When we think of Middle Class America we think of stability, nice jobs, good neighbors and stellar careers; but middle class America is in crisis.  Many are facing foreclosure and are filing bankruptcy despite their degrees, high salaries and symbols of stability. In this three part series we will explore how and why middle class Americans are getting hit worse by the recession than any other demographic in this country.

Part I – Swelling The Ranks Of Bankruptcy

Nearly 1.1 million Americans have filed bankruptcy in 2009. At least 58 percent of bankruptcy filers have some college education and many of those filers are homeowners facing foreclosure.  What was once two markers of stability in America, have now become indicators of future bankruptcy in many cases.

Case Study:

Staci Schubert’s career has taken her from New York to California, from graphic designer to website designer to sales executive. Most recently, she launched a business as a designer of handbags and accessories…After earning $275,000 annually, Schubert used most of her savings to start her business in 2003. The earliest days of the recession in 2007 slowed sales, and she fell behind on business and personal bills. Credit card debt reached $65,000. She tried to find a full-time job without much luck, because the job market was saturated. Temporary freelance design work couldn’t cover her bills. So in January 2008, she filed for Chapter 7 bankruptcy, becoming one of nearly 1.1 million consumer filers that year.

Schubert’s temporary jobs were most likely not enough to cover her bills because of her high debt load. Luckily Schubert does not owe student loans; but she does have a high cost (like most Americans) associated with maintaining her middle-class lifestyle.  Rising housing costs, mounting debt and reliance on automobiles for transportation has all conspired to make it more costly and hence more risky to exist as a middle-class American.  If this debtor needed bankruptcy relief how many other debtors, who have student loans and much lower salaries need to seek bankruptcy relief? Probably a lot more.

A study conducted by two professors from Harvard Law School and Ohio University, found that personal bankruptcy has now become a largely middle-class phenomenon. Most of those bankruptcy filers have a college education and own a home.  The study says that college education and home-ownership can no longer be depended on to protect Americans from financially hard times as was the case in years past.

The shopping season is approaching and many consumers are choosing to use their debit cards instead of a credit card this Christmas season. But despite their apparent safety, there are a few precautions you need to take to make sure that you don’t end up in debt despite avoiding credit cards this Christmas.

Keep close track of your spending. While debit cards are a lot better than credit cards in terms of avoiding interest, fees and debt that you need to repay, debit cards have their own set of pitfalls, including pain-free spending.  If you carry cash it can be quite painful to part with it when it comes time to pay for a purchase. As with credit cards and debit cards, just swiping a card makes spending money less painful causing you to spend more. To avoid spending too much on you debit card, keep a running tally of what you are spending as you go from store to store.

Opt-out of overdraft “protection” programs offered by your bank.  As we have mentioned before overdrafts can end up costing consumers more than what the price of the original purchase. The average overdraft price tag was $34 in 2008. To avoid spending as much as twice what you paid for an item, don’t allow you bank to “protect” you with their overdraft program, just simply opt-out. Note: The Federal Reserve has created new rules, effective July 1, 2010, which will prohibit banks from charging overdraft fees on automated teller machine and one-time debit card transactions unless the consumer opts in to the overdraft service for those types of transactions.

Despite claims that the recession has ended, foreclosures in the Dallas-Fort Worth area continue to rise. Rising job losses and prolonged unemployment are major factors contributing to the foreclosure crisis. More than 61,000 homeowners are facing foreclosure, an increase of 23 percent since 2009.  And despite efforts to slow the wave of foreclosures, most experts fear that the problem is worsening. The foreclosure prevention programs have proven ineffective as mortgage lenders struggle with a backlog of distressed homeowners, many of whom succumb to foreclosure while they are waiting for an answer on their loan modification application.   Many mortgage lenders have little incentive to help distressed homeowners avoid foreclosure and we, the taxpayers, have little power to force their hand.

It’s unfortunate that our legislators have chosen to allow this foreclosure crisis to worsen while the banking industry receives billions in bailout money.  If our legislator s had moved quickly to give bankruptcy courts the power to modify toxic mortgages it may have radically altered the foreclosure situation.  The bankruptcy courts, if given the power, could have assessed the needs of the mortgage lenders and borrowers in a fair and unbiased way, relieving the stress that is now squeezing our economy.

What Legislators Can Do Now

It is not too late for legislators to get aggressive about forcing mortgage lenders to act proactively in preventing foreclosures.  Legislation should be proposed and passed that will allow the government to fine lenders who fail to do their part in preventing foreclosure. Also, legislation should be passed that will give the bankruptcy courts the power to modify toxic mortgage when necessary during a Chapter 7 or Chapter 13 bankruptcy.

If you’re applying for a job in finance, accounting or a position that requires the handling of cash, expensive merchandise or a security clearance, you may be subjected to a credit check. If you’re behind on your bills, have delinquencies, defaults, judgments or liens, there a few things you should know.

While a company is restricted from not hiring you simply because you filed bankruptcy, they may be allowed to deny you employment if you have bad credit.  However, if they were challenged in a court, they would need to prove that your poor credit demonstrated that you would not be able to properly perform you duties.

Before you begin your job search, order all three of your credit reports. Remember, you are entitled to one free credit report a year.  Once you receive your credit report, review it closely. If the credit report reveals blemishes such as delinquencies and defaults, you need to develop an explanation for potential employers. Even if you have an old bankruptcy, it may be wise to be prepared to explain why you filed for bankruptcy and/or why you have blemishes on your credit such as late payments.  Keep your explanation simple and clear.  Example: “I filed bankruptcy because of my divorce” or “I lost my home to foreclosure because an illness to forced me to quit work.”

If an employer informs you that they are not hiring you simply because you filed bankruptcy, file a complaint with the EEOC and call the US Federal Trade Commission’s Consumer Response Center at 1-877-382-4357. You can also contact your local consumer protection agency or your state attorney general.

Let’s clear the air about something, bankruptcy IS NOT a “gut wrenching” experience that destroys your life and leaves you awake at night. I’ve heard this ridiculous notion bandied about by the very people who have benefited from bankruptcy in their life.  They file bankruptcy, reap the benefits, then turn around and tell others not to file bankruptcy because it will destroy THEIR life.  When you ask them how bankruptcy destroyed their life, they’re mute—you can hear crickets.  Let’s get to the bottom of the truth:

Misconception #1 – Bankruptcy will destroy your job (current and/or future).

I can barely contain my laughter. While some employers do a credit check and ask you if you have ever filed bankruptcy, they cannot legally deny you a job because you filed for bankruptcy.  Not only that, sometimes the business that you’re applying with or working with has also filed bankruptcy in the past. Most people understand that bankruptcy may be necessary to recover from a crisis or financial setback. There is little to no stigma attached to filing bankruptcy. Also, it is illegal to fire an employee because he/she filed bankruptcy.

Misconception #2 – If you file bankruptcy your wife/husband/partner/best friend will turn their backs on you and head for the hills.

Most of the time marriages are in jeopardy because of money issues BEFORE bankruptcy. Creditors harassing and threatening the members of a household can be disruptive. But once you file bankruptcy, creditors can no longer contact you or pursue you for payment.  The automatic stay used in bankruptcy stops creditors in their tracks, giving you a break from their calls and letters.  This act alone can usually help alleviate debt-related stress in a marriage.

Misconception #3 – Filing bankruptcy will rob you of your peace of mind.

It is not bankruptcy that robs you of peace of mind; it is the constant harassment of creditors seeking payment that can keep you awake at night.  Wage garnishments, lawsuits and collection agents all rob debtors of peace of mind. Bankruptcy can restore your peace of mind and help you get back on track with a fresh start financially.

Has it been 3 weeks, 6 months or a year since you first applied for mortgage modification so that you could avoid foreclosure?  Has your mortgage servicer lost important documents?  Have they left you on hold for 30 minutes—an hour or “accidentally” dropped the line?  What about the quality of information you receive about avoiding foreclosure?  Is it correct? Timely?  If not, it could be because the person you’re dealing with on the other end doesn’t have any experience working in the mortgage industry.  A Star-Telegram article pointed out that many of the workers recently employed by the mortgage industry have absolutely no experience in the banking industry and definitely no experience helping homeowners avoid foreclosure.

Many new hires have no previous mortgage industry experience. Edwards, for example, worked in a Westin hotel before starting at Bank of America last year.

They want to save money! These banks have taken over $700 billion from the American taxpayer and now they want to save a few pennies hiring individuals who have no previous experience working in the mortgage or banking industry.  How effective will these newcomers be in helping homeowners avoid foreclosure? If we look at how many homeowners have avoided foreclosure via the mortgage modification programs available we can safely conclude that – they are not very effective.

As of last month, about 20 percent of eligible borrowers, or more than 650,000 people, had signed up. But most signed up only on a preliminary basis for trials lasting up to five months.

I would be curious to know how many of those homeowners facing foreclosure, who were deemed ineligible, were deemed so by accident/error on the part of an inexperienced worker.  This is not to knock those workers who simply want to earn a living, but homeowners facing foreclosure have a lot at stake and deserve to be serviced by workers who can help make them eligible and/or tell them what they can do to become eligible for mortgage modification programs that will help them avoid foreclosure.

I don’t want to sound the alarm too soon; but the road to municipal bankruptcy usually begins with small things, like the city’s recreational facilities facing budget shortfalls and closure.  Unfortunately, Fort Worth, like many other municipalities around the country has suffered tax revenue declines caused by the battered economy and now they may need to close the city’s swimming pools–indefinitely.

Most of the city’s swimming pools will be closed next summer, and the Parks Department doesn’t have the money to build new ones, not even with revenue from natural gas drilling, officials said Tuesday. The pools were at the center of budget discussions this summer. Besides closing pools, the City Council voted to eliminate dozens of positions in the budget year that began in October to make up for a big drop in tax revenue.

While the city has dreams of a building modern pools with slides, water rides and “splash pads,” the reality is that when a city begins shutting down its public recreational facilities that can often be a sign that they are at least facing the road to bankruptcy, if they are not already on it.  When the crisis first began to gather steam, we talked about how the foreclosure crisis would hit municipalities hard.  With a decrease in tax revenues (banks don’t pay property taxes on foreclosed properties) many cities would need to cut back on services, some of the critical.  Already, the nation is witnessing a surge in municipal bankruptcy and many cities who have not filed bankruptcy yet are warning that if the economy does not improve they may be forced to file bankruptcy.  Could Fort Worth be next on the bankruptcy list?  While closing a swimming pool is not life threatening, it can be threatening to the quality of life enjoyed by residents. If the city does not find a way to shore up its coffers we could be facing more cutbacks (libraries, police, fire safety etc.) and eventually the threat of bankruptcy.

A Texas judge ruled that State Farm Insurance must repay $310 million in premiums and back interest to Texas customers for overcharging them on homeowner policies. The ruling will affect State Farm Lloyds residential policies between September 2003 and July 2008.

The refund is far less than the $1 billion that consumer advocates wanted, prompting one, Texas Watch, to say Insurance Commissioner Mike Geeslin “is guilty of aiding and abetting the state’s largest insurance company in its grand larceny of hundreds of millions of dollars from Texas homeowners.”

If you were cheated by State Farm Insurance you may receive a refund in the form of a credit upon renewal if you are an existing policyholder. The credits will be applied over a period of no more than 12 months. If you are a former or non-renewing policyholder you will receive a check for the amount owed. If you are a current or former policyholder entitled to a refund and you are currently in a Chapter 13 bankruptcy, speak with your bankruptcy attorney to determine if any of that money must be delivered to the bankruptcy trustee. If you are currently in Chapter 7 bankruptcy (not yet discharged or dismissed) inform your bankruptcy attorney of the refund. It is not clear at this time how much money each policyholder will receive. That final dollar amount will be determined by the policy’s length and the amount of premiums paid. State Farm Insurance has expressed its disappointment in the ruling; but has not yet determined if it will appeal the decision. If the company does not appeal the decision it will have 60 days to begin disbursing refunds.

Via: Star-Telegram

Unemployed homeowners facing foreclosure have been left out in the cold with the government’s foreclosure prevention program.  Since unemployment insurance benefits don’t provide enough income to cover most mortgage payments and many unemployed homeowners don’t qualify for mortgage modifications, many find themselves facing imminent foreclosure with absolutely no or very little negotiating leverage with mortgage servicers. Rep. Barney Frank hopes to change those dynamics by promoting a plan that would use some of the interest the government collects from the financial industry bailout to grant unemployed homeowners facing foreclosure low-interest loans to help them keep their home.

How The Program Would Work

The government would use some of the interest they collect from payments on the $700 billion Wall Street bailout to give unemployed homeowners low-interest loans for a period of 12 to 24 months. [Read the rest of this entry...]

Businesses not subject to means test

After announcing an influx of loans and financial support from various sources, including a $1 billion loan from Carl Icahn, CIT Group has officially filed for bankruptcy protection.  They are seeking protection under Chapter 11 bankruptcy which is designed for reorganization, not complete discharge of all debts.  In order to avoid bankruptcy, CIT Group has attempted to improve its financial situation by offering a debt-exchange proposal to bondholders.  That proposal was rejected by bondholders who instead wanted to proceed with a pre-packaged bankruptcy plan to reduce CIT’s debt by $10 billion.  Because they are filing for Chapter 11 protection, CIT Group will also be allowed to continue its operations of providing loans to small to medium size businesses.

The decision and the ability of CIT Group to file raises concerns for many, especially stock holders.  The U.S. Government, a stockholder through bailout programs, stands to loose approximately $2.3 billion in the bankruptcy plan. [Read the rest of this entry...]

You should avoid making pre-filing bankruptcy mistakes such as using home equity loans or retirement accounts to pay off debts.

Here are some common pre-filing mistakes that folks considering bankruptcy sometimes make:

1.  Refusing to consider bankruptcy until it’s too late. This is a pretty easy one to figure out, but it’s also a surprisingly common mistake made.  Too many people convince themselves that they’re not really in financial trouble, or at least not in as much trouble as they actually are.  It’s far easier to get things under control if you seriously consider bankruptcy as soon as you realize that your finances have become too much for you to handle.

2.  Using a home equity loan to “pay off” debt. This just isn’t a very good option for most people.  First, you’re basically borrowing secured debt to pay off unsecured debt–not a good idea.  You’re also putting yourself in danger of losing your home if you can’t continue making payments on the home equity loan.  Then you’d be in even bigger financial grief than you already are!

3.  Using a retirement account to pay off debt. Using a 401(k), IRA, or other qualified tax deferred retirement account to “get out of debt” just isn’t the wisest thing to do.  First of all, it puts your future financial security in jeopardy–which can really hurt you in the long wrong.  Consider the fact that, while you may have no problem getting a new or second job right now, later on when you’re retirement age it may not be quite as easy as it is now.  While age discrimination is illegal, do you really want to take that risk?  Also keep in mind that by cashing out a retirement account now, you will be taxed on that income which could take a bigger chunk out of your funds than you’re prepared for right now.

4.  Failing to list all your creditors. All I can say on this one is–don’t do it!  You must disclose all of your creditors on your bankruptcy filing.  If you don’t do so, any debt you leave off (especially intentionally) will likely not be discharged along with the debt you did disclose.  Additionally, you could risk having your bankruptcy case dismissed by the judge if it’s determined that you knowingly left any creditors off your petition.

5.  Not hiring an attorney to represent you. While law doesn’t require you to do so, it’s definitely a good idea for most.  Hiring an attorney with experience practicing bankruptcy law will give you a knowledgeable advocate on your side that will make sure you take all proper steps during the bankruptcy process.  It can definitely take a lot of headache out of what can be a trying situation.

Despite bankruptcy’s bad rap in our culture, its benefits make it the best choice for many people needing a fresh financial start.

Bankruptcy often gets a bad rap in our culture, but the truth of the matter is that, for many people, it is the absolutely best option to escape the stress of insurmountable debt and to gain a fresh financial start.  Here is a list of some potential benefits to filing for bankruptcy protection:

1.         Puts an end to harassing phone calls and letters from debt collectors during the bankruptcy process and, for those debts that are discharged, for good!  Creditors and debt collectors must stop contacting you for the duration of your bankruptcy case.

2.         Stops repossession of your property and may force creditors to return property that was already repossessed.

3.         Halts wage garnishment during the bankruptcy process.

4.         Puts an end to the foreclosure process and gives you a well-needed breathing space to catch up on payments.  Just knowing that you won’t immediately lose your home can benefit you in so many ways.

5.         Provides you the chance to dispute any claims from creditors that you believe or false or inflated in an effort to gain more from you than what they are owed.

6.         Possibly the most important benefit of all is the fact bankruptcy allows for the discharge, or forgiveness, of most, if not all, of your debts.  Once you receive a bankruptcy discharge, you are no longer legall obligated to pay off those forgiven debts.

If you are seriously considering filing for bankruptcy protection, you will most likely wish to consult with a reputable and experienced bankruptcy attorney who can help guide you through the often confusing and complicated process.  Having an attorney on your side can provide you with the peace of mind that comes from knowing that you have all your bankruptcy bases covered so you won’t unexpectedly be called “out” from missing a step.