June 30, 2005

The “Credit Card Debt Termination” Scam

“Legally terminate credit card debt! You can be debt-free in 4-6 months!” Advertisements like this are for a new type of program that has spread via the Internet over the past few years. It’s called “Credit Card Debt Termination,” and victims are paying up to $3,500 for this bogus service. In this article, I’ll review the principles behind this program and explain exactly why it’s a scam to be avoided. First, let’s get our definitions straight. The scheme I’m describing here should not be confused with Debt Consolidation or Debt Settlement (also known as Debt Negotiation), both of which are legitimate and ethical methods for debt resolution.

The easiest way to distinguish the Credit Card Debt Termination scam from other valid programs is based on the central claim that you really don’t owe any money! With Debt Consolidation, you pay back all of your debt balances. With Debt Settlement, you pay back a lower amount (usually around 50%) while the creditor agrees to forgive the remaining balance.

However, with the bogus Credit Card Debt Termination program, promoters claim that you won’t need to pay anything at all (except their outrageous fees, naturally). They make the surprising claim that you can legally wipe away your debts simply by using their super-duper magic documents. Based on some legal mumbo-jumbo, the claim is made that you really didn’t borrow any money from your creditors!

In order to understand this scam, a little background is necessary. Remember the tax protest movement back in the 1970s? People were claiming that the IRS tax collection system was unconstitutional, and based on their misinterpretation of the tax code, they refused to pay taxes. The IRS came down hard on the tax protest movement, and through the court system, they blew holes in all the legal arguments put forth by the protesters. The Credit Card Debt Termination scam is a lot like the tax protest movement. In fact, among collection professionals, it’s called the “monetary protest movement.” Just like the tax protest movement, there is a common theme that runs through all of the promotional materials issued by the monetary protestors. The basic idea is that our Federal Reserve monetary system and generally accepted accounting principles (GAAP) do not permit banks to loan out their own money. Therefore, according to their interpretation, the credit card banks are the ones running the scam on the American public. Stay with me here, because the logic is pretty strange. If a bank cannot lend its own money, how does a credit card bank extend credit? The claim here is that your credit card agreement itself becomes a form of money (known as a promissory note) the moment you sign it. The idea is that the bank “deposits” your agreement as an asset on their books, and then any credit you use is offset as a liability against that asset. In other words, the core concept here is that you literally borrowed your own money from the credit card bank.

So let’s say your balance with ABC Credit Card Bank is $10,000, which you borrowed against the card to make everyday purchases. The scam promoters say all you need to do is notify the bank that you want your original “deposit” back. However, you will permit the bank to offset the amount you borrowed against the amount you have on “deposit.” Presto! You don’t owe the balance anymore! Now, as you can imagine, the banks don’t take kindly to such tactics. Many of the consumers using this technique are getting sued by their creditors. But the scammers have more tricks available, as if the “smoke and mirrors” financial nonsense wasn’t enough. One of their techniques is the use of bogus “arbitration” forums. Arbitration is of course a legitimate system that allows businesses and individuals to resolve disputes without going to court. What do the scammers do? They coach people on how to set up a fake arbitration forum, for the express purpose of making a dispute against their creditors! Naturally, the creditors will not send representatives to some non-existent arbitration forum, so the consumer gets to rubber-stamp their own arbitration award. If they get sued in a regular court, they present their bogus award to the judge in the hopes that the creditor’s lawsuit will be dismissed.

There are other techniques used by promoters of this scheme, but the key point to remember is the central claim that your credit card debt does not really exist. Of course, it’s all nonsense based on a misinterpretation of our monetary system, and if you step back and think about for a minute, the truth seems pretty obvious. What these scammers are saying is that the entire $700 billion credit card industry is operating on an illegal basis! Even if the legal theory used by the promoters were true (which it isn’t), do you think for a moment the government would allow this giant industry to go under? That’s exactly what would happen if the promoter’s claims were proven true and used on a widespread basis.

The Federal Trade Commission, which has jurisdiction here, hasn’t stomped on these con artists yet, but it’s only a matter of time. Unfortunately, in the meanwhile, consumers are being bilked out of millions of dollars for a worthless program that will only get them into deep trouble with their creditors. If you are approached by someone offering to wipe away your debts using this system, I strongly recommend you run in the other direction while you hold on tightly to your wallet or purse. Remember, you can eliminate your debts if you take a disciplined approach to your finances, make a budget and stick to it, and don’t use your credit cards unless you can pay off new balances in full each month.

Good luck in your financial future!

Writer's Resource Box:
Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation’s largest debt management firms, he is the author of the Debt Elimination Success Seminar, a five-hour audio-CD course designed to teach consumers how to choose the correct debt program for their financial situation. The course also teaches consumers a do-it-yourself approach to debt resolution that saves $1,000s in fees and interest.http://www.zipdebt.com/article2

© 2005, Charles J. Phelan

June 21, 2005

Will Creditors Still Negotiate After the
New Bankruptcy Law Goes Into Effect?

In April 2005, Congress made sweeping changes in U.S. bankruptcy law that will go into effect on October 17, 2005. It's called the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," and it means big trouble for Americans struggling with debt problems. The new law was a GIFT to the credit card banks, pure and simple. Some estimates show that it will add another $5 BILLION to the industry's bottom line. In other words, it's all about profits and not about "consumer protection."

Some of the folks who've purchased the Professional Business Solutions have asked what effect the new law will have on the practice of Debt Negotiation (also called Debt Settlement). Will creditors still be willing to negotiate with consumers seeking to avoid bankruptcy? Will lump-sum settlements for 30%, 40%, or 50% still be possible now that this tough new law has been passed?

The answer is "YES." It will be "business as usual" in the collection industry. People that choose to file bankruptcy will definitely be affected for the worse, as I'll outline below, but those who choose to privately negotiate their way out of debt will notice very little difference. Creditors will still negotiate. Good deals will still be available. And nothing much will change in the world of collections.

Since my whole approach is about AVOIDING bankruptcy, I won’t go into a detailed analysis of the provisions of the new law. But the net effect is that many (if not most) people seeking relief under Chapter 7 bankruptcy will be forced to file under Chapter 13 instead. Consequently, it will be MUCH more difficult to fully discharge debts in a bankruptcy than ever before. Most bankruptcy petitioners will be forced to pay back part of the debt over a 3 to 5 year schedule set by the courts. One of the worst aspects of the new bill is the use of IRS “allowable” expense schedules for determining your monthly budget. In other words, your actual living expense are thrown out the window in favor of the IRS standards. (And we all know how generous the IRS can be!) So if your actual rent is $1,300 per month, and the IRS says it should be $1,045 for your state and county, that’s just TOUGH! The court will only allow the $1,045, period.

In short, people attempting to file bankruptcy after October 17, 2005 are in for an extremely rude awakening! Goodbye cell phones, cable TV, high-speed Internet access, movies, meals with the family, and anything else beyond the minimum allowable expenses as determined by the IRS and the courts. That's why alternatives to bankruptcy will be needed more than ever.

Now, with these tough new bankruptcy rules, will consumers still have any leverage with their creditors when it comes to negotiating settlements? YES! In fact, I believe it will lead to an INCREASED willingness to settle on the part of many creditors.

What makes me so certain that the banks will still be eager to settle for 50 cents on the dollar or less? Simple. Two words: STEALTH BANKRUPTCY.

After October 17, 2005, hundreds of thousands of Americans are quickly going to discover the new reality of this horrible law, and they are going to forgo the court system of filing bankruptcy. Instead they are going to do what's called “stealth bankruptcy.” A stealth bankruptcy is when you dodge your creditors by moving (with no forwarding address), changing your phone number, and dropping off the radar screen to live on an all-cash, no-credit basis. Many people already choose this path rather than deal with the invasion of privacy that comes with formal bankruptcy. After the new law goes into effect, HUGE numbers of people will go this route, which means that the creditors will actually be in a WORSE position than before the bankruptcy law was revised.

That's one key reason they'll be more willing than ever to take a good deal when you offer it to them. They will try to convince you otherwise, of course, but the reality is that it's always about the bottom line. And when it comes to calculating the bottom line profit or loss for the month, a bank always prefers to collect money NOW rather than YEARS from now. Remember:

1. The creditors don't know whether or not you'll still qualify for Chapter 7. They still face the risk that you will be able to discharge your debts in full, which means they get NOTHING.

2. Even if you file Chapter 13 under the new guidelines, the creditors will still only receive 30% to 50% of the debt on average (much less in some cases).

3. Under Chapter 13, it will still take 3 to 5 YEARS for them to recover that 30% to 50%.

4. A lump-sum of 30% to 50% TODAY is far better than the same amount collected over 3 to 5 years.

Of course, I certainly expect debt collectors to use the new law to harass and intimidate people who don’t know and understand their rights. They may even make false statements, such as, “You can’t file bankruptcy under the new law, so you’d better pay up today!” They will bully and threaten as always, but at the end of the day, they will still accept reasonable settlements. As I said, it will be “business as usual” in the world of collections.

Customers of the Professional Business Solutions learn how to eliminate their debts quickly and safely through the process of creditor negotiation, WITHOUT having to file bankruptcy. When the new law goes into effect on October 17, 2005, the techniques and methods taught in the seminar will be just as effective as ever!

June 2, 2005


The 3 Worst Reason to Buy a House

By Liz Pulliam Weston

If you’re feeling pressure to buy a home, you’re not alone.

Home prices are spiraling ever upward, indicating a demand that’s outstripping the available supply. Wait too long to buy a house, many people fear, and you could find yourself priced out of the market -- or at least out of the neighborhoods you like best.

Meanwhile, mortgage lenders are bending over backwards to give people money to buy homes. They’re allowing people to take on more debt or get loans with worse credit, than ever before.
But that doesn’t mean everyone should be a homeowner. It’s a bigger commitment and more expensive than most first-time buyers ever realize. You should have a clear idea of what you’re getting into before you commit to 30 years of payments -- and you shouldn’t let any of the following popular myths guide your decision.

‘A house is a better investment than the stock market’

It has become popular to tout homeownership as the new best way to build great wealth.
When, oh when, will we learn that past performance is no guarantee of future results?

It’s true that owning a home can be a good financial foundation, because it forces you to save (in mortgage payments that build your equity) and offers you the potential for great leverage. Leverage, simply put, is the ability to invest just a portion of the purchase price, borrow the rest and reap outsize rewards from any appreciation.

Say you put down $20,000 on a $100,000 home, borrowing the balance. If your home appreciates 10%, your equity in the home has grown by 50%. ($110,000 minus the mortgage of about $80,000 equals $30,000, or 50% more than you invested.)

Home prices, however, don’t always go up.

Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California -- all of which suffered major real estate recessions in the past 20 years.

After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems. Anyone who lived here during that time knows people who were “upside down” -- owing a bigger mortgage than the home could be sold for. Thousands of people simply walked away from houses they couldn’t sell, trashing their credit ratings in the process.

It’s hard to know, in advance, when you’re buying into a real-estate bubble. That’s why you should be relatively sure you won’t need to move anytime soon if you buy a home. Three years is probably a minimum, five years is better and 10 or more will help you ride out all but the worst real estate crashes.

‘I’m tired of throwing away money on rent’

You’re not really throwing money away when you send a check to your landlord. You’re exchanging it for a place to live. You’re also getting flexibility and freedom -- things you sacrifice when you buy a home.

When you’re a renter, it’s the landlord, not you, who is generally responsible for maintenance, repairs and fixing the toilet that blows up in the middle of the night. If the neighborhood should start to slide, or you get or lose a job, you can up and move with a few weeks’ notice (less, if you don’t mind losing your deposit).

It’s true that you may have to deal with rising rents and recalcitrant landlords. Homeowners, however, are often stuck with rising taxes and maintenance costs, as well as recalcitrant neighbors.

Moving is never fun, but moving when you own a home is an expensive, time-consuming process. Finding a buyer can take months in all but the hottest markets, and you should figure selling costs will eat up about 10% of your home’s value, once you add agent commissions and moving expenses.

In other words, homeownership is more like marriage; renting is more like living together. Make sure you’re ready to be wedded to a house before you propose to leave behind life as a renter.

‘I need the tax deduction’

Would you give someone a buck just to get 25 cents in return? That’s essentially what you’re doing when you take on a mortgage just to get a tax deduction.

If you’re in the 25% federal tax bracket, every dollar you pay in mortgage interest only saves you 25 cents in taxes.

Don’t misunderstand -- the tax break is nice, and you need somewhere to live. But you should make sure you can really afford to own a home before you take the plunge.

Remember that many of the real costs of owning a home aren’t deductible. Uncle Sam won’t give you a break for insurance, repairs or maintenance, for example -- and those costs can really add up.

Most homeowners should plan to spend at least 1% of their home’s purchase price each year on maintenance and repairs, says finance expert Eric Tyson -- and more if they plan to hire someone else to do all the work. Tyson, co-author of “Home Buying for Dummies,” recommends setting aside some money each month in an emergency fund. You may not spend the whole amount every year, but sooner or later a big expense will come along -- a new furnace or roof, for instance -- that will consume several years’ worth of savings.

If you fail to maintain your home properly, you’ll pay even more when it comes time to sell. Many buyers won’t even bid on a property that shows significant neglect. Even in hot markets, buyers are likely to ask for expensive concessions to pay for the repairs you should have been doing all along.

The best advice on the issue of whether to buy vs. rent remains the time-tested version: Buy a home when the timing’s right for you, when you can swing all the costs and when you plan to stay put awhile. That way you can ride out any downturns in the market and benefit from any appreciation while enjoying a nice and affordable home in the meantime.

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