Debt issues take center stage
This has turned out to be a bumper year for headlines on credit problems, mortgage woes and the like. As pundits debate the merits of the White House mortgage-relief plan, many other issues also affect cash-strapped consumers:
It's in the mail
With all the worry over subprime mortgage borrowers, you would think credit-card companies also would tighten their standards, but it doesn't seem to be happening. Mail volume for card offers rose during the third quarter, with lenders still soliciting high-risk households, market-research firm Synovate said.
Card companies mailed 1.29 billion card offers to U.S. households during the quarter, of which 363 million went to high-risk families - those that have tapped 30 percent or more of their available credit. Both figures were up slightly from the second quarter.
"Despite the credit crunch and increase in foreclosures, the majority of (high-risk) households continue to receive an average of 6.4 offers for new credit cards every month," said Andrew Davidson, a Synovate vice president, in a statement.
Households that are tapped out on credit tend to receive more card offers than others and tend to respond more.
Support for payday loans
Nobody can deny that payday-lending fees can really add up for borrowers who make frequent use of this service. But it's also fair to acknowledge other financial perils lurk for cash-strapped consumers.
A new study by researchers at the Federal Reserve Bank of New York offers some vindication for the industry. The researchers analyzed what happened in Georgia and North Carolina after those states banned payday loans in 2004 and 2005, respectively.
"Georgians and North Carolinians do not seem better off since their states outlawed payday credit: They have bounced more checks, complained more about lenders and debt collectors and have filed for Chapter 7 ("no asset") bankruptcy at a higher rate," the authors wrote in arguing against outright bans on payday lending.
Tax on 'forgiven' debt
Anyone who loses a house in foreclosure faces a potential tax bite. If the lender sells the home for less than the mortgage balance, the difference is considered "forgiveness of debt," and the amount may be taxable to the borrower.
People can skirt this liability by filing for bankruptcy, yet a bankruptcy filing isn't needed. For example, the tax liability wouldn't apply if you're insolvent at the time of foreclosure.
"Basically, if a person's liabilities exceed their assets, they qualify for this exception ... whether or not they file a bankruptcy," said John Joseph Volin, a Tempe, Ariz., bankruptcy attorney. "Virtually everyone facing foreclosure on their home qualifies for this exception."
Tony May, a Tempe certified public accountant, recalls how the IRS once sought taxes from a client who lost her home in foreclosure. "She was barely earning minimum wage and did not know where she would come up with the $2,000 in tax the IRS was looking for," May said. "I successfully argued that the forgiveness of debt was not taxable at the time, even though she didn't file bankruptcy."
Card myths attacked
The American Bankers Association is questioning various "myths" about credit cards, such as the notion interest rates and fees are higher than ever and the assertion card debt causes most bankruptcies.
Perhaps the most enduring misconception is that Americans are "up to their eyeballs" in credit-card debt.
In fact, slightly less than half of households carry card balances (meaning most pay their balances each month), and the median or midpoint debt of balance-carrying households is around $2,200. You often see higher figures quoted, but these are mean-average numbers that reflect ballooning debt incurred by a smaller proportion of customers.
If debt truly was overwhelming most people, household net worth wouldn't keep rising. Yet this measure of assets less liabilities rose again in the third quarter to $58.6 trillion, the 20th straight quarterly gain, notes Northern Trust.
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