Bankruptcy on the Rise

The Great Recession’s Impact on Bankruptcy Filings was originally written by Marilyn Bischoff and published in Idaho's Two Cents Newsletter.

The National Bureau of Economic Research reports that the US officially entered into the recession in December 2007, with the recession ending in June 2009. However, those in the insolvency professions would argue that we are still in a recession. How has the recession affected bankruptcy filings for various demographic groups?

Bankruptcy petitioners are not required to disclose age, ethnicity, educational attainment, marital status, or current employment status. The Institute for Financial literacy, which provides bankruptcy prefiling counseling and post-filing debtor education, does collect demographic information from individuals participating in their program. The Institute provides services in-person, by telephone, and online. At the beginning of either service, participants are asked to voluntarily complete a demographic survey. In 2009 more than 52,000 clients volunteered to answer survey questions. The findings challenge some common assumptions about bankruptcy filers. 

Age
Almost 56 percent of bankruptcy debtors are between he ages of 35-54. An emerging tend is that the 55-64 and 65+ age cohorts appear to be experiencing an increased deterioration in the financial conditions and are filing bankruptcy at greater rates than in 2008. Ages 18-24, 2% filing bankruptcy; 25-34, 17%; 35-44, 29%; 45-54, 27%; 55-64, 17%; 65+ 8%.

Educational Background
Bankruptcy rates of individuals with higher education continue to experience lower levels of bankruptcy, but during this recession their rates have increased. This change may suggest that this is a “white collar” recession, perhaps reflecting our economy changing from a manufacturing to a service/ technology base. Educational level: High school/GED degree or less, 42%; Some college or Associate degree, 38%; Bachelor’s degree, 14%; Graduate degree, 6%.

Personal Income

As expected, lower income household are more likely to file for bankruptcy. Those earnings $30,000 or less made up 59% of filers; $30,000- 40,000, 15%; $40,000-$50,000, 10%; $50,000-$60,000, 7%; $60,000+, 9%.

Causes of Financial Distress
The Institute asked clients to pick from a list of common causes of financial distress to self-describe reasons for their current situation. Clients were encouraged to choose more than one cause; therefore, the percentages equal more than 100%. Reduction of income was cited by almost 2/3 of respondents (65%). That, combined with overextended credit (74%), and unexpected expenses (55%), drove most filers over the bankruptcy precipice. Other responses reflect causes commonly cited in other studies: job loss (42%); illness/injury (31%); and changes in household composition: divorce (15%), birth/adoption (10%), death of family member (8%). Interestingly, retirement was cited by 8% of responders.

Source: Linfield, L., December/January 2011. Class of 2009: The Great Recession’s Impact on the American Debtor. American Bankruptcy Institute Journal. Retrieved 12/14/10 http://www.abiworld.org/AM/ Template.cfm?Section=Home&CONTENTID= 62554&TEMPLATE=/CM/ContentDisplay.cfm.

Patrick's note: I think the biggest thing to learn from this article is not who is going bankrupt, but possibly a key to preventing yourself from going bankrupt. Identify the most danger prone areas and then work to keep yourself out of those areas. Higher education and its corollary, personal income, is a major factor in preventing bankruptcy. However, the causes of bankruptcy demonstrate the wisdom in having a fully funded emergency fund to tide things over when life happens.

Free Credit Score - How to Get One

How to Check your Credit Score, a guest post by Luke Erickson editor of Idaho's Two Cent Tips.

Like a mighty king,this three digit number can seemingly grant our ultimate desires or dash them to tiny bits on little more than a whim or a missed payment. This number determines whether or not you can get a loan, including a credit card, a car loan, or a mortgage, and will also determine the rates that you will pay on these loans. Itis also reclusive and mysterious, rarely being seen by the common consumer. Instead it prefers to meet privately with lenders in back offices where your fate is unemotionally determined. Some zealous subjects have been known to pay tribute, by borrowing unnecessarily with the sole purpose of pleasing this number. In fact, this notorious number is not content to simply rule over its own kingdom, but also tries to extend its influence into other areas, such as insurance, rent, and even employment.

Before I attempt to demystify this number, let’s make sure we’re all on the same page. A credit score and a credit report are entirely different creatures. A credit report lists a detailed  financial history of every single credit account that you’ve established or messed up in the last 10 years or so. Most people have 3 similar but different reports, all of which can be viewed FOR FREE by visiting annualcreditreport. com. A credit score, on the other hand, is a proprietary number that can usually only be accessed by paying a fee. 

Now here is where it gets confusing. You actually have more than one credit score. The main score that lenders, insurers and employers will consider is the Fair Isaac Corporation (FICO) score. But there are some alternatives to FICO scores, including Vantage scores which are done by each of the three major credit bureaus, and some financial institutions may even give you a credit score along with your monthly bank statements. Keep in mind that all of these scores are calculated differently, often times on different scales, and may or may not be an indicator of what a potential lender might see. I have seen cases where a credit score can vary by over 100 points for the same person.

Where can I get my score? 
As described previously, you can get your credit score from about a billion different websites, most offering it for free if you but merely sign up for a free trial of some unnecessary monthly service. As you can imagine it is all but impossible to break free from such an agreement. If you want just any old score, with any old agreement, then any old website will do. But if you want your FICO score, without strings attached, there is only one place I would recommend:

MyFICO.com, but, surprise (to be read with sarcasm) it’s not quite that simple! Do not click the massive red button that says FREE FICO SCORE. As I will describe below, it’s not really free, again another solicitation for some unnecessary service. Find and select the “FICO Standard,” button for a one-time credit check for $19.95. Not cheap, but completely accurate. In addition to your score, FICO standard will give you a FICO score simulation tool which can tell you how your personal score might change given future changes to your accounts. At http://www.myfico.com/ FICOCreditScoreEstimator/ there is also a free FICO score estimation tool which gives you an estimated score that I found it to be fairly accurate.

Aside from your FICO score, I would also recommend the “get credit score” button at the top right of your free credit report from annualcreditreport.com. This gives you a Vantage score for $7.95, which is becoming more accepted by lenders, and can be an indication of your true FICO score. 

Will checking my score affect my credit? 
According to the folks at MyFICO.com, “Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.” Therefore, the answer is yes, checking your score will reduce your score by about 5 points, each time. Not a big deal if checking only once or twice a year. Also, don’t forget that many lenders will actually show you your score when applying for a loan.

The Mission for NASA

"The aeronautical and space activities of the United States shall be conducted so as to contribute . . .to the expansion of human Knowledge of phenomena in the atmosphere and space. The Administration shall provide for the widest practicable and appropriate dissemination of information concerning its activities and the results thereof."
-NATIONAL AERONAUTICS AND SPACE ACT OF 1958

Underwater Mortgages

This is a guest post by Luke Erickson the editor from Idaho's Two Cent Tips.

Recent estimates indicate that about one in every four Idaho homes is currently underwater. Well, it has been snowing a lot lately . . . You don’t have to boo me for that one, I’ll do it myself. The term underwater really  refers to the instance when the amount you still owe on your mortgage is more than the current market value of your home. How can I joke about this topic—especially with such a lame joke? Well the lame part just comes naturally, but I can joke a little about this very serious topic, because for most people with underwater
homes, there is still hope.
Following is an article that illustrates the possible options you might choose from if you find your house underwater.
Stay put
Don’t panic if you hear that you’re “underwater.” All that means is that you would lose money if you sold RIGHT NOW. But unless you absolutely must move right now, you may be able to recoup some or all of that lost equity. Additionally, consider renting your place out. Even if you have to rent your house out at a small loss each month, you may still be better off than any other alternative. Some lenders will work with you to renegotiate the rates and terms of your mortgage, whether you’re in a financial pinch or not. This sort of informal “in-house refinancing,” is fairly new, but some lenders (the smart ones, in my opinion) are working with their borrowers to avoid foreclosure and loss of current customers. 
Negotiate an exit plan
But, if you simply can’t stay put -- Your family no longer fits within the confines of your once spacious two bedroom house, you land a much better job in another part of the country, or your adjustable rate has become unaffordable, the next option is to attempt to negotiate an exit plan.
A short sale is an agreement between you and the bank that you will make every effort to sell your house for as high a price as possible – no big deal, this is something you would do anyway – and in return the lender will accept the sale price as partial payment of your debt and forgive any debt for which you fall short. Hence the term, “short-sale.”
A deed-in lieu is also an agreement with your lender, in which you simply hand them a deed to your residence
with the understanding that you owe them nothing, or at least a reduced amount on the remaining balance, once the lender sells that house. These are forms of proactive foreclosures, if you will. Remember, any such agreement must be in writing to be valid.
As far as your credit is concerned, a short sale, deed-inlieu, or foreclosure will all have similar effects on your
credit score, reducing it by as much as 300 points, de-pending on how your lender reports it to the credit bureaus.
Lender won’t negotiate?
If your lender won’t negotiate, and you must leave your house, there are basically two options. Bankruptcy is a step to either liquidate your assets in return for forgiveness on your loans, as in a chapter 7, or is a legal
restructuring of your debts so that you can afford the payments, as in a chapter 13. Neither option is pretty, and will destroy your credit for up to 10 years.
Bankruptcy makes the most sense when you have additional unaffordable debt besides the mortgage. Or, just walk away - though this option has received lots of media coverage, and sounds pretty simple, it can be  anything but. Walking away essentially means mailing the mortgage company your keys, and leaving your  residence never to return. You may never hear from your lender again. But, on the other hand, in some states,  your lender can still legally come after you for the difference you still may owe after they sell the house. This option will have the same effect on your credit score as a foreclosure.
Which of all these options is the right one? That’s sort of like asking whether it’s best to be punched in the gut or the face. Either way it’s going to hurt. But, I’ve always believed that those who try to do the right thing, whatever that may mean in this situations, will eventually be rewarded for it.

You Cannot Multiply Wealth by Dividing it.

“You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else.  When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation. You cannot multiply wealth by dividing it."*

*  Adrian Rogers, 1931*

Guilt Free Vacations

Are you feeling bogged down with debt? Don't worry, you are not alone. However, you CAN rise up and take that dream vacation. It's not just a fairy tale. Lots of people are finding out how and sharing their stories with us.

I read an article today over at Yahoo Finance: "Staying out of debt leads to first affordable vacation in years."
The article explained how an average couple found themselves, "in a continuous cycle of borrowing from this week's paycheck to pay last week's bills and desperately wanting to catch up and get out of debt."
However, they "finally had to sit down and ask, "Where's all our money going?""
Once they did that, they were able to prioritize their spending. Rather than just throw money away on things that didn't have value to them, they consciously spent or saved their money for things that did. The end result?

After climbing out of debt this year, my fiance and I were able to take our dream vacation to New Orleans. Everything was paid for outright, without any interest charges. We were able to enjoy the trip to its fullest, without wondering how it would be paid for.

This is my idea of a dream vacation! Paris, France.

Photo Courtesy of Flickr, Brooklyn Musuem

It seems that a common thread lately from personal finance bloggers is chronicling the personal success stories. JD at GetRichSlowly.com features a weekly Reader Stories, Trent Hamm at TheSimpleDollar features numerous Mailbags where he answers individual readers questions with his own opinion, Ramit at IWillTeachYouToBeRich also has featured success stories entitled Master's of Earning More.

It makes sense - that is how their own blogs were started. They were reporting on their own personal finance journey. Once they achieved their own success and continued to prosper with their new foundation in personal finance, they have all started showcasing the personal stories of other fellow readers.

This isn't a new tactic. Personal finance books have always included snippets of success stories from people that have been helped by following the proposed program or principles. In some ways, reader stories serve as a further testimonial that what the author is spouting out really does work and more importantly, that it works for more than one type of person.

Take heart in the success stories and realize that you CAN achieve your dreams, too. Others have done it. Look at their stories and try to identify what was their turning point. Identify what things worked for them and try to apply some of the principles and ideas into your own life. Not everything will work all the time, but there is a lot to learn from the experiences of others.

Stop dreaming and start sailing!

I Will Teach You To Be Rich Book Review

I recently picked up I Will Teach You To Be Rich by Ramit Sethi. Ramit has a great website and his book on personal finance is one of the funner ones to read. This is the book to read if personal finance is still a new word for you - then this is the book for you. Ramit has a targeted audience of younger twenty somethings.  As with all knowledge - if you aren't too put off by simple examples that don't exactly mimic your situation and instead apply the principle being taught - you will definitely learn something and most likely benefit, too. 

Ramit has boasted that his $10 book has helped people save thousands, maybe even tens of thousands of dollars. Boast might not be the right word, because some people have reported these savings on one of his videocasts. In fact, armed with the scripts in the book and a bit of extra confidence, I tackled the seemingly impossible task of negotiating the removal of some rather nefarious fees from one of my credit cards.

The real beauty of reading I Will Teach You To Be Rich is that Ramit remembers that there is a large psychological piece of the money puzzle that other personal finance authors and mathematics simply ignore. Ramit realizes that people are  lazy and want the easy way out. This is not to say that Ramit has uncovered the magic silver bullet. Quite the contrary, he is not fearful in telling people that they need to buck up and do the hard thing to get their finances initially under control. Yes, that might mean some work, but then he introduces what he terms your "Conscious Spending Plan". Ramit finds it ludicrous to cut out your daily latte - IF, that latte brings you significant happiness and pleasure to your day. Instead, cut mercilessly in areas that you do not care about so that you can splurge on the things that matter most to you. There is a HUGE difference between being cheap and being frugal.

Ramit dutifully covers the basics of checking accounts and savings accounts and preparing to invest for your future. One of the key messages of the book is the 85 percent solution. Don't worry about getting it 100 percent done, or even perfect. If you only get an 85 percent solution, that is still leaps and bounds ahead of doing nothing like the rest of the population. At least you'll have something to show for it.

Sprinkled throughout the book you will also find a short piece written by some of the most admired personal finance bloggers. Entries from Get Rich Slowly and The Five Cent Nickel and The Simple Dollar among others all contributed. I appreciated the additions from these bloggers because I was familiar with them and I thought it was a rather unique way to collaborate with them in this manner.

In summary, if I was just starting out with personal finance and didn't want to fall asleep reading about asset allocation in my 401(k) or get lectured about cutting up my credit card - I'd think this was the best book out there. Understanding my current situation, having applied most of the principles, it was a good reminder of why I was doing things and in some instances, a call to further simplify them.  If you are at this stage of your own personal finance, then I'd suggest you visit Ramit's website I Will Teach You To Be Rich to learn how to advance you to the next stage of personal finance: Earning More Money. There is a definite focus on his blog and his products to help you earn more money. Inspiring as that all may be - it means nothing if you never take action. Decide today to take action!