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Debt Collections: Do You Have To Pay?

This article was written by Flexo in Debt Reduction. 6 comments.

People who borrow money generally understand that they will eventually need to pay borrowed money back to the lender. This understanding, whether codified in a contract or not in any particular case, makes lending and borrowing money work as an economic mechanism. It’s interesting that regardless of what’s written in a contract, most debt can be legally ignored. Borrowers may feel bound by their pride to honor commitments, but every state in the country has laws that prevent lenders from chasing after deadbeat borrowers after a certain amount of time.

Time-barred debts are subject to a statute of limitations. After a certain amount of time passes with a borrower unable or unwilling to pay back a loan, the lender will no longer be able to sue the borrower for uncollected debt. The lender can still contact the borrower and try to convince him or her to pay back the loan, but the lender’s legal rights to the funds are limited.

This doesn’t mean that it’s a good idea to wait for the statute of limitations to pass on all your debt in order to avoid your obligations. There are consequences if you don’t pay back debt. Most importantly, the three credit reporting bureaus will significantly decrease your credit score, and it could take a long time for that number to return to normal. This will affect your ability to qualify for more loans, mortgages, and credit cards in the future.

This is a dilemma many homeowners have considered recently; with the market value of houses sharply decreasing in the last few years, and the resulting financial reality of owing the bank more on the mortgage than the house is worth, some in this situation have considered walking away from the house and mortgage. In some cases, this could be a tactic that is more financially responsible than continuing to sink money every month into a depreciating asset. Families considering this option have to weigh the consequences, including not being able to qualify for a mortgage again for many years, against the emotion-based drive to honor financial commitments.

Although lenders are legally barred from suing borrowers after the statute of limitations for a particular debt has passed, they might still try. If you’re able to show a judge that the debt is time-barred and no longer legally collectible, you have nothing to worry about other than the consequences.

Credit cards and other open accounts like home equity lines of credit, written contracts, oral agreements, and promissory notes may have different statutes of limitations, and each differs by state, as well. Here’s a list by state of time-barred debts.

The clock starts ticking on the statute of limitations from the day you miss your first payment. The moment you send a payment to the lender, no matter how small, the clock resets. For example, if the statute of limitations on credit card debt in your state is seven years, and it’s been six years since you’ve made a payment, you may determine that it makes more financial sense to refuse to make a payment for one more year rather than negotiate with the lender. If you are in financial difficulty and don’t expect to ever be able to pay off the debt, paying even a small amount means you’ll need to wait another seven years after making the small payment before you’ll be legally protected from paying back the debt.

Not all debt is time-barred; student loans backed or issued by the government have no statute of limitations. Anything you borrow under any of the loan programs that qualify in this category can never be ignored. The lenders are often willing to negotiate the terms in order to help you make payments you can afford, but these students loans are, for the most part, legally stuck with borrowers until the lenders are satisfied.

A few questions for discussion:

Do you think it’s right that borrowers can avoid agreements by patiently waiting for the statute of limitations to pass?
Have you ever been sued for debt you didn’t need to legally pay back?
Have you inadvertently restarted the clock by paying a small amount to a lender when it might have been better to wait?
Are you dealing with the credit consequences of letting a debt expire?

Note: I am not a lawyer, and nothing written on Consumerism Commentary constitutes legal advice. Always check with an attorney before making any decisions regarding the law.

Photo: Dave Stokes
Federal Trade Commission

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Are You Concerned About the Very Poor?

This article was written by Flexo in Society. 73 comments.

Whether you agree with it or not, the reason this country has supported programs like welfare, Social Security, the GI Bill, food stamps, Medicare, government-backed mortgages, FEMA insurance, and other social programs is because a modern society benefits when as many citizens as possible have opportunities to succeed financially. Social programs aren’t perfect and don’t always provide what they promise, and there’s always a small percentage who take advantage of the system.

The push-and-pull between the focus on the society and the focus on the individual existed even before the founding of the nation, and this particular Weeble that wobbles between left and right without falling down (yet) has allowed the United States to become the biggest economy in the world in a relatively short period of time, and that’s a good thing.

From an individual perspective, it might not be that intuitive that one needs to be concerned about the “very poor.” After all, with social safety nets, one might think that the “very poor” have little to worry about. Regardless of the existence of programs — both public and private — poverty is still an issue in this country, even if you don’t see it in your daily life as you shuffle in an office building from meeting to meeting or shuttle from city to city on business trips. It’s hard to be concerned about something if you aren’t faced with it every day.

If, however, you are concerned about the “very poor,” there are ways to help, even if you don’t believe that handouts are effective. The most popular rationalization for not caring about poverty is the idea that helping another individual teaches complacency rather than responsibility, interdependence rather than independence. The incorrect assumption is that families in destitute situations have no desire to work for their money like those who have built wealth for themselves and have earned the right to let their money do the work for them and receive income from dividends and interest rather than working in the middle-class and working-middle-class sense of the word.

The real problem is tied into that psychology 101 concept I turn to repeatedly, Maslow’s hierarchy of needs. If most waking minutes in your day are spent worrying about your shelter, your food, and having a safe place to sleep, “income mobility” is a fantasy. You’re a victim of “class warfare,” but in your reality, you don’t have time or energy for political arguments about class warfare.

If you are concerned about the very poor, there are options. Helping bring attention to poverty can form provide opportunities to those without them without much sacrifice from those with opportunities.

Give money directly to organizations that run programs focusing on providing opportunities. The top-rated charities focusing on poverty according to Charity Navigator are Direct Relief International (although International is in the name, they also work to eliminate domestic poverty, particularly in disaster-stricken areas), SOME (So Others Might Eat, focusing on the D.C. area), and the People’s Resource Center (based in Chicago). If you prefer to give a hand-up rather than a hand-out, focus on organizations that provide job training and placement, programs that expand the reach of educational opportunities, and programs that present positive financial role models.
Volunteer with the organizations that run these programs. Build houses. Build schools. Help at a food bank. When you are actively involved, you get to experience the results of your work much more closely than if you were to send a check every month. No, you won’t get a tax deduction for volunteer work, but that’s not the point.
Become a community leader. When people from poor communities manage to succeed financially, they often don’t return to be the role model their community needs. This is the reason financial illiteracy is a problem that will continue from generation to generation, keeping low socio-economic status communities from thriving.

Are you concerned about the very poor? Does paying your taxes and being satisfied with existing social safety nets relieve you from any other possible responsibilities for how the country fares as a whole? Do we even have any responsibilities to anyone other than ourselves and our families?

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Consumer Financial Protection Bureau Wants Payday Loan Feedback

This article was written by Flexo in Consumer. 7 comments.

While the mainstream financial industry has faced a dizzying array of government and quasi-government regulations through most of the last one hundred years, non-bank financial products have, for the most part, evaded regulations. Catering to lower-income communities, payday loan storefronts and check cashing establishments have managed to justify their business models. The more desperate you are to pay your electricity bills and your rent before your power is turned off and you’re evicted, the more likely you are to willfully ignore the fact that the companies helping you are taking advantage of you in ways that a traditional bank would never be allowed to do.

The Consumer Financial Protection Bureau (CFPB) is now charged with recommending new regulations that go beyond retail banks, thrifts, investment banks, and credit unions into the murky world of non-bank financial products.

If you compare a short-term payday loan with a loan from a bank, you might see that the payday loan’s equivalent interest rate (APR) is 450% or even higher. Mortgages tend to be 3% to 7%, business and personal loans could be 5% to 10%, and credit cards are 10% to 20% unless you default. Anything higher, and the loan might be considered usurious. So how do payday lenders get away with charging 450% or more?

Well, these lenders frame what they charge as a flat or sliding fee, not interest. The loans are typically due in two weeks, the expected arrival of your next paycheck. It might not be fair to compare these fees with interest rates, because the borrower doesn’t hold onto the loan for a long time.

Or does he? There’s some evidence suggesting payday loans create a cycle; rather than paying off the loan when the next paycheck arrives, lenders offer an enticing deal to encourage borrowers to begin the next loan. The two-week cycle repeats.

The CFPB wants to hear from people who have had experiences with payday lenders. In order to get a good grasp on how non-bank financial products can and should be regulated, the organization is seeking comments from the public. What have been your experiences with payday loans? Feel free to share here on Consumerism Commentary, or tell the CFPB your story directly.

Photo: bigburpsx3

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How Rich Are the Presidential Candidates?

This article was written by Flexo in Wealth and Affluence. 14 comments.

When politicians are campaigning, some try to reinforce the idea that they are similar to most Americans. Candidates for President of the United States try to avoid being labeled as elitist, because some sort of connection and kinship with their constituency is important for winning the favor of voters who aren’t already entrenched with a Democrat or Republican ideology.

Of course, the attempt to be viewed as an “average American” is nothing more than marketing and public relations. In order to find one’s way into the political arena at that level, you need to carry something that sets you aside from most Americans. And while money doesn’t guarantee a victory, it doesn’t hurt.

CNN has reported the net worth and income of the Republican presidential candidates as well as President Obama to see how they compare with each other. Like most Americans, they generally have wealth tied into their homes, but their investments, and in some cases, major liabilities and use of blind trusts, show that this crew lives in a world unfamiliar to most Americans.

Mitt Romney’s net worth is between $85 million and $264 million. This is a wide range; with lenient reporting requirements, it’s difficult to be specific. He earns most from dividends and interest on his investments as well as from speaking engagements. Romney includes horses and gold among his investments. According to the Federal Election Commission, Mitt Romney has raised $32 million for his campaign as of September 2011 (the latest data).

Jon Huntsman’s net worth is between $16 million and $72 million. CNN points out that Huntsman’s father is one of the richest men in the world, as has donated more than $1 billion to universities and medical research. Huntsman has raised $4.5 million for his campaign as of September 2011.

Newt Gingrich’s net worth is between $7 million and $31 million. Last year, Gingrich earned $2.4 million from his own company, Gingrich Productions, and most of his assets are tied to this company. He also has listed up to $1 million in liabilities in the form of a line of credit with Tiffany and Co. Gingrich has raised $2.9 million for his campaign as of September 2011.

Barack Obama’s net worth is between $2.8 million and $11.8 million. Thanks to sales of his books, Obama can count himself among the richest politicians. He also earns a $400,000 salary as President. Obama has raised $88 million for his re-election campaign as of September 2011.

Ron Paul’s net worth is between $2.4 million and $5.4 million. This includes a five-year personal bank loan of up to $500,000. As a fan of gold, Paul has major investments in companies involved with gold and silver mining. Paul has raised almost $13 million for his campaign as of September 2011.

Rick Santorum’s net worth is between $1 million and $3 million. Santorum’s wealth is in rental real estate properties. He also has mortgages comprising debt of up to $750,000 on properties with a value of up to $1.25 million. He earned $1.3 million from January to August 2010 as a contributor on Fox News and from the Ethics and Public Policy Center think tank. Santorum raised $1.3 million for his campaign as of September 2011.

Rick Perry’s net worth is between $1 million and $2.5 million. The “poorest” of all presidential candidates, Perry receives a $133,000 salary as the governor of Texas. He has a diversified portfolio of stock investments. Perry raised $17 million for his campaign as of September 2011.

Should the individual who represents the United States of America domestically and globally be a reflection of American society? Does wealth tie into that equation?

Photo: Maassive
CNN, Federal Election Commission

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More Homeowners Can Refinance

by Flexo

Thanks to some changes to the federal Home Affordable Refinance Program (HARP), more homeowners can qualify for government-endorsed refinancing. Previously, the program only offered refinancing options for households where the mortgage value was up to 97 percent through 125 percent of the home’s market value. This did help families who have become underwater, having more left to ... Continue reading this article…

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How to Spend Money on Fun

by Flexo

The point of accumulating and saving money is not to die with the most money in the bank. Yes, it can be helpful to your heirs to leave a fortune for the next generation, but not at the expense of living a fulfilled life yourself. There are many opinions about what it means to live ... Continue reading this article…

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The Financial Planner Who Lost His House

by Flexo

Carl Richards is one of today’s best writers focusing on personal finance. Originally keeping a great blog at behaviorgap.com, The Behavior Gap has moved to the New York Times, and early next year, Carl will release his first book. Look for The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money on January ... Continue reading this article…

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Wealth Gap: Young Vs. Old

by Flexo

The wealth gap is growing, and if the Occupy Wall Street and its satellite protests are any indication, those not within the top one percent of income earners are not happy with their circumstances or the policies that help foster the wealth of those at the top. It’s been called class warfare, but there are ... Continue reading this article…

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