Monday, June 20, 2016

Creditcards.com: 9 debt myths debunked

By Dana Dratch

That free advice you get from friends, co-workers or the "charming" bill collector on the phone could be worth even less that what you paid for it.

From the perils of acknowledging old debts to the odds of "inheriting" financial obligations, here are nine myths that need to be permanently busted, along with a few things it pays to know about debts:

Myth No. 1: Paying old debt always raises your credit score. 
Not always. This much is true: If a debt is seven years old or younger, and it's on your credit report, paying it could improve your credit score, says Anthony Sprauve, spokesman for myFICO, a division of FICO. How much depends on how old the debt is.
The myth part comes in if a debt is too old, or isn't on your credit report.

If a debt is older than seven years, by law it should have already come off your crdit report. So repaying it won't raise your score because it's no longer considered, says Sprauve.

In fact, if the debt is younger than seven years old and for some reason is not on your report, paying it could potentially lower your score, Sprauve says. The reason: If the collector reports the payment to credit bureaus, suddenly that old debt will be added to your report. Even though the debt is now paid, it's a negative mark your report didn't previously have. 

When it comes to debt, time really is on your side. New debts affect your score more than old ones, says Laura Udis, senior financial services advocate at the Consumer Federation of America.
 
Myth No. 2: Paying an obligation 'restarts' the clock on your debt.

Half right. There are two clocks to consider. One is the length of time in which a creditor can force payment on a debt. The second is the length of time a debt can stay on your credit reports.
 
Forced-collection clock: Under state statutes of limitations for debts, creditors can use the courts system only so long to sue you for debt, get a judgment and garnish wages. But watch out: A consumer can unwittingly restart the collections clock on old debt, says Gail Hillebrand, associate director for consumer education and engagement at the Consumer Financial Protection Bureau.

Acknowledging a debt (verbally or in writing), making a partial payment or accepting a payment plan can all risk "re-aging" the debt, restarting that clock.
 
Credit history clock: No matter who owns the debt, how many times it has been sold or whether you acknowledge it, it has to come off of your credit history after seven years, says Chi Chi Wu, staff attorney at the National Consumer Law Center.

And it's illegal to tag an old debt with a new "birthday," she says.

This seven-year clock starts 180 days after the last payment the consumer made on the accounts.

One notable exception to the seven-year reporting rule: collection judgments. A judgment is considered a separate item from the original debt, Wu explains.
 
Myth No. 3: Once the statute of limitations on forced collection passes, creditors can't sue.

Not entirely. You have no legal obligation to pay a debt that's passed the state statute for forced collection, says Ira Rheingold, executive director of the National Association of Consumer Advocates. But creditors or collectors can still file a lawsuit. 

If a creditor or collector sues, and you don't have someone in court to contest the claim, the courts may assume it's valid and grant the judgment, Rheingold says. Then, just like a B-movie zombie, that once-expired debt is alive and kicking again.

So if a collector sues, you or your attorney need to show up in court and demonstrate that the statute of limitations has expired, he says. Merely sending a letter to the courts or the creditor often isn't enough to prevent a default judgment, he adds.

Short on funds? You can contact NACA.net to find a consumer attorney who will take the case for a reduced fee, Rheingold says.
 
Myth No. 4: Making a small or partial payment stops lawsuits and debt collection attempts.
No matter who owns the debt, how many times it has been sold or whether you acknowledge it, it has to come off of your credit history after seven years.
-- Chi Chi Wu
National Consumer Law Center

Not true, unless that's part of a payment arrangement you have in writing, says Udis.

When dealing with representatives for creditors or collectors, get any promises or payment arrangements in writing or record those calls, if that's legal in the consumer's state, she says.
 
Myth No. 5: Paying old debt removes it from your credit report.

Nope. If an old debt is on your report and you pay it, that doesn't mean it will stop appearing on your credit history, says Udis.

What's most likely: It will still be reported, along with a status of paid or settled, she says.

And if the original debt is more than seven years old, it shouldn't still be on your report, which means it won't be included in your credit score, whether you pay it or not.
 
Myth No. 6: If you're in debt, collectors' efforts will make sure everyone around you finds out.

"Not true at all," says Udis. In fact, just the opposite.

"Under federal law, they cannot discuss the debt," she says. The Fair Debt Collection Practices Act prohibits collectors from even disclosing that there is a debt, Udis says.

So while a debt collector could conceivably call friends or family to find you, he or she may only call one time, she says. Collectors are not even allowed to say they're calling because of a debt, she adds.
And that reason doesn't hold water if they already have your contact information.

While the federal law applies to third-party collectors (companies collecting debt for the original creditor or companies who buy the debt), some states also impose the same confidentiality restrictions on the original creditors, says Rheingold.

Worried about your job if a creditor gets a judgment to garnish your salary? Again, you're protected, says Udis. Federal law prohibits employers from firing employees because they're having wages garnished, she says.
 
Myth No. 7: Telling debt collectors to 'buzz off' means they can't call you.

Again, half right. You have the right to tell collectors (verbally) not to call you at work, and they are required to obey, says Tracy S. Thorleifson, attorney at the Federal Trade Commission.

You also have the right to ask them not to contact you again, and they have to comply. But to invoke that right (granted under the Fair Debt Collection Practices Act), you want to put the request in writing, says Udis. After that, the collector is barred from contacting you again.

One right you don't give up with a "drop dead" letter: Collectors still have to serve notice if they file a lawsuit.

Don't want to draft your own letter just to tell collectors to go away? The Consumer Financial Protection Bureau has issued a series of debt collection sample letters
 
Myth No. 8: Divorce decrees split debts into piles of 'his' and 'hers.'

Definitely a myth. Sometimes divorce courts will parcel out the payment of debts (joint and otherwise) during a divorce. (She pays the card bill; he pays the house note, etc.)

But "the court order is between you and the ex-spouse," says Hillebrand. "It doesn't change the obligation you have with the credit card company."

When you walk into court with your name on certain bills and obligations, you are just as responsible to those creditors when you walk out, Udis says.

The best options for joint debt during a divorce are to either pay it all off before the divorce is final or contact the creditors to put the entire obligation solely in one name.

Whichever move you opt for, get proof in writing and hang onto it.
 
Myth No. 9: You can 'inherit' debts.

Totally wrong. Unless a friend or family member of the deceased was already liable for a debt before the death (think joint debts or community property situations), they're not responsible for it after the death, says Robert Hobbs, deputy director of the National Consumer Law Center.

Debts can't be reassigned by creditors or collectors after death or "inherited," he adds.

What is supposed to happen: Once the creditors find out someone has died, they contact the estate and ask to be paid. The estate pays the applicable bills and distributes the assets, says Hobbs.

The best move: If you're getting calls from creditors or collectors insisting you've "inherited" debts, it may be time to chat with an attorney.

Copyright 2013 CreditCards.com.  All rights reserved.

Lifehacker: Ask an Expert: All About Dealing With Debt

Check out the questions and answers here.

Lifehacker: What Really Happens When You File for Bankruptcy?

By Kristin Wong

Bankruptcy is a last resort for people and businesses, including Gawker Media, the company that owns this site. Many companies, like United Airlines and General Motors, file for bankruptcy and continue business as usual. Individuals file for bankruptcy and often emerge in one piece, too. Bankruptcy is poorly understood, so let’s talk about how it affects your finances, or the finances of a company you follow.

The Differences Between Chapter 7, 13, and 11 

In general, people file for bankruptcy when there’s no way in hell they can meet their debt obligations. Popular assumption is that those people are bad with money and take out too much credit card debt. Sure, that happens, but often, people and companies file bankruptcy after a major financial blow. It might be a lawsuit debacle. It might be digital obsolescence. It might be an unexpected illness.

A lot of people think bankruptcy wipes out any and all debt obligations, but that’s not the case. You still have to pay up, and how you’ll pay up depends on what kind of bankruptcy you file: Chapter 7, Chapter 13, or Chapter 11. There are other types of specific bankruptcies, too (Chapter 12 is for farmers and fishermen, for example), but these three are the most common.

With Chapter 7, you may have to liquidate certain assets (like a car or a second home) to pay off at least some of the debt. Most of your assets are probably exempt, but it depends on your state, your financial situation, and whether or not that asset is essential. You have to meet certain eligibility requirements to file, and income is perhaps the most important one. As legal site Nolo explains, there’s a whole set of criteria to determine your income eligibility, but generally, you have to have little to no disposable income.

With Chapter 13, you get a plan to pay off your debts within the next three to five years, but you get to keep your assets. After it’s all said and done, some of those debts will likely be discharged. You have to qualify, though, and that means your secured debts can’t be more than $1,149,525 and your unsecured debts cannot be more than $383,175. Secured debt is debt that’s backed by collateral, like your house or car.

Chapter 11 bankruptcy works kind of like Chapter 13, but it’s typically reserved for businesses, and basically means a reorganization or restructuring for the company. Businesses can file for Chapter 7 bankruptcy, too, but again, that means a liquidation of assets, so Chapter 11 is usually a more attractive option. Companies get to keep their stuff and keep their creditors at bay while they continue their operations, but they have to come up with a plan to pay off at least some of their debt, or get it forgiven.

What Happens When You File

When you file for bankruptcy, you get an “automatic stay.” Basically, this puts a block on your debt to keep creditors from collecting. While the stay is in place, they can’t garnish your wages, deduct money from your bank account, or go after any secured assets.

Ironically, bankruptcy isn’t free. The filing fee alone is a few hundred bucks for Chapter 7 and 13, and nearly $2,000 for Chapter 11. And then there are the attorney fees. You can file without a lawyer, but it’s not recommended since bankruptcy laws can be tough to navigate. Upright Law estimates the fees for Chapter 7 are $1,000-$2,000, and Chapter 13 are $2,200-5,000. Chapter 11 costs a lot more.

Over at Forbes, attorney Robert Bovarnick explains:
In my experience, attorney’s fees run about 4% of annual revenue. If your company has $2,000,000 in revenue, expect to pay between $75,000 and $100,000 to your bankruptcy lawyer–and there may be expenses for accountants and other professionals on top of that.
You’ll also have to take a class or two. The government requires individuals to take credit counseling 180 days before you file, and you also have to take a debtor education course if you want your debts discharged.

A couple of weeks after filing, you’ll have to attend a “creditors meeting,” which is basically what it sounds like: a court meeting between you, your bankruptcy trustee, and any creditors who want to attend. They’ll all ask you questions about your financial situation and decision to file bankruptcy.

Your Assets Get Liquidated With Chapter 7

Nolo says that in most cases, Chapter 7 debtors don’t have to liquidate their property (unless it’s collateral) because it’s usually exempt or it’s just not worth it. They explain:
If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property — which means that you get to keep it, even though it is nonexempt...Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt…
After the creditors meeting, your trustee will figure out whether or not to liquidate your stuff. If it does get liquidated, that means you’ll have to either surrender it or fork over its equivalent cash value to pay back your debt.

You Get a Payment Plan With Chapter 13

With Chapter 13, you get a plan to pay off your debts, and some of them have to be paid in full. These debts are “priority debts,” and they include alimony, child support, tax obligations, and wages you owe to employees.

Your plan is based on how much you owe and what your income looks like, and it will include how much you have to pay and when you have to pay it.

The “Best Interests Test” for Chapter 11

After filing for Chapter 11, the company has to come up with a reorganization plan for their business and finances. While they can continue operating as normal, they do have to run major financial decisions, like breaking a lease or shutting down operations, by the bankruptcy court. Creditors and shareholders can offer their input on these decisions, too. This plan is basically an agreement between the debtor and creditors about how the company will pay its future debts.


The plan also has to pass a “best interests” test. This test ensures creditors will get as much money under the Chapter 11 as they would if the debtor filed for a Chapter 7 liquidation.
Filing usually takes a couple of months to wrap up, but it takes considerably longer for the actual bankruptcy to come to a close. According to Credit.com, Chapter 7 bankruptcy is generally pretty quick and closes in a few months. This makes sense, since Chapter 7 liquidates your stuff to pay off debts quickly. Chapter 13, on the other hand, can last up to five years. According to Nolo, some Chapter 11 cases can wrap up in a few months, but six months to two years is a more common time frame.

What Happens to Your Credit

Your credit score will plummet with a bankruptcy. The higher your score, the more you’ll fall. FICO estimates someone with a score in the mid 700s might see a drop by over 100 points. Of course, a low score can make your life difficult in many ways.

In general, Chapter 7 and 11 bankruptcies remain on your credit report for ten years, and Chapter 13 stays on for seven.

After bankruptcy is all said and done, most debts are discharged, but not all of them. Student loans aren’t typically dischargeable in bankruptcy, for example. Here are a few other non-dischargeable debts, according to Sutton Law:
  • Tax debts
  • Alimony and child support
  • Divorce-related debts, including property settlement debts.
  • Debts for some fines or penalties.
  • Debts for personal injury or death caused by drunk driving
In some cases, student loans are dischargeable after a bankruptcy, but you have to pass a federal test for hardship, and the Department of Education says it’s rare.

Bankruptcy is usually a desperate remedy to a helpless situation. Knowing how it works and what to expect can help you navigate some of the misconceptions and figure out what the process actually entails.

Copyright 2016 Gawker Media.  All rights reserved.

Wednesday, June 15, 2016

Credit.com: How Do Forgiven Student Loans Impact Your Credit?

By Constance Brinkley-Badgett

The idea of having your student loan debt forgiven might sound like a dream come true, but there are a few things you’ll want to consider should you be among those eligible for student loan forgiveness.

It turns out that there are many ways to get federal student loans forgiven. In fact, the Consumer Financial Protection Bureau a few years ago estimated that more than a quarter of working Americans are eligible for the Public Service Loan Forgiveness Program, but only a small percentage are actually using it.

And while student loan forgiveness in and of itself may not negatively impact your credit, the status of your loans before and after you enter into a forgiveness program could, so it’s important to thoroughly discuss with your lender how your loan discharge will be reported.

“Before entering into a loan forgiveness program, be sure you understand how the loan will be reported on your credit report,” said Rod Griffin, director of Public Education at credit bureau Experian. “For there to be no negative impact on your credit scores, the loan must be reported as if it were paid according to the original contract terms.”

That means you might need to negotiate if you’ve made any late payments or gone into default.

Let’s say you qualify for forgiveness because of a disability, and you fell behind on your student loans due to medical bills, inability to work and other factors that might impact your finances. If, when your loan is discharged, the servicer reports the missed payments to the credit bureaus, your balance will show up as zero, but those late payments will remain on your credit report.

You can try to persuade the lender (or collector if it’s gone that far) to remove the blemish from your reports, and they might consider it if you have a good explanation as to why it happened.

Also, if the lender indicates that the account was settled for less than originally agreed, that could also hurt your credit scores, Griffin said.

“It should indicate it is paid in full and that there are no delinquencies in the credit history” in order to not negatively affect your credit, he said.

Errors in your payment history also can negatively impact your credit score, so it’s a good idea to check your credit reports before entering into a student loan forgiveness plan. By doing so, you’ll be able to dispute any errors on your student loan accounts and have them corrected. You can start that process by checking your free credit scores, updated monthly on Credit.com, which will also show you major credit scoring factors like payment history. You can also get a free copy of your credit reports from each of the major credit bureaus annually.

Will You Pay Taxes?

Certain types of student loans that are forgiven are not taxable, but other types are, so it’s good to know where you stand so you aren’t shocked by a big tax bill. A good place to begin your research is our primer on taxes after student loan cancellation. While President Obama’s 2017 budget proposal seeks to exclude Department of Education loan forgiveness programs from taxable income, it will require Congressional action to make that happen.

If you’re already behind on payments, there are some options available to help you get back on track, even if forgiveness isn’t one of them. To get out of default, you can combine eligible loans with a federal Direct Consolidation Loan, or you can go through the government’s default rehabilitation program. If you make nine consecutive on-time payments (these can be extremely low), your account goes back into good standing, and the default is removed from your credit report.


Copyright 2016 Credit.com, Inc.  All rights reserved.