Archive for April, 2010

Bankruptcy and/or Foreclosure

Friday, April 30th, 2010

In trying to stem the foreclosure crisis, the government has enlisted the help of lenders, servicers, investors, and of course homeowners, themselves. Conspicuously absent from this list of participants, however, are the courts.

Thus far, the only meaningful involvement by the courts has seen renegade judges unilaterally challenge the authority of lenders on a case-by-case basis. Sometimes, they have eliminated mortgages completely for homeowners facing foreclosure, but these stories remain the exception. For the most part, they have merely rubber-stamped the foreclosure petitions of lenders, since the law is the law.

, it is unfortunate that bankruptcy courts haven’t been vested with enough power to really help homeowners work around foreclosure: “A big advantage of bankruptcy over government-subsidized modifications is that bankruptcy is a difficult process that does not entice anyone to purposely default in order to get better repayment terms.” In other words, government programs are currently structured such that homeowners must (deliberately) default before they become eligible for relief. If the courts were involved, however, this incentive would disappear.

Under current laws, courts don’t have the power to modify primary mortgages, unless the borrower has first declared bankruptcy. Even then, the lender will still probably be successful in foreclosing on your home if it is determined that you can’t afford to continue making mortgage payments. [Thanks to aggressive lobbying, mortgage debt and student loans are basically "exempted" from the bankruptcy process].

If the borrower files for Chapter 7 Bankruptcy, then he can usually achieve a temporary stay of foreclosure. While this will give you automatic relief, the lender can usually petition to have the stay lifted within 3-4 months, which means that at best, this is merely a stopgap measure. If the borrower instead files for Chapter 13 bankruptcy, he can usually work out a repayment plan for the missed mortgage payments. Unfortunately, this procedure won’t do anything to reduce the size of one’s primary mortgage. (Second mortgages may be eliminated, but bankruptcy courts are barred from meddling with the primary mortgages). Rather, it will help those suffering from “temporary” financial distress that still have enough income to remain in their homes.

However, common sense dictates that those who could still afford to pay their primary mortgages probably wouldn’t go through the hassle of filing for bankruptcy, except in rare circumstances where their other debt was crippling, which means this avenue is basically useless. Fortunately, some institutions have started to lobby the government to think about changing bankruptcy laws, for the sake of creating an end-all solution to the foreclosure crisis. Let’s hope that they succeed!

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Graduates Struggling to Repay College Debt Burden

Friday, April 30th, 2010

At first glance, a college degree may seem like a good investment for your future. Indeed, studies suggest that higher education enables individuals to significantly improve their earning capacity. But the question is, how far does it go in providing good value for money? In recent years, some graduates have come to the conclusion that a college degree is not worth the time, effort, and resources you put into it.

Graduates of for-profit universities have found that their debt load makes it impossible for them to earn a decent living. Around 53% of these graduates carry around $30,500 or more when they leave the university. Meanwhile, 24% of students from private nonprofit schools and 12% of those from public colleges carry similar debt loads.

As if their debt problems aren’t enough, it is compounded by the tough job market. The graduates of 2008 faced after the financial crisis and recession. At this point, their main concern isn’t how they can repay their loans but if they can even get a job at all. According to Sandy Baum and Patricia Steele of the College Board, “Too many students are borrowing more than they are likely to be able to manage.”

The study from College Board also revealed that, in terms of numbers, blacks are most likely to borrow; 27% have a debt of $30,500 up. Among the whites, the figure stands at 16% while it is at 14% for Hispanics. Asians tend to borrow least as only 9% of them have this burden.

Given this figure, financial policies need to be strengthened to let students borrow only what they can realistically repay. In addition, it is important to help students become financially literate before they undertake any borrowing for postsecondary education. Their expectations should be based more on facts, not just hope.