Michigan Collection Law Blog

There was a great article in USA Today of Saturday, March 7, 2009. In that article, the reporter advises that banks are now closing lines of credit and credit card accounts that are inactive. Even people who have been making their payments timely are seeing a reduction in the LOC that the bank will extend. This is having the unintended consequence of lowering one's credit score. Like it or not, the FICO score is the most prevalent determinant in how much credit any grantor will give a consumer.

The Fair Issac company invented the FICO score back in the 1950s or so. It was founded by some mathematical geniuses who put together some models of how to predict one's credit worthiness. They have done quite well ever since. Now, no one knows for sure what all exactly goes into the Fair Isaac credit score. We also don't know how much weight is attributable to each factor. Fair Isaac keeps its methodologies as a closely guarded secret (who knows, may be they know the formula for Coka-cola, too). However, we do know that the size of the lines of credit, and the percentage that those lines are used at the end of each month, are factors in determining your line of credit. The more of your line that is used at the end of the month, the more deleterious effect it has on your credit score. For example, if you have used $10,000 of a $40,000 line of credit and that is outstanding at the end of the month, that is one thing. But if the bank has cut your available credit down to $20,000. You are now going to be reported as using half your available credit. By cutting your credit score, your ability to get future credit is diminished.

I am now genius, but then it does not take a genius to see that all of us are in an economic downward spiral if those who have been fortunate enough to avoid job loss and the other economic atrocities of this economy are financially affected. Whats the solution? Ha ha...that answer does require a genius.

I would advise that if you have any inactive LOC, go ahead and use it. Pay it off as soon as you can, but go ahead and use it. You do not want the bank to close your LOC for want of use. Secondly, if your bank has cut your LOC, call your bank and see if you can get it to reverse it decision. Explain that economic consequences to the bank and how it will affect your credit score. Be nice, but firm. Your bank should not be hurting a good and loyal customer in today's market. These are rarities. Use your status as a rarity to make your bank return the favor.

I just read a very interesting article in USA Today. It talked about credit card companies like American Express paying some consumers $300 to pay off and close their accounts. I have never seen anything like this before. It appears that these banks are targeting those consumers that are carrying balances and not charging very much.

Its just like I have been telling my clients for years; if you are pursuing someone for a debt, you are in a race for your money, competing with other creditors. The banks are finally getting around to realizing this. They want to be paid first because they now know that the race is on and if they are going to get their money, they have to win that race.

If you are approached by your credit card company, you may want to consider their offer to close your account. Just make sure that they promise (in writing please), to report that you were the one to have closed the account on your credit report. By doing so, you will preserve your rights under the Fair Credit Reporting Act and perhaps even under the Fair Debt Collection Practices Act. You do NOT want a notation that says "Account closed by lender" or any such thing. You want to it reported on your credit report as "Account closed by consumer." Now, the bank may threaten to close your account anyway if you do not accept their offer. That is probably their prerogative under the credit card agreement. However, if the bank wants to terminate this relationship amicably and they certainly don't want you make a fuss about whose idea it is to close your account, simply insist on this provision in your credit file. By the way, did I mention that you should get that in writing? :)

I am working with a few clients that are suffering through a mortgage foreclosure. As soon as they received the sheriff's notice, I sat with them to discuss their options. In both cases, we put together an exit strategy that I would like to share with you.

First, we had to prioritize what was important in a new home. In our case, we decided that keeping the kids in the same school system was paramount so we knew we had to look for a new home in that area.

Second, we had to look at resources we had to move into a new home. One option to consider is moving into an apartment. Another option was to consider purchasing a home on a land contract. The land contract should have a 5 year balloon which should be enough time for someone to reestablish one's credit. The third option is to rent a house in the same area as the current home. I was amazed to learn that even though the area that we were looking was very well heeled with expensive homes, that there were a lot of rental properties. Not only that, these rental houses were fairly large (over 3,000 square feet...large by my standards anyway) with very modest rents. It appears that the mortgage foreclosure crisis has created a glut of these large homes that people need to get some money out of for on reason or another. It may be that the owners have passed away and the kids are trying to get some money from the houses and cannot sell them today. Anyway, it appears that staying in the same area would not only be easily accomplished, it would be quite economical too.

The third part of an exit plan is to calculate is the date that you have to be out of the foreclosed property. Under Michigan law, home owners can be evicted six months after the sheriff's sale unless the property is abandoned. After the sheriff's sale and until the the order of eviction is filed, the use of the property remains exclusive to the former home owners. Hence, you get to live rent and mortgage free for six months. At the risk of sounding like a conniving jerk (a phrase hurled at me t by my wife once in a while), a home owner can use this period to save up money for a down payment on a land contract, or a security deposit and moving costs. Think about it, living rent and mortgage free for six months is a great boon to anyone's finances. You just need enough discipline to save what you can.

Interestingly, the sheriff's sale for my clients' property was scheduled for last month. Although we had our exit plan in place, the bank did not appear at the sale. I cannot tell you why the bank did that, but I can give you plenty of good reasons why the bank made the right move. First of all, when the bank owns the home, it incurs substantial holding costs on the property such as taxes and utilities. Moreover, the bank has to hire a property maintenance company to visit the property to keep out trespassers, squaters, thieves and vandals. It is far more economic for the bank to keep people in their homes and perform these functions than for the bank to start forking out bailout dollars. Third, the banks already own tons of property. They were not supposed to be in the real estate business, but now they are. The banks are unhappy about this. Finally, there is talk of legislation to put a moratorium on foreclosures.

The moral of my story is to let you know that even though the bank may post a notice of foreclosure on your door, it may not actually attend the sale. It is important, however, that when this does occur, you must circle the proverbial wagons, keep calm and talk with attorney or some calm and detached third party about assembling an exit strategy. You have no idea how much inner peace you will achieve during the storm of a foreclosure, once you have put that plan together. Foreclosure sucks and for many of us, its a fact of life. Embrace it, face it and continue to live....elsewhere.