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Will you face a tax bill after foreclosure?

Dec 12, 2011 | | Comments Comments Off

Dear Liz: Several years ago, we were talked into getting what I believe was a predatory loan — a negatively amortizing mortgage for 100% of the purchase price of our home. The loan broker assured us we could refinance the following year to a more traditional mortgage.

We paid the minimum monthly payment required, which didn’t cover all the interest owed, so that amount was added to our mortgage balance. Like others, we have experienced the nightmare of the current housing market, and with the negative amortization adding on even more debt, we are severely underwater.

We’ve worked with two companies trying to get a workable loan modification but to no avail. The bank is not cooperating at all.

A lawyer I consulted is advising us not to pay at all going forward, saying that the upside-down home isn’t worth saving or worth the grief. She told us to put our payment amounts into savings so that we have something to live on after we have to leave the home, which I so far have been able to do. But I’m worried about the potential fallout.

Would we be required to pay taxes on the remaining balance we owe after a foreclosure? If we can’t afford to pay the taxes on $200,000 of untaxed income (that we really didn’t earn), what do we do then? Does bankruptcy help with that?

Answer: When a lender cancels or “forgives” debt, it typically sends you a Form 1099 for the amount of forgiven debt. This amount usually must be included as income on your tax return. But there’s a big exception when it comes to mortgage debt secured by your primary residence.

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows you to exclude from your income the debt that’s left over after a foreclosure. The law applies for the calendar years 2007 through 2012.

You can find more information about the act in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, as well as in IRS news release IR-2008-17.

In some cases, lenders aren’t content to write off the excess debt and instead decide to pursue homeowners after foreclosure for the remaining balance owed. You may be protected by state law from such a lawsuit (as homeowners in California typically are), but you’ll want to discuss this possibility with your attorney. If you are hit with such a lawsuit, you may need to consider filing for bankruptcy.

Categories : Q&A, Real Estate
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Be aware of ATM risks

Dec 12, 2011 | | Comments Comments Off

Dear Liz: Please warn people to be careful when they use ATMs. Some jerk posted an out-of-order sign on the outside ATM at my bank to get people to use the inside ATM, which had a skimmer installed on it. The crooks managed to get $500 out of my account, but the bank was on the ball and called me. I denied the transaction and the bank returned the money to my account.

People need to be aware of anything funny-looking about the ATM or the door lock. If there’s a piece of plastic sticking above or below the door lock, don’t use it. Personally, I don’t use the ATM anymore. I go inside to a teller to get cash.

Answer: People can be remarkably trusting when it comes to using ATMs. Stand-alone ATMs may be phonies, designed just to take your bank card information and PINs. Even ATMs attached to banks can be compromised, as your experience shows.

Some security experts advise avoiding stand-alone ATMs, and all advise being cautious about using any cash-dispensing machine. Before sticking your card into one, you should grab the slot where your card goes in and see if you can move it. If you can, don’t use the machine. If you enter your card and PIN into an ATM and get any kind of error message, alert your bank immediately, as that can be a sign of a compromised machine.

You don’t have to avoid using ATMs, but they should be used with caution.

Categories : Banking, Q&A
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I apologize to waiters everywhere

Dec 08, 2011 | | Comments Comments Off

Apparently a number of restaurant servers thought my column on holiday tipping was advising people that they could stiff their waiters and waitresses in December.

Good heavens.

The column “Holiday tipping: When it’s okay to skip” points out that holiday tips are voluntary and can be reduced or eliminated if you’re in tough financial straits.

Now, I knew that some people don’t know what a holiday tip is. I hear from them every year when my holiday tipping columns run, because they think I invented the custom and they want to let me know how outraged they are that I did so. I typically get as many emails from those folks as I do from the people who want their particular job category added to the list of those who customarily get holiday tips. (This includes a fair number of mail carriers. For the record, federal regulations prevent U.S. Postal Service mail carrier from accepting cash tips or any gift worth more than $20. A federal job with civil service pension isn’t worth risking for a few extra bucks at the holidays.)

But the outraged servers are new, so I’ve asked MSN to add a paragraph defining what a holiday tip is: an extra, voluntary payment given in December to acknowledge good service throughout the year.

To be clear: you don’t get to stiff your server, or your cab driver, or your bell hop, because it’s the holidays. Or because you don’t agree with the whole idea of tipping, or because you’re just a grump. If you’re not going to tip, you shouldn’t use services where tipping is expected.


Categories : Liz's Blog
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Payoff options for student loans

Dec 05, 2011 | | Comments (1)

Dear Liz: I graduated from college last summer and was lucky enough to get full-time employment. However, I have a great deal of college debt, including private and federal loans. Are there government programs that help pay back college loan debt? Do you have any suggestions? I cringe at the thought of paying double what I owe over the life of the loan because of interest and want to get this debt under control in the next few years instead of 15.

Answer: Your eagerness to pay off your student loan debt is admirable and is particularly appropriate when it comes to your private student loans. Unlike federal student loans, private loans have variable interest rates, limited repayment options, no forgiveness possibilities and fewer consumer protections. Using private student loans to pay for education is a lot like using credit cards, except that credit card debt can be erased in Bankruptcy Court. Private student loans typically can’t be discharged that way.

You needn’t be quite so anxious about paying back your federal student loans. The interest rates on these loans are relatively low and fixed, plus you have a number of repayment and forgiveness options. Often the best approach is to consolidate your federal loans into the longest payback period offered. That will reduce your required payments on the federal loans, freeing up more money to pay down your private loans. Once your private loans are paid off, you can apply the payments you were making on those toward your federal loans and speed your way out of debt.

There are a number of programs that offer stipends to help pay down student loans, and some that offer at least partial forgiveness of federal student loans. Serving in AmeriCorps or the Volunteers in Service to America can generate a $4,725 stipend to pay down your loans. Volunteers in the Peace Corps may apply for deferment of their federal loans and partial cancellation of Perkins Loans (15% for each year of service, up to 70% in total). Those who serve in the Army National Guard may be eligible for up to $10,000 to pay down their student loans. There are also debt forgiveness programs for those who teach or practice medicine in certain communities. You can find a more complete list, including links, at the FinAid website. People with jobs in public service fields (teaching, emergency services, the military and others) can qualify for forgiveness of their remaining federal student loan debt after 10 years of payments, while those in other jobs can erase their debt after 25 years (the time period will be cut to 20 years starting next year).

By the way, you shouldn’t stint your retirement in your enthusiasm to get out of debt. You really can’t make up for lost time when it comes to retirement savings, so try to contribute at least 10% of your income, and preferably 15%, to your workplace retirement program or to an IRA.

Categories : College, Q&A, Student Loans
Comments (1)

Dear Liz: Why do you keep saying retirement accounts will earn an average annual return of 8%? We haven’t seen returns like that in years, and there’s no chance we will in the future.

Answer: No one knows what the future will bring. But we’ve been through tumultuous times in the stock market many times in the past. Between the mid-1960s and early 1980s, for example, the Dow Jones industrial average benchmark of stock prices pretty much went nowhere, pinging back and forth between about 600 and 1,000. (Just do a Web search for “Dow Jones history” and you’ll turn up charts that show this.) People were pretty disgusted with stock market returns, and many were pessimistic about the future of our economy. Through the rest of the 1980s and ’90s, though, stock market returns exploded.

In every 30-year period since 1928, stocks have had an average annual return of at least 8%. Those who hung on through bad times were eventually rewarded for ignoring the doom-and-gloomers.

Categories : Investing, Q&A
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My book “The 10 Commandments of Money” is coming out in paperback later this month–and I’m making room on my bookshelves by giving away five copies of the hardcover version.

You can enter to win a copy by leaving a comment on my blog (not my Facebook page). Make sure to leave your email address (which won’t show up with your comment, but I’ll be able to see it). The winners will be chosen at random.

The deadline to enter is midnight Pacific time on Friday. So–comment away!

Categories : Liz's Blog
Comments (77)

Tom Petruno is one of the smartest guys I know. Now that he’s leaving the Los Angeles Times, we’re really going to miss his insights on the markets, the economy and the world.

You should take a few minutes to read his last column for the Times, because it offers a sense of perspective that’s too often missing from today’s business coverage. He writes:

I’m stepping away at a time that is strikingly reminiscent of my first few years in the business of covering financial markets and the economy. That was 1979-82, in what was then considered the worst U.S. economy since the Great Depression.

Sound familiar?

Many Americans’ attitude toward the stock market was exactly the same then as now. In 1979 the market was mistrusted or outright despised. What was the point of owning stocks? The Dow Jones industrial average was no higher in 1979 than it had been in 1964.

The rest of that story is that after so many years of pinging between 600 and 1,000, the Dow Jones Industrial Average in the 1980s finally started its long, explosive climb upwards. (The DJIA closed today at 11,555.)

Many of you reading this probably don’t remember those years, and some of you who do are convinced it’s different this time. Like Tom, I’ve been hearing the doom-and-gloomers predict the end of the economic world for decades now. And whaddya know…we’re still here.

This is not to downplay the severe financial beating so many have experienced. There are people who have lost everything they had, and who aren’t likely to get all or even most of it back. The unemployment rate is scary and so is the all the debt we’ve accrued, as people and as nations.

But we have survived worse. I think we will again.

Categories : Liz's Blog
Comments (1)

Dear Liz: A large safe containing our passports, Social Security cards, birth certificates, checks and credit cards was stolen from our home several days ago. We notified our bank and credit card companies. Is there an advantage to requesting new Social Security numbers? If we do this, would it affect our credit in any way?

Answer: New Social Security numbers wouldn’t necessarily protect you from identity theft and could create additional complications.

Thieves might still be able to use your old numbers to establish new accounts, and those fraudulent accounts could show up in your credit reports. If for some reason the credit bureaus didn’t combine the records for your old and new numbers, then you could be left without any credit history at all, which could make getting future credit difficult.

The Identity Theft Resource Center, which advises victims and has a fact sheet on this issue (No. 113, available on its website at http://www.idtheftcenter.org), typically doesn’t recommend applying for new numbers. Instead, it suggests credit freezes, which prevent most lenders from viewing your credit reports or establishing new accounts without your consent.

Credit freezes aren’t foolproof, since some lenders don’t check with credit bureaus before opening accounts. Credit freezes also won’t prevent a thief from using your Social Security numbers to commit healthcare fraud or criminal identity theft (which is when a thief pretends to be you when he or she is arrested). Also, there may be fees involved with freezing and unfreezing your credit reports.

But credit freezes are probably your best defense at this point, before you’ve been victimized. You can learn more about credit freezes at the Consumers Union site, DefendYourDollars.org.

Categories : Identity Theft, Q&A
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Should she walk away from her home?

Nov 28, 2011 | | Comments Comments Off

Dear Liz: I’m 59 and have been unemployed for more than three years. My retirement is gone, my unemployment insurance has expired and my family resources are maxed out. I own one rental property that I’m trying to sell because it has a negative cash flow. The comparable market is glutted now. I’ve missed the last four payments on my home of 32 years, although I’ve applied for help through the Making Homes Affordable program. I am overwhelmed and unsure how to handle this. Do I just walk away? I am actively seeking employment, working with Goodwill’s Job Connection, but don’t have much hope at this stage. I’m too young for a reverse mortgage and too old for doing physically demanding work.

Answer: Talk to a housing counselor approved by the Department of Housing and Urban Development about your situation, including the rental property. (You can get a referral to this free or low-cost help at http://www.hud.gov.)

You don’t need the financial drag of this property adding to your woes. Ideally you’d be able to slash the price for a quick sale, or if you owe more than the property is worth, to arrange for a short sale. That’s when the lender agrees to accept the proceeds of the sale in lieu of the larger amount you owe. Otherwise, you may need to let the property go into foreclosure.

You may not be able to save your primary residence either. If you don’t have any income, you’re unlikely to get a refinance or a modification, but the HUD counselor can apprise you of your options. If you have any equity in the property, it probably makes sense to sell it while you can rather than let the bank take over and lose a small fortune in foreclosure-related fees. For more information, read attorney Stephen Elias’ book, “The Foreclosure Survival Guide.”

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Marriage doesn’t combine your credit reports

Nov 28, 2011 | | Comments Comments Off

Dear Liz: To what extent do you inherit a spouse’s credit score for activity that occurred prior to the marriage? My fiance and I would like to get married soon. However, he has been going through a short-sale process for almost a year. The bank took a long time to review the matter and would not accept the multiple offers. My fiance has recently stopped making the mortgage payments and that has negatively impacted his credit. When we get married, does his credit score activity become incorporated into mine?

Answer: No. Your credit reports and credit scores aren’t combined when you marry.

If you apply for a loan together, both of your credit histories and scores would be taken into account. His bad scores could prevent you from getting approved. If you did get approved, you would probably have to pay a much higher interest rate.

If you do plan to get a mortgage or other loan together down the road, he should start to rehabilitate his scores as soon as his home situation is resolved. He should expect his scores to remain in the poor-to-fair category for at least three years, and it may take as many as seven years to get them into the “excellent” range.

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