The New York Times and the Associated Press have been reporting new statistics just released by the “New York Fed.” I’m sorry, but I talk Minnesotan and “New York Fed” is not something in my vocabulary. So I looked that up and find that it’s the Federal Reserve Bank of New York. If you can’t believe them, then who can you believe.
The New York Fed says that consumer debt in the US now exceeds the level it was at before the recession. I will admit that I’ve been wondering a bit, because over the past couple months my phone has been ringing a lot more than it did in 2015 and 2016. I think the ringing of my phone might be a better barometer of what’s going on than the financial reports in the media. I remember in 2008 when it started ringing like never before, they were still saying on the financial news networks that there was no sign of a recession. The media in general wants to downplay economic problems. So I figure if they are actually reporting a story like this, things are probably worse than they are admitting.
The New York Fed goes on to say, however, not to worry. The new debt is proportionately more auto loans and student loans than it was in 2008, and besides the people with the debt are more credit worthy now. In addition, home ownership is down and a higher percentage of mortgage debt is held by people over 65, as if that somehow was good news. They admit that the student loan debt is getting up there and could be a bit high. Also it might be that defaults on those auto loans are on the rise. But a lot of the language in these stories is very soothing, so not to worry.
My opinion, based more on what I see with my own eyes, is this. I think it is time to worry. People may be back to work, but their earnings are down. They still need to drive and the old car can only go so far, so they are getting car loans that they can’t really afford. If they are not back to work they are back to school, getting student loans that they can’t afford. Getting credit might be a bit more work than it used to be, but with the help of Credit Karma and other similar sites the lenders can still be manipulated into granting credit to people who really can’t afford it. Maybe on paper they look more credit worthy, but that could be as much a fiction now as it was in 2008. In other words, I believe individuals in this country are getting overextended again. For many, another bubble may be about to burst.
This post is for general information purposes only, is not legal advice and does not create and attorney-client relationship.
Judge Gregory Kishel, Chief Judge of the U.S. Bankruptcy Court for the District of Minnesota, said last week at the bar association’s Bankruptcy Institute that the bankruptcy court for our state had enough money to make payroll and pay expenses through Monday October 14th or thereabouts. After that he said it was his intention and the intention of all the staff to continue working without pay. As close as I can tell, that must be what they are doing. I just got a routine legal notice from the court in my email about two hours ago. So I know that somebody is there and on the job right now.
I don’t know how long they can go on like that, but the way the judge was talking it sounded as if they were prepared to stick it out for the duration. This has been a good thing from my perspective, because I have been able to continue my work with very little noticeable side effects from the shutdown. So far the only thing that has come up has been that I found a mistake in a proof of claim form which the IRS filed in one of my Chapter 13 cases. When I picked up the phone to call the IRS guy who had prepared the claim form, I got a message that the IRS office was closed because of the government shutdown.
The news I heard this morning before coming to the office was all about possible default on the national debt unless something is done in the next few hours. That would mean, depending on who one listens to, anything between possibly almost nothing at best and a terrible crash and depression like that of 1929 at worst. So in looking for a graphic to go with this post, I have decided to pull out my picture of the fiscal cliff. Hard to know what is really going to happen. Guess I’ll fasten my seat belt and hang on for the ride.
Most people I talk to have not heard of the “fiscal cliff.” Those who have believe it will not affect them. This includes a husband and wife I met with yesterday. But when I ran the numbers for them, based on a November 1st article in Forbes, I found that between the two of them their paycheck withholding should go up by about $438 per month. That is, the net take home pay for the two of them together will be $438 lessper month starting January 2, 2012. That is just a few days from now. When I tried to warn them and suggested that they should be thinking about how they would deal with this, they blew me off. They are absolutely in denial about the prospect that this could ever happen. If we go over the fiscal cliff as scheduled, this should come as a heck of a shock.
My calculations assume, of course, that no steps will be taken to reduce the impact of the fiscal cliff.
From where I sit it looks like a majority of people are living right on the edge. For them a drop in take home pay like this will mean they no longer have the funds to pay their credit card debt. Often when people are in such a situation, they go to their employer and increase the number of exemptions they are claiming for withholding purposes on their paychecks. They claim more withholding exemptions than they should. Some increase the number of exemptions to the point that no taxes are being withheld at all, and for them all that is withheld is social security and medicare. This increases their take home pay, but it is at the cost of not having enough taken out to cover state and federal tax liability. The income which should have been withheld for taxes is then used to make payments on credit card debt. Often this is still not enough to get that credit card debt under control.
When it comes time to file their tax return, they find that they owe a tax debt which is too large for them to pay. Now on top of the credit card debt there is a substantial tax debt. Eventually they wind up in my office. I can help get rid of the credit card debt. But as long as the tax debt is less than three years old, there’s nothing I can do to help with the tax debt.
The worst creditors you can have are the IRS and the Minnesota Department of Revenue. In almost all circumstances, it is better to stop paying other debts before you stop or reduce the withholding of taxes from your pay check. Don’t fall for the temptation to unreasonably increase the exemptions you claim for withholding from your paycheck. That will work for a short time, and then you’ll really wish you hadn’t done that.
This post is for general information purposes only and should not be considered legal advice. You should consult the attorney of your choice concerning the details of our case. Reading or responding to this post does not create an attorney-client relationship. I am a debt relief agency helping people to file for relief under the federal bankruptcy code.