but “accidents” happen, right? You want to text me however many times a day you want to? What if I am at work? Do I want to open my phone at lunch to a blast of ten texts? Really? Where would it end?

The good news, however, is that we can submit a comment to the CFPB regarding this rule, how it would affect us, and perhaps how we don’t want debt collectors to call us personally if a friend or family member is having a financial issue. If we all submit comments, respectfully and with a discussion of the impact on us, the CFPB must take these comments under advisement before the final rule goes into effect. Here are the links for the rule text (it’s over 500 pages!), the page to submit your comment, and the original release of the rule into the Federal Register. I’m a nerd, and I like to provide sources for everyone. And if you have insomnia, the proposed rule will knock you out in no time.

To submit your written comment:
regulations.gov/comment?D=CFPB-2019-0022-0001

More Information about this Proposed Rule can be found using the following links:
Open Notices Debt Collection Practices Regulation F
Federal Register Publication”

Please submit a comment and help me spread the word to others who may not be aware of this proposed rule. We all have the opportunity to make a public comment before August 19th. After that time, the “public comment period” is scheduled to close. We have over a month to get after this. We can positively influence this rule if we all raise our voices to the CFPB.

Enjoy your vacations and the rest of your summer!

Congratulation Grads! What to do About Your Student Loans

Posted on by Dawn Kennedy

 

Anyone who saw the news this weekend saw the incredible act of generosity by billionaire philanthropist Robert F. Smith, the commencement speaker at Morehouse College, in Atlanta. Mr. Smith paid the student loan debt of the 2019 graduating class- a total grant of about $40 million dollars. For most graduates, however, student loans will follow them long after the diploma is received.

Many students are on the “Student Deferment” program for their loans, but after graduation, payments begin in six months. What do they do next?First and foremost, students must have a plan. They must have a budget. Then three steps: 1. get to paying as soon as possible on a repayment plan, 2. get out of the student deferment before it statutorily ends and, 3. stay out of forbearance in the future. Going into and out of forbearance is the fastest way to grow a student loan balance. Why? Because the interest capitalizes every time the loans go into and out of forbearance, and when students change payment plans. Capitalization means that the outstanding interest becomes a part of the principal balance, and you then pay interest on the new principal. This is a reason that student loan balances balloon.

The first issue, that few borrowers truly understand, is that during student deferment unsubsidized student loan interest already capitalizes quarterly for the length of the deferment. Four years of loans every semester, unsubsidized interest amounts capitalizing every quarter. This is why students graduate with thousands of dollars of student loan debt amounts over what they actually borrowed. So, during school, these loans are growing. After graduation, many students are faced with large payments they cannot afford on the “Standard Repayment Plan” over ten years, so they immediately put the loans into “forbearance” and a payment is no longer due. But once again that unpaid interest will capitalize every time the loan goes into and out of forbearance.

So, what to do? Here are a few first steps.

1. Have a budget and include in the budget the biggest student loan payment you can afford. Things may be “tight” again for a little while but getting right into payments and staying out of forbearance will make loan payoffs faster and less expensive.

2. Download the Student Loan Guide, “Do You Have the Right Student Loan Payment” from my website and follow the steps to retrieve your total federal student loan data from the National Student Loan Database (NSLDS). From there, check your loans CARFEULLY, to make sure they are, in fact, yours. Look at the disbursement dates, and make sure you were attending. Mistakes sometimes happen.

3. Use the Debt Snowball for the individual loans. If you can avoid consolidation, you can stack your loans from lowest total amount to highest, and attack the debt using a “debt snowball.” As each loan is paid, you will have a huge sense of accomplishment, and the motivation to keep going.

4. Avoid Forbearance. If you cannot make any payment at all AFTER your student deferment period ends- call your servicer and get into a payment plan, do NOT go into forbearance. If you graduate this month, you have a few months before the first payment is due. Get moving on these, but if there is an unavoidable reason you just cannot make the payment, get into Income Driven Repayment, or some other plan, and make sure you absolutely re-certify every year. When you go into and come out of IDR, guess what? Your interest capitalizes.

In my humble opinion, it is this interest capitalization that is making student loans hard to pay off. And when people enter into forbearance, it is because there is a short-term issue causing a hardship or some other issue. The servicers will happily put you into forbearance, “so you don’t have a payment due for six months” but in the long run, it actually hurts the borrower financially. We need stronger disclosures.

Best of luck to the class of 2019! May you find your joy and excitement felt during “Pomp and Circumstance” lasts for years as you leave college and embark on the rest of your journey!


image credit: gocollege.com

 

More on the UltraFICO- Not Good for Consumers

Posted on by Dawn Kennedy

I had the amazing privilege to attend the Consumer Assembly last week in Washington DC, and there was a panel discussion on credit scoring. The panel was actually a discussion on a group of American consumers that are dubbed by the industry the, “Credit Invisibles.” These are people who cannot get a “good” credit score in the typical way, by having open lines of credit that are at least six months old. The industry that scores credit, including the Fair Isaac Corporation (FICO), the developers of the FICO credit scoring models, and Vantage Score Solutions, LLC, the developers of the Vantage credit scoring models, feel that “credit invisibles” are disadvantaged in receiving access to credit products. And they are, but this new model by FICO to address the credit invisibles and those with marginal credit is not good for consumers.

I first blogged on the new “UltraFICO” score back in October in a two-part article series. The first was an introduction to the scoring model and the second was on some unspoken dangers related to judgments and bank account attachment when the credit reporting agencies have you bank account information, which you must consent to disclose under this model.

During last week’s panel discussion I learned more about the purpose of the model, and some facts that have me re-thinking my original posts about how this score may be “OK” for a mortgage product. And I was wrong in my previous posts. The model is not “OK” for any credit. None.

Before I move on to the specifics, I have to take a moment and point out that the panelists, including the VP from FICO from whom I received the information directly, entered into the lion’s den of an audience of consumer advocates, and spoke openly and answered questions about their products. That was a very nice thing to do, and I am appreciative of their honesty. I also know that in their “heart of hearts” they believe that they are helping consumers. It is at that point, I cannot disagree more. Remember, the credit scoring businesses are in the business to help people get and stay in debt. Any model that they can create to help consumers access credit is good for them, not necessarily for you. They sell these models. You are denied under one, they offer a second. Here are five “Fun Facts” about the UltraFICO:

1. The “UltraFICO” will be marketed, and is intended, for all types of credit not just secured, collateralized mortgages. In my original post, I speculated that the releasing of banking information to show the history of cash transactions might be “ok” or even great for mortgage lending, the only good use I could envision for this model. Well, when you apply for a mortgage, the banks take your last months of bank statements anyway. So, for that credit product, this appears to be moot. The UltraFICO will be available to all creditors who wish to purchase it.

2. The UltraFICO is intended to be a “second chance” credit scoring model. This little piece of information was new to me, and this is the first indication that it is not good for consumers. I originally believed that borrowers could just “opt-in” to this model by consenting to include their banking info. Actually, this is intended to be an option for people who would be denied credit in the original model. The credit denial becomes a “maybe” and the borrower has the option to “consent” to include their banking info in the hopes that their credit score will go up and they can be approved.

3. The Premise of the UltraFICO by Fair Isaac is faulty. One telling thing about this model is the statement by the panelist that the checking account information would be reliable because, “Consumer’s are in control of those accounts.” I disagree. I had a debit card number stolen and used in a fish market in Mexico. Filed the report, got the money back, but in this day and age of data breaches, I would never make the statement that consumers are always in control. FICO assured us that their model would be able to determine these little situations and not count them, but the scoring models are not transparent. All types of situations can arise where a consumer, for a period of time, may not be in complete control of every transaction in their account.

4. The UltraFICO model needs two to three years of banking information. Ah, another tidbit of info I was previously lacking. To use this model, consumers must 1. not have bounced a check in the last twelve months 2. Have at least two to three years of checking account information available for the model and 3. Have an average balance of $400.00. Good to know. 78% of consumers live paycheck to paycheck. There are many consumers that cannot maintain an average $400.00 balance after bills are paid and groceries are purchased. The VP assured us that in the beta-testing, using Experian as the Credit Reporting Agency (CRA), most consumers had their score increase under this model. But this now provides the information that a consumer may know they do not have, and “opt-out” of the model, rather than be denied AND have a score decrease.

5. Your banking info will be out there to the CRA, including “new” Finicity, who will become a CRA to comply with the Fair Credit Reporting Act. A fourth CRA will enter into the picture, Finicity who will be the CRA for these UltraFICO banking information providers to FICO for scoring. Because FICO never sees anything but the “raw data” they have zero, none, no liability for what happens to your info. Under this model, FICO assures us that it will be a “single use” calculation of the borrowers banking info. Okay, what happens then? The CRA and the creditors are responsible for protecting the data and are subject to the FCRA, so, it’s good. Or is it?

Data breaches have recently revealed sensitive info that an identity thief can use to create an account, such as social security number and date of birth. But now, a breach can put your banking info at risk, no need to create a fake account when they can raid yours, or use the UltraFICO themselves. How many additional hours will consumers add to the identity theft cleanup mess when the bank must investigate everything, and to close that account could subject the consumer to bounced checks and whatever else. But, you can file a dispute with the Credit Reporting Agency online. Eyeroll.

If you are purchasing a house, find a bank who will perform manual underwriting, and do not use the UltraFICO to provide your banking account information. Please. Your info will be out on the internet for who knows how long. Even if the CRAs pinky swear to delete it. For other types of credit, if you are going to be denied without this info- you are going to be denied. The interest rate is likely higher than you would expect anyway once the UltraFICO model is used. And for the car dealers and others who will “deny” people initially to access their banking information for approval, we know, we know. If you give a mouse a cookie, he will want a glass of milk. Protect your banking from the UltraFICO.

 

Medical Debt and Payment Plans- The Medical Debt Relief Act

Posted on by Dawn Kennedy

“The hospital is saying that if we need a lower payment, we have to take out a loan.” I wouldn’t have believed it myself, but that statement came from my client. I actually was at a loss for words. “So, if you do not make the minimum payment the hospital has set you up with on the “plan” they won’t accept any payment at all?”  Apparently, that is what the hospital told them. So, what to do if you are faced with this issue? Let’s talk about it.

First of all, the hospital is not required to carry your debt balances. They can decide that they will make payment plans with patients, provided the debt is paid in 12 months, or 6 months, or whatever. To be honest, medial providers of all types, private doctors, hospitals, labs, etc, are often very quick to turn an outstanding medical debt to collections. It is that fear of collections that can cause consumers to make mistakes in handling these debts.

About 18 months ago, on September 15, 2017, the three credit reporting agencies, Equifax, Experian, and Transunion changed the way they report medical collections on the consumer’s credit report. These changes were designed to help consumers who are paying medical bills on a payment plan or are waiting for insurance to pay some or all of the outstanding debt. I wrote about this briefly in an earlier article, it is not unusual for insurance claims to be filed with errors, and payment is delayed.

What to advise my client? Well, if you cannot afford the payment, and it was a very large payment, the bill will probably be sent to collections, but until it is, make your lower payment amounts to the hospital. Do not stop paying because you cannot afford the amount they are asking. And I gave them the same option I am going to share here. These are the things to consider if your hospital is threatening to send you to collections because you cannot afford their plan.

First, DO NOT take out a loan or put the balance of a medical debt on a credit card. It changes the “character of debt” from medical to “personal loan” or “credit card debt.”  The reporting agencies will not report a medical collection on the consumer’s report for 180 days, that’s six months, after the account is sent to collections. This gives consumers six months to pay the debt in full. If you change medical debt to anything else, you are adding interest, and any late payment can be reported.

Second, many medical collection accounts can be removed, once they are paid. In certain scoring models used by creditors, paid medical collection accounts do not factor in at all, even if the paid debt is not removed.

Third, there will be more flexibility to lower your payment each month with a collection agency. Collectors want a payment. Period. If it takes longer than six months, see above.

Fourth, do not make the medical debt payment at the expense of any of the family’s “four walls.” Food, utilities, rent or mortgage, and transportation are the priorities with your income. PLEASE do not put your “FICO” in front of the electric bill or pay the debt before you get food in the pantry.

The last little tidbit of news here is that the credit reporting agencies must remove any medical collection account within 45 days after it is paid in full by insurance. As I said earlier, mistakes in claim filing, not by the consumer, but by the provider, can delay payment beyond the six months.

 

Why I Advise Most People to Try Coaching Before Filing a Chapter 13

Posted on by Dawn Kennedy

I am a lawyer, so it may be odd that I recommend to many people that they should try financial coaching as an option before filing for Chapter 13 bankruptcy. It is also, in many cases, an unpopular opinion with both consumers and some lawyers. I’ll get this out of the way upfront. Yes, I can take a bankruptcy matter, but I find there are many cases where it may do more harm than good. It is also tax refund season, and many people wait for their refund to file so they can afford the bankruptcy filing fees. In fact, I have received a few calls in my practice about it lately, so I thought I would get my rationale into an article.

First, a few bankruptcy basics. When most people think about filing bankruptcy, they are referring to a Chapter 7. A Chapter 7 bankruptcy (meaning filed under Chapter 7 of the Bankruptcy Code) wipes out or “liquidates” almost all of the debtors unsecured debt, but there are exceptions. As well as some rules regarding secured debt such as cars and mortgages. It’s not just a wave of a magic wand, and since 2008, requires the debtor “pass” means test, if the household income is below certain thresholds. There are of course special exceptions, and what law doesn’t have exceptions?

What if the consumer “fails” the means test? Then the bankruptcy code they are eligible to file under is a Chapter 13. A Chapter 13 is basically a court approved repayment plan to creditors. The bankruptcy filing creates an estate, and a bankruptcy trustee manages the repayment for three to five years until it is completed and the bankruptcy (estate) is discharged.

So now we know the basics, why coaching before filing? My top three reasons.

First, the consumer keeps control of his or her income while debt is paid. When a consumer files bankruptcy, all of the debts and all of the income are listed on various “schedules.” The consumer’s assets, meaning property, bank accounts, disposable monthly income, etc. become the “bankruptcy estate.” This includes the consumer’s income, because it is what the filer is promising the bankruptcy court he or she will use to repay the debts. A repayment plan is submitted to the court, and if approved, the estate (with the payment plan) will be managed by a bankruptcy trustee, who works for the court.

So, the consumer no longer gets to control his or her income. It is an asset promised to pay debts, and all debts are paid from this estate for the length of time that bankruptcy is in repayment. This also means that any income increase, such as a raise or bonus, at any time the estate still exists will belong to the trustee. The trustee may demand that more money be paid to the creditors, particularly if the increase exceeds 10% of the consumer’s current income. And you cannot lie to the court. Never a good idea. And most of the time the consumer must submit personal tax returns to the court annually anyway. This is for as long as the estate exists.

Only after discharge will the consumer regain control. While it is true a certain percentage of the debt can be discharged at discharge, most of the debt must be repaid. The general rule is that at least as much of the debt that would have been discharged if the consumer qualified for a chapter 7, and the court can order more based on disposable income and assets.

Another note, if the consumer owes family money, and pays some of it back in the months preceding a bankruptcy filing, the trustee, under what is known as a “claw back,” can demand the family member return the money so it can be added to the estate. This is because the court will presume that the money was paid to a “preferred” creditor.

Second, coaching can help change attitudes and habits, a bankruptcy often doesn’t. Consumers are already required to go through a credit counseling type personal finance class before filing any bankruptcy and again before it can be discharged. I can’t speak to the effectiveness of these courses. But you can potentially see the limited change in money habits these courses have by looking at the average of Chapter 13 bankruptcies that successfully make if the full five years to discharge.

Only about one in three approved payment plans makes it through to discharge. Yup. Only about 33%. Yikes. Another statistic? Approximately 8% of bankruptcies are from re-filers, which account for about 16% of annual filings. More than 1 in 20 filings each year are from consumers who already filed once before. Yes, life can happen to anyone, and I am not here to judge, but if the consumer worked with a Ramsey Preferred Coach, I would take a bet that there would have been an emergency fund prior to that second filing.

When someone works with a coach, the repayment of debt comes not from fear of the court or trustee, but from a sincere desire to change from habits that can be personally harmful, to those habits that give peace of mind. The “not owing a monthly payment to anyone who charges a $39.00 fee if you are one second late with a payment” peace of mind. Also, a coach can keep you accountable. How can you forget to budget if you meet with a coach each month for a while? What if something comes up and you have a question? There is a coach walking beside you for support. Coaching is not forever either, and many people don’t even need three to five years of coaching, unlike a Chapter 13.

Third, the consumer may be asked about filing a bankruptcy long after it is removed from a credit report, and it may affect future opportunities. I find this to be a heartbreaking fact that many people do not really consider prior to filing. Everyone is thinking about the credit report, the “ten years” hit in the “public records” section. But that is just one part. Consumers are often asked on a job application, mortgage loan application, security clearance application, “Have you ever filed bankruptcy?” Which is not the same as, “Have you filed bankruptcy in the last ten years?” And the “have you ever” question must be answered YES. This can lead to loss of some future opportunities that were never even thought of before.

Jobs in law enforcement, for example, are difficult to obtain after filing. Not to lie, even getting a license to practice law can be a challenge because an applicant may not pass the Moral Fitness requirement. Military or government jobs requiring a clearance may be an issue. So, while there is protection against losing your job during a bankruptcy, and protection from discrimination at your current employer, no such protection exists if you try to change jobs later in private industry.

And that’s it. My three biggest reasons for advising consumers to try coaching first, before filing a chapter 13 bankruptcy. If you or someone you know is in a financial situation where bankruptcy has been raised in conversation, you (or they) may want to have a chat with a financial coach, first.

Your New “UltraFICO” Score! A Good Thing?

Posted on by Dawn Kennedy

The Fair Issacs Corporation, the creators of the mysteriously calculated FICO Credit Score, are changing the scoring method using new criteria, again. In early 2019, a new scoring method will allow consumers to contribute their banking information to a third party, Finicity, which, “allows Americans to benefit from positive financial behaviors.” The idea is that if you are newer to credit, or have a lower score, the credit bureau can have a look at your checking, savings, and money market accounts to check your credit worthiness. One argument in support of this new approach is that consumers do not currently have any input into their credit scores, because the FICO is calculated only on debt account data submitted by creditors and lenders.

Fair enough. What could possibly go wrong?

From my lowly perch, a lot. First of all, while the consumer will have a choice of accounts to include, they will not have any control over how it is collected, and whether the information is kept by the credit bureau. The process, as published in the Wall Street Journal, is as follows,“Experian will compile consumers’ banking information with help from financial-technology firm Finicity and will distribute the new score to lenders.” Yeah, read that again, Experian will send a summary of consumer bank accounts to lenders. FICO won’t keep any of that information after the score is calculated, but the credit bureau will have your banking Information.

Anyone hear about the hack on Equifax? Anyone? Of course, you have. Well, have you heard about the Experian hack? 15 Million T-Mobile customers personal data was hacked via Experian, including social security and passport numbers. Lovely. Since I don’t use T-Mobile, I am already standing in line to provide my banking info. Eyeroll. It’s already happened once, and they will not be less of a target if they are the bureau with your bank accounts.

Cybersecurity aside, who here believes that when the UltraFICO is available, creditors will accept the FICO? Lenders know the consumer can opt in banking information, so why not rely on the UltraFICO for lending decisions? This is the plot from the classic children’s book by Laura Joffe Numeroff, If You Give a Mouse a Cookie. The lesson? If you give a mouse a cookie, he will want a glass of milk, then a straw, then a napkin, and on and on.

So, why the change? Benevolent Credit Bureaus? Hardly. Since the housing melt down, the pool of traditionally “highly qualified” borrowers shrunk. The change is due to lenders requesting, “credit-reporting firms and FICO to figure out a way to help them boost lending without taking on significantly more risk.” Oh.

As a consumer law advocate, I see danger ahead. Who would be “at fault” if banking information is compromised? Any hack could mean consumer’s accounts are cleaned out until the necessary fraud investigations are completed, and the money is returned by the bank. Missed or late mortgage, car payments, or utility bills can have consequences and mean financial insecurity for the most basic needs of a family. Will your mortgage company waive the late fee if it isn’t your fault? Will the electric company leave the lights on? If not, late fees on every bill owed by the American family could add up to hundreds of dollars. And over 75% of families already live paycheck to paycheck. In my humble opinion, a “free” 12-month credit monitoring product is not going to repair that mess. Or, maybe I am just a cynic and Fair Isaacs is looking out for consumers.

 

photo:credit.org

Where Did 2018 Go? Thoughts on the 12 Weeks Until Black Friday

Posted on by Dawn Kennedy

This past weekend consisted of various discussion with the (grown) children about Halloween costumes for the grands and some early planning for the holidays, and it hit me, we are close to the 2018 holiday season. This year has flown by, way too quickly. And now there are only 12 weeks until Black Friday, or for many people, six paydays. But before you close this article, call me “scrooge”, and delete me from your friends list because I want to chat about the Black Friday in September, give me a moment, and I will explain. So why is “Black Friday” my measure of the season and not the actual festivities on, say, Christmas or Hanukah?? Because that shopping day after the turkey traditionally “kicks off” the holiday season. And the spending begins for many. And we love to spend.

In 2017, consumers spent an average of $967.00, between Black Friday and Cyber Monday, accounting for approximately 20% of ALL annual online shopping those days. The amount budgeted on gifts for children has averaged about $500.00 per child, relatively unchanged over the last few years. But gifts aside, there are other expenses around the big season from food, wrapping paper, shipping costs, travel expenses, and new outfits that don’t always make it into the average household budget. In fact, last year almost two-thirds of the average holiday budget went to “non-gift” spending.

All these articles quaintly mention the “holiday budget” as if this was planned in advance. I really don’t know anyone, myself included, who likes a holiday budget. Because sometimes I see something and think, “wow, this is great for…”and want to purchase that thing. For many people, the total holiday cost is really only unveiled after the revelry as the statements start coming in the mail. And the reality comes in January that for too many people, they blew out past the budget, and accumulated quite a bit of debt for the season. The average American woke up in January 2018 with over $1050.00 in DEBT. Not what was spent as a whole, but what they spent in the hole to finance the season. For the 78% of average American families living paycheck to paycheck, an additional $1000.00 in debt, and at incredibly high interest rates, is a burden.

Good news, we all have twelve weeks, or an average of six paychecks to squirrel away some cash. But even better? Companies with seasonal hiring opportunities are at the best it has been in years, and with low unemployment, retailers are competing for seasonal employees. The reported average wage is $12.00/ hour for temps, but Costco is reportedly paying $20.00 and hour!

It’s not too early to start to plan the season. And not just where you are going for dinner on which days. It’s time to think about how to pay for it. Too many people raid emergency funds and take loans from retirement accounts to fund the holidays. And because these holidays come every year, it can become a vicious cycle. But, with all this time available before the shopping and revelry begins, that second job, or extra shift, or part-time side hustle may be just what you need to make this season “Merry and Bright.”

source: imtresidential.com

Medical Debt Collections and Credit Reporting

Posted on by Dawn Kennedy

 

Around this time last year, the three credit reporting agencies had to change their rules (due to an agreement with several state’s attorney generals in 2015) surrounding reporting of a consumer’s medical debt in collections. Now, they basically have to give consumers a standard 180 day “grace period” before reporting medical collections on the consumer credit report. Another reporting change requires the bureaus to remove a past due medical bill that is later paid by insurance.

For many Americans, the increase in medical debt is due to higher deductibles and out of pocket costs for healthcare, timely payment by insurance to providers, and the decision by insurers that a provider was “out of network” resulting in a lower reimbursement and the outstanding costs passed on to the consumer. A fun little statistic related to the rules change is that up to 80% of bills submitted by providers to insurers are incorrect the first time. So insurance doesn’t pay them, the bills must be corrected and resubmitted for payment. This results in delays in settling medical bills. Sometimes for months.

The 180-day reporting delay is good for consumers with medical debt because these bills are often passed to collections quickly, within 30-60 days after the payment was due. Faster than many creditors will pass off non-medical debt accounts. This allows time for consumers to deal with insurance, pay their medical bills, and work on billing disputes even if the account is with collectors.

It is important to note that, while it is true that it will no longer have as big an impact on the “FICO” and VantageScore credit scoring models for 180 days, other credit scoring models that lenders use have not adopted this approach. So, you still need to watch your credit report if you are facing medical debts in collections.

Here are a few other things to consider if you or someone you know is facing medical debt:

• You are not alone. Around 43 million Americans had medical debt on their credit reports last year. The average amount of medical debt in collections was $579.00 last year. With 78% of Americans living paycheck to paycheck, this is a large enough number to cause financial hardship.

• While medical debt should NOT be ignored, if you are struggling with debt, it should be given a lower priority than other consumer debt, such as credit cards and personal loans. To do this, the medical debt must remain a “medical-debt,” meaning do not borrow or pay these debts with a credit card.

• Collectors will often try to push you to pay the bill, even suggesting you just put the balance on a card. But if you pay the medical debt with a credit card, you can limit your ability to settle the debt, or seek financial assistance from the hospital or other agency. You can stop collectors from calling by making your request in writing. You just need to send a letter.

• There are statutes that protect consumers who owe medical debt from being turned away from the emergency room for medical care. And, according to the National Consumer Law Center:

“If you request financial assistance from a nonprofit hospital, the hospital cannot deny you care in any part of the hospital because of an old bill until it determines whether you are eligible for financial assistance. You usually have about eight months (240 days) from when you first received the old bill to request such financial assistance.”

• Medical debt is a big reason for bankruptcy, but not why you think. When people are too ill to work, income plummets, savings can be exhausted and often medical debt was transferred to credit cards.

Remember, you now have 180 days to get medical bills handled before they hit your Equifax, Experian, or TransUnion credit report. You can dispute anything erroneously reported and have the records of medical bills that were paid by insurance removed.