Los Angeles Bankruptcy Blog

We have a tendency to think not of the cost of something, but the monthly payment amount.  How many of us consider the total cost of a car when we go to buy it?  We just think of what sized check we’d need to write each month, right?  “I can afford that,” we ponder to ourselves.   But seriously, how many people really sit down and figure out how much money they can afford to spend?  When was the last time you sat down and added up your monthly expenses and did a budget?

When you watch a television commercial for an automobile, have you noticed that the total price of the vehicle is in the small print?  What we see instead in the large print is the monthly payment that seems oh-so-affordable.

The danger of a thinking only in monthly payment mentality is obvious:  you are sweeping under the rug the interest fees and other finance hits you’re taking.  Take the typical Cashcall loan.  For $10,000 cash, you will pay “only” $300 a month.  However, when you figure how many months you’ll be paying, it turns out you’re paying $30,000 back to Cash call, something like 29% APR.  Is that a wise decision?

Another hazard of monthly payment mentality is that we all think we can afford
another couple of hundred bucks a month in our budget, again without ever doing hte actual math.  Adding a new monthly payment most likely means you need to be cutting back and making a sacrifice elsewhere (that daily $5 latte, for example).

But are you really going to make that sacrifice and cut out something you currently spend on to get something else?  Rather, we continue to add new things to the expense list, playing Checkbook Jenga until the budget topples on the floor.

So, next time you are thinking about buying something or financing it, really ask yourself whether you have the money.  If you add a new payment, what will you cut out?  And what is the total cost?

Some interesting findings from a recent study about the increased number of applications people get before a bankruptcy as opposed to credit after bankruptcy.

Can you guess?

3 to 1 .

Beware when you are asked to cosign for someone. Yes, it can be difficult to say “no” to them. They’re family. They’re a trusted friend. They’re someone who’s close to you that’s trying to get back on their feet. And they come to you for help.

When you become a cosigner for someone, you’re taking on the responsibility that they’ll be good on the debt. In California, this can be a risk even if you’re on the title or pink slip with them, because any accident or damage the driver incurs — even if uninsured — can be your responsibility. Suddenly, you are on the hook not just for the car loan amount if your coborrower defaults on the car loan or car note, but you can be liable for any property damage or medical bills as a result of anyone driving and then crashing your coborrower’s car.

I had someone visit my office last week. A 18 year old girl with her mom. The daughter, in a moment of inattention, rear-ended the car in front of her. Somehow, she wasn’t insured. But mom cosigned for the loan, and mom was also on the registration. Suddenly, both are responsible for the vehicle that got crunched and mysteriously totalled. Suddenly, both are on the hook for any medical bills from the daughter smashing into someone.

Who should file bankruptcy? The daughter? They’ll just come after mom. Should mom file bankruptcy? Why not get a judgment against daughter? She’s 18 and has her best earning years ahead of her. The judgment can grow with penalties and interest and follower her forever until she becomes an adult, owns a home and gets a real job.

There can be serious headaches when you take the chance to cosign for someone’s debts.

In my years of practicing only bankruptcy law, I have helped hundreds of people get a fresh start. The following not scientific or a study, but just my observations based on my own personal experiences why people file bankruptcy.

So, in no particular order:

1. Divorce: going from two incomes to one can cause people to have a tougher time getting by. Also, bankruptcy is effective at tying up the loose ends — and shared debts — in a divorce for a fresh start.

2. Job Loss: whether unemployed now or a couple of years ago, people use credit cards as temporary loans to get by and pay back once reestablished and back on their feet. Unfortunately, once the income stream starts again, the disappointing surprise is that the minimum payments are not affordable. And even if they are, it’s enough only to maintain the debt, not reduce it or eliminate it.

3. Identity Theft: not just by a stranger, but I’ve seen relatives who “borrow” someone’s identity by using their credit without permission.

4. Medical Debt: Sometimes medical and health-related debt can come up suddenly. Maybe insurance will cover some of it, most of it, or none of the medical expenses or hospital stay. A bankruptcy can eliminate the tens of thousands of dollars of medical debt.

5. Budgeting Problems: You have $3,000 coming into your bank account each month after taxes, but you spend $3,500 for all of your living expenses. That extra $500 each month is coming from somewhere, and you are simply delaying the inevitable by continuing to use the credit cards.

6. Reorganizing Debt: Making minimum payments is only paying just the interest on the loans. Chapter 13 bankruptcy is more effective than debt management companies, and gives people a chance to get out of debt by making a manageable payment they can afford.

7. Lawsuits (”I got a summons”): Old credit card debt can lead to a lawsuit. This can prompt action to finally file bankruptcy and lead you to deal with the issue, once and for all.

8. Foreclosure: Filing bankruptcy can stop the foreclosure and let you either save your home or walk away with dignity (and possibly a better credit report than a foreclosure if you ever want to get another home).

9. Wage garnishment: The law suit turned into a judgment and now you want to stop the wage garnishment as they threaten to garnish your paycheck.

10. Saving for Rainy Day: Very few people seem to save for the proverbial rainy day. The credit cards are there, and relied upon to get you through. Instead, take 10% (or even 5%) of every pay check and put it aside in a separate account and don’t touch it. Make it automated.

I punched this list out in 15 minutes. I could probably come up with another five or ten if I wanted.

Which category are you in? What’s missing?

Ditech, the famous mortgage lender with its slick TV commercials these past years, has a new slogan: “People are Smart.” This replaces the bumbling loan guy who is always cursing, “lost ANOTHER one to Ditech!” Foiled again!

But why did he always lose another one to Ditech?

And why is a mortgage company making a blanket statement about a trait concerning all of humanity? After all, if everyone was smart, that would be just normal. Kind of like Lake Woebegone, where all kids are smarter than average.

But I digress from my point.

Why?

I have a theory. Ditech doesn’t really think you’re smart. Or me either. They think you’re a sucker for their business tricks, and will do what it takes to get you into a loan.

Sometimes, these loans aren’t what’s best for you.

They look around, and see New Century and their subprime company filing bankruptcy. They also see Countrywide having good credit customers defaulting. Foreclosures are up nationwide.

So what to do? They’re convincing and flattering a future jury pool that, golly, your eyes… they are like pools of clear water. We never meant to trick anyone to get into a bad mortgage. See? We think you’re smart! Everyone in the whole world who can see our ads is smart. We don’t think you’re dumb “marks” for our ploys, so why would you come after us?

Of course, this is all just my opinion. But can you come up with a better explanation for such universal flattery having nothing to do with the nature of their business?