Answer: The short and obvious answer is that “nothing is the same.”

Home prices are down 33% from their 2006 peak, with even bigger drops in many areas. Lending standards are dramatically tighter as well. When your loan was originally made, lenders might not have cared much if your home’s size or amenities were fudged, or if the wrong “comparable properties” were used to arrive at your home’s value, or if you made the income or had the assets you claimed. Now they care, deeply, about all of those things.

Even if the world hasn’t changed, your property may have. Deferred maintenance could have reduced its value, while improvements may have increased it. Lawsuits or other problems may have popped up that affect the title.

And when you think about it for a moment, you’ll realize that all those loans that were made so easily in the past — with simply a few keystrokes — are what helped lead to the economic mess we’re in today. Yes, the pendulum may have swung too far and made refinancing unnecessarily tough, but the old easy lending standards were simply unsustainable.

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.

[Update: Jane's post was based on some language that was actually changed in the final version. More on that in a moment.]

You may not realize this, but these financial advisors are only required to make sure investments are “suitable”–which is a pretty flexible (let’s call it saggy) term. As Jane puts it,

For example, it’s okay for them to offer you high-cost mutual funds when low-cost funds are available that invest the same way. It’s okay for them to sell you a high-cost, out-of-state 529 college savings plan when your own state’s plan costs less and gives you a tax deduction, too.

Consumer advocates were trying to get the rules changed to hold these advisors to a higher, “fiduciary” standard. But Sen. Tim Johnson, a Democrat from South Dakota that Jane calls “the senator from Citibank,” put the kibosh on that. [Update: He tried to, by calling for the SEC to study the issue and not giving it the authority to act on its conclusions. The final language shortens the study period and gives the SEC the power, although not the requirement, to change the rules based on its findings.]

The fiduciary standard is important, and I’m kicking myself for not writing more about it–especially after Rep. Barney Frank’s comments about the importance of the media shining the light on issues where Big Money would otherwise rule. But that’s a fight for another day.

[Update: Indeed. From Knut A. Rostad, chairman of the Committee for the Fiduciary Standard: "The final language's greatest weakness is it allows the SEC discretion in whether it will initiate rule-making. This is where the efforts of the Consumer Federation of America, ourselves and others can make a difference." In other words, we'll have a chance to put the SEC's feet to the fire.]

Here’s what the compromise bill does include for consumers:

• A new consumer protection bureau to be housed within the Federal Reserve. Congressman Frank predicted the bureau would be so independent that the Fed wouldn’t be allowed to “open its mail.”
• States would be allowed to impose stricter consumer protection laws on banks if they wish, reversing the “pre-emption” standard that allowed banks to follow weaker federal laws instead.
• FDIC insurance limits are permanently increased to $250,000, retroactive to Jan. 1, 2008.
• Sets new minimum standards for home lending and requires lenders to verify income, credit history and employment status to ensure borrowers have the ability to repay loans. The fees that induced many brokers to steer borrowers to higher-cost loans would be banned.
• A provision known as the “Volcker” rule would prohibit banks from making risky bets with their own funds, and limit their ability to trade derivatives. The derivative market would be regulated for the first time. The bill also gives federal regulators the power to seize and dissolve troubled financial companies. FDIC chairman Sheila Bair has characterized these powers as designed to prevent future taxpayer-funded bailouts.

But isn’t that “old school” thinking? Aren’t we all supposed to be in “survival mode” now and building up our emergency funds instead of paying off debt?

I am recently divorced at age 65, with no chance of getting a job soon. I did not get spousal support as my ex is on Social Security and a pension (which goes away when he dies). I got half of a very shattered IRA, which I am going to need to live on.

I am in the same boat, faced with carrying $8,000 of credit card debt or using funds that I need to live on to pay off the debt. What’s your answer to my problem?

Answer: Take a close look at what credit card companies are doing to their customers these days. They’re doubling or tripling interest rates, even for people with good credit. They’re lowering credit limits and slamming shut accounts, endangering people’s credit scores. They’re experimenting with new fees.

Why would you put up with that if you had a choice? People who don’t pay off their credit card debt with their savings when they can are choosing to bind themselves to companies that have made it quite clear they don’t care about their customers’ financial well-being.

The key phrase there is “when they can.” If you’re facing a layoff or already unemployed, you really do need to be in survival mode and conserve your cash. That means paying the minimums on your debt until your economic situation improves.

If your situation doesn’t improve, or if issuers raise your rates to the point where you can no longer pay your minimums, you may need to consider credit counseling or even bankruptcy to deal with this debt.

photo credit: abductit

Some of the country’s top financial planners were asked about the toughest questions they got from their clients this past year, and how they answered them.

The panel at Sunday’s Financial Planning Association session in Anaheim included Elissa Buie, Michael Branham, Harold Evensky, Tim Kochis and Ross Levin. Ron Lieber of the New York Times moderated.

The discussion was illuminating enough that I shared it on Twitter and am doing so again here. Below you’ll find my tweets and some comments expanding on important points. Read and learn from some of the best financial planning minds in the country.

Tough question #1: Didn’t you see this coming?

Toughest client ?: Didn’t u see this coming? CFP Buie: This was always in the realm of possibility. Can’t predict timing.

Evensky: It only seems obvious in hindsight. We will not see it next time, either.

Kochis/Levin: Clients feel emotionally planners failed them. Planning is more than technical. Part of job is dealing with pain.

My take: True financial planners (all the above are CFPs) have studied market history and knew big drops were possible–in contrast to investment salespeople who didn’t have such training and were caught flat-footed. True financial planners set up clients’ portfolios with an eye to worst-case scenarios. But planners will still have to help their clients through the emotional shock of losing money, since you don’t really know your risk tolerance until you’ve seen what a loss really feels like.

Tough question #2: Did asset allocation fail?

Did asset allocation fail? Branham: In crisis everything tanks. AA did work in that fixed income provided safety net.

Kochis: AA not designed to work in ST; designed to work over long periods & looks like it will.

Levin: we got this same ? in different context in 1999: shouldn’t you be all in tech stocks?

Evensky: Asset allocation worked very well. We just allo’d in some of the wrong places. Fixed income/LT Treasuries did very well

Evensky: AA does not protect against losses. It’s about better managing risk. One client: I don’t have to be happy but I don’t have 2 worry

Evensky’s comment about allocating in some of the wrong places was actually a laugh line (those are SO hard to communicate in 140 characters), but his serious point was that not everything tanked and that asset allocation doesn’t protect you against all losses anymore than it guarantees you the highest returns. It’s about getting the right mix of risk and return.

Tough question #3: What IS within our control?

wht IS w/in R control? Kochis: spending, major purchases, charity, family wealth trnsfr (silver lining: low values, low int rates)

Kochis: also, risk tolerance/return expectations. Evensky: that, & security selection. You have a great deal of control.

Buie: Ppl control just about everything other than market/economy. Knowing this helped keep some from jumping out window

Buie: Ones who reduced spending felt the most control. The well adjusted recognized the importance of human capital (ability to earn).

Branham: You can control saving rate, media intake, how they react. They can focus on important things in life.

The markets and economy may not be within our control, but our spending and saving levels certainly are. Buie noted that those who controlled their spending had the greatest sense of mastery of all her clients. She added that we also control our human capital–our ability to earn. We can find new ways to make money, start businesses, work longer, etc. Branham noted that a steady diet of “the sky is falling” news reports don’t tend to help us feel calm and in control, but focusing on what’s really important (family, relationships, etc.) does. Kochis pointed out that the market swoon and low interest rates actually gave wealthy families opportunities to transfer assets with less of a tax hit and to make other advantageous estate-planning moves.

Tough question #4: Do I have to change my lifestyle (cut back, retire later, give up the dream)?

Do I have 2 change my lifestyle? Levin: this is a ? abt control. Life happens. If we pretend omniscience, we do a disservice.

Levin: Only way you guarantee lower lifestyle is to give up on stocks.

Branham: 4 most, no. It’s life cycle dependent (harder 4 early/near retirees). Just as important we dn’t get 2 frugal as we dnt ovrspnd

Kochis: Essential not to overreact, do things u can’t reverse. take in stages, don’t assume everything’s changed 4ever

Buie: Ways 2 live a big life: Using home exchanges, hug some1 (prefbly some1 u know), give blood. It’s abt more than $$.

Kochis: some clients convinced it’s different this time. Not so much now, but definitely in March.

Levin: I was afraid in March. Most important is to put [on your own] oxygen mask first. Have to believe what u tell clients

Evensky: there is risk no matter what. We believe the safe thing to do is to stay invested.

Levin was pretty candid about his own emotions as the market plummeted. As I wrote above, knowing this could happen is different from experiencing it yourself. The planners saw some of their colleagues abandon long-held financial planning principles when the fear got to be too much. Levin said it was important to get a handle on his own fears so he could better advise his clients.

Tough question #5: How can I be sure you’re not a crook?

Moderator @ronlieber says his family advisor got arrested 4 theft, so this is top of mind 4 him.

How can I be sure UR not a crook? Evensky: trust but verify. Look @ ur statements. Determine who is holding ur $. Shldnt be advisor.

There is no guarantee from credentials or length of time in biz.

Buie: 3rd party custodian is essential. But statmnts dont protect against forgery. custodians must report more clearly, educate clients

Levin: a lot more $ gets lost thru bad advice than thru crooks. Clients shldn’t be bullied.

Buie: some annuities being sold have high expenses, limited upside. Being sold using fear. Concerns her.

A few scam artists are so sophisticated that their schemes are tough to detect. One big red flag for these planners is when the advisor is the custodian of the funds, rather than a third party. Levin points out that bad advice costs people far more (in high expenses, mediocre returns, etc.) than scam artists do.

photo credit: jocelynmarie

Snagging a date with that cute dude, getting good grades, banishing that zit. Yup, teen girls worry about a lot of stuff. Now add the economy and money to that list.

According to a survey from Bank of America and “Seventeen” magazine, teen girls are slightly more anxious about the economy (85 percent) vs. teen boys (75 percent).

Girls’ fears range from not having enough cash to pay for things they want – like lip gloss and mini dresses – to how to pay for  the big, important stuff – like college.

The research, based on interviews in April with 2,000 teens ages 16-21, also shows:

• Teen girls are more likely to be stressed about finding a way to pay for college than teen boys (69 percent vs. 59 percent).
• 40 percent of teen girls think their parents should bail them out of a tough money situation, no matter how old they are. (Ack!!)
• About 65 percent of teens said they had changed their spending habits as a result of the economy.
• 4 in 10 teens have altered their college plans because of the economic slowdown, while 1 in 5 had to either go with their second choice of college because of cost or attend a state school instead of a private one to save money.

Whoa – some of you are in need of a reality check. (C’mon girls – your parents should bail you out no matter how old you are?!) Getting a financial education doesn’t cost. Teens and parents can start below with a few MSN columns:

• Parents, stop scaring your kids
• What kids need to know about money
• Teach your teens how to handle credit cards
• Should parents bail out their kids?
• Money woes? What to tell the kids
• Teens need debt driver’s licenses

• Increased their interest rate–19% (up from 15% in February survey)
• Increased their fees–14%
• Lowered their credit limit–14% (up from 8% in February survey)
• Increased their minimum payment due–12%
• Reduced their rewards program–9%

This national telephone poll was conducted for Credit.com by GfK Custom Research North America from June 12-14, 2009. A total of 1,000 interviews were completed, with roughly 500 female adults and 500 male adults. The margin of error is +/- 3 percentage points for the full sample.

For more on dealing with the credit crunch, read:

• Banks have declared war–on you
• 6 steps for paying off toxic debt
• The credit card party is officially over
• Thaw out your frozen credit

No matter what, “the losses workers have sustained are so extraordinary, they’ll need to be much more proactive about saving to build their nest egg back up to pre-recession levels,” says Pamela Hess, director of retirement research at Hewitt Associates.

Here are some of the study’s key findings:

• The median rate of return in 2008 for 401(k) plans was a 28.3% loss—with the average 401(k) balance dropping from $79,600 in 2007 to $57,200 at the end of last year.
• Only 11% of employees were able to break even or gain in their 401(k) portfolios. Forty-four percent of employees lost 30% or more of their savings in 2008.
• 74% of employees participated in their 401(k) plan in 2008, which is consistent with previous years’ findings.
• The average 401(k) contribution rate dropped only marginally, from 7.7% in 2007 to 7.4% in 2008. Just 5% stopped contributing to their 401(k) plan altogether in 2008.
• There was a slight increase in the number of workers who made any trade in their 401(k) plan last year: 19.6% in 2008 vs. 18.7% in 2007.
• Nine of the ten most active trading days were the day after a large downturn in the market, or days with an average return of -4%.
• Employees’ average equity exposure dropped to just 59% in 2008—which is an all-time low since Hewitt began tracking it in 1997. Stable-value funds—which are considered less risky investments—experienced an 11% increase in asset allocation in 2008.
• 18% of employees took a hardship withdrawal from their 401(k) plan in 2008. The number of employees taking out 401(k) loans (23.1%) in 2008 remained similar to levels in prior years.

For more advice of investing, check out my columns below:

• 5 life lessons from the recession
  

• Under 35? Hurray for the meltdown!

• What’s the best way to reduce risk as I approach retirement?

Currently, Americans have returned to some good financial habits during the recession, including:

• 81% are saving more or the same than they were six months ago
• More than half have reduced discretionary purchases, and nearly half have cut back on household spending
• 71% of people feel either an equivalent or increased sense of financial control than they did six months ago

But according to the survey, which polled 1,000 respondents online on April 14 and 15, these habits might not stick or develop further once the financial crunch eases. (Survey’s error of margin is +/-3.1%):

• One in four admit to not having a specific savings strategy
• 15% say it took significant debt or bankruptcy to get them to save at all
• Half don’t thoroughly research all the financial products they purchase
• 44% don’t consider themselves as knowing enough about personal finances to “get by”
• 43% have saved money on and off, but never followed a consistent plan
• One in four admit to not having a specific savings strategy, and 15% say it took significant debt or bankruptcy to get them to save at all
• Only 12% have instituted an actual budget

If history is any indication – ahem the dot.com bust in the stock market in 2001 comes to mind – then it doesn’t take consumers all that long to forget.

Don’t repeat history. Check out my columns for the latest financial news to help you get back — and stay — on track:

• 7 guides to fixing your finances

• The 100 most useful Web sites

• Organize your financial life

Steve Rhodes, founder of GetOutOfDebt.org, recently echoed that advice (hat tip to CreditMattersBlog.com).

A Wall Street Journal columnist recently suggested borrowing against credit cards and using the cash to boost your emergency fund.

I know a few folks–homeowners and business owners–who tapped big lines of credit and stuffed the money into savings. They’re now patting themselves on the back for their foresight, even though carrying the debt is costing them hundreds of dollars a month.

Has the world gone mad? Not quite, when you consider:

• Most American households don’t have enough liquid savings to cover a typical stretch of unemployment, which in this recession is creeping toward 12 weeks (3 months).
• Half of households told MetLife pollsters that they were one month (or two paychecks) away from not being able to meet their financial obligations. More than a quarter–28%–would fall behind after missing a single paycheck.
• In the past, many would have turned to their credit cards or home equity lines of credit to pay their bills, but lenders are slashing access to that credit. Bankers are freezing or lowering limits on home equity lines of credit across the board, and one banking analyst has predicted that card card issuers will cut total limits by more than half in coming months.

Still, carrying expensive credit card debt–or adding more to your pile if you don’t absolutely need to–is a risky proposition, to say the least. You’re paying unnecessary interest, courting damage to your credit scores and putting yourself further at risk of the whims of your lenders, which can jack up your rates or change your terms at any time.

Furthermore, you need to be suspicious of any “one size fits all” advice, because everybody’s financial situation is unique.

The key in knowing what to do know is to gauge your total financial flexibility–your ability to pay your bills and cope with setbacks based on your available resources.

Here’s what I recommend:

Take stock of your own situation. See how much unused credit you have on cards and your home equity line. Check your FICOs. Get an idea of how much your home is worth and what the sales trend is–flat, declining, sharply declining. Figure out how much money you’d need to survive for at least three months and compare that against your cash stash and your access to credit.

Gauge your risk. If you don’t have much equity and home prices in your area are plummeting, you’re at high risk of having your HELOC frozen or the limit lowered. If your credit scores aren’t good to excellent (FICOs of 720 or above), or you’re using more than 50% of your available credit card limit, you’re at greater risk of having your limits cut and not being able to fight back by persuading the lender to rescind its decision or transferring your balances elsewhere. If you have only a few cards or lines of credit, you’re more vulnerable than if you have several accounts at different lenders. As I said last week and in my MSN column yesterday, diversifying our credit has become as important as diversifying our investments.

Make a plan. If your credit scores are great, you have tons of accessible home equity and there’s plenty of space on your credit cards, your financial flexibility is high–which means you needn’t panic and change your debt-repayment plan. Otherwise:

• If things are a little tighter, you might consider opening an escape hatch or two: another credit card if you can resist the urge to run up more debt, or a line of credit at your bank.
• If you have accounts that have already been frozen–the lender’s told you that you can no longer draw on the account–paying the minimums and stashing your cash may make sense, since you won’t free up any additional credit by paying the debt down.
  
• If you have a HELOC that’s at risk and you planned on tapping it in the next year–for college tuition, say, or to finish a remodeling job–get the money now.
  
• If you’re already on the edge, you have little financial flexiblity and a layoff would push you over, then by all means, conserve cash now. Pay the minimums on your debt. Think about the expenses you’d cut if you lost your job, and trim them immediately so you can put the extra cash into savings.
• If you’re really in deep, now may be the time to consider consulting a bankruptcy attorney–who can give you truly individualized advice, rather than generalizations that can turn around and chomp you on the butt.