Debt Collectors

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” -Ogden Nash
Some debt collectors will do anything to collect from you including harassing your family, friends, coworkers, etc. But you have rights.

The Consumerist features several useful posts.

Let's begin with a sample letter that one should send immediately after first being contacted by a debt collector: http://consumerist.com/2007/07/sample-letter-for-disputing-a-debt-collection-notice.html

The letter asks for four things:

* (1) the amount of the debt;
* (2) the name of the creditor to whom the debt is owed;
* (3) Provide a verification or copy of any judgment (if applicable);
* (4) Proof that you are licensed to collect debts in (your state)

The letter goes on to mention...

* because I have disputed this debt in writing within 30 days of receipt of your dunning notice, you must obtain verification of the debt or a copy of the judgment against me and mail these items to me at your expense;
* you cannot add interest or fees except those allowed by the original contract or state law.
* you do not have to respond to this dispute but if you do, any attempt to collect this debt without validating it, violates the FDCPA;
...
Should you pursue a judgment without validating this debt, I will inform the judge and request the case be dismissed based on your failure to comply with the FDCPA.

What is debt validation? The collection agency needs to prove that they own the debt. They can claim that the debt was sold to them but you have the right to ask them to prove it. Often the proof is flimsy or wrong. There are many stories now of mortgage factories signing fraudulent papers assigning mortgage debt for illegal foreclosings.  The Consumerist recently featured a story of a of a collection agency forging the signature of a dead woman thousands of times to establish validation of ownership.
http://consumerist.com/2011/01/dead-woman-tried-to-collect-on-thousands-of-debts.html

Another debt right to be aware of is the Statute of Limitations. A company can not appear out of the blue and say you failed to pay a debt from 20 years ago.  Well actually they can (and will) say it, but will very likely lose in court if you challenge them. Each state has its own limit on when debts expire. See http://www.creditinfocenter.com/rebuild/statuteLimitations.shtml for details.

Bottom Line

Search the Internet to know your rights. Read the Fair Debt Collection Practices Act at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf

But if legal language makes your head spin, the FDCPA is explained here,
http://en.wikipedia.org/wiki/Fair_Debt_Collection_Practices_Act
and here
http://www.expertlaw.com/library/consumer/fair_debt_collection.html
and here
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm

Debt

"Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you"-J. Reuben Clark Jr., 1938

If you have credit card debt and are unable to pay the full amount each month, then I highly recommend visiting the web site, The Real Damage

Enter in a amount of money for something you'd like to buy, click the "What's the Damage button?" and see how much you'll actually be spending by the time the debt is paid off. Not so obvious is that you should customize the parameters behind the calculation by clicking on the "Credit Cards" bar to the right. This allows you to enter your actual interest rates, outstanding balance, and amount you pay off each month. There is also an "Additional Payments" bar so you can see how paying a little extra can go a long way to reducing the total cost of debt.

The site does not ask for email or any personal info.

Bottom Line

Never pay just the minimum amount on a credit card bill. This will keep you in debt for years and cost you big time. With the default settings on Real Damage, a $75 purchase cost a total of $168 after all the interest payments.

Ten Worst Money Mistakes Anyone Can Make

"Money get back,
I'm alright Jack keep your hands off my stack."
-lyrics to Money by Pink Floyd

FreeMoneyFinance.com says there is just one rule to managing your money:
Spend less than you earn over a long period of time

While this is great advice, you can still lose your shirt by making one these Ten Worst Money Mistakes.

1. No Emergency Fund
Things happen; the washing machine breaks, car needs repairs, kids need braces, and so on. Borrowing money to pay for life’s emergencies will just put you deeper in debt. Protect yourself by keeping six months of living expenses in a SAFE place. Safe means not in stocks or any investment that can lose value suddenly. CDs are nice but the money is locked up for months or years. I keep six months in a savings account. It earns peanuts but it’s always there if I need it.
Corollary: if you use your emergency fund, pay it back ASAP.

2. No Will
57% of Americans have no will, including 69% of parents with kids under 18. If the parents die the State will decide how the money is allocated.

3. Not Enough Insurance
Insurance is the ultimate emergency fund for really big events like the total loss of your house or car. Consider also an umbrella policy on your house that covers lawsuits and liability like someone slipping on your icy sidewalk. Our umbrella policy paid off when a small leak was found in our underground oil tank.

4. Marrying the Wrong Person
Marry someone who agrees with your money style. A miser and a spendthrift are incompatible and divorce is expensive.

5. Not Saving
Put away at least 10% of each paycheck for future expenses like a new car, college tuition, vacation, etc. Don’t borrow for these big ticket items. The only item that is just TOO big to save for is a new house.

6. Too much house
Speaking of houses, don’t buy more house than you can afford. Don’t count on overtime or a future raise to pay the mortgage. Put as much money down as you can, say 20%, and aim to pay off the loan within ten years. The interest on a 20-30 year loan is a monster. My parents bought a $70,000 home but the total mortgage payments over 20 years would total $240,000.

7. Waiting to Invest
Don’t wait for a “good time” to invest. I’ve had stocks plunge to half their value and thought they would never recover. But they did. The NY Lottery (which I don’t recommend) says you have to Play to Win. Likewise you have to invest to make any gains.

8. Being in Debt
Debt eats your money. The goal is to earn interest and make money, not pour it down a hole to make someone else wealthy.

9. Not maximizing your Career
Your job is where you’ll earn most of your money. Even a small raise in pay will accumulate over the years to a nice amount. Work hard and get paid what you’re worth.

10. Over Spending
This violates the prime directive (spend less than you earn) and is a sure way to go into debt. Everyone says, “I don’t earn enough”, but in reality it’s how you spend, not what you earn that makes a difference. Boxer Mike Tyson earned $300 million in his career, but it wasn’t enough for his lavish lifestyle. He filed for bankruptcy in 2003, owing $27 million.

Bottom Line

Check out the full article at Ten Worst Money Mistakes Anyone Can Make. It contains dozens of useful links for Estate Planning, emergency fund planning, Insurance planning, etc, contained within the story.

Short Selling a House

"Our house is a very, very, very fine house
With two cats in the yard"
- Crosby, Stills, Nash & Young

A family I know fell behind in their mortgage payments and wanted to work with the bank to catch up but the bank refused to cooperate. After a year with no settlement, the bank has agreed to "short sell" the house and our friend will move elsewhere. What does "short selling" mean?

A short sale is a sale of real estate in which the sale price falls short of the balance owed on the property's loan. ... Both parties consent to the short sale, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan. - Wikipedia

In a short sale the house is sold at or near market prices in a depressed market (much higher than a foreclosure sale but less than the purchase price). The seller saves their credit rating but may still have to make good on the entire loan (ouch!)

The buyer of a short sale may get a great price but the money saved might not be worth the extra hassle and additional months to closing. Read "What It's Like To Buy A Short Sale House" from Consumerist.com. The story ends happily but oh, the stress and follow-ups and loops to jump through along the way. And there was always the chance that the house would be auctioned off before the short sale was closed (and even afterwards).

Bottom Line

Read the comments on the Consumerist Short Sale story for more examples of short sales gone bad (or very slowwwwly). As one buyer put it, "I certainly would not recommend the short sale process to anybody, ever."

A lesson from Greece

"Beware of Greeks bearing Gifts" - regarding the Trojan Horse from the Iliad

The nation of Greece is teetering on bankruptcy and Europe is wondering what to do. Bail them out or cut the strings that bind so Greece does not pull down the entire European Union.

Three articles today caught my eye:

Super-wealthy investors move billions out of Greece

One way to "balance" the budget is to raise taxes, and in particular to tax the wealthy. The rich are no fools and are pulling their money out of the country while they can.

Greece ‘Dress Rehearsal’ for U.S., Deutsche Bank Says

What is happening in Greece is similar to California and soon perhaps the US itself.

Maybe Greece Should Go Bankrupt

I like this article. Capitalism is based upon survival of the fittest. When there is no penalty for failure there is no incentive for progress and efficiency. Everyone gets fat and lazy.

"Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely. In a four-year period between 2005 and 2009, Greek politicians expanded the burden of government spending from an already excessive level of 43.8 percent of GDP to an even more excessive level of 51.3 percent of GDP. Subsidies are rampant, the public sector is bloated, civil service pay is way too high, and entitlements are wildly unsustainable. A fiscal crisis – with no escape options – is probably the only hope of reversing these disastrous policies. So why, then, would it make sense for Germany and other nations to provide an escape option?"

"Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers. Greece is in trouble because the the people riding in society’s wagon assumed that there would always be enough chumps to pull the wagon. In reality, Greece is turning into a real-world version of Atlas Shrugged. Government has become such a burden that the job creators and wealth generators have given up and/or moved their money out of the country. Should taxpayers in other nations reward the greed and narcissism of Greece’s interest groups by being forced to pull the wagon instead?"

Bottom Line

Maybe Greece Should Go Bankrupt provides an apt conclusion:

I have sometimes warned audiences of what will happen when a majority of voters in a country or a state become dependent on government. In such an environment, it obviously becomes much more difficult to put together an electoral coalition that will lead to fiscal changes that shrink the burden of government and curtail the predatory state. This is what has happened to Greece, and what is soon going to happen in other European nations (and, barring reform, what will eventually happen in the United States).

FDIC

"Bank failures are caused by depositors who don't deposit enough money to cover losses due to mismanagement"- VP Dan Quayle

How secure is your bank? So far in 2009 the FDIC has rescued 188 failed banks such as Bank of Honolulu, First Bank of Idaho, and California National Bank. If your bank fails, what happens to you?

If your bank is NOT insured by the Federal Deposit Insurance Corporation (FDIC) then you are out of luck. You will most likely lose all money and get nothing.

What is the FDIC?

TheSimpleDollar.com has the answer. The FDIC is an organization run by the government of the United States to sell insurance policies to banks. Most banks in the US buy the insurance and pay a fee to the FDIC for coverage. FDIC insurance covers checking accounts, savings accounts, certificates of deposit, most money market accounts, and cashier’s checks. It does not cover stocks, bonds, mutual funds, US treasuries, or safe deposit box contents.

Under current law FDIC insures investors up to $250,000 per depositor per account type. I always thought the limit was per bank but a report by the Congressional Budge Office (CBO) says that separate coverage applies to an individual account, a joint account and an IRA account at the same bank.

What Happens When an FDIC Insured Bank Fails?

The FDIC takes over that bank and all of the accounts held there. Under the “purchase and assumption” method, the FDIC sells the failed bank to another bank who takes over the accounts and some (or all) of the loans. This is often done over a weekend. You'll wake up Monday morning and discover your money is with a new bank. This happened when Wachovia failed and was taken over by Wells Fargo.

When there is no buyer, the FDIC liquidates everything in the bank and then issues payouts for depositors up to the $250,000 limit. The process is straightforward, usually involving minimal hassle from the customer, and frequently paid within a week.

Bottom Line

Before 2008 the FDIC limit was $100,000 per depositor. Congress raised this to $250,000 as a temporary measure during the banking and Wall Street crisis. It will return to $100,000 on Jan. 1, 2014 unless Congress extends the law.

When the FDIC was created in response to the Great Depression, The Banking Act of 1933 set the recovery cap at $2500 (about $40K today if adjusted for inflation). The limit was quickly rasied to $5000 in 1934 (=$80K today) and to $10,000 in 1950 (=$85K today). In 1966 the FDIC limit became $15,000 (=$95K today), and rose again three years later to $20,000 (=$112K today). It became $40,000 in 1974 (=$166K today) and $100,000 in 1980 (=$250K today).

I find it interesting that each time the limit is adjusted "for inflation" the amount of coverage (in today's dollars) keeps going up. From $40K equivalent in 1933 to $250K today. If you think about, who is the government protecting here - the average citizen or wealthy backers? How many Americans have more than $40K saved in a bank? According to a study by the Congression Budget Office (CBO), only 1 percent of all accounts exceed $100K. Even families at the highest income level in 1998 had an average checking account balance of only $19,000. I love this quote from the CBO report, "The one certain result of raising deposit insurance coverage is increasing the costs of insurance [for banks and the government]."

References

The CBO study on FDIC limit and inflation, http://www.cbo.gov/doc.cfm?index=3474&type=0
More facts on the FDIC at http://www.enotes.com/everyday-law-encyclopedia/fdic
Inflation Calculator http://www.westegg.com/inflation/infl.cgi

Bankruptcy

“The worst bankruptcy in the world is the person who has lost his enthusiasm”- H. W. Arnold

I recommend the Consumerist article, Bankruptcy Is A Last Resort.

Bankruptcy is not a get out of jail free card for your debts, it's a nuclear weapon. If you use it, expect to be considered credit unworthy for a decade [because] bankruptcy is recorded on your credit report for ten years. …

There are two types of personal bankruptcy - Chapter 7 and Chapter 13. Chapter 7 is total liquidation where all of your possessions are sold to help pay off the debt. Chapter 13 is known as the "wage earner's plan" and is used to help restructure the debts so that the debtor can work towards paying them off over the course of several years.

Bottom Line

For the ten years after bankruptcy it won’t be impossible to get a loan but it will be difficult. Rates will be higher on home and car loans because you are a “risk”.
And though it is illegal, you may find landlords rejecting your apartment application and companies that are reluctant to hire you.