Tuesday, April 23, 2013

The dark side of student loans part 1.

As I said before... I'm using this blog as a second brain to hold all the great info that the first brain forgets because it's too full of useless trivia like "What university did Neil Armstrong do his undergraduate studies at?"  SO as the title says.. this one is about the dark side of student loans.  More importantly what happens after you are no longer enrolled in school... regardless whether you've got a degree or not.  Many of my clients coming through the door have some form of student loan and medical bills.  These two seem to go hand in hand.  I didn't remember college being that rough but at the same time I was also under my parents medical insurance plan so any bills I did incur went to them for 4 out of my 5 1/2 years of college.  I admit... I was blessed.  So here my clients are sitting across from me.  Some have completed college, some haven't, some have jobs, some don't and the clock is ticking.  Some of these folks have been bombarded with collection calls and letters so that they are curled up tighter than an armadillo and just want it all to go away.  What they don't know about student loans is what can really hurt them.  These aren't like those credit card balances... these loans have teeth and can make your life miserable until you get back on track.  So we will start with the worst loan status (because that is often the scenario my clients find themselves in) and work backwards.


What this means:  You haven't paid on your student loans.  For federal student loans this is 270 days (almost 9 months) without payment.  With private loans this could mean the moment you miss your first payment.  Careful review of your Loan Contract/Promissory Note is required to determine when this event occurs.

According to  Adventures in Education , the Law Offices of Craig Zimmerman and FindLaw:
  • Collection Calls - may be made by either the Servicer or Third Party Debt Collector.  Collectors may call your home or place of business.  The purpose of these calls are to get you make a payment
  • Higher interest or denial of credit — Your credit can be seriously damaged if you default on your student loan. This damage to your credit will affect the interest rates on future loans you are offered and can result in denial of credit opportunities outright.
  • Responsible for collection fees and costs — When you have a defaulted loan, you are charged additional collection fees and costs associated with your loan collection that can substantially increase your loan balance.
  • Wages garnished — Under wage garnishment, a certain percentage of your income may be withheld by your employer and sent to your loan holder to pay for a defaulted student loan.  If your loans are federally guaranteed, the Department of Education serves your employer with an “Administrative” Wage Garnishment for up to 15% on your income.  An Administrative Wage Garnishment is different from a standard garnishment.  The primary difference is there are no court proceedings.  The DOE simply fills out the necessary documents and serves them on your employer.
    In Texas (where I am located), private student loan lenders (non-federal/non-state) cannot automatically garnish your wages like the DOE.  First they must sue you and get a valid judgment against you.  This may seem like a good thing at first but obtaining a judgment against you actually gives them MORE tools to which they can collect on the debt including bank account garnishment and liens on property.  Texas is a community property state so if you cannot pay your student loans, lenders have the ability to go after your spouse for repayment if the loan was taken out during the marriage.   
  • Social Security Offset (Garnishment) - The Department of Education files documents with the Social Security Administration.  The Social Security Administration will withhold an amount up to 15% of your Social Security (including Social Security Disability Income) check. 
  • Tax Refund Offset - The Department of Education files documents with the Internal Revenue Service (IRS) in order to intercept (offset) your tax refund.  The IRS will remit an amount equal to the defaulted amount up to and including the entire amount of your refund.  You will not receive your tax refund and instead receive a letter from the IRS explaining the refund was applied to the defaulted student loan. 
  • Lottery winnings withheld — If you win the lottery, the winnings can be seized and applied toward a defaulted loan.
  • Legal action — In extreme circumstances, the holder of a defaulted loan may take legal action against you to force you into repayment.   If the actions above fail to resolve the issue or they are unsuccessful, the Department of Justice (DOJ) will file a lawsuit against you.  A DOJ lawsuit is almost impossible defend and nearly always results in a judgment against you.  Once the DOJ obtains a judgment, they may enforce the judgment by seizing your personal or business bank accounts, retirement accounts and other assets like your home, automobile or other valuables like jewelry.  Many self employed individuals (doctors, lawyers etc.) make the mistake of thinking because they can’t be garnished, nothing can happen.  The reality could be far worse than a garnishment. 
  • Professional license withheld — You may have your professional license (e.g., cosmetology, real estate, medical) withheld. To have the license reinstated, you must have an established repayment arrangement with your loan holder before a release letter will be sent to the licensing agency. This is the case here in Texas for some licenses.  Please check with your individual licensing board to see if it applies to you.
  • No more federal financial aid — If you default on your student loan, you will be ineligible for further federal financial aid unless your eligibility is reinstated.
  • Whole outstanding principal balance plus interest and fees becomes due at once — This is not uncommon in private loan contracts.  Not receiving a monthly statement does not relieve the borrower from the obligation to pay.

FindLaw says:
     Bankruptcy law--more specifically, section 523(a)(8) of the Bankruptcy Abuse Prevention and Consumer Protection Act--treats student debt as a priority debt, requiring it to remain after bankruptcy whether it was acquired from a private lender or the federal government. To be able to discharge the debt through bankruptcy, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”

So what is "undue hardship"?  According to the Law Offices of Craig Zimmerman:
     Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). Not all courts use this test. Some courts will be more flexible, some less.
Although this does not appear to be a difficult standard to meet, for the most part, most debtors are unable to get their student loans discharged. The same standards apply to both private and federal or state student loans.  Additionally, in order to obtain a bankruptcy discharge of student loans, the bankrupt debtor has to file an adversary proceeding (or a lawsuit) against the student loan creditor and have a court determine if the student loan debtor/borrower meets the criteria for discharge.   Since the adversarial process is usually an expensive and time consuming process, debtors who may meet the criteria can find themselves barred from exercising their rights due to financial limitations.

  If you are unsure who holds your loan(s) and need help identifying your lender, servicer, and/or guarantor, use the National Student Loan Data System Student Access area to retrieve your loan information.

The studentloanborrowerassistance.org group recommends these tips for dealing with your federal  loan servicer*

It is usually best to communicate with your loan servicer in writing, because you’ll have a physical record of what has been said and done.
  • Keep a record of events. If you speak with someone on the phone, make a note of whom you speak to and when, and what was said. If you use the mail, keep a copy of your letter and of any replies you receive.
  • Keep the evidence. Retain the originals of all receipts, bills, letters and e-mails regarding your account. Provide copies of the originals if you are asked for them. Send letters via certified mail, with a return receipt requested.
  • Stay calm. If you have confronted someone directly, don’t let the emotion of the moment get to you. If you are clearly not getting an adequate response, simply take the next step in the procedure for resolving your problems yourself.
  • Write clearly and concisely. Be polite and courteous, but don’t be afraid to convey the detail of any incident and to articulate your concerns. Write down the facts in a logical order and stick to what is relevant. Remember to include important details like your account number or social security number. Put these details at the top of your letter.
  • Agree on a reasonable time to expect a response. Ask for a response in a reasonable time, and be sure to tell the person how you can be reached.

*The Federal Student Aid Ombudsman of the Department of Education

The studentloanborrowerassistance.org group also has this to say about collection on private student loans.
There is a time limit for private student loan collection and private collectors do not have as many collection tools as the government.   Lawsuits are the main collection tools that private student lenders have.
This does not mean that private student loans are better than government loans. In fact, government loans are usually more affordable and have a lot more borrower protections. However, it is true that if you default, the government has a lot more ways to come after you than private lenders do. Regardless of whether the loan is private or government, it is very difficult to discharge in bankruptcy.
The time limits on how long private student lenders can try to collect vary by state, but are usually about six years after default. You should contact an attorney in your state to find out more about time limits (also called statutes of limitations).
This time limit gives the lender a certain amount of time to sue. If the lender sues during this time and gets a judgment, the amount of time the lender is given to enforce the judgment varies by state. Depending on the state, a creditor may have from five to as much as twenty years to enforce a court judgment. In most states, the creditor is allowed to keep renewing the judgment which basically gives the creditor an unlimited amount of time to try to collect.  State exemption laws determine what type of property, if any, a creditor with a judgment can take.
Private lenders will often hire collection agencies. You have the same rights as with government loans to fight back against any harassment or abuse. The main collection tool private lenders have is to sue you in court. Find out more about how to fight back in court.
Any collection fees for private loans should be stated in the loan agreement. The lender should not be allowed to charge collection fees unless there is a provision like Section L in this agreement. There may also be other laws in your state that place restrictions on the amount of collection fees that private creditors can charge.
Private lenders may negotiate with you to set up a repayment plan or otherwise settle your debt.

If you find yourself having to deal with legal actions taken against you, it may be time to consult an experienced collections lawyer. 

Tuesday, January 22, 2013

Can you REALLY buy a house without a credit card?

This question was presented to me today.  At the time I had no answer.  In my younger days I had done all the "worldly things" to build an "I love debt" (a.k.a FICO) score.  Before I was 18, I had piggybacked on my parents good credit and got a credit card where they were the co-signer.  This was to be used in case of emergency when I was traveling without them.  Never needed it but there was the security of knowing that mom and dad's money could bail me out if I ever got stuck (eg. the bus left without me or I had some type of medical emergency).   They also had me put my college textbooks on it so they could pay for them without actually being there.  In my quest for independence because I've always been a "Me DO!" kind of girl, I tried to get a credit card on my own at college before I turned 18... got denied... but thanks for the free pizza and t-shirt.  If I remember right, even Kohl's turned me down for a card when I was 19.  Finally I got one from First USA and felt grown-up, responsible... and poor.  Everything I made I always seemed to spend.  Given what I know now about the psychological and physical response to spending via credit card versus cash, I'm not surprized.  The good news is I always paid it off so my credit score just kept going up.  The next thing I know, I'm married and trying to buy my first home.  They run our credit scores and we are cleared for a 30-year mortgage for a lot of money.  Woo Hoo! 

Now let's fast forward... I am not the same person I was at 23 and a number of my ideas about money handling have changed.  I have three kids and my goal for them is to NOT follow the path I took but rather the path I teach.   We live on a cash budget now.  If we don't have the money, we don't buy it that moment.  We save up to purchase cars, TVs, computers, vacations and anything else big ticket.  The last thing we have to pay off is the house and with focused determination (NOT luck) we will pay our 15-year mortgage off 5 years early.  Yes, I said I had a 30 year mortgage earlier... that was 3 houses ago too.

 So that brings me back to the question "Can you buy a house without having a credit card?"  I had to do some digging but the answer is YES!  I found an example of how a family was able to purchase a home without opening a credit card.  The mortgage process was a bit more convoluted than the mainstram method of obtaining a mortgage but people who don't have credit cards and only rely on cash/debit are not mainstream... yet!  What impressed me most was the fact it was done with a big bank.  Kudos to Wells Fargo for going old school.

Check out the story at Simple Mom's blog.

Tuesday, December 11, 2012

Books I have read...

Over the summer I have tried to educate myself on the events that led up to the financial collapse in 2007.  Now that it is December I have come to the realization of two things:

1) It is incredibly difficult to write a blog post on an iPhone at 30,000 feet
My summer reading started off with a book called "Borrow: The American Way Out of Debt".  It covered the history of the credit industry in America from its early days of pre-industrialized, primarily agricultural funding to the current "buy now-pay later" mentality we currently find ourselves in now. Given that my profession is personal finance and the over-extension of credit is the main impetus for people to come seek me out, this was a great primer to understanding just how we (America) got into this mess to begin with. Excellent book, one I would love to have on my shelf if only I could find it at Half-Price Books.

The next book was "Chain of Blame". This specifically covered the rise and fall of the sub-prime mortgage industry over the past 30 years with emphasis of what led to the implosion in 2007. It's a who's who of mortgage lenders and how the industry changed after the collapse of the S&L's. All parts of the mortgage creation business are explored in detail in how greed at each step of the way caused the meltdown. Also another great book.

The third book was "Whatever Happened to Thrift?" Truth be told.... I can't remember what this book was about only that I was reading it in a hotel room Pensacola , Florida. Maybe that was my brain telling me it wasn't worth reading, too much whining by the author maybe? Or that it (my brain) was already on the beach and wished that I would put these books down and join it there. I'll chalk that one up to emu brain.

Next up was "Busted - Life Inside the Great Mortgage Meltdown". This book told the history of the housing crisis mixed with the author's own personal experience that was paralleling the events being played out on the national level. While I was less than thrilled at the personal choices he was making in regards to other areas of his life (affair/divorce/remarriage) he does lend a sense of "This could have happened to anyone" during this time-frame if you believed in all the marketing hype that was thrown at you. Many will tell you that you CAN, but that doesn't mean you SHOULD!

"The Big Short" has led to another couple of books that I have read or want to. Here the author delves into the insurance collapse that accompanied the mortgage collapse and how the two were tied together. I haven't finished this book ironically because I own it and since there isn't a pushy librarian demanding I give it back, it's been pushed to the bottom of the stack. Four years post meltdown, we all know how it ends so I'm not too worried about history changing itself.

"Liar's Poker" was my follow up read to "The Big Short" although chronologically it really happens before. Same author, this time talking about his short stint as bonds trader for Salmon Brothers and its eventual implosion while he was employed there.  The sheer amount of greed is overwhelming.
The latest completed book was "Nickel and Dimed: On (Not) Getting By in America".  The author decides to conduct an experiment to see if she can make a living at working some of America's entry level "unskilled labor" jobs.  It was a fascinating read as she writes about the struggles to find decent housing, manage the physical and mental demands of her jobs and the different trials that came up at each location.  My only comment about this book would be more towards the parameters of the experiment.  She was trying to go it totally alone with no help whatsoever.  Why?  I believe we were meant to live in community.  I understand for the sake of the experiment she didn't have the time to develop the necessary relationships to ease her burden, bond with those around her and improve her life.  There was a blurb in the book when she was working as a WalMart employee in Minneapolis where she interviews a "friend of a friend" who actually did what she (the author) was attempting to do, pick-up and move to a strange place knowing not a single person and start a new life.  The interviewee said it best when she said "The first thing you do is find a church."  That really spoke to me as to the kindness and generosity that we "the church" should have towards the needs of those around us and how we were meant to live in community.  Whether the interviewee was just using the church or actually joined the particular congregation, I don't know.  It makes my heart joyful when I see messages come across "The City" message board for our church where we've been able to lighten each other's burdens through various ways (e.g. finding employment, new lawnmower, a car, moving assistance and prayer). 
So, in all, it hasn't been a bad summer/fall for reading.  Not too many fines accumulated by late fees :) I've attempted several other financial history books but decided to give my brain a break and indulge it in some Amish romance novels.  A girl needs some fluff in her life.

Tuesday, October 9, 2012

Practice What You Preach

I had an interesting moment this morning.  I had gotten the email that the book I had requested at the Manchaca library was ready for me to pick up and came to the realization I also needed to do a mid-paycheck grocery shop. In my attempt to try and get all my errands done in one swoop and minimize the number of trips I decided to order my day as such:
1) Take Gavin to pre-school at 9AM
2) Hang out in library parking lot until it opens at 10 AM
3) Get library hold
4) Go shopping.

OK you say... what's the big deal... is this even blog worthy?  Well, that's where the oddness (is that a word?) comes in. 

I knew I was going to be hanging out for 45 minutes in the parking lot and decided a better use of my time would be reading one of the many books on the subject of my new profession Personal Finance instead of playing one of the silly little time wasters on my iPhone.  Don't get me wrong, there's a time and place for silly little time wasters but today didn't seem the day.  I brought my book I had recently purchased at Half Price Books called Affluenza.  It's based on a PBS TV series that had been done 15 years ago and has been updated as recently as 2005 (I'd be curious to see if there was a 3rd revision).  As the book title suggests, it is about the tendency of America to overbuy in an attempt to fill the hole in their lives, keep up with the Jones, etc.  So far it's been good.  Sitting in the car, another thought popped into my head.  I should write a post about the books I've read lately that have really been a help to understanding how we as a people have gotten into a financial mess on the personal level.  However, as my favorite TV chef would always say when a tangent popped up.... "But that's another show... or rather blog post".

So now you know what I've been reading, the kicker is the place I was going shopping... Costco.  Say hello to the store dedicated to the vogue of volume.  If there isn't a place more dedicated to the American spirit of Affluenza, it's a Warehouse Club.   Don't read me wrong, I LOVE Costco.  I have done my homework and know what is cheaper at which store (HEB or Costco) and which items fit our family's eating habits better.  I don't buy the 10 lbs of bananas at Costco even though on a per pound basis it's cheaper.  We just can't eat 10 lbs of bananas at once, because that's pretty much how you have to eat bananas.  You wait and wait and wait until they are ripe and then BAMMO! you've got a ton of fruit to chow down on before the fruit flies invade.  My kids love fruit but they do have their limits. There are other things that we do consume in such quantities (bread, milk, bacon, cereal, peanut butter) and have sufficient shelf life that it makes sense to buy them at Costco.

But, as usual I realize that I am the exception and not the norm.  Gone are the days of when I saw something at Costco I liked, I would get it regardless of real need or perceived need.  I stood in front of the men's dress socks display for 5 min pondering whether or not to buy them for Colin.  I did end up getting them only because I think the last time he bought dress socks was college, so... Happy Birthday Dear!  I bought you socks.

I just found it rather ironic that today in an effort to save the gas of running back to the house to wait for the library to open up, I brought a book about our over-consumption as a culture and then promptly went to Costco. 

Everyday I have to remind myself of our family's financial goals and why we are doing/not doing certain things.  I guess a day like this is a nice way for me to keep street cred with my coaching clients.  I have to follow through in my own life with the same things I am telling them.  I think the Hair Club for Men president says it best...

"I'm not just the owner... I'm also a client."

Thursday, October 4, 2012

Best kept secret in Texas

OK, so it's not a secret and it doesn't pertain to just those of us living in that wonderful state but I'm guessing it's something that most people don't do and should.

I would think that in the post-financial meltdown that "Easy Money" would be a little harder to come by.  I would think that at least "I" would have to do the initiating to get the money (Pawn Shop, Title loan, Payday loan, etc.) but nope! I opened my mailbox and there it was... an innocent little fake  check for no small chunk of money, made out to Colin from a group down the street called OneMain Financial.


A little digging showed me that they are an affiliate of CitiFinancial.  Yes, many moons ago we had a credit card with Citibank and while we were never late with a payment and gave them any money beyond what we charged... we would always manage to spend every penny of every paycheck.  In other words.... since paying with a credit card didn't register any pain (until I opened the statement every month), we often spent way more than we wanted.  That being said, we went on a financial lifestyle change and have dumped credit cards and debt for good.  OK... almost for good, we still have a mortgage but we are chipping at that bad boy with a sledge hammer to make it go away!  But back to the slime...

At one time I knew the little phone number you could call that would opt you out of getting pre-screened offers of credit and such.  Granted I'm not taking them up on the offer anyhow but I really don't like the thought of someone getting this little gem and taking us down the identity theft path.  So as I'm scanning to figure out which financial institution is ruffling my feathers I see at the bottom that wonderful number that will prevent future offers of crap being stuffed in my mailbox for at least the next 5 years. 


Here is the magic number you have been looking for!!


Did you see that?!?  Did you call?  I did.  Five minutes later I had both mine and Colin's name opted-out for the next five years.  In five years we may not have a postal system anymore but at least those offers of easy credit won't be heading my way until then.

Wednesday, September 26, 2012

Giving credit...

I am NOT a pioneer.  I have learned that about myself.  I am still an engineer at heart.  Show me how to do it and I will do it... better... faster.  So when I started this business I found myself wanting to emulate successful people in the same field and not blaze my own path.  While searching websites for who was actually out in my new profession I came across Deanna and her website.

At the time I found her site, I was still in the early stages of how to set up and classify my business (LLC, Sole Proprietor, etc..).  I thought it couldn't hurt to call her and see if she'd talk to me about how she went about setting up her business.  I figured had several things going for me:
1) She's in Texas like me so I would hope she would know what were some of the legal requirements and necessary certifications to running a Financial Counseling business.  Turns out there are very little in the way of requirements and no certifications necessary :)

2) I'm far enough away that I'm not viewed as competition.  College Station is kind of her western edge and farther east than I think my name will ever get so our markets don't really cross.  Shoot if I could get my name beyond South Austin I'd be a happy camper.

We talked for 45 min and she gave me insight into the business that I could have spent many years learning with trial and error.  So for all that I'd like to say a BIG THANKS!!!

Friday, September 14, 2012

Second brain

So one of the mental barriers I am facing in my new business is the fear that I will forget to tell a client some crucial detail they will need to know or that I won't know or remember where to send them for more information.  So much good information is flying at me from all over the place that my brain just isn't absorbing it at the rate I'd like it to.  I fight the battle between "It will all become second nature over time, client by client" and "You need to know ALL info for ALL possible clients right NOW!!"  It's not pretty but I think the former is winning.  I'm restarting my blog in hopes of having a place to all the valuable links of information that are sent to me on an almost daily basis.  If anyone else finds it helpful... fantastic!