Finance & Credit Trends to Avoid in 2018

Finance & Credit Trends to Avoid in 2018

At the beginning of the most recent century, both lenders and borrowers had developed many bad habits from a toxic combination of unrealistic optimism and immediate gratification. These bad habits led to a dramatic increase in bankruptcy for both individuals and corporations alike. In the years that followed, consumer lending became less available, and with many more restrictions on borrowing when available. This was not necessarily a bad thing, as the years that followed saw a decrease in household debt, without a significant corresponding decrease in savings. However, in this period of time when information is so readily available, it appears that we are even quicker to forget such recent history. With this preface in mind, there are several trends that have begun to arise which should be discouraged for lenders and consumers alike. Otherwise, the consumer runs the risk of needing bankruptcy protection, yet at the same time may have limits on what protection the Bankruptcy Court can provide.

1) Over – reliance on lender sponsored loan modifications – Following the crash of the housing bubble, there was a rush on various fronts to provide options that would allow distressed homeowners to retain their homes. In response – and often at the insistence of government – many mortgage lenders would offer loan modifications to qualified borrowers. Many borrowers sought these loan modifications to make their payments more affordable, or to address past-due payments that would potentially lead to a foreclosure. After a period of time that would be set forth in the original loan modification, the same homeowners could apply for subsequent loan modifications if necessary. Unfortunately, some homeowners would become delinquent again and then be surprised when their lender was not willing to offer a subsequent loan modification, or would only offer a modification with terms that did not really reduce the financial burden on the homeowner. Inevitably, these properties would go into foreclosure.  At that point, the only opportunity for the homeowners to protect their house from foreclosure would be to file a Chapter 13 bankruptcy. Unfortunately, if the delinquency on the house was too great, a Chapter 13 bankruptcy may not provide any significant relief depending upon the homeowner’s income. If you are struggling with your mortgage payments and have already modified your home mortgage, it would certainly be worthwhile to consult a bankruptcy attorney before your mortgage lender has the opportunity to initiate the foreclosure process.

2) Resurrection of six and seven year auto loans – For many years, the five year automobile loan was the industry standard, and the maximum length for which a lender was willing to wait for repayment. When the economy was booming, and optimism abounded, lenders began offering auto loans with a repayment term as long as 86 months. Unfortunately, many car purchasers realized after a short period of time that the vehicle would depreciate at a rate much quicker than the loan balance was paid down. As a result, these consumers would be “upside – down” on the vehicle for the majority of the repayment period. This would make it very difficult to trade in the vehicle without creating negative equity on the subsequent purchase. When the economy crashed, and borrowers struggled with the payments, many of these “upside-down” vehicles were repossessed or surrendered.  Auto lending became more restricted, and the five year loan limit was restored for a majority of auto lenders. However, our firm is now starting to see an increase in the amount of automobile loans that exceed the 60 month period of time. Of additional concern is the fact that minimal down-payments are being made towards the purchase of these new cars, which means that the majority of the payments being made for the first half of the loan are going towards interest, with very little reduction in the principal of the loan. While a Chapter 13 bankruptcy does allow a debtor to pay for a vehicle based on its value, and not the amount of money owed on the vehicle, the Chapter 13 debtor must have owned the vehicle for at least 910 days. A Chapter 13 bankruptcy can prevent repossession of the vehicle, but may not offer any significant savings if the consumer is at the beginning of a long-term car loan.

3) Consumers with more than two – three credit cards – During the recession, many consumers saw that their credit cards were canceled, or their limits were reduced. Additionally, there was a decline in the issuance of retail and store – specific credit cards. However, in our recent consultations with clients it is become evident that the number of credit cards being carried by individuals has increased dramatically. While store – specific cards may offer discounts and other financial incentives, carrying more cards can increase the likelihood of default.  And the cumulative minimum monthly payments of a variety of cards will usually exceed the minimum monthly payment on one card with the same aggregate balance. In addition, part of your credit score is attributable to the amount of credit that you have available. If you have multiple credit cards with high balances, your credit score will be reduced. Because of companies like Synchrony Bank and Comenity Bank – which provide the credit for multiple different retail cards – consumers will receive multiple credit card offers from other retail stores who receive financing from these lenders. The ready availability and ease of obtaining credit can quickly get out of control.  In our experience, individuals with more than 5 credit cards become more likely to file a Chapter 7 bankruptcy.

4) A reduction in savings and retirement planning – Unfortunately, a side effect of renewed economic optimism can be the failure of consumers to adequately prepare for an emergency. Instead, consumers rely on their available credit for emergencies, rather than setting aside their own funds. Another disturbing trend is the failure of working consumers to take advantage of voluntary retirement/savings programs that are sponsored by their employers, such as a 401(k) or thrift savings plan. While a failure to participate in such programs – or participate at a minimum level – will leave more disposable income, no purpose is served if that disposable income is used to service unnecessary credit card debt at 12-18% interest.

Those who ignore history are doomed to repeat it, and the institutional lenders in the United States have proven this adage to be true over and over again. Unfortunately, the time cycle between the relearning of these financial lessons has diminished each time. has continued to grow shorter and shorter. If you find that your debt service is exceeding your income, or that you are falling farther and farther behind on your bills, it would certainly make sense to consult a bankruptcy attorney. Most bankruptcy attorneys in the CSRA offer a free consultation, and it is always wise to identify your rights before it is too late to assert them.  Lenders may ignore history, but you don’t have to.