If you’re listening to public radio this weekend, you may hear my interview with Marketplace Money’s Tess Vigeland where we talk about sustainable budgets, affordable educations, dealing with debt and why the usual advice about emergency funds is just nuts. You can listen to the show, download the podcast and read the transcript HERE. While you’re at it, sign up for the RSS feed so you don’t miss the great stories Marketplace Money offers.
Here are just a few of the issues we tackled, with some follow-up information since you can only go into so much depth on radio:
Eden has a one-year-old baby and wants to save for college. She’s doing so using U.S. savings bonds and asked me if that was a good strategy. I had to tell her it really wasn’t. Interest rates are so low these days on savings bonds that you’re really losing ground when you invest in them. A better bet would be a 529 college savings plan, which receives favorable treatment from financial aid formulas and allows your money to grow tax-free for college. Eden wanted to retain control of the money, which a 529 allows you to do. You can switch beneficiaries to another relative if your child doesn’t go to college, or use the money yourself, or simply withdraw it and pay a 10% federal penalty on any earnings (not the whole withdrawal). For more, read “How to save for your kid’s college.”
David lost two properties in 2008, one to a short sale and one to a foreclosure, and received 1099s tax forms for the difference between what the properties sold for and what his mortgage balances were. He asked if he could escape this tax bill. When a lender forgives debt, the amount of forgiven debt is typically treated as taxable income to you. One exception is if the foreclosure or short sale involves your primary residence. Then, thanks to the Mortgage Forgiveness Debt Relief Act of 2007, the canceled or forgiven debt is not taxable. Unfortunately for David, neither property involved was his home. The other way around having to pay tax on forgiven debt is if you were insolvent at the time. David should speak to a tax pro about what to do next.
Kathy called in because she’s in the middle of a divorce, their house is underwater and her husband doesn’t want to try a short sale–he just wants it to go into foreclosure. Kathy’s worried she’ll be sued for the difference between what they owe and what the home is worth, and wonders if she’ll have to file bankruptcy. California homeowners are protected from lawsuits by lenders if the loan in question was used to buy the house–if it was purchase money, in other words. If the loan was refinanced, though, the protection is more questionable. And as I noted in “Lose your house, then get sued,” some people who arrange short sales inadvertently agree to remain on the hook for the unpaid debt. Long story short, Kathy needs to talk to an experienced bankruptcy attorney about her exposure; she can get referrals from the National Association of Consumer Bankruptcy Attorneys.
Another caller was facing a $30,000 IRS bill and $30,000 in credit card debt. He had the cash to cover one debt but not both, and asked which one he should pay off. I suggested he pay off the credit cards, because the IRS offers low-rate installment plans. If you owe $25,000 or less, you can apply online for an installment plan. If you owe $25,000 or more, you may still qualify, but you have to jump through a few more hoops. For more, visit the IRS’ page on payment plans and installment agreements.
Yet another caller had a pile of debt and a 401(k), and wanted to raid his retirement to pay off the bills. No, no, no, I told him. A 401(k) withdrawal triggers a tax bill that will eat up one quarter to one half of your withdrawal, plus you lose all the tax-deferred gains that money could have earned. A $1,000 withdrawal will typically cost you $10,000 or more in lost future retirement income. If you’re considering tapping retirement accounts to pay your debts, you need to talk to an experienced bankruptcy attorney first because you’re likely in over your head and you need to understand the ramifications of what you’re considering.
In honor of Valentine’s Day, we had a few questions about spousal liability for debt. One wife asked if she could be taken off a joint credit card where her husband was carrying a big debt. The answer is no; if you’re a joint account holder, rather than an authorized user, you are equally responsible for the debt and it will show up on both your credit reports. One solution is to have the husband get a three-year, fixed-rate personal loan from a credit union, pay off the debt with that and then close the card. Next, a husband told us his wife had stopped paying her credit cards, and his credit card issuer had recently frozen his account. If the wife’s cards were in her name alone, her problems should not affect his credit; his issuer may have acted for other reasons. If, however, these are jointly held cards, her problems will indeed hurt his score.
These are just some of the questions we tackled. I’ll be back on the show next month and we’ll be tackling more of the issues that affect you, so call in if you can.
Host Bob McCormick and I will discuss how to deal with credit, debt, budgeting and all kinds of other financial topics on Bob’s “Money 101″ show from 9 a.m. to 11 a.m. That’s 980 AM on your radio dial.
And we’ll probably make passing mention of my new book, “The 10 Commandments of Money: Survive and Thrive in the New Economy.”
If you just can’t wait until then to hear more, check out this MoneyWatch broadcast I did a few weeks ago with the fabulous Jill Schlesinger and the inimitable Jack Otter.
If you’re somewhere where you can’t crank up the volume (like at work–shhhhh), then you can just read the transcript of this Consumerism Commentary podcast I did with Flexo and Bryan.
Wherever you are, whatever media you like, I’m here to help you get a better handle on your money.
What do you do when a neighbor hits you up for money? Are 529s a good place for college savings, or are they too risky? And how do you figure out how much liability insurance you really need? This weekend I answered some listener questions about on Marketplace Money’s Getting Personal, and you can listen to the podcast here.
Need more? Consumerism Commentary recently posted this podcast, where I talk to Flexo and Bryan about my new book “The 10 Commandments of Money.” The podcast is segmented by topic so you can jump in to the area that interests you, or just listen to the whole thing.
If you’re not doing so already, you should subscribe to the podcasts at these two sites. They’re great sources of financial information and entertaining interviews to help you manage your money.
Dear Liz: I’m 26 and got married in August. For our honeymoon, we went to my hometown. We went for a hike through the hills and I got bitten by a rattlesnake.
After I spent the night in a hospital, we got a bill for just under $20,000. I don’t have health insurance (big mistake, I know). Because our combined income is more than $24,000, we were told we were not eligible for any discount. The woman I spoke with about the bill told me my options were to pay off the bill at $550 a month for the next three years, which is more than we pay for rent; pay the bill in full and get a 10% discount, which I do not have the money for; or file for bankruptcy.
We’re going to look at getting me on my wife’s insurance plan and see if we might be able to get them to retroactively cover some of the cost, but that doesn’t seem too likely even though the incident happened less than a week after we got married. What is the best course of action?
Answer: Don’t hold your breath about getting covered retroactively — that’s not going to happen. But get added to your wife’s insurance as soon as possible anyway. As you’ve seen, even the healthiest person is just one accident or illness away from potentially catastrophic bills, and having insurance will help you the next time.
Call the hospital and ask to speak directly to a financial counselor. Most hospitals have them, and they can help you review your situation to see if you might indeed qualify for discounts. Many hospitals offer some kind of financial aid or charitable program for people with incomes higher than yours.
Even if you don’t qualify for a charitable discount, you still might be able to reduce the bill if you can persuade the hospital to charge you what it would have charged an insurer for the same stay. Insurers negotiate significant discounts with providers, and you could end up paying quite a bit less if the hospital gives you the same discount.
If you can get the total bill reduced, you may be able to work out a payment plan with the hospital that you can afford. Whatever you do, try to avoid taking out a loan or using credit cards to cover this bill. A payment plan with the hospital typically won’t carry any interest, while the rates you would pay to a lender would probably be sky-high.
If the hospital won’t cooperate and you can’t pay the bill, bankruptcy might be the best of bad options. Otherwise the debt probably would be turned over to collection agencies that could hound you for years.
For more tips and strategies on how to negotiate your debt, pick up “The Medical Bill Survival Guide” by Nicholas Newsad.
Dear Liz: I am 43, own my home free and clear and have a credit score of 794. On one of my credit reports, there are two credit card accounts and five installment accounts that I know have been closed but are still listed as open. Should I inform the bureau that these accounts have been closed?
Answer: There’s really no reason for you to enlighten the credit bureau. These open accounts may be contributing to your credit score with that bureau, and closing them could risk reducing your score.
By the way, you don’t have just one credit score. You have many. The leading credit scoring formula is the FICO, and you have FICO scores at each of the three major credit bureaus. The bureaus also sell alternatives to the FICO score, including the VantageScore and their own in-house “consumer education scores.” A 794 is a high score on the FICO scale but only middling on the VantageScore scale.
If you really want to know where you stand with lenders, check your FICO scores and review your credit reports at all three credit bureaus.
Dear Liz: A friend of mine had a savings account for many years but didn’t put any money in it for some time. When he went to take money out, the bank had taken the money because he hadn’t used it enough. Are banks allowed to close an account and take the money if the account hasn’t been used in a while without contacting you? If so, how long do you have before the bank can take the money?
Answer: One of two things happened here. Either your friend’s funds were eaten up by account fees, or the account was declared abandoned and whatever money was left was turned over to his state’s unclaimed property office.
The amount of time that has to pass before an account is declared abandoned varies by state and can be as little as one year. Some states expect banks and other financial institutions to make some effort to track down accountholders. In other states, little or no effort is required. In any case, your friend can use the website of the National Assn. of Unclaimed Property Administrators at http://www.unclaimed.org to see if his lost account is being held by his state. While he’s there, he may turn up other unclaimed property that belongs to him, since these offices also collect utility deposits, insurance proceeds, refunds and the contents of safe deposit boxes, among other property.
Dear Liz: I am 70 and still working hard to retire attorney fees from my divorce while paying my daughter’s college tuition. I met with a bankruptcy attorney and got not-very-encouraging news. The attorney told me it would cost $2,000 to file for bankruptcy and there was no guarantee that my $36,000 in credit card debt would be retired. Instead, I might have to repay the debt over two to five years. He left me with the impression that there would be no debt relief, just a delay with a set repayment schedule. I have made no decision about how I will proceed, but the credit card payments are killing me. Can you advise?
Answer: Not everyone can qualify for a Chapter 7 liquidation bankruptcy, which typically erases credit card debt. If your income is above the median for your area, or you’re trying to protect assets that would be taken in a Chapter 7 case, you could wind up in Chapter 13 bankruptcy, which requires a repayment plan.
The best way out of your situation may be to buckle down and pay off the debt as quickly as you can, even if it means your daughter’s taking a sabbatical from school for a while. You also could sell or cash in some non-retirement assets, if you have them, to pay off your debt.
If you really can’t afford these bills, you could contact a legitimate credit counselor such as one affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org to see if you could swing a debt management plan that would allow you to pay off these bills at a lower interest rate.
If that won’t work, another option is to try to negotiate a settlement with your creditors. Settlements trash your credit scores, and your creditors could sue you if you stop paying your bills, so this solution isn’t for the faint of heart. You may want to return to that attorney and ask for guidance before you take such a drastic step.
Dear Liz: I recently changed jobs and wonder what I should do with my old 401(k) account. Should I roll it into an IRA or transfer it to my new employer’s 401(k) plan? Everything I read says an IRA is better because you have more choice in picking investments, but I’m not sure where I should set up the new account. Does it matter?
Answer: You probably would have more investing choices with an IRA, but you might also wind up paying more. A good, large-company 401(k) plan often offers access to institutional funds that charge less (sometimes much less) than what a retail investor would pay for a similar investment through an IRA. If your new employer’s plan is a good one, transferring the money there is often the simplest and most cost-effective solution. Or you may be able to leave the money where it is, if you like the plan. Only if neither option is palatable, or if you’re convinced that you can find better, lower-cost options on your own, does an IRA rollover become the clear best choice.
I’ll be signing copies of my book “The 10 Commandments of Money” tonight in the Barnes & Noble at The Americana Mall in Glendale, Calif. I’ll be there from 7 to 8 p.m. And yes, there will be cookies, as well as some Katie Cupcakes from Big Sugar Bakeshop. Get ‘em while they last.
If you can’t join me tonight, I’ll still be happy to sign your copy. Just CLICK HERE to find out how to arrange that.
See you tonight!