Not only do you have to have a higher score to get lower rates, people that traditionally have those higher scores are finding that smaller things, like purchases made with retail credit cards and revolving lines of credit, are having a greater negative impact on their credit score even if payments are made on time.  The obvious question resulting from these changes is: WHY???

While there are several factors to consider, the simplest answer is to blame it on today’s villain; Big Banks.  In 2008 the nation’s two largest mortgage lenders, Fannie Mae and Freddie Mac, posted enormous losses.  Even massive TARP loans were not enough to stem losses so to recoup losses and mitigate risk they decided to take the TARP funds AND lend less.  In early 2008 they announced they would revise the number for a “good” credit score raising their requirements to 720; they increased it again in 2009 to a 740.  Other banks and lending institutions followed suit and soon so few people qualified for competitive rates, or even any loan, that consumer mortgage lending was nearly at a standstill.

While much of the blame lies with the banks, consumers are not completely powerless.  The most important thing is to be aware of not only your credit score, but what is contained in your credit report.  Consumers have the right to contest inaccuracies and each credit reporting agency provides an address where consumers can report discrepancies and send proof.  Consumers can also reduce their debt-to-income ratio; while not using available credit helps, closing lines of credit that are not used helps even more.  When applying for a mortgage a good mortgage broker can help you improve your credit by 10, 20, or even 30 or more points in a short period of time.

Your tax returns and potential bankruptcy filing are invariably connected.  Your tax returns from previous years are used as evidence of your adjusted gross income and are provided to the trustee in bankruptcy before your meeting of creditors.  Taxes deducted from your paycheck are not counted as income for purpose of the Schedule I income calculation; this is important in a Chapter 7 where your monthly expenses must exceed your income and in a Chapter 13 where Schedule I might be used in calculating your plan payment.

Any tax refund you might receive affects and is affected by your bankruptcy as well.  In a Chapter 7, your refund is property of the estate and is subject to seizure if it is received within 90 days before filing or up to 180 days after discharge.  If it is not received in that period, the policy here in the Eastern District of Michigan is that it still has to be prorated and exempted.  The problem is that if you have to exempt a large tax return using the “wildcard” exemption, your attorney may be unable to exempt other assets as well.  Even more concerning is the case of the debtor that has equity to exempt; the “wildcard” exemption may not even be available to that debtor and the trustee will take the tax return.  In a Chapter 7, if you can plan a little ahead, you can prevent this money from being used to repay your creditors:

1. If you have no home equity to exempt, and little in the way of other assets, don’t worry, your tax refund will probably be exempt.
2. If you have home equity, or a large number of other assets that are not exempt under another category, you may need to preserve your “wildcard.”  If your Schedule I (income) is not in danger of exceeding your Schedule J (expenses) all you need to do is fill out a new W-4 and increase the number of exemptions you are taking.  While you won’t get a large check come tax time, you will notice an increase in your take-home pay.

Your tax refund amount matters less if you do not qualify for a Chapter 7 and file Chapter 13 instead because that money will likely end up with the trustee, for the benefit of creditors, no matter what.  The reason behind this is that if you decrease your monthly taxes, your Disposable Monthly Income (“DMI”), and thus your plan payment will most likely go up.  If you choose to leave it alone and receive a refund, you’ve most likely got to turn it over to the trustee anyway.

While the content of this article are legal in nature, and the author is an attorney licensed to practice in Michigan, this is opinion only.  You should consult with your own attorney before acting on any advice or, call us today at (248) 595-8617 for a free consultation.

The Obama Administration sent legislation to Congress this week aimed at creating a Consumer Financial Protection Agency. This 152-page draft hopes to protect consumers from the crooked and deceitful business practices so many of us encounter when dealing with financial institutions. The Administration’s goal is to provide consumers “with simple, transparent and accurate information on financial products like credit cards and mortgages and also do a better job of protecting them against unscrupulous practices.” Administration sends Congress consumer legislation, AP 06/30/2009.

Is this legislation enough to let the financial institutions know we are all fed up with their business practices? Like many things, that will have to be left to be seen but it is a start. The financial laws in the U.S. have not had a major rewrite since around the Great Depression so, considering the times, a revision is due. My concern is that this agency will just become another government bureaucracy that will be so large and slow moving it won’t help anyone until it’s too late (I’m talking about you SSA, VA, Treasury, and others). It is not enough to simply rewrite the laws, there has to be some enforcement mechanism in place that allows people to get the help they need. At the risk of sounding self-serving, I suggest a civil cause of action that allows the consumer, or the consumer’s attorney, to seek damages against the financial companies if they don’t follow the rules.

A similar scenario can be found in the Fair Debt Collection Practices Act and its state equivalents. FDCPA, 15 U.S.C. §§ 1692-1692p (2006); MDCPA, MCL 445.251 et seq. There were problems with the way creditors were collecting debts, congress passed a law regulating how creditors could go about collection, and, instead of leaving the enforcement to a government agency, they created a cause of action that allows debtors to seek damages, fees, and costs.

As expected, the financial companies are vehemently opposed to this legislation, claiming it will stifle the development of new products. I’m convinced that what they are really worried about is that they will have to put the terms of their new products in language that the consumer will understand and that hopefully the consumer will evaluate whether they can afford to repay the product. The mortgage companies successfully killed H.R. 1106 which would have allowed Chapter 13 Bankruptcy Judges to modify mortgages so maybe the banks can kill this legislation . . . . but I hope not.