Friday, February 11, 2011

Five Quick Ways to Bankrupt Yourself

It's always been easy to go bankrupt but the recession made it that much easier, with 15 million people unemployed and struggling to pay their bills.
An astonishing 1.5 million people went bankrupt in the past year, up 20 percent from a year earlier.
"It's easier than most people realize," said Samir Kothari, co-founder of, a site that helps people find the best, most cost-effective providers for everyday services like cellphones, cable, credit cards and gas.
"There is a general lack of financial discipline in the way people live their lives, manage their money and plan -- not that they don't do it well, but rather that they don't do it at all," Kothari said.
Remember the days when Intuit's Quicken and Microsoft Money software for managing your personal finances became popular? Millions of people bought the software, but as it turns out, they were used about as often as infomercial exercise equipment: Only about 10 percent of the people who bought it actually used it.
"There was already a minority of people buying it to help manage their money -- and even those who bought it aren't using it!" Kothari said.
To help illustrate the point -- and maybe help a few people avoid becoming a statistic, here are five quick ways to bankrupt yourself:
©Getty Images/
A how-to guide for bankruptcy, Step 1: Pour all of your money down the toilet.
1. Doing the Plastic Shuffle
The single best way to go bankrupt is to bury yourself in credit-card debt.
Our parents didn't have the option to rack up tens of thousands in credit-card debt -- credit cards didn't really become widely used until the 1960s. But for today's generation, it's an easy -- and common -- way for people to live above their means.
Transferring balances to a lower annual interest rate can be helpful if used sparingly, and in conjunction with a plan to pay it off, but chronic transferring often just masks a bigger problem.
"People think it will all just work out somehow. They think: 'I'll get a raise. I'll get a good tax refund,'" Kothari explained. "These things are not based on logic but on people being very optimistic about life -- defying reality. I think that's what gets people into trouble."
With the new credit-card legislation, lenders are now required to print on each statement the amount of time it would take to pay off the bill by only paying the minimum, and how much you'll ultimately be paying after all that interest.
"Imagine if you see that it will take you 17 years to pay off your bill!" Kothari exclaimed. "That should help shock America into realizing the trouble with living a reckless credit-card kind of spending game," Kothari said.
2. Assuming Insurance Will Cover Your Medical Bills
So, maybe you budget. You make an allowance for food, clothes, beer.
But do you have an allowance for medical costs?
Here's why you should: The No. 1 cause of bankruptcy is medical bills.
Harvard researchers found that 62 percent of all bankruptcies are caused by medical bills. Even more disturbing: 78 percent of those were people who had insurance.
"Things happen. Surprises happen," Kothari said. "And people don't prepare for the unexpected. They don't have a mindset of, 'How do I prepare myself for the unexpected?'"
Of course, the best medicine is to not get sick. And to that goal, you can do your best to lead a healthy lifestyle. But you also need to live a healthy "fiscal lifestyle," Kothari said -- make sure you're saving every month and building a cushion for the unexpected.
"Then you can be more resilient when life happens," he said.
3. Taking Out Advances on Your Paycheck
So you think just this one time, because you really really have to, it's OK to take an advance or loan on your paycheck?
Sounds like somebody needs a timeout!
If you need to get your paycheck money before it's due, there is some seriously fuzzy math going on.
"Payday loans are financial products that keep you in the poor house," BillShrink says.
When our parents were running short ahead of payday, they did things like split a can of beans for dinner and save the steak for when they're more financially secure.
These are humbling experiences but they build solid financial habits -- not to mention provide great stories they can proceed to repeat to their children 1,489 times throughout their lifetime.
Your parents' stories don't always work to scare you into managing your money better. But here's something that might: Fees on paycheck advances and loans make credit-card interest rates look like chump change.
BillShrink estimates that, when you factor in all the fees, the interest rate is 911 percent for a one-week loan, 456 percent for a two-week loan and 212 percent for a one-month loan.
4. Keeping Up With the Joneses
A huge part of the nation's money problems today are psychological: You see your neighbor, who you know doesn't make as much as you, just bought a luxury car.
How can he afford it, you wonder.
What most people often don't realize is -- he can't.
So you just sit there and think about how much you want it. You convince yourself that if he can afford it, so can you. And then, you just hit the breaking point -- and you buy it.
"There's a strong association between materialistic possessions and status," Kothari says. "Remember 'he who dies with the most toys wins?'"
From new houses and cars to the latest gadgets or exotic vacation destination, it's all very tempting to want to either keep up with -- or outdo your neighbor.
"People think that stuff matters to other people more than it really does," Kothari says.
Here's a statistic to keep in mind the next time you get neighbor envy: There are approximately 181 million people with credit cards in this country and more than half of them carry a balance.
So maybe next time you ask yourself, "How can he afford it?" you can also ask, "Is he one of the 100 million who carry a balance on their credit cards?"
And remember: Whatever you buy is on your credit card -- not his. Before you make a big purchase, make sure you've got the cash in the bank to back it up.
Maybe he should be keeping up with you!
5. Overestimating the Value of an Expensive Degree
The more education you have, the higher your pay, right?
When people take out student loans, few do the math to see what the average salary will be after graduation -- and how long it will take to pay off their loans.
They just assume that someone else has probably already crunched the numbers, making sure the cost of the degree is proportionate to the salary. They assume that because they've invested in education instead of, say, a new pair of shoes or golf clubs that their money was spent wisely.
Well guess what? Those people already got the first question wrong -- before even signing up for the class.
"The for-profit education sector is really, really big industry with huge advertising budgets," Kothari says. "They'll have a guy who says he graduated and now he makes $200,000 a year -- if you compare data on average salary, I'm sure it's not aligned with some of those marketing claims," Kothari said. "They're just selling a product."
So do your homework -- before you go to school.

What Is the U.S. Government's Credit Score?

By: Stephen Simpson
Credits to: Investopedia

Although the U.S. government has the luxury that the market for its debt is the single largest securities market in the world, there is growing concern about the creditworthiness of the government and its ongoing ability to borrow. What would happen if the federal government were subjected to the same standards as its citizens and assigned a credit score?

• What Fuels the National Debt?

While the credit rating agencies jealously guard the formulas by which they calculate credit scores, a few general concepts are widely acknowledged as major factors. Let's look at how the United States would stack up for each element that goes into a credit score.

Are Bills Paid on Time?

Paying on time is good, paying late is bad. Having a debt go to collection or discharging debts through bankruptcy is very bad.

Generally speaking, the United States has a very good record of paying its bills on time. The national government has defaulted on its debts just twice -- back in 1790 (under the huge burden of debts incurred in the war for independence) and again in 1933 when the government explicitly changed the rules and unilaterally decided it did not have to honor the obligation to repay its debts in gold.
Along the way, the federal government has faced a few moments where creative accounting had to be employed. Nevertheless, for all of its faults and flaws, the United States scores well in terms of paying what it owes in interest and principal and doing so on time.

How Much is Owed?

The larger the amount of outstanding debt, the worse the score, though this is mitigated by a borrower's ability to pay.

By absolute standards, the United States has a huge amount of debt (over $14 trillion at the national level). However, looking at public debt as a percentage of GDP, the U.S. clocks in at about 59% -- in the upper third of countries, but much better off than the likes of Japan, France, Singapore, Canada and even Germany. It should be noted, though, that this figure refers to debt held by the public, and does not include external debt.
How Much Can Be Borrowed?

Lenders are hesitant to loan money to applicants with a large percentage of their credit capacity being used, such as someone who has several maxed out credit cards.

Debt capacity is an area where the U.S. government likely cannot score well. Although it is true that there are legal debt limits imposed by Congress, a simple vote can increase them. To that end, the U.S. debt ceiling has ballooned from $6.4 trillion in 2002 to over $14 trillion in 2010.

In other words, there really are only minimal limits on how much the government can borrow -- it would take an almost unthinkable amount of borrowing for the United States to truly max out its borrowing ability.

The Length of Credit History and Mix of Credit

The longer someone borrows and repays money, the better. Successfully managing multiple kinds of debt (installment debt like a mortgage or student loan, or revolving credit like a credit card) adds to a lender's confidence and will improve a credit score.

The U.S. government seldom borrowed from its own citizens on a regular basis until the First World War made it impractical to borrow from foreign governments. However, the U.S. government has used debt to fund projects and wars since the very founding of the republic. Consequently, while it does not have the credit history of a nation like France or the United Kingdom, the United States would score well on this metric.
New Applications for Credit

If a potential borrower is actively seeking credit, it could be a sign of financial distress that does not yet appear.

Given the creativity of the federal government, and its willingness to try new products like the inflation-protected TIPS, it is probably fair to assign a reasonably high score to this metric. One potential problem, though -- and one that the credit rating agencies do not openly discuss in terms of its significance -- is that the United States has rarely paid its debts in full. Instead, the government expands its borrowing capacity and rolls over old debt with new debt offerings.

The Treasury holds regular and routine debt auctions, so an outside observer could credibly argue that the U.S. is effectively always taking new applications for credit.

And the Final Score Is ...

Using some of the online credit score estimators, and making some assumptions about how to translate government performance into numbers that make sense for applications designed for regular people, it is possible to at least estimate a score. In particular, it was assumed that the United States would have a tremendously large amount of outstanding debt and debt instruments, but a long history of paying on time.
Perhaps shockingly, most of these estimators come up with a score of around 650 (with a range of 625 to 720). That is basically in the middle of the range, and consistent with the recent rating on U.S. debt of A+ by China's Dagong Global, the only non-U.S. credit rating agency that seems to draw much interest or credibility. By comparison, countries like Norway, Switzerland and Singapore score an AAA from Dagong, and the United States is largely on par with Japan, France and Britain in Dagong's scoring.
The Bottom Line
To some extent, notions of credit scores just do not apply to countries. The U.S. government has an advantage that most debtors do not - if the U.S. government needs to pay its debts, it can simply print the money to do so. If you or I tried that, we would soon get a visit from the Secret Service and our credit scores would no longer be of much concern.
By the same token, nothing lasts forever. There was a time when Britain was the unassailable global financial titan and those days are long past. If the United States does not begin to tackle its debt load, its persistent deficits and its ongoing expansion of services and obligations, there will be a time when debt ratings do matter and the United States may find it cannot get all the debt it wants on easy terms.

15 Insurance Policies You Don't Need

By:by Lisa Smith
Credits to: Investopedia

Fear of the future sells insurance. Because we can't predict the future, we want to be ready to cover our financial needs if, or when, something bad happens. Insurance companies understand this fear and offer a variety of insurance policies designed to protect us from a host of calamities that range from disability to disease and everything in between. While none of us wants anything bad to happen, many of the potential catastrophes that happen in our lives are not worth insuring against. In this article, we'll take you through 15 policies that you're probably better off without.

1. Private Mortgage Insurance
The infamous private mortgage insurance (PMI) is well known to homeowners because it increases the amount of their monthly mortgage payments. PMI is an insurance policy that protects the lender against loss when lending to a higher-risk borrower. The borrower pays for this insurance but derives no benefit. Fortunately, there are several ways to avoid paying for this unnecessary policy. PMI is required if you purchase a home with a down payment of less than 20% of the home's value. The small down payment is viewed as putting you at risk of defaulting on the loan. Put down at least 20% and the PMI requirement goes away. Alternatively, you can put down 10% and take out two loans, one for 80% of the sale price of the property and one for 10%, although interests rates can prevent the economics of this maneuver from working out in the homeowner's favor.
2. Extended Warranties
Extended warranties are available on a host of appliances and electronics. From a consumer's perspective, they are rarely used, particularly on small items such as DVD players and radios. If you purchase a reputable, brand-name product, you can be fairly certain it will work as advertised and that the extended warranty is statistically likely to be unnecessary. If you spend $5,000 on a giant, flat-screen television, the policy is still unlikely to pay off, but might make you feel better. For everything else, forget it.
3. Automobile Collision
Collision insurance is designed to cover the cost of repairs to your vehicle if you are involved in an accident. If you have a loan out on the car, the loan issuer is likely to require that you have collision insurance. If your car is paid off, collision is optional; therefore, if you have enough money in the bank to cover the cost of a new car, collision insurance may be an unnecessary expense. This is particularly true if you are driving an old car, because cars depreciate so quickly that many vehicles are worth only a fraction of their purchase price by the time the loan is paid in full.
4. Rental Car Insurance
Most auto insurance policies offer additional coverage for the cost of car rentals, touting it as a useful feature if your car is ever involved in an accident and needs to spend some time in the repair shop. This may sound like a good idea, but in reality, most people rarely rent a car, and when they do, the cost is relatively low and hardly worth insuring against. Although rental car insurance is relatively inexpensive, amortized over the course of a lifetime you are still likely to spend far more than you will benefit.
5. Car Rental Damage Insurance
Many auto insurance policies already cover rentals, so there's no need to pay for this twice. Check your policy before you pay. Depending on where you rent the vehicle, you may also be able to pay a small fee for insurance on your rental when you pick it up at the rental center. If this fee is less than what you'd pay for a year in your old policy, choose the fee over the policy.
6. Flight Insurance
Flight insurance coverage is completely unnecessary. Despite media portrayal, airline accidents are relatively rare, and your life insurance policy should already provide coverage in the event of a catastrophe.
7. Water Line Coverage
Water companies have made an aggressive push to sell policies that cover the repair of the water line that runs from the street to your house. The odds are in your favor that you will never use this coverage, particularly if you live in a newer home. If you live an average suburban neighborhood and you do need to repair the water line, the distance to the street is short, the likelihood of a problem is low and repair costs are a few thousand dollars or less. The same goes for policies offered by other utility companies.
8. Life Insurance for Children

Life insurance is designed to provide a safety net for your heirs/dependents. Because children don't have heirs to worry about and, statistically speaking, most kids will grow up safe and healthy, most parents should not purchase life insurance for their kids. Instead, use the money that you would have spent on life insurance to fund an education plan or an individual retirement account (IRA).

9. Flood Insurance

Unless you live in a flood plain or an area with a history of water problems, don't even bother buying flood insurance. If none of the homes in the area has ever been flooded, yours is unlikely to be the first.

10. Credit Card Insurance

Purchasing coverage to pay your credit card bill in the event you cannot pay it is a waste of money. A far better idea is to avoid running up your credit cards in the first place, so you won't need to worry about the bills. Not only do you not save on the insurance premiums, you'll also save the interest on your debt.

11. Credit Card Loss Insurance

Federal law limits your liability if your credit card is stolen. Your out-of-pocket costs are limited to $50 per card and not a penny more. In fact, many credit card companies don't even try to collect the $50.

12. Mortgage Life Insurance

Mortgage life insurance pays off your house in the event of your death. Rather than add another policy - and another bill - to your list of insurance plans, it makes more sense to get a term-life policy instead. A good life insurance policy will provide enough money to pay off the mortgage and to cover other expenses as well. After all, the mortgage isn't the only bill your survivors will need to pay.

13. Unemployment Insurance

This coverage makes minimum payments on your bills if you are out of work, which sounds like an attractive proposition. A better plan is to save your money and build up an emergency fund instead. You won't have to cover the cost of the insurance policy and, if you are never out of work, you won't spend any money at all.

14. Disease Insurance

Policies are available to cover cancer, heart disease and other maladies. Instead of trying to identify every possible disease that you may encounter, get a good medical coverage policy instead. This way, your medical bills will be covered regardless of the problem you face.

15. Accidental-Death Insurance

Unless you are extraordinarily accident prone, an accident is unlikely. Major catastrophes such as car wrecks and fires are covered under other policies, as is any harm that comes to you while at work. Accidental-death policies are often fraught with stipulations that make them difficult to collect on, so skip the hassles and get life insurance instead.

When Choosing Insurance

There are so many policies to chose from, and they all cost money. While a certain amount of insurance coverage is necessary and prudent, you need to choose carefully. In general, broad policies that offer coverage for a multitude of potential events are a better choice than limited-scope policies that focus on specific diseases or potential incidents. Before you buy any policy, read it carefully to make sure that you understand the terms, coverage and costs. Don't sign on the dotted line until you are comfortable with the coverage and are sure that you need it.

Wednesday, February 9, 2011

Republicans: Halt taxpayer aid for Fannie, Freddie

WASHINGTON (AP) -- Federal taxpayers should stop propping up Fannie Mae and Freddie Mac, and Congress will wean the country away from its reliance on the two huge but fiscally feeble housing finance companies, House Republicans said Wednesday.
Democrats conceded that changes are needed in Fannie and Freddie, which have swallowed $150 billion in federal aid since the government took them over in September 2008. But they cautioned that care must be taken to avoid jeopardizing the popular 30-year fixed rate mortgage and the access to the housing market that the two companies have helped provide to millions of moderate-income families.
Neither Republicans nor Democrats are ready to push specific plans or timetables for overhauling Fannie and Freddie through Congress. That underscores divisions over how to fix the way the nation's $11 trillion housing market is financed, and a hesitation over making drastic changes in such an enormous sector even as the economy starts rebuilding strength after its deep swoon of the past three years.
Fannie and Freddie, along with other federal agencies, have accounted for about 90 percent of new mortgages over the past year, reflecting a lingering hesitancy by private lenders to re-enter the housing market. Congress' work on reshaping the country's mortgage finance system is expected to take months or longer.
At a hearing Wednesday of the House Financial Services subcommittee that oversees the two housing giants, Rep. Scott Garrett, R-N.J., said his goal is "to ensure that we put an end to this destructive and costly housing finance policy that protects taxpayers and actually strengthens communities instead of destroying them."
Garrett, who chairs the subcommittee, said afterward that he wants to see "eventually no government backstop for any entity" like Fannie and Freddie. He said he had no specific schedule for moving legislation through his committee.
Many Republicans argue that Fannie and Freddie were a major cause of the nation's housing crisis of falling home prices and numerous foreclosures by backing numerous subprime loans -- mortgages that quickly became worthless because they went to people who could not afford them.
Rep. Jeb Hensarling, R-Texas, a member of the House GOP leadership, said the main question is "how do we transition to a competitive market without taxpayer guarantees, and how soon can we get there."
But there is some reluctance in GOP ranks to do anything too abruptly. Rep. Michael Fitzpatrick, R-Pa., said he wants the government's rule wound down but warned that doing it too quickly could harm the economy.
"We can't allow prudence to be the enemy of progress," he said.
Democrats say Fannie and Freddie merely followed the private sector, which set the pace for making subprime loans, and performed the constructive functions of keeping 30-year mortgages affordable and helping lower income families become homeowners.
Rep. Maxine Waters, D-Calif., the subcommittee's top Democrat, said she is open to any plan that takes steps like preserving the 30-year mortgage and helping all qualified borrowers get loans.
Waters said that while the details of any housing finance overhaul are crucial, "I think it's even more important that we make clear what values underpin our vision for the future."
In coming days, the Treasury Department is expected to release a report stating the Obama administration's views on how to reshape Fannie and Freddie. That report is expected to propose several options for revamping the country's housing finance system, including phasing Fannie and Freddie out and gradually shrinking the government's role in mortgage financing, according to lobbyists who have heard descriptions of the plan.
Whatever the House decides to do this year -- if anything -- the Democratic-run Senate and President Barack Obama are likely to have their own, differing views.
Credits to: Alan Fram, Associated Press

Foreclosure Myths Debunked

By: Broderick Perkins

When millions of foreclosures suddenly flooded the market at the onset of the housing crash, home owners knew little to nothing about holding onto their homes or how to recover if they got the boot.
Misinformation and fraud compounded the effects of slow regulatory action and lackadaisical response from the lending industry.
Uncharted waters were submerged in rumors, speculation, conjecture and ignorance.
Years later, foreclosure myths endure.
Freddie Mac, one of the nation's largest home loan investors, initially charged with expanding opportunities for home ownership and now focused on the liquidity needs of the mortgage market, is also about myth busting.
To set the record straight on foreclosures, it offers "Top Foreclosure Myths" and the truth behind those false beliefs.
To wit:
  • Myth: You should stop paying your mortgage so you can leverage assistance with your mortgage payments.The approach, called a "strategic default," can become a tactical trap.
    It isn't necessary to default on your mortgage payments in order to qualify for help.
    If you are struggling to stay current on your mortgage, you may be eligible for a loan modification or other assistance program.
    You signed a contract that binds you to making regular mortgage payments. If you don't make your payments, you will be exposed to foreclosure, subsequent black marks on your credit report and years of financial recovery.
    If you can financially afford to make your mortgage payments, even if you've been declined a mortgage modification , short sale or other work out, do so to maintain your credit standing.
    If you need help, contact your lender, contact a U.S. Department of Housing and Urban Development (HUD)-approved counselor online or call the Homeowner's HOPE Hotline at 888-995-HOPE (4673).

  • Myth: After a foreclosure, you'll never get another mortgage.Well, perhaps you borrowed more than you could afford or your ability to pay for what you thought you could afford went away. You may not qualify for a home for as long as seven years, but that's not "never."
    Work to create a spending and savings plan that will rebuild your credit. Get approved counseling that will reveal your effort to recover.

  • Myth: Workout options are over once you get a foreclosure notice.Lenders would prefer that you keep your mortgage and continue to make payments because they lose money when they foreclose on you. Even if foreclosure proceedings have begun, it's not too late to be considered for a workout or other alternative.

  • Myth: You need to leave your home as soon as you're notified that your property is in foreclosure.A notice of foreclosure is the first step in the foreclosure process. There are procedural and legal guidelines and applicable state and federal laws that servicers and lenders must follow in every foreclosure. Foreclosures take months to complete.

  • Myth: If you're late on your monthly payments, you'll lose your house.You will if you stick your head in the sand. If you have a financial hardship and fall behind, it's possible to keep your house and get back on track if you tell someone who is able to help. Contact your lender to discuss your options that include forbearance, loan modification, reinstatement, repayment plans, even a short sale.

  • Myth: All the offers for help are probably all scams.Scam artists do often target homeowners who are struggling to meet their mortgage commitment or who are anxious to sell their home.
    Deal with your lender first, rather than an outside party. If you do deal with an outside firm avoid those that ask for a fee in advance to work with your lender to modify, refinance, or reinstate your mortgage. Ignore guarantees from outside firms that claim they can stop a foreclosure or modify your loan.
    Legitimate offers will have specific information identifying your current mortgage, including the loan number of your mortgage. Shy from offers that come from a company other than your current lender or an authorized agent of your lender.

  • Myth: Give up if your lender is not responding to your inquiries.Never give up. Lenders are deluged. It make take longer than you'd like to reach your lender, which is why you should contact your lender at the first sign of trouble. The process of obtaining a loan modification or other foreclosure alternative may require diligence in the form of multiple calls and multiple submissions of documents between you and your lender. The process isn't perfect, the procedures continue to change. 

    Credits to: Michael Magaw and Peter Wollner's Real Estate Update Newsletter
  • JFK; Bush; LBJ; Nixon