Shenwick & Associates has recently received calls from employees of struggling businesses inquiring whether bonuses paid to employees are recoverable in bankruptcy. These inquiries stem from recent articles in the New York Times, CFO.com, and Creditslips.org that discuss the possibility that the Bankruptcy Code may allow Lehman Brothers as a debtor-in-possession to "claw back" some of the $5.7 billion in bonuses that were paid out to its employees and executives in the past year.
Under section 548 of the Bankruptcy Code, a trustee in bankruptcy can recover fraudulent transfers made prior to bankruptcy. Specifically, section 548(a)(1)(B) of the Bankruptcy Code allows recovery by the debtor-in-possession if constructive fraud exists. Constructive fraud exists if the debtor: (1) made a transfer within 2 years of the filing of its bankruptcy petition; (2) received less than "reasonable equivalent value" in exchange for the transfer; and (3) either was insolvent at the time the transfer was made, made insolvent by the transfer, or the transfer was made to the benefit of an insider under an employment contract and not in the "ordinary course of business."
In a post on Creditslips.org, Adam Levitin, a professor of law at Georgetown University, stated that the third element would likely be the deciding factor if a fraudulent transfer claim was filed in the Lehman Brothers bankruptcy case. He reasoned that the first two elements were easily established because the bonuses being challenged were made within one year of the bankruptcy petition and generally, bonuses that are paid in addition to a salary are clearly transfers made for less than reasonable equivalent value.
It is this author's experience that in these cases the third factor is always the key factor. The defenses available to an employee who seek to retain his or her bonus are that the company was solvent when the bonus was paid or the bonus was made in the ordinary course of business.
Accordingly, regardless of insolvency, Lehman Brothers may succeed in a fraudulent transfer claim if it can establish that the bonuses were made to insiders and were not made in the ordinary course of business.
For more information about the recovery of bonuses under the Bankruptcy Code, please contact Jim Shenwick.
Wednesday, October 29, 2008
Monday, October 27, 2008
New York Times: Banks Mine Data and Woo Troubled Borrowers
By BRAD STONE
Published: October 21, 2008
Brenda Jerez hardly seems like the kind of person lenders would fight over.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” Brenda Jerez said of credit offers.
Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.
For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.
“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”
Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.
Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.
They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.
These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.
These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”
This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.
The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.
“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”
Compiling Histories
To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.
Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.
The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.
“It almost seems like they are trying to get you into trouble,” he says.
The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.
During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.
The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.
Profiling Methods
Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.
In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.
One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.
The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.
The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.
An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”
Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.
In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.
At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.
“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”
“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.
The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.
What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.
“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.
Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.
“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.
Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.
Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.
“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”
Decrease in Mailings
In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.
Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.
Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.
For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.
Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.
He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.
The campaign flopped. “It was just too eerie,” Mr. Harvey said.
Copyright 2008 The New York Times Company. All rights reserved.
Published: October 21, 2008
Brenda Jerez hardly seems like the kind of person lenders would fight over.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” Brenda Jerez said of credit offers.
Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.
For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.
“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.
“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”
Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.
Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.
They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.
These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.
These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”
This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.
The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.
“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”
Compiling Histories
To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.
Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.
The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.
“It almost seems like they are trying to get you into trouble,” he says.
The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.
During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.
The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.
Profiling Methods
Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.
In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.
One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.
The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.
The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.
An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”
Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.
In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.
At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.
“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”
“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.
The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.
What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.
“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.
Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.
“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.
Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.
Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.
“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”
Decrease in Mailings
In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.
Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.
Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.
For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.
Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.
He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.
The campaign flopped. “It was just too eerie,” Mr. Harvey said.
Copyright 2008 The New York Times Company. All rights reserved.
Monday, October 13, 2008
New York Times article-One Thing You Can Control: Your Credit Score
By Ron Lieber
It’s been nearly impossible to think about much other than retirement, college or other savings in recent days. The pain has been all too acute and, unfortunately, the damage is not contained. Lurking beyond the devastation in the markets are other problems, like the fact that consumers are having an increasingly hard time getting loans.
I know it seems odd to think about your own creditworthiness at a time like this. Isn’t borrowing what got the world into this mess in the first place?
Your credit score, however, is something that you have a fair bit of control over, since it reflects your behavior as a borrower. Right about now, focusing on something within your control may feel like real progress. Last week, we started down that road with a look at budgets and spending, and there’s more to come.
Credit matters if you need a new mortgage because you have to move for your current job (or a new job if you lose your old one). It matters for many of the loans you may use to send a child to college. And it matters if you need to use credit cards for a time because your income has fallen or disappeared and there is no other option.
You don’t always know ahead of time when your creditworthiness will be a factor. But if an immediate need to borrow emerges, which it may for any number of people in the coming months, there will be no time to fix any problems. That’s why it’s a good idea to focus on it now.
Lenders are already rendering harsher judgments, and they’re likely to get even tougher. The Federal Reserve Board survey of senior bank loan officers in July, the most recent such survey, showed tightening lending standards across every major loan category.
“It’s a 10,000-decibel wake-up call and a slap in the face to people who viewed credit as a right rather than a privilege,” John R. Ulzheimer, the author of “You’re Nothing But a Number.”
That number he wrote about is the almighty FICO score. A company called Fair Isaac supplies the formula that generates the score. The three major credit bureaus, Equifax, Experian, and TransUnion, create their own versions of the FICO score using data from the credit reports they keep on you. They also, confusingly, create their own alternative credit scores, but more about those another time. For today’s column, the term “credit score” is synonymous with FICO score.
If you want to see the credit history that serves as data for the score, you can get a free copy of your credit report free each year, once from each of the bureaus, at annualcreditreport.com. If you want to see the FICO scores themselves, you can pay $47.85 for the three of them at myfico.com. Click “products,” then select the “FICO Credit Complete” package.
The median FICO score is roughly 720, according to Fair Isaac, though that number will probably drift a bit lower in the coming months. That’s a good SAT math score, but a score at that level may cause some problems as lenders get more strict.
So first, let’s review the new standards in a few major lending categories, keeping in mind that banks do make exceptions in some cases. Then, let’s look at some tips for improving your credit standing.
CREDIT CARDS If you’re looking to get the best interest rate or some of the richest reward offerings, representatives from card shopping sites like cardratings.com and creditcards.com figure you will need at least a score in the 720 to 750 range right now.
For a card with a credit limit of $20,000 or $25,000, a score closer to 700 was often adequate until recently, said Mr. Ulzheimer, the author, who is also the president of consumer education for credit.com, a credit information and application site.
The Fed loan officer survey said that 65 percent of domestic banks had tightened lending standards for cards, up from 30 percent in its April survey.
AUTO LOANS It’s not easy to get one right now. In 2007, 83 percent of people who applied for one got one, according to CNW Marketing Research of Bandon, Ore. The approval rate this year? Sixty percent, through Oct. 8.
Meanwhile, the minimum credit score required for the very best rate was 786 at the end of September according to CNW, up from 741 a year ago. Marc Cannon, a spokesman for AutoNation, the largest car dealer in the United States, added that there was no magic number for good rates, because it could depend on car type, cost and loan length.
MORTGAGES Here, it’s especially hard to come up with a bottom line number, because different entities (lenders, mortgage insurers, Fannie Mae and Freddie Mac) can add fees or dictate terms. In general, the bigger your down payment, the better chance you’ll have at getting the best available rate, as long as you have a credit score of at least 740 or so.
If you can’t come up with a big down payment, there are still loans available. There is one bright spot for borrowers: The Federal Housing Administration backs certain loans that lenders make to borrowers with down payments of as little as 3 percent, even if their credit scores are below average.
If only such programs were available for lower-scoring people elsewhere. Until they are, your score remains crucial, and there are a number of things you can do to improve or preserve it.
CHECK FOR ERRORS First, examine your credit report for accounts you don’t recognize. If you find any, it may be a simple error, but it could be a sign that a thief is opening new accounts in your name.
You’ll also want to look for any incorrect indications of late payments or other black marks. If you find any, report them to the credit bureau, since the errors are probably hurting your credit score. They are supposed to respond within 30 days.
PAY ON TIME It’s obvious, but it’s also crucial, because payment history accounts for about 35 percent of the FICO calculation for the general population (it could be more, or less, for certain individuals though). Just 60 or 65 percent of credit reports show no late payments, which means a lot of other people are still messing this up.
It’s easy to get lulled into complacency when, say, doctors’ billing services decline to report you to the credit bureaus for ignoring their bills for three months. Sure, they may be lenient, but don’t think that a mortgage company won’t report you for being a single day late.
If you have trouble remembering to send in bills, pay them automatically each month through your bank account or credit card. Then, pay the card bill automatically as well each month, or set multiple reminders for yourself to pay that bill on time.
REDEFINE YOUR DEBT About 30 percent of your score reflects the amount of money you owe. If you pay your credit card bills off each month, you may think that you’re home free on this front and that your debt is zero.
But that may not be the case. The credit report data used by the FICO system show your credit limit and your end-of-month balance, before you pay the bill. If you have just one credit card with a credit limit of $5,000 and you’re spending $4,000 each month, that can rough up your score, even if you’re paying it off in full every month.
Mr. Ulzheimer, the author and credit.com educator, suggested that if you were applying for any sort of loan or card soon that you put away your other cards for a few months so that you show no balance at all. If that’s not possible or practical, lower your spending so that your monthly bills are no more than 10 percent of the available credit on all of your cards. It also may be worth asking for a higher limit on a card or two, just to improve this ratio.
BEWARE OF RETAIL CARDS Given the overall economic environment, you’ll probably be looking for savings everywhere you can find them come holiday gift-shopping season.
But stay away from those deals offering 10 percent off when you open up a store credit card account.
These cards can hurt your credit score if you open too many in a short time, and their credit limits tend to be lower than standard credit cards, Mr. Ulzheimer noted. That can contribute to the same problem he addressed in the section above.
So use an existing credit card. Or spend cash. Better yet, give cash. It may come in even handier than a great credit score in the coming months.
Copyright (c) 2008 The New York Times Company. All rights reserved.
It’s been nearly impossible to think about much other than retirement, college or other savings in recent days. The pain has been all too acute and, unfortunately, the damage is not contained. Lurking beyond the devastation in the markets are other problems, like the fact that consumers are having an increasingly hard time getting loans.
I know it seems odd to think about your own creditworthiness at a time like this. Isn’t borrowing what got the world into this mess in the first place?
Your credit score, however, is something that you have a fair bit of control over, since it reflects your behavior as a borrower. Right about now, focusing on something within your control may feel like real progress. Last week, we started down that road with a look at budgets and spending, and there’s more to come.
Credit matters if you need a new mortgage because you have to move for your current job (or a new job if you lose your old one). It matters for many of the loans you may use to send a child to college. And it matters if you need to use credit cards for a time because your income has fallen or disappeared and there is no other option.
You don’t always know ahead of time when your creditworthiness will be a factor. But if an immediate need to borrow emerges, which it may for any number of people in the coming months, there will be no time to fix any problems. That’s why it’s a good idea to focus on it now.
Lenders are already rendering harsher judgments, and they’re likely to get even tougher. The Federal Reserve Board survey of senior bank loan officers in July, the most recent such survey, showed tightening lending standards across every major loan category.
“It’s a 10,000-decibel wake-up call and a slap in the face to people who viewed credit as a right rather than a privilege,” John R. Ulzheimer, the author of “You’re Nothing But a Number.”
That number he wrote about is the almighty FICO score. A company called Fair Isaac supplies the formula that generates the score. The three major credit bureaus, Equifax, Experian, and TransUnion, create their own versions of the FICO score using data from the credit reports they keep on you. They also, confusingly, create their own alternative credit scores, but more about those another time. For today’s column, the term “credit score” is synonymous with FICO score.
If you want to see the credit history that serves as data for the score, you can get a free copy of your credit report free each year, once from each of the bureaus, at annualcreditreport.com. If you want to see the FICO scores themselves, you can pay $47.85 for the three of them at myfico.com. Click “products,” then select the “FICO Credit Complete” package.
The median FICO score is roughly 720, according to Fair Isaac, though that number will probably drift a bit lower in the coming months. That’s a good SAT math score, but a score at that level may cause some problems as lenders get more strict.
So first, let’s review the new standards in a few major lending categories, keeping in mind that banks do make exceptions in some cases. Then, let’s look at some tips for improving your credit standing.
CREDIT CARDS If you’re looking to get the best interest rate or some of the richest reward offerings, representatives from card shopping sites like cardratings.com and creditcards.com figure you will need at least a score in the 720 to 750 range right now.
For a card with a credit limit of $20,000 or $25,000, a score closer to 700 was often adequate until recently, said Mr. Ulzheimer, the author, who is also the president of consumer education for credit.com, a credit information and application site.
The Fed loan officer survey said that 65 percent of domestic banks had tightened lending standards for cards, up from 30 percent in its April survey.
AUTO LOANS It’s not easy to get one right now. In 2007, 83 percent of people who applied for one got one, according to CNW Marketing Research of Bandon, Ore. The approval rate this year? Sixty percent, through Oct. 8.
Meanwhile, the minimum credit score required for the very best rate was 786 at the end of September according to CNW, up from 741 a year ago. Marc Cannon, a spokesman for AutoNation, the largest car dealer in the United States, added that there was no magic number for good rates, because it could depend on car type, cost and loan length.
MORTGAGES Here, it’s especially hard to come up with a bottom line number, because different entities (lenders, mortgage insurers, Fannie Mae and Freddie Mac) can add fees or dictate terms. In general, the bigger your down payment, the better chance you’ll have at getting the best available rate, as long as you have a credit score of at least 740 or so.
If you can’t come up with a big down payment, there are still loans available. There is one bright spot for borrowers: The Federal Housing Administration backs certain loans that lenders make to borrowers with down payments of as little as 3 percent, even if their credit scores are below average.
If only such programs were available for lower-scoring people elsewhere. Until they are, your score remains crucial, and there are a number of things you can do to improve or preserve it.
CHECK FOR ERRORS First, examine your credit report for accounts you don’t recognize. If you find any, it may be a simple error, but it could be a sign that a thief is opening new accounts in your name.
You’ll also want to look for any incorrect indications of late payments or other black marks. If you find any, report them to the credit bureau, since the errors are probably hurting your credit score. They are supposed to respond within 30 days.
PAY ON TIME It’s obvious, but it’s also crucial, because payment history accounts for about 35 percent of the FICO calculation for the general population (it could be more, or less, for certain individuals though). Just 60 or 65 percent of credit reports show no late payments, which means a lot of other people are still messing this up.
It’s easy to get lulled into complacency when, say, doctors’ billing services decline to report you to the credit bureaus for ignoring their bills for three months. Sure, they may be lenient, but don’t think that a mortgage company won’t report you for being a single day late.
If you have trouble remembering to send in bills, pay them automatically each month through your bank account or credit card. Then, pay the card bill automatically as well each month, or set multiple reminders for yourself to pay that bill on time.
REDEFINE YOUR DEBT About 30 percent of your score reflects the amount of money you owe. If you pay your credit card bills off each month, you may think that you’re home free on this front and that your debt is zero.
But that may not be the case. The credit report data used by the FICO system show your credit limit and your end-of-month balance, before you pay the bill. If you have just one credit card with a credit limit of $5,000 and you’re spending $4,000 each month, that can rough up your score, even if you’re paying it off in full every month.
Mr. Ulzheimer, the author and credit.com educator, suggested that if you were applying for any sort of loan or card soon that you put away your other cards for a few months so that you show no balance at all. If that’s not possible or practical, lower your spending so that your monthly bills are no more than 10 percent of the available credit on all of your cards. It also may be worth asking for a higher limit on a card or two, just to improve this ratio.
BEWARE OF RETAIL CARDS Given the overall economic environment, you’ll probably be looking for savings everywhere you can find them come holiday gift-shopping season.
But stay away from those deals offering 10 percent off when you open up a store credit card account.
These cards can hurt your credit score if you open too many in a short time, and their credit limits tend to be lower than standard credit cards, Mr. Ulzheimer noted. That can contribute to the same problem he addressed in the section above.
So use an existing credit card. Or spend cash. Better yet, give cash. It may come in even handier than a great credit score in the coming months.
Copyright (c) 2008 The New York Times Company. All rights reserved.
New York Times op-ed: Fight for the Family Home
By Eric S. Nguyen
Cambridge, Mass.
Lenders have been foreclosing on about 250,000 homes every month this year — one every 10 seconds. And among the hardest-hit Americans have been families with school-age children. Many of those families file for bankruptcy; indeed, nearly two-thirds of those trying to save their homes in bankruptcy have young children. Yet our laws make it especially difficult for families to keep their homes.
Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.
The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?
If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes — but not on the family home.
For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments — to keep the children in the same school and stay in the same neighborhood.
Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.
Congress missed the chance to include this critical reform in its recent $700 billion bailout for financial institutions. But both Republicans and Democrats should see the wisdom of fixing the problem quickly. Automatic foreclosures on family homes do not reflect our shared sense of fairness. And bankruptcy reform is an important step on the road to recovery.
Eric S. Nguyen is a student at Harvard Law School.
Copyright (c) 2008 The New York Times Company. All rights reserved.
Cambridge, Mass.
Lenders have been foreclosing on about 250,000 homes every month this year — one every 10 seconds. And among the hardest-hit Americans have been families with school-age children. Many of those families file for bankruptcy; indeed, nearly two-thirds of those trying to save their homes in bankruptcy have young children. Yet our laws make it especially difficult for families to keep their homes.
Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.
The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?
If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes — but not on the family home.
For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments — to keep the children in the same school and stay in the same neighborhood.
Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And it would cost the taxpayer nothing.
Congress missed the chance to include this critical reform in its recent $700 billion bailout for financial institutions. But both Republicans and Democrats should see the wisdom of fixing the problem quickly. Automatic foreclosures on family homes do not reflect our shared sense of fairness. And bankruptcy reform is an important step on the road to recovery.
Eric S. Nguyen is a student at Harvard Law School.
Copyright (c) 2008 The New York Times Company. All rights reserved.
Wednesday, October 08, 2008
Letter to Sen. Chris Dodd and Rep. Barney Frank on personal bankruptcy and Chapter 13 bankruptcy filings
Gentlemen:
The purpose of this letter is to acknowledge your efforts regarding the $700 billion bailout bill and also bring to your attention certain issues regarding personal bankruptcy in the current financial crisis that many United States citizens are experiencing.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that these mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
We would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
Sincerely,
/s/ James H. Shenwick
James H. Shenwick
The purpose of this letter is to acknowledge your efforts regarding the $700 billion bailout bill and also bring to your attention certain issues regarding personal bankruptcy in the current financial crisis that many United States citizens are experiencing.
I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.
The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.
Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.
Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that these mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.
We would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.
Sincerely,
/s/ James H. Shenwick
James H. Shenwick
Friday, October 03, 2008
Blackberry and iPod Portable Electronics Repair
Yesterday my Blackberry broke. Rather than throw it out, I had it repaired at Portatronics. Their number is (646) 797-2838. They have two locations in midtown Manhattan at 2 West 46th St (at 5th Ave), 16th Floor and at 307 W. 38th St (at 8th Ave). Their hours are 10 a.m. to 7 p.m. The service was amazing! In 10 minutes they fixed the "spin wheel" and the cost was $59. I recommend them highly for Blackberry, iPod and any portable electronic device repairs.
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