Q&A: How to find out if a car has flood damage

Dear Liz: You’ve been writing recently about how to find a good, cheap used car. Can you write about how to research whether a car has been damaged in a flood?

Answer: Carfax, which provides vehicle history reports, offers a free flood check in the “resources” section of the site’s press center.

Flood-damaged cars that have been totaled by insurance companies are typically sent to auto recyclers for dismantling but some wind up back on the market. These cars are supposed to have salvage titles that make clear their dubious histories, but it’s relatively easy for unscrupulous sellers to register the car in a different, more lenient state that obscures its past. This is known as “title washing.”

Carfax’s service can help you spot the damaged cars, as can your own senses. A car that smells like mold or strong cleaning solution (to cover up the mold) is a bad sign. Carpeting or upholstery that’s obviously newer than the car can indicate it’s been replaced after flood damage. Look in the glove box and under the seats for mud or silt. A sagging headliner on a newer car is another red flag.

A good mechanic can help you spot problems if you’re not sure. If the seller won’t let you take the car to your own mechanic for inspection, don’t buy it.

Q&A: Debt has a habit of hanging around

Dear Liz: Last year my dad had an account he couldn’t pay and it is showing up on his credit report as a closed, charged-off account. As expected, the lender sold it to another company. The new company now also has it listed as an open account in collection on his credit report. How can the same account be listed twice? I thought the second company couldn’t report it.

Answer: That’s not correct. Once the debt was charged off and turned over to collections, it could be reported again as a collection account. If the original account still shows a balance owed or more than one collection shows up for the same debt, however, your dad should definitely dispute it and file a complaint with the Consumer Financial Protection Bureau.

Q&A: Reverse mortgages have gotten safer and cheaper but aren’t for everyone

Dear Liz: I have been making interest-only payments on a home equity line of credit but starting in January the payments will increase to include principle. I would like to do a cash-out refinance of my first mortgage (I owe about $190,000) to pay off the HELOC (on which I owe $140,000).

My home is worth about $600,000, but my debt-to-income ratio is very high, and I’ve been told I won’t be approved.

I have never been late on my mortgage or credit cards, on which I owe about $30,000. I am working very hard on paying off my debt but my income is low, $25,000 a year.
I am 72, a widow and find it hard to land a good paying job like I used to have. I have to settle for what I can get.

My son and his family live with me and pay $900 rent and half of utilities but those payments are not reflected on my taxes.

The advice I am getting so far is to get a reverse mortgage for about a year, to not take any money from it and instead pay down my credit, then after a year try to refinance again. What are your thoughts on reverse mortgages?

Answer: Reverse mortgages have gotten safer and less expensive but they aren’t a good short-term solution for anyone. All mortgages have costs, and it makes little sense to pay to set up a reverse mortgage if you plan to get rid of it a few months later.

Reverse mortgages, for those who don’t know, allow borrowers 62 or over to tap their home equity to get a lump sum, a series of monthly checks or a line of credit. Borrowers don’t have to make payments on these loans, but any debt incurred on a reverse mortgage grows over time and must be paid off when the borrower sells, moves out or dies.

The most common reverse mortgage is the Home Equity Conversion Mortgage, which is insured by the federal government. The HECM loan typically includes upfront and annual mortgage insurance premiums, third party charges, origination fees, interest and servicing fees.

The amount you can borrow is based on your age, prevailing interest rates and the value of your home (the maximum home value considered is $636,150). You’ll find a calculator at www.reversemortgage.org/About/Reverse-Mortgage-Calculator that can help you estimate what you can borrow and the costs.

Normally, people can’t access more than 60% of the borrowed amount in the first year. That’s to prevent them from running through all their equity in a short time. The exception is when the money’s being used to pay off existing loans. You probably would be able to borrow just enough to pay off your current mortgages, but the upfront mortgage insurance premium you would owe would be high: 2.5%, rather than the usual 0.5%.

Another complication is the fact that you have family living with you. You’d need to think through what would happen if you died, had to sell or moved into a nursing home, because that could leave your son and his family homeless if they weren’t able to pay off the mortgage.

A final concern is the fact that you’ve been living beyond your means for quite a while, as shown by the amount of debt you have. Eliminating mortgage payments could help you pay off your remaining debt, but that’s only if you keep your expenses in line with your current income — not what you were able to spend when you had a good job. There’s also no telling how much longer you’ll be able to continue working, which would mean getting by on even less.

Consider meeting with both a nonprofit credit counselor and a bankruptcy attorney to understand your options. You can get referrals from the National Foundation for Credit Counseling (www.nfcc.org) and the National Assn. of Consumer Bankruptcy Attorneys (www.nacba.org), respectively.

Q&A: Tax implications of parents paying off a child’s loans?

Dear Liz: My wife and I co-signed for student loans for our daughter. My daughter made payments on these loans since she graduated from college four years ago. My wife and I just paid off the loan balance, which was $22,000. Is our payment considered a gift to our daughter?

Answer: Yes, but your gift is within the annual exemption limit, so you won’t have to file a gift tax return. You and your wife can each give your daughter $14,000, or a total $28,000, without having to file a return. Gift taxes aren’t owed until the amounts someone gives away above those annual limits exceeds $5.49 million.

Q&A: Why tapping retirement cash early shouldn’t be done lightly

Dear Liz: I’m reaching out on behalf of my father, who does not know how to write emails. He was wondering if he pulls his money out of his IRA, how much will he get charged? Also, how much would he be able to give to his granddaughters without being charged?

Answer: Withdrawals from IRAs and most other retirement accounts are taxable. The tax bill will depend on his tax bracket and whether his contributions were pre-tax (deductible) or after-tax (non-deductible). If he withdraws money before age 59 1/2, he also may face tax penalties. A premature withdrawal can easily trigger a tax bill of 25% to 50%. Once the money is withdrawn, it also loses all the future tax-deferred returns it could have earned.

If he gives the money to his granddaughters, it’s unlikely he would face an additional tax bill. He would be required to file a gift tax return if the amount exceeded $14,000 per recipient in a year, but he would only have to pay gift taxes if the total amount he gives away in his lifetime over that limit exceeds $5.49 million.

Clearly, taking money out of a retirement account is a big deal and something that shouldn’t be done lightly. At the very least, your dad should consult a tax pro who can estimate the bill he’s likely to face. He’d be smart to consult a fee-only financial planner as well so he understands the potential effect this withdrawal could have on his future standard of living.

Q&A: Making sure your free credit report really is free

Dear Liz: Please tell me again how to get my free credit report each year.

Answer: You can get a free annual look at your credit reports from the three major credit bureaus at www.annualcreditreport.com. If you search for “free credit report,” you may wind up at a look-alike site, rather than the federally mandated one. A good clue that you’re on the wrong site will be if you’re asked for a credit card number.

Your free reports don’t include free scores, which are the three-digit numbers lenders and others use to judge your creditworthiness. Your bank or credit card companies may offer free scores, or you can sign up with one of the many sites that offer them. Keep in mind that there are different types of scores, and the one that you’re seeing may not be the same as the ones your lenders use.

Q&A: More advice on how to find a reliable cheap car

Dear Liz: I have repaired my own vehicles all my life, and I wanted to add a bit to your response to the person in Chapter 13 bankruptcy who needs another car after paying $1,500 cash each for two junkers. You are correct that a $3,000 car is likely to be more reliable, but I would stress heavily that there are no guarantees on cars at that price range even if you have a mechanic check the vehicle.

My advice on getting a reliable cheap vehicle is to first identify what make and model vehicle you want, then spend several weeks on the model-specific forums on the Internet reading the Q&As. There are wide variations in even the same models of the same year. One might use an engine that has a serious defect, but others do not have that defect.

The mistake most used-car buyers make who are looking for a cheap car is to be too impatient. They go for the first thing that’s listed at their price range with no regard to what make and model it is. It is simply not possible to research the skeletons in the closet of unfamiliar models in the hour in between viewing the listing online then running out to see it. Figure out the model in advance, then be patient.

Answer: Thanks for offering your advice. Even people who have plenty of money often don’t spend enough time researching their options and wind up regretting a purchase or paying too much.

Q&A: How long will a tax lien linger on a credit report?

Dear Liz: You wrote an article about how the credit bureaus are removing civil judgments and tax liens from people’s credit reports. I’ve been denied credit due to a few tax liens. Creditors won’t negotiate, even though the IRS has already deemed me unable to pay due to my disability. (I’m receiving Social Security disability income.) My question now is, how can I be sure it is being removed? Do I need to call the bureaus? Order another credit report?

Answer: Your unpaid tax liens may disappear, or they may not.

Starting in July, Equifax, Experian and TransUnion began removing liens and judgments when those records lack enough personally identifying information to ensure that the negative marks wind up on the right people’s reports. Another new requirement is that the records be properly updated, so that accounts that have been paid or resolved aren’t still showing as unpaid.

The error rate for these records was high, leading to many complaints, disputes and lawsuits. The bureaus expect to purge virtually all civil judgments but only about half of the tax liens.

If your liens aren’t purged and you can’t pay them, you may have to wait a while for them to fall off your credit reports. Paid liens are subject to the seven-year limit on how long most negative items can appear on credit reports. Unpaid liens can technically remain indefinitely, although the bureaus typically remove them after 10 years.

Q&A: What to consider before giving money for law or medical school

Dear Liz: Our daughter is in medical school using scholarships and student loans. We are now in a position to help her out, but worry that financial help might work against her sources of aid. Would it be better to pay some on her outstanding loans, give her money, pay some of her living expenses or put the money into a savings account to give her when she graduates to use towards paying down her debt? The amount we could give her would not be enough to pay for everything each semester, just something to ease her burden. We don’t want to jeopardize her ability to receive aid.

Answer: While nearly all graduate students qualify as independent — which means that parent financial information isn’t required to get aid — some medical and law schools do consider parental assets and income in their calculations.

Your daughter should call her school’s financial aid office anonymously to ask about its policy regarding parental aid, said Lynn O’Shaughnessy, a college financing expert at TheCollegeSolution.com. If your help would hurt, you can use the savings account route but you needn’t wait until she graduates to give her the money. Once she files financial aid forms for her last year, she should be able to accept your largesse without consequence.

Q&A: An Internet search isn’t the best way to find a credit counselor

Dear Liz: You’ve mentioned finding a nonprofit credit counselor and I was wondering the best way to go about that without feeling like I’ve been scammed. I’m wise enough (in my later years) to know that “nonprofit” does not mean free or even cheap services, so I didn’t want to just search for “nonprofit credit counseling, McKinney Texas.” Suggestions? Or should I do just that?

Answer: You can find a nonprofit credit counseling organization in your area using the National Foundation for Credit Counseling site at www.nfcc.org. NFCC is the oldest and largest credit counseling organization. Member organizations provide a variety of free and low-cost services. Those include financial education, credit report reviews and counseling about credit and debt, bankruptcy, foreclosure prevention, housing and reverse mortgages. If you’re struggling with credit card debt, these agencies provide debt management plans that can allow you to pay off your accounts at lower interest rates.

If you think you may need a debt management plan, you may also want to consult with a bankruptcy attorney. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org. Credit counselors — and their clients — are sometimes too optimistic about people’s ability to pay off debt, so you should understand the advantages and disadvantages of bankruptcy before you commit.