Ronald Ceniceros: Bankruptcy Lawyer Heber City Utah

Before you file for bankruptcy, speak to an experienced Heber Utah bankruptcy lawyer. Bankruptcy can adversely affect your credit score.
Your credit score—the estimate of how likely you are to repay money that you might borrow to finance the purchase of a car, a home, or a refrigerator—is a valuable asset. This score determines whether you will be able to borrow money from anyone besides a pawnshop, your brother-in-law, or a loan shark and the interest rate you will pay when you obtain a mortgage to buy a house or use an installment sales contract to finance the purchase of a car.

Credit is very helpful in managing your financial life, and in two different ways. In the long run, the money going out more or less must match the money coming in—but in the short run, there will be shocks that will lead to a surge in the money going out relative to the money coming in, and access to credit can smooth the adjustments—and minimize the sharpness of the decline in your expenditures when there is a sudden drop in income or a one-time surge in emergency expenditures.

Moreover, credit often is needed to finance the purchase of “big ticket items”—homes, cars, refrigerators, and other durables that provide a flow of services over time. You can rent these assets, or you can “buy to rent,” or you can buy them with credit and repay the loan over three, seven, or thirty years. In each case, you make a series of monthly payments, and hence you need to know which form of acquiring the use of the assets is less costly. Credit usually is the lower cost choice—if you qualify for the credit.

One of the two basic types of credit is secured or asset backed; home mortgages and auto loans are asset backed because the terms of the credit contract provide that the lender has the right to acquire ownership of the asset if the borrower fails to adhere to the repayment terms. A loan from a pawnshop is a secured credit; the borrower leaves an electric guitar or the motorcycle or the diamond ring at the shop and receives a loan for ninety days. If the borrower fails to repay within ninety days, the pawnshop is likely to offer the goods for sale.

Unsecured credit means that the borrower’s credit reputation is on the line. The borrowers usually sign a note—an IOU that specifies the terms of the loan, primarily the interest rate and the repayment schedule. Most unsecured credits are for less than $5,000. The lenders rely on the assumption that most borrowers will repay on time to protect their credit reputations and their ability to borrow in the future. The lenders can always pursue the borrowers into the courts and force them into bankruptcy—which will make it difficult for them to secure credit for the next seven years.

Interest rates on secured credit are lower than on unsecured credit, because the risk of loss to lenders is smaller. Ideally the lenders would set the interest rate charged each borrower based on the likelihood that the borrower would not repay. The greater the likelihood that the borrower would not repay, the higher the interest rate. You might think that the lenders would like to set the structure of interest rates so that they are indifferent between low-risk borrowers and high-risk borrowers after adjusting for losses and the costs associated with managing these losses—for example, the costs associated with homes that they have acquired through foreclosure or the costs associated with repossessing an auto if the borrower has not repaid in a timely manner. In fact, the lenders set the interest rates so that high-risk loans are more profitable than low-risk ones, even after adjusting for the greater likelihood and higher costs of the losses. One reason that high-risk loans are more profitable is that these borrowers have fewer alternatives; they can’t easily take their business to other lenders. The firms that make “payday loans” are immensely profitable.

Credit cards differ from checks and debit cards because they bundle the payment with an “automatic loan,” since you pay with “other people’s money”; you prequalified for what in effect is an unsecured loan when you received the card with its credit limit. (Often the credit limit when you receive the first card is $3,000.) Once you’ve received the card, you’re free to draw on the line of credit.

The rewards credit cards differ from the no-rewards credit cards in that you receive something back, often cash or frequent flyer miles. One rewards card provides 1 percent back on purchases of x, 2 percent back on purchases of y, and 3 percent back on purchases of z. Another type provides “points”—for example, accumulate 10,000 points (often you earn a point for each $1.00 of expenditure) to buy a vacuum cleaner—or you can accumulate frequent flyer miles (FFMs) that will be added to the FFMs that you accumulate when you fly on the airlines. (In effect, the airlines sell FFMs to the banks and the others which they “give” to you when you buy their goods and services.) Figure that these rewards amount to 1 to 2 percent of the value of your purchases.

The supplier of the line of credit is likely to be a bank, but it could be a specialized lender or travel firm like American Express. If you pay the bill from the lender within the grace period—say, fifteen or twenty days after you receive your monthly bill—you are not charged interest. In effect, the lender makes you an interest-free loan for two or three weeks, twelve months a year. The firms that issue the credit cards are not charities; they incur costs of $150 to attract one more user of credit cards. These firms view you as a profit center. They have three sources of income to offset the costs incurred in attracting more users of the cards and in making the interest-free loans.

These lenders buy the IOUs from the gas stations and the supermarkets and the department stores that you have produced when you used your credit card for $0.97 or even $0.95. (These sellers hate these fees; they feel they are being gouged. But they have little choice, because if they didn’t take the cards, many customers would take their business to their competitors that take cards.) Most of these sellers have raised their prices to offset most or all of the haircut they take when they sell $1.00 of IOUs to the lenders for $0.97. (Some of these sellers have established their own cards to reduce the amount they have to pay the credit card companies.) Assume that you charge $1,000 a month, or $12,000 a year—that’s $360 of income to the lenders from being able to buy your IOUs at a discount.

Moreover, these lenders have a lot of data that indicate no more than 50 percent of those who use credit cards will repay the amounts due within the grace period, so they now have a set of borrowers who are on the hook and paying interest initially that is in the range of 12 to 18 percent.

Finally, you may have paid an annual fee of $60 or $85 for the card. Some upscale cards have annual fees of $395.

Once you have a credit card, keep it; don’t change cards even if some other vendor has a card with a low teaser rate—the lenders take the stability in your relationships seriously.

Improving your credit rating by reducing your average monthly balances relative to the limits means that you may need to reduce your spending relative to your income. But that’s a one-time adjustment that may take three or six months—once you’ve dieted, you will have the benefit of lower interest rates for an extended period. For example, assume that you are stretched and that you are carrying $8,000 of credit card debt from one month to the next. The interest rate probably is in the range of 20 to 25 percent—so you are paying $1,600 to $2,000 a year in interest. As you work off the debt, the interest payments decline. Commit to a few rules that will enable you to reduce your indebtedness by delaying some purchases until you are able to pay the monthly bill in full when it arrives.

Several million families a year file for bankruptcy because of the burden of their credit card debt. The usual pattern is that when the monthly bill arrived, they took the easy way out—they paid the minimum required by the lender, which might have been as little as 5 percent of the amount due.
The interest rate was probably in the range of 12 to 15 percent, so the amount due would be increasing even if they paid the minimum. In effect the borrowers are on a treadmill; the indebtedness on their credit cards has morphed into a “permanent loan,” and they have little hope of paying down the indebtedness unless they either win the lottery or adopt exceptional measures to squeeze their consumption spending relative to their incomes. Assume that their indebtedness is $8,000 and their income is $40,000. The interest rate on the indebtedness is 24 percent, and so their interest bill is $1,920 a year. A lot of money. It didn’t start out that way. But compound interests compounds, and if you are slightly late with one payment, then you are charged a fee—yes, the fee was noted in the fine print, but you ignored the print.

There are five ways to get off the treadmill. Declare bankruptcy. Negotiate a reduction with the lender (good luck). Semi-starve. Refinance by increasing your home mortgage, or sell the car and other big-ticket items.
Getting off the treadmill is so difficult that you are well advised to avoid getting on the treadmill. Pay your credit card balance in full every month.

Mortgage rates are usually lower than rates charged on business or consumer loans, in part because a house serves as collateral that the lender can possess if the loan is not paid. Interest rates on business loans are usually lower than those on consumer or credit card debt. Interest rates charged on credit card debt are particularly high because people who delay payment and use this debt most are those who are short of cash and have a relatively high likelihood of default. The principle that the interest rate charged on debt depends on the default risk of the debt applies to all borrowing. If debt is perceived as riskless, the rate charged will not be much higher than the rate for riskless government debt. In making a risky loan, however, investors require that the interest rate be higher.

The test of a successful financial plan is whether the end of a regular salary check will have a baneful impact on your spending. You want to be sufficiently confident about your financial future so you won’t be in the large majority that fears they will outlive their assets.

No matter how hard they may try, borrowers may end up being unable to keep the debt obligations they have incurred. What happens then depends on the law and on what their creditors and the bankruptcy court decide to do.
When a borrower defaults on a payment, the lender usually waits and sees whether the payment is just late. The lender might impose a penalty for late payment. Going to court to try to collect debts or seizing a property that serves as collateral is time consuming and costly. The lender may eventually take legal actions to enforce the collection or trigger bankruptcy proceedings. If the borrower persists in default, the lender is likely to take legal action. By filing for bankruptcy protection, you can prevent the lender from taking legal action against you to recover the debt. An experienced Heber City Utah bankruptcy lawyer can help you with your bankruptcy filing.