Q&A: Bad boyfriend plagues grandparents’ finances

Dear Liz: We have raised our granddaughter since birth. She is the apple of our eyes. Then she fell in love. The boyfriend had no job, no car. My husband co-signed a loan for this boy! He didn’t even know the boy’s last name. I was devastated, as we are on Social Security so our income is limited. Our granddaughter couldn’t afford the payments and the boy was useless. They got so far behind that we ended up having to mortgage our home to pay off the truck. We hoped to sell it but of course the kids have broken up and the boy disappeared. When I asked the Department of Motor Vehicles what I could do to get him off the title, they said I couldn’t do anything.

Answer: Your husband is showing signs of cognitive impairment. Co-signing a loan can be (and often is) a lapse in judgment; co-signing for a virtual stranger indicates a more serious problem.

A study for the Center for Retirement Research found that people’s financial decision-making abilities peak in their 50s. By our 70s, our problem-solving abilities typically have declined enough to make us more vulnerable to bad decisions and fraud.

That’s why it’s important to simplify our financial lives in retirement and to consider safeguards that can keep us from being victimized.

Freezing your credit reports at the three major credit bureaus is one good option. That can keep criminals from opening accounts in your names. You would have to thaw your reports to apply for a loan or credit card, and adding that extra “speed bump” to the process could give you time to rethink a bad decision.

If you had children you could trust, you might have your financial institutions send them duplicate statements and discuss any large purchases or investments with them. If you don’t have someone you trust, a licensed fiduciary could serve a similar function. California has a Professional Fiduciaries Bureau within its Department of Consumer Affairs where you can learn more.

At this point, you should check the vehicle title to see if the names are listed with an “and” between them or an “or.” If it’s an “or,” your husband should be able to transfer title to the new owner. Otherwise, you may need to get an attorney to help you get a legal order to remove the boy’s name from the title. Check with your local bar association to see if there are any pro bono or legal aid services that can help you.

Q&A: Social Security divorced spousal benefits

Dear Liz: A friend was told by Social Security that she could not collect spousal benefits on her ex-husband’s work record because she did not have his Social Security number. How can I help her find it?

Answer: Your friend may have run into a new Social Security employee, or at least one who is not well-informed. Social Security says on its website that people who qualify for divorced spousal benefits do not need their exes’ Social Security number as long as they can provide enough identifying information for the agency to locate his record. She does need to have a marriage certificate and divorce decree along with her own birth certificate.

To qualify for divorced spousal benefits, the marriage must have lasted 10 years and your friend must currently be unmarried

Q&A: Income tax vs. capital gains tax

Dear Liz: I was wondering about the disabled vet who wanted to sell his home, which had increased in value by about $1 million. You mentioned that “[S]ingle people with incomes over $415,050 in 2016 are subject to the 39.6% marginal tax rate. Most people pay capital gains tax at a 15% rate, but those in the top bracket face a 20% rate.” Would he have to pay federal income tax on the non-exempt portion of the equity as well as paying 20% capital gains on the non-exempt portion?

Answer:
You may pay income tax or capital gains tax on a source of income, not both. If an investment has been held less than a year, the gain is considered short term and subject to income tax. Investments held more than a year are considered long-term and qualify for capital gains treatment.

When you’re selling your primary residence, the first $250,000 in profit is typically exempt from tax. The rest of the gain would be taxed as a capital gain.

Q&A: How to deal with debt collectors

Dear Liz: After struggling financially for seven years, I’m getting a good lawsuit settlement. After taxes, I’ll be set. I want to pay my bills but to the actual company — for example, the credit card company, not some bill-collecting clowns that threatened me with “the sheriff will come over and arrest you” or “your brother and sister will inherit your debt” and other lies.

I also don’t want to pay these inflated fees from bill collectors that have no rhyme or reason and sound like they are throwing darts at numbers board.

Finally, I’ve asked a couple of the bill collectors to provide me with the name and contact at the original company so I can verify that they have authorization. But with data being compromised every day, how do I know they are legit?’

Answer: You typically don’t have the option to pay the original creditor once a debt collector enters the scene. Chances are good the original creditor long ago wrote off the debt as a loss and sold it, often for pennies on the dollar. You’ll know the bill is in the hands of a debt buyer if you check your credit reports and the original creditor shows the amount owed as zero, said Michael Bovee, president of Consumer Recovery Network, a debt relief company.

You’re right to be concerned about paying the right party — not because of database breaches but because of the lousy records and bad practices that plague the debt collection industry. The same debt may be sold to multiple buyers or come with so little identifying information that it’s unclear who originally owed what to whom.

Before you pay any debt, you should ask in writing for it to be verified. By law, debt collectors must provide you with the name of the creditor, the amount owed and how you can dispute the debt or seek further verification. The Consumer Financial Protection Bureau offers sample letters on its site, www.consumerfinance.gov.

The CFPB also accepts and investigates complaints about collection agencies, such as those who violate the federal Fair Debt Collection Practices Act by harassing people or falsely threatening to arrest them (you typically can’t be arrested for debt).

It’s understandable that you don’t want to deal with a rogue collector or an unethical collection agency. If the debt is beyond your state’s statute of limitations and you can’t be sued over it, then there’s little reason to open negotiations with such bad actors. They could renege on any deal they make with you and simply sell the debt to someone else, starting the whole circus over again.

If you must resolve the debt — you typically can’t get a home loan, for example, if you have open collection accounts showing on your credit reports — then you should call the original creditor and verify which company bought the debt. If the debt wasn’t sold but assigned to a collection agency, get the name of that firm. Then you can call and negotiate payoffs low enough to offset any fees or interest that have accumulated, Bovee said. But do so before you apply for the loan and don’t let the collectors know you need to clean up your credit, since that weakens your bargaining position.

You’ll want to arm yourself with as much knowledge as possible before you contact any collection agency. You can download a free e-book at DebtCollectionAnswers.com, a site run by consumer advocate Gerri Detweiler, that can help you get started.

Q&A: Reverse mortgage due when borrower dies

Dear Liz: I was laid off from my job this year and decided to move in with my widowed dad in the suburban home that he and my mother purchased outright in 1989. However, over the years they apparently took out a reverse mortgage with a current balance of about $500,000 (the house was recently appraised at $680,000). When my father dies, how much longer can I live in the house? If there is little or no equity left, can I walk away from the house and let the lien holder handle the sale?

Answer: Reverse mortgages, which allow people 62 and older to tap the equity in their homes, are due and payable when the borrower dies, sells the home or moves out. You won’t be expected to vacate the premises the day after he dies, but you typically would have to leave the property within six months. You may be able to get an extension of that time if you’re selling the house or trying to get a loan to pay off the mortgage.

If there is still equity left in the home, it might make sense for you to try to sell it yourself to get the maximum value. Lenders only want to recoup what they’re owed and aren’t required to go to any extra effort to maximize the amount going to the heirs.

If the home is worth less than what’s owed, you can do a “deed in lieu of foreclosure,” which essentially allows you to hand over the keys and walk away. The good news is that you’re not on the hook. Reverse mortgages are non-recourse loans, which means that the lender can’t pursue the estate or the heirs for the balance owed.

Q&A: Helping a friend build credit

Dear Liz: I am selling my car to an old friend with no credit history. (The used car salesman wanted to charge her 6.5% interest.) Is there a way that I can report her timely payments to the credit reporting services to help her build her credit?

Answer: It’s not really practical for individuals to report payments, since subscribing to credit bureaus is expensive.

The rate your friend was quoted actually isn’t bad given her lack of credit history. If she kept the loan term relatively short (four years or less), she might be able to build up enough equity and credit history to refinance it to a lower rate in a year or two.

If she’d prefer not to take that route, you might suggest she explore credit builder loans. These loans, offered by credit unions, banks and some online lenders, are designed to help establish credit histories at the bureaus. The lenders typically put the borrowers monthly payments, minus a small interest charge, into a certificate of deposit that is the borrowers to keep after the final payment.

Secured credit cards are another good way to build credit scores. Borrowers make a refundable deposit with the issuing bank and get a credit line that’s typical equal to that deposit.

Q&A: The hazards of debt settlement

Dear Liz: My wife and I owe about $46,000 in credit card debt. We are considering a debt consolidation plan in which our debt would be reduced to about $27,000. According to what I’ve read and what’s included in the paperwork, any reduction in our debt may be reported to the IRS as income. I’m assuming this would not only increase our tax burden but could result in the forfeiture of some of my Social Security benefits. Am I correct in these assumptions?

Answer: What you’re considering is debt settlement, not debt consolidation.

With debt consolidation, you get one loan to pay off other, smaller debts in full. The right debt consolidation loan would offer a fixed interest rate and would allow you to pay off what you owe within three to five years.

Debt settlement, on the other hand, means you’re trying to get your creditors to accept less than what you owe. Debt settlement typically requires that you stop making payments to your creditors, which will trash your credit scores and could lead to lawsuits. You typically accrue interest, late fees and penalties that could offset or even wipe out any savings the debt-settlement company is promising you.

And the fact that the company seems to be promising you specific results, such as a $19,000 reduction in your debt, is a red flag all on its own. Your creditors don’t have any obligation to settle with you, and a debt settlement company shouldn’t promise that it can make the debt disappear.

To answer your specific questions: Yes, any debt that is “forgiven” in a settlement is considered income that can be taxed. It isn’t considered earned income, however, and so doesn’t trigger the Social Security earnings test that can reduce your benefits.

You’d be wise to read what the Federal Trade Commission and the Consumer Financial Protection Bureau have to say about debt settlement on their sites. In the vast majority of cases, you’re better off avoiding this option. Pay off what you owe if you can. If you can’t, explore a debt management plan offered by a nonprofit credit counselor and also make an appointment with a bankruptcy attorney so you understand all your options.

Q&A: Gift tax returns

Dear Liz: You recently answered a question about gift taxes and mentioned gift tax returns. Who is supposed to report the gift, the one giving or the one receiving the money? It seems like the one receiving the gift should, but in the answer it seemed the one giving the gift was subject to taxes.

Answer: The giver would file the return. The gift tax rules require people to report any annual gift over $14,000 to any one person, although the givers don’t owe gift taxes until those aggregate amounts exceed a certain limit (currently $5.45 million). The gift tax rules are designed to keep wealthy people from circumventing estate tax laws by giving vast amounts to their heirs before they die.

Q&A: Cashing out an IRA to pay off credit card debt

Dear Liz: I owe about $49,000 on my credit cards and now have the money to pay them off in full. Should I? Or should I slowly pay them in large amounts?

Answer:
There’s typically no reason to delay paying off credit card debt. Carrying balances costs you money and doesn’t help your credit scores. You’ll see the fastest improvement if you pay them off in one fell swoop.

The only excuse for delaying would be if this windfall comes from a retirement fund. Cashing out a 401(k) account or IRA to pay off debt is not wise, since you’ll trigger huge taxes and penalties. Add in the future tax-deferred compounding you lose and the total cost is far more than you’ll save in interest.

Q&A: Tax break for helping out son

Dear Liz: Our son bought a house and lost his job two months after the purchase. We have helped him stay afloat. Thankfully he has a new job. We don’t expect to get the money back — he is still trying to get out from under — but we have given him close to $10,000. Can we claim this as a “gift” to him on our income taxes?

Answer:
The IRS doesn’t view money given to family members as a charitable donation. In other words, there’s no tax break for bailing out your kids.

If you’re so wealthy that estate taxes might be an issue — which means estates worth more than $5.45 million a person in 2016 — then you might be concerned about gift tax rules. You’re allowed to give a certain amount to any person annually without having to file a gift tax return. In 2015 and 2016, that amount is $14,000, so you and your wife together could give up to $28,000 to your son without needing to file a gift tax return. It’s only when the total value of gifts over this annual exclusion hit $5.45 million that you’d have to worry about paying gift taxes. Clearly, this isn’t an issue for most families.