Money Law Blog

Hardship withdrawals from retirement plans, such as 401K plans, nationwide have reached a ten-year high, according to a report issued last week by Fidelity Investments which administers about 17,000 plans across the country covering some 11 million participants.

In the second quarter of this year, about 62,000 workers asked for withdrawals from retirement plans to pay medical expenses, costs to purchase or repair a primary home, tuition and education expenses, burial or funeral expenses, or to prevent an eviction or foreclosure on a primary home.

Even worse, besides withdrawals, more and more people are taking loans from retirement plans. A two percent increase in the second quarter now means that 22 percent - almost a quarter of all participants -- have outstanding loans against their accounts.

It's a risky and sometimes financially-disastrous game for consumers. Too often, in my fifteen years of bankruptcy practice in the Washington-DC area, I have seen people needlessly lose their retirement, and worse, dig themselves into a deeper hole.

There are several typical scenarios:

• To stop collectors from hounding him, the debtor takes a lump sum withdrawal to pay off his bills. Unfortunately, many do not subtract withholding taxes from the withdrawal. When the end of the year comes, the debtor does not have the cash to pay the income tax plus the additional 10-percent penalty. The debtor has now turned his debt problem into a more serious tax problem.
• The debtor takes a loan to pay off debts or make payments on debts, and then as his income situation deteriorates, he defaults on the 401K loan payments. At the end of the year, a "distribution" (equivalent to a withdrawal) is declared. The full tax and 10-percent penalty on the loan is now due.
• To stop a foreclosure or mollify creditors, the debtor takes out a loan or withdrawal to make the minimum payments on installment loans or pay the mortgage. The saddest cases are person who drain retirement funds, which are generally protected in bankruptcy, to make minimum payments on debts that never go away, or the house goes into foreclosure anyway when the money runs out. In most cases the debt could have been discharged in bankruptcy from the very beginning and he still would have kept the tens and hundreds of thousand he had saved for retirement. The debtor "ate his seed corn" for nothing!

Continue reading "Hardship 401(k) Withdrawals: Be Careful. You May Be Digging a Deeper Hole!" »

Ah, country witticisms. I love 'em. They're funny, and true.

So it is with the current debate surrounding the appointment of Harvard Law professor and consumer bankruptcy expert, Elizabeth Warren, to head the new Bureau of Consumer Financial Protection.

For consumers, who have been beaten up by the financial system in this country, the agency is one of the best things to come out the recent financial reform act.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house," she wrote in a now-famous 2007 article in the journal Democracy proposing such an agency. "But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street."

It was Warren who dreamt up the idea and has been its champion. To think that anyone else would be considered as its first director is unfathomable. It's a bit like telling the Wright brothers: Thanks, Wilbur. Thanks, Orville. Now hand us the keys. You're not flying it.

Obviously Wall Street and its allies in the Senate are trying to torpedo her nomination. It makes perfect sense: When you can't defeat the legislation creating the agency, then water down its effectiveness by getting a stooge for a regulator.

The lobbyists know Warren is a plain-spoken consumer advocate who's not afraid to "tell it like it is," such as taking the financial industry to task for the reams of fine print in contracts. She's popular with plain folks and even been the inspiration for a recent rap video.

As a Washington, DC-area bankruptcy attorney, I have seen exploding adjustable rate mortgages that even I, with a law degree, training in finance, and former holder of a stockbroker's license, have trouble understanding.

The agency's first director is critical. The initial head will set the course for the agency and determining whether it will be an effective advocate for consumers, or a patsy for the financial industry.

As the economy falters, local governments also are feeling the pinch since tax revenues decline. Virginia and Maryland had two-month tax amnesty windows last year. Now it's the District of Columbia's turn.

Running August 2 to September 30, 2010, under the temporary tax amnesty taxpayers who owe taxes to DC will be able to pay without penalties. No questions asked.

The savings can be substantial, especially if no return was ever filed, since there are "failure to file" penalties, as well as "failure to pay" penalties. With interest and penalties, the effective growth rate of a tax debt can be approximately 25 percent a year!

DC's new tax amnesty initiative indicates there will be no criminal tax prosecution. But, if under the facts of your situation, there is any possibility the government could make a case for PURPOSEFUL tax evasion, you may want to consult counsel before coming forward. Interest will not be waived, and usually cannot be under the law.

The types of taxes qualifying for the amnesty are:

• Income
• Gross receipts (a business tax)
• Estate
• Tobacco
• Toll communications

Real property tax does not qualify.

The website has a handy interest calculator to add up your the total you owe once you've figured your tax.

Note that the information will be shared with the federal government, so expect a bill from IRS that you will have to deal with.

Continue reading "DC Tax Amnesty: If You Can, Take It Now!" »

Here's how the FTC describes the debt-relief firm's typical modus operandi:

Some debt settlement companies claim that they can arrange for your debt to be paid off for a much lower amount - anywhere from 30 to 70 percent of the balance you owe. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000. But there is no guarantee that debt settlement companies can persuade a credit card company to accept partial payment of a legitimate debt. Even if they can, you must put aside money for your creditors each month and pay the hefty fees debt settlement companies charge before they settle any of your debts. On top of that, you may have to pay a final fee to a debt settlement company that's a percentage of the money you've supposedly saved. Meanwhile, it may be months - or even years - before the debt settlement company negotiates with your credit card company to settle your debts. And, if you stop making your payments in the meantime, the credit card company usually will add late fees and interest to the debt each month. That can cause your original debt to double or triple. All these fees will put you further in the hole.

Word to the wise: Do it yourself. Do a budget. See what you can afford to pay. Call your creditors and see what you can negotiate. If you need help, try a nonprofit credit counselor, particularly one approved by the federal government for pre-bankruptcy credit counseling. The list is available at the US Department of Justice website at "List of Credit Counseling Agencies Approved Pursuant to 11 U.S.C. § 111."

Meanwhile, the industry continues to propagate misinformation and, unfortunately, the press continues to pass it along.

Reporting a statement by David Leuthold, executive director of the Association of Settlement Companies, a July 30, 2010 Washington Post article by Ylan Q. Mui, states: "The average customer has about $30,000 in credit card debt. These borrowers cannot afford a debt-consolidation plan but do not qualify for bankruptcy, Leuthold said."

The truth is there are very, very, very few cases where a person does NOT qualify for bankruptcy, e.g. where he lied to the court in a prior bankruptcy and his case was dismissed by the judge with prejudice to re-filing for a stated period time, or he got a discharge in a prior bankruptcy within a certain number of years under the new law. Those are isolated cases.

The real question is WHAT type of bankruptcy the person qualifies for: Chapter 7, 13 or 11. In each there is a discharge.

The debt settlement companies love to propagate this confusion to scare people away from getting relief under the law and instead drive them into the arms of these hucksters.

The same article reports the trade association executive predicting the new rules on advance fees will cause many of the debt relief companies to go out of business. Maybe that would not be such a bad thing.

It's not often you hear a leading public official use adjectives that blunt to characterize the practices of a business. But those were the words of Federal Trade Commission Chairman Jon Leibowitz last month announcing new rules to rein in the predatory practices of for-profit debt relief firms.

Responding to more than 3,500 Better Business Bureau complaints filed across the country, the new FTC rules are aimed at curbing widespread abuse of desperate consumers looking for solutions.

"Too many of these companies pick the last dollar out of consumers' pockets - and far from leaving them better off, push them deeper into debt, even bankruptcy," Leibowitz added.

At this bankruptcy law firm serving clients in MD, VA and DC, we applaud the efforts after seeing way too many unfortunate victims who have lost hundreds and thousands to the scammers before coming to this office.

Closer to home, since 2003 the FTC has been engaged in an on-going legal battle with Germantown, Maryland-based, AmeriDebt, one of the larger such such firms and its founder, Andris Pukke, which the agency says fleeced some 300,000 customer for $172 million in hidden fees.

As of October 27, 2010 for-profit debt management companies selling over the telephone will no longer be able to charge an upfront fee until the consumer sees results, and then only in proportion to the degree of success, if any.

As of September 27, 2010 the firms will be required to make important disclosures, including:

• How long it will take to see results.
• How much it will cost.
• What are the negative consequences from debt relief programs including a hit to the debtor's credit score and possible taxes on debt forgiven.

As a bankruptcy attorney serving homeowners facing mortgage problems in DC, Virginia and Maryland, I try to stay abreast of trends reading the columns of national economists and financial writers.

Financial columnist Ezra Kein's essay "Digging into finance's pay dirt" of Sunday, July 25, 2010 points up the seamier side of finance in America - predatory lending to the poor. Klein bases his commentary in part upon reporting by Gary Rivlin in his book "Broke, USA." Klein writes:

But before they [the working poor] were Wall Street grist [for subprime mortgage lending by mainstream banks], the working poor were good business.

"To me, it was so counterintuitive," Rivlin says. "People with no money in their pockets are good for business?" But they were profitable. And fringe finance bloomed. By 1996, there were more payday lenders than all the McDonald's and Burger Kings in the land combined.

It was also a different sort of business. Unlike traditional banking, it wasn't about finding good credit risks who could repay their loans promptly. Quite the opposite, actually. The central insight was that you wanted people who couldn't quite stay ahead of the loan. Then you could hit them with late fees and try to get them to refinance with more fees and catches, and generally bleed them and bleed them and bleed them.

Reading the column it struck me that the worst of the economic crisis may have passed, but predation still continues. It has not stopped. It's going on today, as we speak. Our bankruptcy law firm specializes in helping homeowners in DC, MD and VA, and we're seeing it in how lenders deal with homeowners seeking modifications.

Continue reading "Homeowner "Shakedown" by Lenders in the Mortgage Modification Game" »