Consumer Credit Case Studies

Each credit report and financial situation is unique, we have come across thousands of unique cases over the years. Below is a number of real life case studies (all names and personal details have been altered to protect their privacy).

Debt Consolidation – Case Study of Sherry:

Sherry is earning $100,000 with $30,000 of credit card debt and very high expenses. Her balances are very close to limits and some over the limits. She wants to pay her creditors but can’t handle the high interest rates and increased minimum payment. She owns a condo in Manhattan with a little equity and had a piece of property upstate with a value of $30,000. She was denied a loan against her property because of low scores from her very high balances on her revolving credit card debt and although her property was on the market it was not selling. Debt Consolidation may be the best choice for Sherry since her interest rates could be reduced to 6% rather than the 23% she is paying currently. She will pay them a small fee plus a reduced monthly payment which they will deliver to her creditors. It is important that she knows the Debt Consolidation Company may make her reduced monthly payments late or put a mark on her credit profile stating she is in a debt consolidation plan. This mark can affect the scores negatively. She can also ask the DC Company to keep this info off her credit profile and to make sure payments are made on time but there is no guarantee this will occur. We have seen the scores drop dramatically because of these marks. The credit can always be cleaned up in the future when she gets a handle on her debt. If Sherry is saving 17% interest on her $30,000 and her payments are not drawn out for 10 years it could be a good choice in this situation.

Loan Modification – Case Study of Amanda:

Amanda was a professional with a family owning a home upwards of $1,000,000 in Long Island. After owning the home for a year she took a loan on the increased value to renovate (about 29 months ago). Amanda has a salary of over $250,000 and is the only income earner in her family. She called to ask about Debt Settlement after talking with a Debt Settlement Company that called her. She owed over $175,000. Was barely covering her mortgage and was having difficulty paying her credit card debt. Her interest rates on the credit card debt were hiked up because her balance was very high if not at the limits. The Debt Settlement Company most likely found her on a list the credit reporting agencies sold seeking out high debt individuals. They told her that her credit would not be ruined (even though she would have to stop paying her debt) and she would probably not have to pay taxes on her savings. She would have to put money into a bank account through them until she saved up enough money for the Settlement Company to pay the creditors 40% of what she owed. They would take their fee first and when she had enough savings they would begin to negotiate her debt. Most of this was false. If you don’t pay your bills on time you will have late payments on your credit report END OF STORY. She really needed to look into getting a loan modification first since the amount of her mortgage was, most likely, more than her property value. If she had many settled accounts with late payments she may not have qualified for the loan mod. We referred Amanda to an Attorney to discuss her mortgage situation and advised her against debt settlement until she examined the loan mod option first. She also needed to find out what the tax ramification would be if she had $100,000 + added to her $250,000 income after her credit card debt was settled for less.

Debt Settlement – Case Study of Joe:

Joe is an elderly man whose business just dissolved. He has a home with a small loan and large value. He has savings but his wife was ill with a chronic disease and he was suffering from depression. He owed $40,000.00 in credit card debt and had a 750 credit score. He and his wife were not making any income. After speaking with him for a while I learned that he did not need his credit and was not concerned about his scores reducing. He was not a candidate for bankruptcy and it made sense for us to negotiate his debt. The creditors would not even speak to us until he was 4 months late and his credit score dropped. It was a tough situation for him and his wife since they were bombarded with harassing phone calls (even after telling their creditors to stop calling them) day and night. They thought it out and we were able to save them about $24,000. They were very happy and relieved at the end of the process. It did cost them for our services and the taxes paid on their savings to the IRS but in the end it was the best decision for them. Remember each situation is different in terms of taxes paid and must be discussed with your CPA.

A Credit Story – James & Ava:

Take James and Ava, both teachers, and about to get married. They have plans to buy a home in the suburbs of Long Island N.Y and start a family as soon as possible. James had some credit management issues however—late payments with accounts that he did not pay at all. He is now in his late twenties and has not addressed these credit issues in a few years.

Ava, on the other hand, has always been diligent about managing her credit and paying on time. She has a 745 Fico score while James’ score is in the high 500s. Since they need both incomes to cover the cost of the mortgage, both of their credit scores are essential for mortgage approval. Unfortunately, James also had some student loans that were defaulted on. Therefore, he can’t get approved for an FHA backed loan. The government does not want to approve a loan they insure if the applicant has previously defaulted with them. This puts the couple in a difficult situation. Since real estate has dropped dramatically, they now have the opportunity to afford a home in a better school district which will enable their children to have greater success in the future. If they decide to wait until James’ credit naturally gets better, it could be 5 years and prices on homes may be much higher.

This is a very stressful way to begin a life together and start a family. Ava is disappointed and resentful that her plans must be set aside and the relationship is already on shaky ground before they really even begin the life they wanted together.

A Credit Story – Larry:

Larry is a real estate broker and has just come across a property that is an incredible value. He had no intention of purchasing an investment property but he knows this deal is a once in a lifetime opportunity. Larry has been a great credit manager and has a Fico score of 785. Although his income has lowered dramatically due to the economy, Larry has worked hard to insure his credit is protected and therefore he was able to qualify for the best loan at a very low interest rate. If Larry’s score was below a 740 he would have been denied the funding needed. The property is valued at $800,000 and Larry will be renting it out. He will earn $3000 a month in profit of rental income once the deal is done.

Larry’s credit has afforded him a great value and extra income at a time where he needs it most. If he had James’ credit this would never have happened. As you can see, this credit situation is quite the opposite of what happened with James and Ava. In Larry’s situation great credit was able to provide him a great opportunity.

A Credit Story – Sam & Carol:

Sam and Carol, both successful Attorneys in NYC had been looking for an apartment for well over six months. They were having difficulty compromising to find a place that met both their needs for practicality, style, neighborhood, and price. After much difficulty they finally found the perfect Manhattan Condo that brought all their qualifications together, while fulfilling their aesthetic dream.

When they first started their apartment hunting both their scores were well over the 740 fico requirement. With combined income of over a million dollars, good assets, and low debt ratio, it seemed like a slam dunk for loan approval. However, due to the length of time since credit was pulled the banker had to run new scores for loan application. Carol’s score dropped to a 652 which meant they would be denied mortgage approval. They were both astounded and angry when they learned that Carol had a tax lien recently updated on her credit which was placed in error dropping her score at least 60 points, as well as a recent late payment on a Bloomingdale’s card. By the time Carol and Sam found us they had only a week to get the score increased before losing the property. Carol was devastated and felt it was her fault they were going to lose the home of their dreams.

A Credit Story – Jim:

Jim, a high powered executive, and his wife Susan, an art dealer, were getting ready to refinance the $900,000 that was left on their mortgage. Since their Fico scores were around a 770 their current rate of 5% would be reduced down to around 3%. This would save about $1000 a month and around $300,000 over the life of the loan. Throughout the process of refinancing Jim was traveling and took a very long time to get all the documents the banker needed for loan submission. Since so much time had gone by the bank required a new credit report with the application. Unfortunately, when the credit was pulled Jim’s score dropped by 80 points. Jim had opened two new credit cards not realizing his average age of credit would be reduced by these new born accounts which would drop his scores. He had no way of knowing the two zero percent balance transfer cards would now be costing him $300,000.

Carol and Sam were very lucky and were able to qualify for loan approval. Within a week we had success removing the lien from Carol’s credit profile and her scores went up to 715. With the couples ability to put more funds down and the increase in score they were able to get loan approval.

Unfortunately for Jim and his wife there was nothing anyone could do to help. Once new accounts are opened only time could increase the average age of credit and ultimately the credit scores.

 

When advising clients on paying down debt, it is important that the credit profile be evaluated individually. Speaking with a Bankruptcy Attorney, Debt Consolidation Company, Mortgage and Loan Mod expert, a good Realtor for short sale info, and a Credit Restoration firm are very important to make an educated decision. There are some professions that will not hire a person with a bankruptcy on their record so when seeking info make sure to ask about this possibility and how it relates to your career.