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Radio recap: Money questions answered on KFWB

Feb 11, 2011 | | Comments Comments Off

I spent two hours this morning with the incomparable Bob McCormick, host of KFWB’s Money 101 show, talking about my new book and answering listener questions that really ran the gamut.

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.

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