Credit/Debt Recovery

"Debt Know How" from MasterCard

Mastercard is offering debt education at the linked site. It's a bit like the tobacco company-sponsored "quit smoking" sites, but there's still good information here for anyone who wants to become more financially literate.

2006 will have a rough start for many consumers. When credit card minimums go up just as we're trying to pay down our holiday debt, we'll need all the help we can get; Mastercard's Debt Basics site is one place to start.

Credit Card Debt Isn't Passed On

Michelle Singletary's column today is a good one as usual. I want to point everyone to her answer about passing credit card debt down to the next generation: unless your children co-signed for the debt, you've got nothing to worry about.

Bankrate Gets It Wrong

[UPDATE] Justin Harelik responded in the comments below, and that led me to revisit this post. I hadn't looked at it for almost a month, and I was struck by how nasty its tone is. I'll leave the content of the original post unchanged so everyone can see what an ass I was. I apologize sincerely for that.

He has edited the original article to correct the factual error about FICO scores, changing "Credit Counseling wrecks your credit score" to "Be careful with debt repayment plans". That's good advice. Justin's point is that if credit counseling is used carelessly (as it is a majority of the time) it can have disastrous effects on one's credit. On this, he and I completely agree: clients should only enter a credit counselor's Debt Management Plan if they are fully committed to sticking with it. Enrolling in a counseling DMP doesn't damage your score, but dropping off of one could devastate it. [/UPDATE]

Original post:

This story from Bankrate made its way to my inbox before the holidays, but I'm just now getting to it.

It's a load of horse$hit. Not a total load, as there are a couple of things that aren't complete lies, but the basic thrust of the article is a hatchet job on credit counseling. In fact, if credit counseling were a person, this would be libel. It makes me sad, because Bankrate is usually more responsible than this.

Bankrate's "Bankruptcy Adviser" Justin Harelik says (this is the title of the article) "Credit Counsleing Wrecks Credit Score." By now, everyone knows what Fair, Isaac says about that: "What's not in your score? Whether or not you are participating in a credit counseling of any kind."

Harelik writes that "Many of my clients have reported that their credit dropped rapidly after enrolling in credit counseling." Clients, he says? What kind of clients? Mr. Harelik is a bankruptcy attorney. Of course. Apparently, letting a bankruptcy attorney answer a question about credit counseling is like asking a scientologist about psychiatry. Infer from that what you will.

The logical fallacy here is pretty elementary. Some of my clients went to credit counseling and their credit scores went down... post hoc ergo propter hoc. I had diarrhea for two days after reading Justin Harelik's article; is it fair for me to blame one on the other? These clients of Mr. Harelik's may have seen lowering of their credit socres, but FICO scores do not change based on credit counseling. So maybe there were other factors that led to those decreasing scores.

This is a source of big misunderstanding about credit counseling; people don't go to them when their finances are rosy. Credit counseling clients are usually in trouble, and their credit reflects all sorts of signs of that trouble, like late and missed payments, exceeding their credit limits, etc. So, no, it wouldn't surprise me if a credit counseling client saw his/her score drop. But no, that drop wouldn't have a thing to do with his/her debt management plan or credit counseling; it's a reflection of all the things that made that person seek credit counseling in the first place.

Harelik says as much later in the article, when he states that he never lent money to anyone in credit counseling when he was a loan officer: "utilizing credit counseling serivces indicates financial overextension and the inability to pay for existing debt, let alone afford more." Well, yeah. Sure. People in credit counseling are over-extended, and shouldn't get more debt. Duh. No credit counselor would argue that. If I'm overextended, I'm not going to get approved for a loan regardless of whether I went to credit counseling or not. So it's misleading to suggest that the loans wouldn't be denied if those consumers had only opted for something other than credit counseling.

Which is what Harelik is really urging here. He suggests that the person who wrote to him should seek a chapter 13 bankruptcy.

He also says that credit counseling will "make home mortgages extremely difficult to obtain." That's funny, I remember several mortgage lenders falling all over themselves to get access to our DMP graduates when I worked in credit counseling. But oh, don't believe me, I worked for the creditors, right? And bankruptcy lawyers never operate in their own self-interest, but credit counselors always do. And that oceanfront property near Phoenix is selling for $20K an acre.

Happy Holidays

I hope Christmas went well for everyone; I likewise hope the New Year is a happy and prosperous one for all my readers.

I further hope everyone avoided digging themselves into a debt hole when doing holiday shopping this year. The best way to answer to debt problems is to avoid incurring debt in the first place, but sometimes one has to dig her/himself out the hard way.

The beginning of a new year is an ideal time to revisit your household budget. Factor in the extra payments needed to address any holiday debt you've incurred, and you should be in a better position to make a full financial recovery.

And now that the memory of all that holiday shopping is still fresh in your mind, consider this: There is no reason not to start saving right now for next year's holidays. And I mean now. Don't wait another day. Set up a Christmas club account at the credit union, or set aside a bit more savings in your budget; whatever it takes. Become the kind of person who plans a year in advance for the holidays; there's nothing stopping you.

OK Senator pushes for financial literacy education

According to this editorial in the Claremore Daily Progress, Oklahoma State Senator Daisy Lawler proposed legislation that would require all high school students to take a class in financial responsibility.

It's a good idea on paper, and I support the notion of providing financial literacy education in schools. However, I'm a former public school teacher myself, and I can tell you that most politicians and Jump$tart Coalition types who push for this kind of legislation were never teachers and don't know what it's like in the classroom these days.

As a teacher, I wasn't just charged with teaching kids reading, writing, and arithmetic. I had to deal with a whole lot more. Like keeping kids off drugs, keeping them in school, helping them have good self-esteem, dealing with parents, making sure they had adequate nutrition, behavior management, etc (and don't forget George Will's "Three R's; racial sensitivity, recycling, and reproduction").

So now let's throw "financial responsibility" on the pile. Teaching kids good money management is traditionally the parents' job, but now it joins the ranks of all sorts of other parental responsibilities that have been handed over to the schools.

I can tell you from experience--this idea is not as good as it sounds. And it gets to the heart of what people seem to care about these days; consider the evolution debate. Why on Earth would anyone want a public school handling their kids' religious instruction? I was in school in the 80's and all of our history textbooks were 25 years old. I never learned about Vietnam, or any president after Kennedy, for that matter. And now I want that institution to teach my kids to manage their personal finances? No thanks.

Bankruptcy Reform backfired?

Here's a link to an article by MSN's Liz Pulliam Weston that confirms some things I was arguing all through the bk reform process.

There was a dip in bankruptcy filings immediately after the new reforms became law, but this followed a massive surge in filings by consumers trying to beat the deadline. Now, two months after the reform went into effect, bankruptcy lawyers and credit counselors are reporting that bankruptcy filings are picking up again. Conclusion: the bankruptcy law has backfired on the credit card companies.

Like I said all along; bankruptcy reform would only affect around 10% of filers. 90% of those seeking bankruptcy will have no trouble getting it under the new law, and it seems they're doing so in unexpectedly large numbers.

There's something else in this article that isn't touched on that I think is significant.

Bankruptcy attorneys and many consumer advocates worry the counseling requirement will allow agencies to divert potential filers into debt repayment plans that the debtors can ill afford.

But this hasn't happened, as the article suggests.

Why not? NFCC President Susan Keating and Springboard CEO Dianne Wilkman are both quoted, suggesting that most of the clients coming in for pre-bankruptcy counseling simply can't afford anything but bankruptcy.

I would add something to that answer; it seems to me that bankruptcy reform has completely changed credit counselors' attitudes toward bankruptcy. Traditionally, CCCS' battle cry was "Avoid bankruptcy at all costs!" But these days, credit counselors seem perfectly willing to send every client who qualifies for bankruptcy straight to an attorney. In the past, it may have seemed like credit counselors and bk attorneys competed for clients, but there's little evidence of that competition after two months of BAPCPA.

What's at work here? It could be any of the following:
1. Credit counselors never coveted bk attorneys' clients.
2. Bankruptcy reform effectively eliminated credit counselors' objections to bankruptcy.
3. Providing pre-bankruptcy counseling and referring the client on to legal assistance eliminates the hassle of handling DMPs, dealing with hostile creditors, begging for Fair Share, etc.
4. Credit counselors are not eager to make enemies of America's bankruptcy lawyers.
5. Similarly, credit counselors don't want to be seen to be abusing the trust legislators put in them when BAPCPA was enacted.

I happen to think it's a little bit of each of the above. (And there are a few other factors I'm not as sure about, so I didn't list them.) There may have been legit reasons for bankruptcy attorneys and consumer advocates (read: "bankruptcy attorneys and other attorneys") to oppose BAPCPA, but the credit counseling requirement was never one of them.

TypePad Problems

Apologies to all for the last few days. TypePad's shutdown really threw my posting schedule out of whack. I understand people weren't able to post comments, either. Hopefully I'll get back on track this week... provided TypePad stays up and running and I'm able to log in.

Credit card issued to a tree

One of my favorite sites, Snopes.com, issues this report about a West-Hollywood realtor who sccessfully applied for a Chase Visa card for "Never Waste A Tree."

So far, so good; it's a fun story. But then the usually serious-minded folks at Snopes lay this incident at the feet of (what else?) bankruptcy reform.

In the article, they assert that "Recent changes to U.S. bankruptcy laws have made it more attractive for banks to offer credit cards to customers they might ordinarily have spurned" such as recent bankruptcy filers. It's no surprise they would have this misconception: everyone else in the mainstream media seems to.

But in reality, credit cards being issued in a careless manner is not a new development. And creditors have always loved the newly bankrupt; BAPCPA didn't change that. I suppose the notion of extending credit to an entity that doesn't exist offers us a lesson about creditor incompetence, but it does nothing to bolster the argument that bankruptcy reform was a bad idea.

Creditors going after the bankrupt

A recent NY Times article (I won't even bother linking because of their silly registration policy [though, thankfully, bugmenot.com seems to be up and running again]) describes how creditors are flooding recent bankruptcy filers with credit card offers.

This is nothing new; lenders love the newly bankrupt. 1, they figure the debtor-to-be has freed up a capacity to incur new debt, 2, they see the bankruptcy filer as an established borrower (and one whom they expect to carry larger balances), 3, they get to charge much higher interest rates to these consumers, and most importantly, 4, the recently bankrupt can't legally declare bankruptcy again any time soon.

This is a story right now because there are so many more fresh bankruptcy filers out there who declared bankruptcy in the rush to beat the Oct. 17th deadline; and this gives the Times a chance to re-fight the Bankruptcy Reform issue (something I'm not eager to do... so why the hell am I posting this? I'm an idiot!). The article quickly shifts focus away from the issue of providing credit card solicitations to the recently bankrupt to a rehash of all of the things that are wrong with bankruptcy reform.

As with every bankruptcy debate, this boils back down to personal responsibility; whether you recently filed bankruptcy or not, take all of the credit card offers you get and SHRED THEM. That's all.

Maybe under the new BAPCPA rules, solicitation of the recently bankrupt won't happen as much. Since BK filers now have to go through credit counseling, maybe they'll be more likely to opt out of pre-screened credit card offers. A little financial literacy education will go a long way.

Of course the financial education bankruptcy filers will now get under BAPCPA will help them do a better job rebuilding their credit after bankruptcy, which is part of the justification for sending them credit card offers right away. If banks refused to work with the recently bankrupt, the same "consumer" groups who criticize the creditors for flooding the bankrupt with solicitations would criticize them for not doing enough to help those debtors re-establish credit. I think the creditors know they're in a no-win situation when it comes to "consumer" groups and the NY Times, so I don't think they're likely to change their practices any time soon.

Panic slowly spreading over increase in minimum payments

I'm starting to see signs of panic surrounding the forthcoming increase in minimum credit card payments (if you missed that story, the OCC recommended an increase in minimum payments so debtors could work their way out of credit card debt more quickly; roughly 10 years to pay off a balance instead of 30).

Friends have called, worried about how they're going to make the new payments, and news articles are springing up warning about the change, which officially takes place on Dec. 31st. (Though many banks have already enacted their increase in minimums.) And now, I'm getting junk mail from mortgage lenders offering to help me refinance so I can withstand the higher minimum payments.

I'm not convinced all of this worrying is justified. In this story about a recent speech by Comptroller of the Currency John C. Dugan, The OCC's position is:

We recognize that the change in required minimum payments will make it more difficult for some existing credit card borrowers to pay the full amount of the increased minimum payments due. We have encouraged lenders to work with these borrowers to the maximum extent possible to avoid writing down the loan and cutting off the customer’s credit.

The OCC is suggesting that creditors re-age accounts, lower interest rates, restructure or defer payments, or waive fees in order to help consumers negatively impacted by these new minimums.

We'll see if the creditors actually step up and help consumers who have trouble making the new payments. In the meantime, if there was ever a Christmas season where leaving one's credit cards at home was an excellent idea, this is the one. And don't panic about increasing minimums; take it seriously, but remember there are a lot of services designed to help consumers in a tough spot when it comes to credit card payments.