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Household Debt Hits An All-Time High

U.S. household debt reached $12.7 trillion in the first quarter of 2017. That's a record high, topping the pre-recession level in 2008. Your immediate reaction might be concern over anything passing financial crisis levels, but it's more complicated than that. An abundance of mortgages, many made to poorly qualified borrowers, helped sink the economy a decade ago.

That's not what's happening now. One way to look at the latest debt level: Americans have returned their finances to a better balance as the economy has healed, helped in part by an improving job market and attention to debt.

"Many whose credit was damaged during the economic crisis have restored their financial health to the level where they can qualify for mortgage loans, credit cards, auto financing and other types of credit," says Bruce McClary with the National Foundation for Credit Counseling. [as reported in 5/23/17 Credit & Collection News e-newsletter]

Comment of The Bankruptcy Law Firm, PC: Another possibility is that, instead of borrowing more because they are financially healthy, that a large number of consumers are "over-spending", i.e. spending more than those consumers can afford to pay back.

Puerto Rico Declares Bankruptcy

Facing mountainous debt and population loss, the board overseeing Puerto Rico filed Wednesday for the equivalent of bankruptcy protection in a historic move that's sure to trigger a fierce legal battle with the fate of the island's citizens, creditors and workers at stake. The oversight board appointed to lead the U.S. territory back to fiscal sustainability declared in a court filing that it is "unable to provide its citizens effective services," crushed by $74 billion in debts and $49 billion in pension liabilities. The filing casts a shadow of uncertainty over the future of Puerto Rico pensioners, American retirees who own the island's debt, institutional investors who backed the island in good times and businesses with lucrative contracts. But it could also provide hope to residents seeking to preserve access to basic services such as public safety and health care, while also offering a potential route to economic stability for an island that has been suffering for years. Puerto Rico officials have complained that their debt crisis has cut off funds needed to pay doctors and run schools. Puerto Rico has lost 20% of its jobs since 2007 and 10% of its population, sparking an economic crisis that worsens by the day. The island's response has worsened matters. Politicians raised taxes, allowed governmental bureaucracy to balloon, borrowed to pay the bills and promised pensions that the island could not afford. [reported in Wall Street Journal of 050417 and in Credit & Collection e-newsletter of 050417]

Justice Department Says People In Marijuana Business Can't Use Bankruptcy

People who make money from the marijuana industry can't use the federal bankruptcy courts when they get into financial trouble, says a Justice Department bankruptcy watchdog. U.S. Trustee Program director Cliff White wrote a letter to trustees who handle consumer bankruptcy cases earlier this week reminding them that the drug is illegal under federal law and warning them not to handle any money from the sale of marijuana-related property.

The one-page letter, sent on Wednesday, said the Justice Department division has seen an increase in the number of bankruptcies where "marijuana assets"are disclosed. The division oversees trustees who handle personal and corporate bankruptcy filings. Often, their role requires them to take in monthly payments that a bankrupt person makes on a debt-repayment plan.

Trustees may also be required to sell off a bankrupt person's valuable property. "Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets," Mr. White said. [as reported in Credit & Collection 5/1/17 e-newsletter]

63% Of Medical Debt Complaints To Federal Regulators Assert Money Isn't Owed

Sixty-three percent of consumer complaints about medical debt collection claim the debt was never owed, was previously paid or discharged through bankruptcy or was not verified debt, according to a recent report. In its report Medical Debt Malpractice, consumer advocacy group United States Public Interest Research Group and left-leaning think tank Frontier Group analyzed 17,701 medical debt collection complaints filed with the Consumer Financial Protection Bureau over more than three years. The agencies found medical debt reflects more than half of collections on consumer credit reports. In addition, complaints about medical debt collection are the second most common grievance filed with CFPB after credit card complaints.

For medical debt collection complaints, data revealed 48 percent of all complaints are attributed to "continued attempts to collect debt not owed."

The top three complaints related to this issue are "debt is not mine" (24 percent), "debt was paid" (21 percent) and "not given enough info to verify debt" (15 percent). The report also found instances of harassment from collectors. Researches stated medical bill complaints are concentrated to a small number of companies, as 10 companies accounted for more than 20 percent of all medical bill complaints. Transworld Systems was the company with the highest number of medical debt collection complaints, followed by Commonwealth Financial Systems and Tenet Healthcare Corp., according to U.S. PIGRG. [as reported in Credit & Collection 4/14/17 e-newsletter]

US House of Representatives Votes to Create New Section of Bankruptcy Code

US House of Representatives Votes to Create New Section of Bankruptcy Code, Just for Banks The US House of Representatives voted on 4/6/17 to add a new section to the Bankruptcy Code just for banks, a measure meant to allow banks to fail without needing taxpayer bailouts or setting off a crisis. [Reported in 4/6/17 Washington Examiner, and reported in ABI e-newsletter of 4/6/17]. For this proposed new "banks only" section of the Bankruptcy Code to become law, the US Senate would also have to vote to adopt the new provision, and the President would have to sign the new legislation into law. Under the Bankruptcy Code as it stands at present, banks, savings and loans, and other bank-like financial entities are prohibited from filing bankruptcy, by 11 USC 109(b)(2) and 109(d), except that an uninsured State member bank can file Chapter 11. Almost all banks are FDIC insured, and as such are prohibited from filing bankruptcy in any Chapter, under the present Bankruptcy Code.

Payless Hits Ch. 11 With Plans To Close 400 Stores

Payless ShoeSource Inc. and 28 affiliates filed for Chapter 11 bankruptcy on Tuesday, 4/4/17, with more than $1 billion in liabilities and a plan in hand to lop off significant debt and immediately shutter 400 stores.

The shoe giant, with 4,400 stores in over 30 countries, said in its filing in Missouri that most of its first- and second-lien lenders are on board with a restructuring support agreement, but warned it expects a fight with real estate companies over existing leases.

Debt Collection Firm Files Bankruptcy; Owes $460M

Saddled with $460 million in debt, a Centennial-based debt collector has filed Chapter 11. SquareTwo Financial, which has more than 200 employees at its DTC headquarters and call center, filed its bankruptcy petition in the Southern District of New York on March 19. The company confirmed through a spokesperson that it will shut down all its operations, including its 60,000-square-foot office in Centennial, by the end of the year. SquareTwo reported assets of $311 million and liabilities of $460 million. Its bankruptcy plan calls for erasing $130 million in debt. Court filings show SquareTwo seeks to sell the business to a South Carolina collection agency, Resurgent Holdings. According to bankruptcy filings, Resurgent would invest $405 million and pay $264 million for equity in certain SquareTwo subsidiaries. SquareTwo then would pay off selected creditors and wind down.

P. Scott Lowery started SquareTwo Financial under the name Collect America Ltd. in 1994. The University of Denver-educated lawyer then started a law firm franchise to grow the business. Collect America would buy past-due debt from banks, credit card companies and other lenders below face value, sending it to franchisee law firms to collect. In exchange for back-office support from Collect America, franchisees received a fee and sent the collected money back to the firm. The company has since dropped its franchise model, but still works with a network of law firms. [as reported in 3/23/17 Credit & Collection e-newsletter]

Credit Reports to Exclude Certain Negative Information, Boosting FICO Scores

March 13, 2017
Wall Street Journal

Many tax liens and civil judgments soon will be taken off people’s credit reports, the latest move to omit negative information from the powerful financial scorecards.

Click here to read the full article

Bank Card Default Rate Hits 42-Month High

Bank Card Default Rate Hits 42-Month High. Data through January 2017, released today by S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, shows the composite rate up three basis points from the previous month at 0.92% in January. The bank card default rate recorded a 3.21% default rate, up 26 basis points from December. Auto loan defaults came in at 1.06%, up three basis points from the previous month.

The first mortgage default rate was 0.72%, up one basis point from December.

All five major cities saw their default rates increase in the month of January. Miami had the largest increase, reporting 1.67%, up 14 basis points from December. Miami's composite default rate is at a 31-month high. Dallas and Los Angeles both reported eight basis point increases from the previous month at 0.75% and 0.80%, respectively, in January. Chicago saw its default rate increase five basis points to 1.03%. New York reported a default rate increase of one basis point from the last month at 0.88%. When comparing the bank card default rates among the four census divisions, the default rate in the south is considerably higher than the other three census divisions. [as reported in 2/23/17 Credit & Collection e-newsletter]

US Household Debt Climbs To $12.58 Trillion

Are you feeling nostalgic for 2008? Perhaps not, but we are heading toward an unpleasant milestone set in 2008 - a record amount of household debt. The New York Fed's February 2017 Quarterly Report on Household Debt and Credit reports that our collective household debt has reached $12.58 trillion. At the current rate of increase, household debt should surpass the 2008 peak of $12.68 trillion sometime this year. It's not unreasonable to expect cumulative debt to rise over time even if interest were not considered, since the number of households in the U.S. expands every year. There were125.82 million American households in 2016 compared to 116.78 in 2008. Even so, the overall trend line is cause for concern. Given that runaway debt was a major driver in the Great Recession, should we be worried that another meltdown is on the way? Probably not. For answers, look beyond the cumulative debt number to the changing nature of that debt. The New York Fed's report breaks down household debt into specific components: housing/mortgage debt, student loan debt, auto loan debt, and credit card debt. While mortgage debt is still the largest component of household debt, that debt is not rising as rapidly as other forms of debt in relative terms.

[as reported in 2/23/17 Credit & Collection e-newsletter]

"Barton Doctrine" Cases Being Appealed in Second Circuit:

"Barton Doctrine" cases being appealed in Second Circuit: Wait and see whether or not the law in the Second Circuit move in, or away from, the direction of the Ninth Circuit, by holding that the Supreme Court's Barton doctrine not only bars suits against trustees but also against other important players in bankruptcy cases such as creditors' committees and plan administrators? Litigation arising from the chapter 11 liquidation of commodities broker MF Global Inc. is raising the issue in the Second Circuit, based on four decisions handed down by Bankruptcy Judge Martin Glenn in New York since October. Based on the Barton doctrine, he has now enjoined Bermudian insurers from suing in Bermuda to enforce an arbitration clause in an insurance policy. The insurance companies are already appealing to district court, and the appeals likely won't stop there.

Number of Retirees With Student Loan Debt Quadrupled In Last Decade

The vast majority of people in the United States holding student debt are between the ages of 18 and 39, but a new report suggests seniors are taking on more of the debt burden for their children and it is endangering their welfare. The number of seniors carrying student debt quadrupled during the last decade while the average amount of debt those people carry doubled in that time, as did the portion of student debt held by people over 60, according to a new report from the Consumer Finance Protection Bureau.

Because many parents and grandparents are borrowing the money for their children and grandchildren to go to college, but offering the help comes at a price for some as they endanger their ability to pay for healthcare and risk garnishment of social security payments if they fall into default.

"Student loan debt is clearly an intergenerational problem, and what we're seeing is that this is unfortunately putting older consumers' retirement at risk," Seth Frotman, assistant director of the Office for Students at the CFPB, told The Washington Post. "Older Americans are struggling under the weight of student loan debt." Researchers at the CFPB found people over 60 are the fastest growing demographic borrowing money for school, currently carrying about $66.7 billion in student loans -- 6.4 percent of all student debt, more than double the 2.7 percent it was in 2005. [as reported in Credit & Collection e-newsletter of 1/20/17]

Student Debt Payback Far Worse than Believed

Many more students have defaulted on or failed to pay back their college loans than the U.S. government previously believed, the Wall Street Journal reported today. Last Friday, the Education Department released a memo saying that it had overstated student loan repayment rates at most colleges and trade schools and provided updated numbers. When the Wall Street Journal analyzed the new numbers, the data revealed that the Department previously had inflated the repayment rates for 99.8 percent of all colleges and trade schools in the country. The new analysis shows that at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years. The changes could have implications for federal policy.

Some lawmakers have endorsed the idea of punishing colleges if enough students aren't paying back the loans. [As reported in 1/19/17 American Bankruptcy Institute e-newsletter, referring to Wall Street Journal report]

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