Bad Moon Rising

Remember when the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was going to make it, in the words of Senator Chuck Grassley, “more difficult for people to file for bankruptcy?” Well, it did — briefly. But now, according to statistics released by the Administrative Office of the U.S. Courts, bankruptcy filings (1,202,503) for the 12-month period ending March 31, 2009, were up 33.3% over the number of filings (901,927) for the 12-month period ending March 31, 2008. That’s the biggest increase since BAPCPA was passed.

Sure, most of those (1,153,412) were individual (non-business) bankruptcies. But the means test, which was designed to prevent “abuse” of the Chapter 7 discharge by channneling into Chapter 13 those with the means to repay at least some of their debt, hasn’t had much impact. Chapter 7 filings rose 46.3% compared to a 10.9% increase in Chapter 13 filings. Given the shape of the economy these days, it’s no wonder that so many don’t have the means…

But the biggest increase of all was in Chaper 11 (business reorganization) filings. For the 12-month period ending  March 31, 2009, Chapter 11 filings rose a whopping 69.1%. It seems it’s not only individuals without the means these days….

Linking student loan payments to income

If you’re a recent college graduate, or even if you’re not, there’s some good news on the student loan repayment front. On July 1st, the federal government’s new Income Based Repayment Plan (IBRP) went into effect.  The acronym isn’t pretty, but the program is.

The IBRP calculates monthly student loan payments based on a borrower’s income and family size. Specifically, under the plan, annual loan payments will be 15% of the difference between a borrower’s gross income and 150% of the federal poverty level (the latter depends on family size and state of residence). Then, monthly payments are calculated as one-twelfth of that amount. After 25 years of qualifying payments, the principal loan balance may be forgiven. According to Lauren Asher, president of the Project on Student Debt, a consumer group based in Berkeley, California, you’ll generally qualify if you owe about as much in federal student loans as you make in a year.

“This is hugely important, especially right now when so many people are encountering much worse job prospects than they could have imagined when they first borrowed for a graduate or bachelor’s degree…If you’re earning a lot less than you thought you would short term or long term, you can make affordable payments on your loan, stay in good standing and have a light at the end of the tunnel.”

The program is open to graduates who have a Stafford, Graduate PLUS or consolidation student loan made under either the William D. Ford Federal Direct Loan or Federal Family Education Loan programs. The loans could be for undergraduate, graduate or professional studies, as well as for job training. To enroll in the plan, borrowers should contact their lender. The Department of Education has an IBRP calculator, along with additional information, which you can check out on their website.

Spate of celebrity deaths puts estate planning need in spotlight

Michael Jackson, Farrah Fawcett, David Carradine, Karl Malden, Ed McMahon…the list of celebrity deaths that has been in the news recently is long, and media speculation regarding their respective estates is shining a light on the need for estate planning. Now may be a good time for estate planning professionals to remind clients and prospects to review their estate plans, or put one in place.

Is this a rerun?

According to a report from Bloomberg, a financial institution which shall remain nameless is taking a 2007 collateralized debt obligation (CDO) that has been downgraded and repackaging it into new securities that it anticipates will  have AAA ratings–important in marketing the new securities to institutional investors who are only allowed to buy AAA debt.

According to the Bloomberg article, Moody’s downgraded the CDO to A3 (a heartbeat away from its lowest investment-grade rating) in June after the default rate on the underlying debt rose to 7%. Supposedly banks also have been using the process with commercial mortgage-backed securities in recent weeks.

Correct me if I’m wrong, but didn’t this process contribute to the financial meltdown in the first place, and aren’t we still trying to work our way out of the problems associated with toxic assets camouflaged as diamonds? Just asking…

Variable student loan rates drop to record lows

If you happen to have a federal Stafford or PLUS Loan issued on or after July 1, 1998 but before July 1, 2006, you’re in the golden window. That’s because starting July 1, 2009, the interest rates on these loans (which reset each July 1st) will drop to the lowest rates in the history of the federal student loan program. The new interest rate on Stafford Loans in repayment will be 2.48%, down from 4.21%; the new rate on in-school, grace, or deferment status Stafford Loans will be 1.88%, down from 3.61%; and the new rate on PLUS Loans will be 3.28%, down from 5.01%. These rates will be in effect through June 30, 2010.

If you have more than one variable-rate loan, you can consolidate them and change your interest rate from a variable rate to a fixed rate. The interest rate on a federal consolidation loan is a fixed rate that’s equal to the weighted average of the current applicable interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a point. To see if you’re eligible and to apply for loan consolidation, visit www.loanconsolidation.eg.gov.

If you’re one of the unlucky ones with a federal loan issued on or after July 1, 2006, your interest rate is higher, and fixed for the life of the loan. For unsubsidized Stafford Loans, the rate is 6.8% (“unsubsidized” means the government doesn’t pay the interest during school, grace or deferment periods); for PLUS Loans, the rate is 8.5% (looks like Uncle Sam is making out nicely here). For subsidized Stafford Loans, the interest rate will drop as follows over the next few years:

•    5.6% for loans first disbursed on or after July 1, 2009, and before July 1, 2010
•    4.5% for loans first disbursed on or after July 1, 2010, and before July 1, 2011
•    3.4% for loans first disbursed on or after July 1, 2011, and before July 1, 2012

What do the numbers really mean?

The most recent weekly unemployment statistics show that the four-week average of new claims fell by 7,000, and continuing claims–people who have lost a job but haven’t yet found a new one–saw their first weekly decline since Jan. 3, to 6.687 million.

The stats might be a little more useful if the continuing claims number contained one additional piece of information: how much of the decline resulted from people actually finding jobs, and how much represents people who have exhausted their unemployment benefits and are no longer counted in the employment statistics.

Green shoots or brown weeds? Kind of hard to tell at this point–which is probably one reason the S&P continues to bounce around between roughly 920 and 950.

Bring back 1933

Stock markets seem to be remarkably capable of shaking off any worries since the closing lows of March 9. Though it’s just shy of positive territory and continues to be the laggard year-to-date, the Dow is up 48.75% since its low, while the Nasdaq is up 46.13%. By contrast, the S&P 500 is up just shy of 40% since its March low.

How much further could the rally go? Well, the S&P saw its best annual price increase in 1933, when the index rose 46.59% (after four straight years of price declines). From a year-to-date standpoint, that means there’s a lot of room overhead from the S&P’s current 4% YTD increase. However, starting from 903 on Jan. 1, the S&P would have to hit 1324 by year-end to equal 1933’s annual increase–which coincidentally is almost exactly the amount by which the S&P has risen in the last three months.

Here’s what would have to happen to match 1933’s record: at 939 yesterday, the S&P would have to rise another 41% over the next seven months, which would mean almost a 96% total increase from the March low of 676. By contrast, the S&P has already exceeded the most lame non-negative year for capital appreciation: 1947’s 0.00%.

Who would have thought it necessary

for the Section 409A regulations to address what happens when the US government obtains control of a US company… Well, the IRS didn’t back then, but it has now.

One of the events that can trigger a distribution from a nonqualified deferred compensation plan governed by Section 409A is a change in ownership of effective control of a company, or a change in the ownership of a substantial portion of the company’s assets (“change in control”). In Notice 2009-49, the Service has clarified that the government’s acquisition of stock or warrants of a financial institution or other entity will NOT result in a change in control for Section 409A purposes, and will not trigger distributions from nonqualified deferred compensation plans maintained by those companies.

Keep Big Papi or GM?

Red Sox former slugger, David (Big Papi) Ortiz is mired in a terrible slump. Former US auto making giant, GM is mired in a terrible slump. If you had to make a choice, who would you keep: Big Papi or GM? Both have histories of tremendous production. Then again, past performance is no indication of future returns.

If you get rid of GM, the economic impact could be staggering for generations. If you get rid of Big Papi, the emotional toll on Red Sox Nation could take generations from which to recover. If you let Big Papi go, who’d take his place? They’d have to import a hitter from another team which could cost millions of dollars and many talented players. If you let GM go, foreign manufacturers like Toyota and Honda would sell most of our cars. (Wait a tick, aren’t they already the most popular?)

But why keep GM? Certainly mismanagement and lack of foresight caused their present crisis. Why should we pay for their mistakes? Ford seems to be doing ok. By the same token, why keep Big Papi? He gets paid a lot of money just to hit and right now, he isn’t even doing that.

It’s quite a dilemma, but for me, based on pure dollars and cents, I’ll keep Big Papi. He won’t cost me the tax dollars that it would take to bail out GM, and I can wait for the new combo car/airplane to be available for the ultimate in transportation. And heck, maybe JD Drew will get hot. (Yea, right!)

Getting the First-Time Homebuyer Tax Credit to buy the house

The First-Time Homebuyer Tax Credit is an IRS tax credit for qualified first-time homebuyers that purchase a principal residence before December 1, 2009. It’s for 10 percent of the purchase price of the home, up to a cap of $8,000. While this is a boon to many first-time homebuyers, it hasn’t been much of a help in the up-front process of buying a home, since the credit is taken on your tax return “after the fact.”

That’s about to change. The Federal Housing Administration (FHA) has announced a policy that lets borrowers of  FHA-backed mortgages opt for a second short-term loan roughly equivalent to 97% of the amount of the first-time homebuyer tax credit they will be eligible for. This second loan places a lien on the property that’s purchased, and is repaid once the buyer files a tax return and receives the credit.

Some details:

• The tax credit loan may not be used to fund the minimum FHA 3.5% down payment requirement. It’s to be used to obtain a lower interest rate on the mortgage, pay closing costs, or make a larger down payment.
• The second lien can’t exceed the total amount of the minimum down payment, closing costs, and prepaid expenses. The advance, when combined with the first mortgage, cannot result in cash back to the borrower.
• If monthly payments are required on the second lien, the amount of the payments must be included within the qualifying ratios for the FHA loan (front-end: 31%; back-end: 43%), unless the payments will be deferred for 36 months. No balloon payment may be required for 10 years.
• The borrower cannot be subject to any outstanding pay garnishments, have defaulted student loans outstanding, or owe any unsettled obligations to the IRS.

Details may be obtained from the FHA here. As always, the borrower should be clear on any details before signing on the dotted line.