Debt Advizor

Using a credit card can become a sure-fire way for many consumers to slip into debt, it has been claimed. Although conceding that it can be “very difficult to live without a credit card” in modern society, the Thrifty Scot states that cards are “the leading cause of debt problems” among British consumers.

The personal finance portal advises those who are worried about credit card debt to stop using their plastic to make purchases, clear the existing balance and then cancel the account with their card provider.

“Unless you keep a tight rein on your borrowing habits, it is quite easy to get caught up in borrowing over and over again until you reach the point that it is no longer feasible to consolidate your debts,” the website explains.

It also warns against the use of store cards, which can also contribute to serious debt problems. “Having a charge card for the store makes it very convenient and easy to purchase items on the spur of the moment that you don’t really need,” the Thrifty Scot says.The Federation of Small Businesses recently urged the government to impose a cap on credit card interest rates.

A record amount of commercial real estate loans coming due in Texas and nationwide the next three years are at risk of not being renewed or refinanced, which could have dire consequences, industry leaders warn. Without new lending, many malls, offices, warehouses and other properties could default or go bankrupt.

Texas has about $27 billion in commercial loans coming up for refinancing through 2011, ranking among the top five states, based on data provided by research firms Foresight Analytics LLC and Trepp LLC. Nationally, Foresight Analytics estimates that $530 billion of commercial debt will mature through 2011. Dallas-Fort Worth has nearly $9 billion in commercial debt maturing in that time frame.

If a loan is not paid off or refinanced when it matures, the lender can foreclose on the property. “This is a very serious problem, and it’s not going to go away very soon,” said Jeffrey D. DeBoer, chief executive of the Real Estate Roundtable, an industry group in Washington, D.C. “The issue is what happens when loans cannot be refinanced. The stress on the financial system itself would be quite acute, and the impact on local communities and jobs could be quite serious. All of this adds up to what we think is a compelling case for policymakers to restart the credit markets.”

In the last few years, lenders sold a record amount of real estate loans as securities to investors. Then the $900 billion commercial mortgage-backed securities market came to a standstill as the subprime housing debacle, Wall Street crisis and recession hit. The lack of credit weighs on the industry, considering the refinancings coming due.

Most of Texas’ $27 billion in loans maturing through 2011 – $18 billion – is held by financial institutions, according to Foresight Analytics. Texas also has $9 billion in commercial mortgage-backed securities, the third-largest amount after California and New York, according to Trepp.

“Banks are saying we have to pay them off or they’ll take the property back – that would be an unnecessary death knell for the industry,” said Steve Golding, president of Dallas-based developer Jackson-Shaw. “The banks are just going to have to be patient. If everyone is forced to sell, the banks are going to lose and the taxpayers are going to lose.”

In addition, little credit is available for new loans. Jackson-Shaw has $35 million to $40 million in construction loans coming due this year, half of which do not have extension options, Golding said. In those cases, the developer will try to negotiate extensions with its lenders or seek long-term commercial mortgages for the properties. In the past 18 months, Jackson-Shaw has built up a “war chest” of cash for such situations.

Arizona is joining other states asking Congress to liberalize bankruptcy rules so judges can modify home loans to help reduce foreclosures. Arizona Attorney General Terry Goddard has joined the attorneys general from 21 other states in the effort. Current federal law allows bankruptcy courts to adjust other debts and loans, but not home mortgages. Goddard and other state AGs contend the courts could make the change immediately, which would help reduce foreclosures and generate new loan terms that could help borrowers and lenders.

California Attorney General Jerry Brown also is among those making the written push to congressional leaders. A similar effort was launched in 2008 but failed to gain approval, but the odds could improve with Democrats gaining seats in Congress and the incoming Obama administration.

In an unusual side effect of the credit-crunch racehorse trainer jailed for growing and selling cannabis to repay a loan shark debt should have sought professional help, an expert has said. Police found 199 plants at Swadlincote, UK which is the home and business of Robert Woods. Woods, who admitted producing and supplying the drug, said he made about £400 each week, which he was using to pay debts of £183,000.
The 55-year-old was given a 21-month prison sentence.

Mr Ward of East Midlands Public Protection Project Team, which investigates and prosecutes illegal loan sharks in the region, said: “This guy has got himself into all sorts of issues. The problem is there’s a temptation to borrow money from loan sharks to pay off creditors. That’s not the way forward. The first port of call is to get some sensible money advice from a body like the Citizens’ Advice Bureau. They can help people sort out a management plan. We run a 24-hour helpline for people who are victims of loan sharks. If people call, one of our investigators will take their case on board. Any contract with an illegal loan shark is not valid as it is an illegal form of borrowing. Therefore they cannot take people to the small claims court. We can prosecute loan sharks but we need information from the public.”
Mr Ward urged people who might be tempted to turn to a loan shark because of the credit crunch to think again.

So guys, if you have debt problems get good advice, don’t grow weed!

It happens to nearly every business sooner or later: A customer makes a purchase on credit, then never pays up; or a vendor loans a customer money to help keep the customer’s business afloat, but the company goes under anyway. The only good thing about bad debts is that you can turn them into a tax break. First off, the bad debt must be directly related to operating your business, says Frederick W. Daily, author of Tax Savvy for Small Business; nonbusiness bad debts generally aren’t tax-deductible. Note that you only take a bad-debt deduction if you previously recorded the amount owed as income received. If you have not previously included the uncollected amount in income, you don’t get to deduct the bad debt.

However, you still get to deduct your cost for the goods at issue. Be sure to include the cost of goods sold for unpaid merchandise in your total for “cost of goods sold” on your tax form to help reduce your gross income. Not every bad debt can be turned around, though: If you are in a service business and don’t have much in the way of cost of goods, you’re out of luck here. Also, unfortunately, only the cost of goods is deductible, not the full retail price you charged the deadbeat customer.

The Federal Reserve may have slashed the benchmark interest rate to zero percent, but the frozen credit market isn’t showing many signs of thawing yet. So more consumers are turning to each other. Online person to person loans could total almost $6 billion dollars by 2010. For some, it’s an unexpected lifeline.

“I needed a one lump sum payment upwards of $16,000,” said Rob Ramonas. When Ramonas returned to civilian life from a four-year tour of duty as an Army nurse, a perfect financial storm was waiting. First, there was a divorce, and then a house in limbo. Then Connecticut’s Department of Corrections told Ramonas he owed four years of payments toward his pension. And all that while he was also trying to take care of his two-year-old child. “I was flabbergasted,” Ramonas said. “You know, how do you grab that kind of money all at once?”

Already maxed out at his credit union, Ramonas needed money fast. So he looked online and found Lending Club.

“Lending Club is a social lending network, which is an alternative to the banks,” says Lending Club CEO Renaud LaPlanche. “It’s a way for people who have the money to loan to people who need the money.”

As major financial institutions stumble or fail completely, online lending sites like Lending Club are on the rise. Since 2005, the amount of their outstanding person-to-person loans has virtually doubled every year, David reports, swelling from $118 million in 2005 to $1.5 billion in 2008.

It works like this: Folks like Ramonas complete a personal loan request online. “It was one of the easiest things I ever did.” Ramonas says. Once Lending Club approves the loan, lenders, like Howard Rubinstein, can choose to help fund it. In Lending Club, the average loan is for ten thousand dollars at a rate of thirteen percent for three years. Wary of the turbulent financial markets, Rubinstein has invested thousands of dollars in on-line lending clubs.

“I was just really intrigued at the opportunity to make more money than I could make from CDs in the bank and at the notion of being able to lend without the bank as an intermediary,” Rubinstein said. “I’ve been happy. I think I’ve made ten percent on my money since February, when I went in.”

And hundreds of thousands of Americans are following suit, including Rob Ramonas. “Once this loan is paid off I will go in there as an investor and make some loans to other people,” Ramonas says.

There many discussions of moral hazard in the mortgage debacle, and rightly, they focus primarily on the large bonuses given out to the bankers. But aren’t credit default swaps more to blame? Aren’t insured buildings more commonly victim to arson attacks?

Help me out here if I’m wrong, but don’t credit default swaps, a financial instrument invented in the 1990s, suffer from the usual insurance contract problem of “moral hazard?” If you can make a deal so that you get compensated if your mortgage-backed security defaults, aren’t you more likely to bring about a default? If you are, say, Goldman Sachs and AIG offers to, in effect, insure for a modest price a no-doubt-fraudulent pile of mortgages you are thinking about buying from some dubious firm, why not go for it? AIG is rock solid! And if, perchance, AIG turns out not to be so solid, well, Goldman has friends in high places.

Credit default swaps have a second interesting moral hazard aspect. You don’t have to be the owner of the security to get paid if it goes bust. This is kind of like being able to take out a life insurance policy on a complete stranger or your own worst enemy. The murderous marital moral hazard implicit in life insurance is a common theme in crime stories (e.g., Double Indemnity). That’s an inevitable problem, but insurance companies have tightened up over the centuries on who can take out a life insurance policy on whom. Still, there was an Arsenic and Old Lace case in LA recently of two elderly women, who had murdered homeless men after taking out multiple life insurance policies on them. (They bribed the men into signing up for one, then forged their signatures on other policies).

It would certainly be interesting to learn more about the impact of both types of moral hazard. I could see how the second kind (where third parties make bets against the financial health of firms in the securitized mortgage business) could be either bad or good for the economy, in that it could send signals that financial instruments are dubious.

The total federal bankruptcy filings jumped up by 30 percent for the 12-month period ending Sept. 30, with business filings climbing by 49 percent in the same period, according to the Administrative Office of the U.S. Courts. The annual figures released on Monday may not bode well for the coming year, with the fourth quarter numbers showing a 34 percent rise in that quarter alone, according to the report.

Individuals seeking bankruptcy protection represent the bulk of filings, with a total of 1.043 million for the fiscal year ending Sept. 30, up from 801,000 in the same time for 2007. Business filings grew to nearly 38,700 for the fiscal year just ended, up from nearly 26,000 for 2007. Do you need a Bankruptcy Lawyer?

The report shows that the most severe cases, liquidations under Chapter 7, were up by 40 percent from fiscal year 2007, while Chapter 11 reorganizations rose by 49 percent. Only Chapter 12, designed to protect family farmers, was down — by 8 percent for the year. The numbers show some of the hardest-hit areas on a per capita basis were Tennessee, with 7.3 filings per 100,000 population; Nevada, with 6.4; Georgia, with 6.0; Alabama, with 5.9; and Indiana, with 5.89. When looking at liquidation filings alone, Nevada jumps to No. 1, followed by Indiana, Michigan, Kentucky and Colorado.

Broken down regionally, by circuit courts, the western states of the 9th U.S. Circuit Court of Appeals saw the biggest percentage gain, up by nearly 69 percent from 113,541 filings in 2007 to 191,595 in 2008, according to the records. Within the circuit, California’s Central Valley, Los Angeles and the state’s northern regions were hardest hit, followed by Nevada. Do you need a Bankruptcy Lawyer?

The Central District of California, covering the Los Angeles area, saw a 96 percent rise in filings, from roughly 29,000 in 2007 to 57,000 in 2008. The Eastern District, in the Central Valley, with heavy home foreclosures, saw an 83 percent rise and the Northern District saw a 69 percent jump. Nevada showed a 77 percent increase, according to the report. The smallest increase came in the 5th Circuit, up by 6 percent, with the bulk of the increases coming in Louisiana and Mississippi, still recovering from Hurricane Katrina.

If flipping a house in today’s real estate market seems riskier than trekking with a ragtag band of hobbits to Mordor, take heart: Home flippers can still find plenty of opportunities, though they’re not entirely without risk. It may seem counterintuitive to invest in real estate when the housing market is in its darkest hour. But in fact, it may prove to be the most optimal time for such a venture. The question is whether this is the darkest hour or just another break on the ride down.

According to RealtyTrac, a seller of mortgage default data, the foreclosure rate reached its highest level in 50 years in 2007, and has since risen to record numbers in the third quarter of 2008. Real estate investors are finding bargains everywhere, particularly in formerly hot housing markets such as Florida, Nevada and California.

“The key … is doing your research and knowing what you’re getting into. Know the area you’re buying, the market, how the price compares to the neighborhood.”

The horizon is flush with opportunity for those with the money and know-how to snap up a bargain and flip it, but to make it pay you first must understand how the rules of the game have changed.

“The prices that were recently so outrageous are down again, so those with capital or access to credit will find it’s a very good time to pick up bargains in the marketplace. Those bargains are mostly in neighborhoods where you would like to live. Areas undergoing urban renewal present good investment opportunities.“

It seems elementary, but in the recent past many flippers found themselves in trouble because they had not correctly calculated the amount of money it takes to finish a flip and market it. Investors should figure out how much money they’ll need right upfront, and not just the purchase price. It translates to being realistic about renovation costs and the hidden expense that gets so many in trouble: carrying costs.

“You may have carrying costs on the books longer than you think. The days of the 60-day flip are gone.”

Carrying costs, or house payments you must make until you sell the property, can subtract thousands from the bottom line. And even though you are technically chipping away at the debt incurred when you purchased the property, the interest you’re paying at the top of the flip probably won’t be earned back in the sale. Those payments come right out of your potential profit.

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I’ve been spending a lot of time on the road lately travelling over the Festive season, and I’m struck by the number of radio ads for debt settlement services that boast they can cut a consumer’s credit-card debt by half or more.

“So scared you can’t answer your phone anymore?” they ask. “We’ll get creditors off your back.”

I know from my own experience that many of these outfits make promises they can’t keep. Shortly after my wife and I bought a house in Santa Fe, N.M., in December 2005, I began looking for ways to cut our debt, which we had let creep up over the years. Like millions of Americans, we received credit cards in the mail during the 1990s. For many folks, these 0% offers were too good to pass up, and some made the mistake of confusing easy credit with income.

Unfortunately, if you lost your job or got sick and you were late with a payment, the interest rates could skyrocket from 0% to 30% virtually overnight. That was in the agreement that came with the pre-approved card, but most people never bothered to read the fine print. Compounding matters for debtors was a concept known as “universal default.” If you missed a payment on one card, other creditors would automatically raise their rates even if you had been paying them on time.

We fell behind on our credit-card payments and that’s when we started to learn the facts about debt problems. They are not pretty but over the next year we will try and help people out before they get into bad trouble. Good Luck!