USAinDebt

The year of 2008 will be remembered and identified by the worldwide market crash that hit the economies of many countries, big and small. The global financial crisis ruined quite a few large financial firms which resulted in the collapse of thousands of smaller dependent companies and businesses. Combined with the sub prime mortgage crisis, bad debts, lack of liquidity, corruption and poor government control are pointed out as the main reasons for the market dip.
Although the crisis erupted with full power in 2008, its foundation has been started way earlier than that. To begin with, the American consumer has always lived beyond their means. Buying almost any type of commodities is very often associated with obtaining some type of a loan and paying it off within extended period of time. Credit became the foundation of nearly every purchase. Especially when it came to real estate, banks and other lending institutions were quick to provide credit to consumers, basing their decision on the muddy information, provided by mortgage brokers.

On the other side, consumers were happily taking on those mortgages, being under the false impression that prices of property will always rise and that they are making a good investment. They were also easily hooked by the Adjustable Rate Mortgage (ARM) which allowed them to take on a mortgage at a super low rate. The housing market was at its full glory: the USA home ownership rate grew to the record 69.2% (US Census Bureau Report, 2007). In the meantime, those mortgages were pooled and sold to domestic and foreign investment institutions as ‘AAA’ graded CDO’s. Since everyone was buying, demand has increased which naturally led to the increase in supply. Housing is built everywhere, 24/7. When the market reached its tipping point in the middle of 2007, supply became higher than the demand and prices began to decline. Prices quickly dropped by over 20% within less than a year (Standard & Poor’s Home Price Indices, 2008).

At one point, more people were finding themselves in a situation where they had zero or even negative equity in their homes. As a lot of those people took ARM mortgages, their payments were steadily increasing by that time. Many were unable to pay their mortgages. A wave of refinancing attempts and foreclosures made it harder and harder to obtain better financing rates and new loans. By the end of 2007, Nearly 1.3 million US housing properties were in the process of foreclosure (RealtyTrac. US Foreclosure Activity Report, 2008). This further deepened the issue – more and more consumers were unable to meet their repayment obligations, defaulting on their mortgages. People were resorting to withdrawals from their last savings accounts and even cash advances from credit cards. That led to a global bank run in which more than $550 billion dollars were withdrawn from US accounts. Banks were vastly losing their liquid assets. As a result of this, banks went low on cash, their assets disappeared and a liquidity problem developed. This pretty much is what brought down Washington Mutual – consumers feared that the bank is in trouble; they pulled their cash out and left the bank high and dry. The collapse of the Credit Default Swaps (CDS) market boosted the rapidly evolving subprime mortgage crisis even more. The weak regulation of the CDS market allowed for millions of junk swaps to be traded. The above mentioned investors, buying the ‘AAA’ graded pooled mortgages suddenly found themselves holding nearly worthless paper.

As a result of that, bankruptcies were quick to follow. This huge instability in the market had a snowball effect: AIG, the largest US insurer quickly started losing money merely because of the now worthless CDO’s they have insured. It became a vicious cycle: People were failing to pay off their mortgages, their homes were foreclosed; the owners of those failed loans were unable to recover their money so they turned to the insurers of those loans, who quickly run out of finances to pay the insurance on those junk mortgages. The result: consumers are low on cash, banks are low on cash, investors, insurers and banks are low on cash. The liquidity of the market almost doesn’t exist.

The fall of Lehman Brothers Holdings on September 14th, 2008 started a domino effect within the financial world. Many of their investments were foreign-funded, and as a result of that the US mortgage crisis quickly spilled beyond America’s borders. The German branch of Citigroup was heavily stressed by the bankruptcy of Lehman Brothers. The Indonesian stock market suspended trading after a 10% on October 8th of 2008. Thailand, Russian and Ukraine followed. Merrill Lynch was sold to Bank of America. Black Monday turned into the Black Week for the US markets: The Dow Jones fell 456.3 to 8122.2 leading to a 21pc dip, The S&P 500 fell 53.4 to 856.5, a weekly drop of more than 20pc (TMG. Financial crisis: US stock markets suffer worst week on record, 2008). This brings a whole new problem in the financial market: banks close their doors to loans, not just mortgages, credit cards and personal loans but loans to big companies, such as GM, IBM etc. These companies often rely on loans to support their productivity, but with this market seize it is hard for even them to obtain a good credit.

What started as a mortgage crisis in the middle of 2007 has quickly developed into a worldwide financial crisis. The failure of U.S. and European investment banks, insurance firms, mortgage banks and governments to contain and resolve the subprime mortgage crash has allowed for it to spread and grow into a huge, complex financial mess which is now known as the market crash of 2008.
References

Census Bureau Reports on Residential Vacancies and Homeownerships. US Census Bureau. 26 October 2007.
http://www.census.gov/hhes/www/housing/hvs/qtr307/q307press.pdf

Standard & Poor’s Home Price Indices. Standard & Poor’s S&P/Case-Shiller. New York, November 25, 2008.
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_112555.pdf

US Foreclosure Activity Report. RealtyTrac. Irvine, January 29, 2008.
http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847

Financial crisis: US stock markets suffer worst week on record. Telegraph Media Group Limited. London, October 10, 2008.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3174151/Financial-crisis-US-stock-markets-suffer-worst-week-on-record.html

Tags: market crash 2008 | lehman brothers | foreclosure | census | financial crisis |   CDS | debt | credit

With the current economic crisis spreading worldwide, many individuals are forced to seek new ways to save businesses, homes and other property. Not that long ago, the word ‘bankruptcy’ was something feared more than death and it was avoided at all costs. Nowadays, however, many resort to bankruptcy lawyers in order to be able to get out of the hole and at least partially save what they have. In a matter of fact, as per CNN ‘consumer bankruptcy filing increased almost 50% over the previous year’ and we are talking million of filings here.

Bankruptcy brings a lot of consequences that might have a very negative impact on your financial ‘grade’. Here are several facts to consider:

1) You are still obligated to pay off some of your debts: Although you will probably get rid of a lot of your simple debts, you may still be responsible for repaying, for example your mortgage or your car loan. There are certain exemptions of that rule in some states, so make sure you check that before filing. You also won’t be able to get rid of your student loans or tax debts.

2)  Bankruptcy will leave a mark: Bankruptcy filing stays on your credit report for 7 to 10 years. It will be there, on top of the negative list when you apply for credit cards, auto insurance, mortgage, rental and even a job. It will be hard for you to obtain any normal loan repayment terms.

3) Bankruptcy costs a lot: Besides the high interest rates you will most likely be getting as a result of your bankruptcy filing, you will also have to pay lawyer and filing fees.

4)  Bankruptcy process takes time: In most cases you may be required to take financial planning and credit counseling session before you are even allowed to file.

5) Bankruptcy filing is restricted: You can file once every six years. So if it does not work the first time,  you will have no other options for the next 6 years. Re-filing has a waiting period of 180 days.

6) Bankruptcy screws up your co-signers: Bankruptcy doesn’t protect the co-signers of your debt. If the filing discharges your debt,  your creditors are free to go after the co-signer.

7)  Bankruptcy won’t save your from acquiring interest:  All of your nonchargeable debts are still acquiring interest and other fees.

8 ) You still may not be able to save your property: In some cases, when you property debts are higher than the discharge exceptions, the bankrupt’s trustee may have to liquidate (sell) your property in order to pay the creditors.

9) There are different types of bankruptcy: Chapter 7 bankruptcy obligates the debtor to turn over all all nonexempt property to the bankruptcy trustee who then liquidates it and repays the loans.  Chapter 13 allows the debtor to keep their property and enter into a repayment plan with 3-5 years term.

10) You can fail in bankruptcy: If you continue missing payments, for example on your mortgage, even though you are under a bankruptcy protection your mortgage lender can go ahead and proceed with foreclosure.

Please be advised that the above facts can have exemptions and vary by state.

Tags: bankruptcy | chapter 7 | chapter 13 | filing | debt | credit | taxes

Would you pay money to lend yourself your own money? No? Well if you wouldn’t do so, why would you take an Refund Anticipation Loan?

It probably seems easy at first: sing a paper and walk out with a check against your coming refund. Yes but no! Your tax RAL will cost you much more than you can imagine. As an example, H&R Block’s RAL cost is about $230 for a $3000  refund. And you get that refund on a Emerald Card with 36% APR!

Such loan makes no sense. You are way better filing with e-file and getting the refund deposited directly into your bank account. It only takes about a week after the e-filing to receive your funds.

Tags: e-file | filing | hr block | taxes | ral

As per the latest reports, Americans are  ’above their ears’ in debt - $48 trillion - and soaring. 9 out of 10 households in the US owe money - in mortgages, car payments, credit cards, student loans, medical bills, various payday, credit union and personal loans. And unless you are one of those lucky exceptions, you probably owe green. If so, read-on: here are your first golden steps in becoming debt - free.

When dealing with your debt, the first thing to do is to summarize your responsibilities. In another words, understand how much you owe. And in order to do this, you will need a couple of simple things: Microsoft Excel, Internet, a phone and a couple of hours of free time.

For starters, create a new Excel file and password-protect it. Go to Excel, click on “Tools” then “Options”, click on the “Security” tab and look for the box “Password to open”. This is where you are going to put your password. After you have typed the password, click on “Ok”, re-enter the password (for security) and voila, your document is protected. Save it.

Your next task to do is to type in “Creditor” into the first box (A1). Write “Owed” in B2, “Available” in B3, “APR” in B4 and “Minimum Payment” in B5. Save. Next, list the names of your creditors in the first column, one name per row. Save again. The next step is to contact each creditor that you have listed in the first column and obtain as much information as you can. Against the name of each creditor you should fill out what’s owed, what’s available, what is the APR on the credit and what is the minimum monthly payment. Save frequently to avoid loss of information!

After you have everything listed, it’s time to summarize your debt. You will be using Excel’s Auto Sum function for that. Let’s do it with the numbers in column#2, “Owed”. Click on the first number in that column, hold the “Shift” key on your keyboard, and then click on the next empty box underneath the last number in that same column. This way you should have selected all the numbers below the “Owed” column, plus one more empty box. When that’s done, click on the Auto-sum Button which looks like the Greek letter Sigma - “Σ”. This will add all the numbers that you have selected and display the result on the bottom. The great thing about Auto Sum is that if you change any of the numbers in the column, Excel will automatically re-calculate the result! Do the same for the “Available” and “Minimum Payment” columns. Save.

Let’s summarize what’s been done. You have just made the first step towards your financial freedom. You now know exactly how much you owe, what are you minimum monthly payments, how much all those credit lines cost you per month and how much credit you have available. Good job!

Tags: credit | debt | debt-free | loans | apr | autosum | excel

Companies spend a lot of money on advertising their products to the public and unfortunately that good advertising often works: people tend to buy products that they have seen on TV or read about in the magazines. Sometimes, however, those products are not the best buy. They are expensive because of the brand they are sold under at the same time they are no different that the rest of the products on the shelf. Generic, or otherwise called store brands can often save shoppers lots of green.

A good example is CVS. What does a regular CVS customer buy? Cosmetics, medicine, household supplies. So let’s get two separate carts and shop. Shampoo, toothpaste, face cleanser, pain reliever, cotton swabs.

Cart 1: contains Head & Shoudler’s Dandruff Shampoo, Classic Clean; Crest Vivid White Night Toothpaste; Clean & Clear Oil-Free Daily Pore Cleanser; Advil Ibuprofen Coated Gel Caplets; Q-tips. Total for this cart: $35.00.

Cart2: CVS Dandruff Shampoo 2 In 1, CVS Bright White Whitening Toothpaste, CVS Oil Free Acne Cleanser,Pain Relief Rapid Release Gel Caps Extra Strength, CVS Cotton Swabs Flexible Plastic. Total for this cart: $13.39.

Looking at the above, it is easy to see that the CVS store brands have saved us $21.61, which is a nice piece of change. Worried about the quality of what you are buying? Compare the ingredients and you’ll see that they are 100% identical in most products! Why pay for the brand name when you can have the same for less?

Tags: cvs | save money | store brands | generic

If you happen to be in debt then the likelihood is that you consider credit card to be a dirty word! Credit cards account for the majority of debt in this country at the moment, but did you know they can also help to get you out of debt?

The latest credit card trend is towards balance transfers. Transferring your credit card balances from a high interest card to one of the many interest free credit cards that have fixed nine, twelve or eighteen month offers can knock hundreds of dollars off your bills and give you a little breathing space to get your credit card balances cleared. But if you are not sure where to look for these offers then a website like About Your Money can help.

About your money is a comparison site that has access to plenty of the latest interest free credit cards and the related offers. The site is really comprehensive, complete with a comparison table and a guide to help you choose the interest free credit cards that will best suit you. If your debt is more extensive though, you might want to take a look at the personal loans section instead.

Now is the time though. With 2008 approaching and bringing a fresh start with it, now is the time to look to clear your debt.

Here’s 12 excellent articles, combined in our Carnival of Credit Report Stories. Have fun reading!

Karen Halls presents Bankruptcy Vs Bankruptcy Alternatives posted at
A Bankruptcy Lawyer’s Blog, saying, “When you’re beginning to find it difficult to pay off your debts you might consider filing for bankruptcy as your ultimate debt solution. But have you considered other options before you finally declare personal bankruptcy?”

Aaron Wakling presents Improving Your Credit Score - Fundamental Factors posted at The Credit & Credit Card Blog, saying, “To understand how to improve your overall credit rating, it is imperative you understand what factors influence your FICO score.”

Eric Hudin presents Estate Planning Tax Advice - Why You Need It and Where to Find It posted at My Estate Planning Career Blog, saying, “Taxes are something you have to pay all of your life, and if you do not plan ahead, they will be something your estates will be paying even after you are gone. So making sure that you get quality estate planning tax advice when you are arranging your final affairs is one way to ensure that your heirs, and not the IRS, receive the bulk of your estate.”

Allen Taylor presents Investing - Determining Your Goals posted at Investing World Today, saying, “Much like an exercise program, you will want to determine your
goals before you begin to invest. Your goal might be retiring in 20-30 years, kids college funding or, if you got started a bit late, retirement in the next 5 to 10 years.”

Tim Ramsey presents 7 Steps to Debt Freedom posted at My Debt Relief Blog,
saying, “For anyone out there who has ever forgotten a payment or found themselves with more debt than their income could pay, you know how aggressive some of these creditors can be.”

Eric Stanley presents How The Recent ?Credit Crunch? Could Affect You posted at
Personal Finance Blog Articles, saying, “With banks and financial intuitions unsure on the risks involved with lending to one another, a ripple effect is being sent out
into the rest of the lending world.”

Thomas Humes presents Guidelines for Building Wealth posted at Wealth Building World, saying, “Review my guidelines for building wealth.”

JASMBA presents Getting Ahead posted at Getting Ahead.

Matthew Paulson presents The First Thing’s First: Prioritize Your Debts posted at
Getting Green.

Larry Russell presents Diversify To Avoid Investment Fraud posted at THE SKILLED INVESTOR Blog, saying, “Stories about financial fraud often seem to include the phrase
“his or her life savings.” There should never be a moment during your lifetime when your life savings are not heavily diversified across many investment vehicles and firms.”

Colin Robertson presents How Long Do Negative Items Remain on a Credit Report posted at The Truth About Credit Cards.com.

James presents Notorious Practices of Payday Loan Companies posted at ZooLaw.

That concludes this edition. Submit your blog article to the next edition of credit report stories using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Definitely take a look at what Philip Brewer @ WiseBread has to say about 401(k)!

Here’s an excerpt:

‘The twin advantages of tax deferral and a corporate match make the 401(k) the foundation of most people’s savings plan. Putting in enough to get the maximum corporate match is almost always the right choice–a good corporate match is so much money, funding your 401(k) usually even comes ahead of paying off debt. Sometimes, though, it makes sense to put money other places.’

Read When NOT to put money in your 401(k) on WiseBread

You basically have two options when filing: you can either file for Chapter 7 or Chapter 13, depending on your situation. The main difference between the two is that Chapter 7 involves liquidation of property as opposed to Chapter 13, which works more like a repayment plan.

Chapter 7 Bankruptcy, also know as a “straight bankruptcy” or “liquidation bankruptcy” Chapter 7 is the most common in US. About one million Chapter 7 bankruptcies were filed for the year of 2006. A filing under this chapter could be done either by an individual, a partnership, or a corporation or other business entity. Individuals with higher income will most likely not qualify for this type of filing. Chapter 7 does not offer a repayment plan, instead the debtor surrenders all non-exempt property to a bankruptcy trustee, who sells it and puts the proceeds towards repaying the debt. It is possible to discharge certain debts when filing under Chapter 7. You won’t be able to discharge taxes, spousal and child support, student loans. This one stays on your credit report for up to ten years, even if your case is not approved. Filing fees are different for different states, but you should expect to pay a sum above $1000. Cost could be higher for businesses. Debtors must attend obligatory credit counseling within 180 days prior to filing bankruptcy petition.

Chapter 13 Bankruptcy, or a “wage earner’s plan” offers a 3-5 years debt repayment plan to the debtor, and it also allows a defaulter to keep their property. About half a million Chapter 13 filings were done in 2006. This bankruptcy is meant for individuals with a steady income, who can afford to make monthly payments towards their debt. A 3-year plan is proposed if the debtor’s income is below the state median, and a 5-year plan is proposed if the earnings are above the state median. A Chapter 13 filing stays on your credit report for up to 7 years. Debtors must attend obligatory credit counseling within 6 months prior to filing bankruptcy petition. Chapter 13 doesn’t let you discharge family support, restitution, student loans, old taxes and DWI judgments. Filings under Chapter 13 are usually more complicated than Chapter 7 therefore this plan is associated with higher filing costs. You must not miss a single payment, skipping a disbursement will dismiss your case.

Filing for bankruptcy is a tough step to take, but unfortunately sometimes individuals have no other choice but to go that way. Even though, before filing you should re-check all your options again. Remember, bankruptcy will stay on your credit report for up to 10 years, and this move should be your last resort.

Tags: bankruptcy | chapter 7 | chapter 13 | debt | credit

Collection agencies can be a real pain in the neck. Their representatives are annoying, rude and they won’t leave you alone until you pay them. Besides that, a collection agency is capable of ruining your credit profile for up to 7 years and that can really hurt you in many ways. So if you have one of the abovementioned annoying persons calling you, read on.

Before anything else, let’s clear up what is a collection account and what is a collection agency. Simply said, a collection account is opened on a bill that you haven’t paid for a while. Like your cell phone bill, or your credit card payment – if your cell phone carrier or bank for some reason haven’t received any payments from you over an extended period of time,  they will do a couple of things. First, they will try to call you. Second, they will mail you. And third, if they still haven’t heard from you, they will sell your bill to a collection agency. What happens is that the collection agency pays the money you owe for you, and takes over your bill. So now you owe that money to a collection agency. They will open a collection account under your name, get your credit reports and post a collection record on usually all three of them. Then they will get your contact information and start harassing you by phone and mail.

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