Ask The Money Coach

Archive for the ‘Employment’ Category

It sounds like you and your mother can not only not afford your home, but the house itself is also severely underwater. I understand your desire to improve your credit and get your own place, but honestly, you must fix problems A, B, and C before you can move on to issues D and E. In this case, problems A, B and C are: getting realistic about your financial past and present, learning how to create and live with a budget, and dealing with your home dilemma. Until you first do those things, you won’t be able to pay off your debts (issue D) or improve your credit (issue E). Without tackling first things first, you’ll also put yourself at risk of losing another home simply because you’ve neglected to learn certain financial lessons.

So let’s start with the first thing: a reality check. You seem to have attempted to throw your mother a lifeline, only to wind up nearly drowning yourself. Your email said you bought the home from her back in 2004 to help her avert bankruptcy and foreclosure. Despite your best intentions, you also stated that you and her wound up 3 months behind on the mortgage and in danger of being foreclosed upon anyway. That’s what led you to seek out the $10,000 loan you’re not saddled with. What happened to during the time of your unemployment? Your message indicated that you were twice laid off and that you “made some not so smart money decisions?” Whatever those decisions were, you have to truly acknowledge them, and make sure that you don’t repeat them.

It sounds to me as if you had your mother have been stuck in a cycle of making repetitive bad decisions. I hope you don’t think I’m being too harsh on you. Because I’m telling you these things honestly out of care and concern for your situation. I can sense your struggle and I know it’s very hard to be in such a tough predicament. I’m just giving you a bit of “tough love,” however, because I’ve seen cases like this time and time again. The only way people get out of these dilemmas is by actively breaking the cycle and ending the behavior that landed them in hot water.

Now let’s move on to the second issue: having a proper budget. Unfortunately, most of us grow up never having learned to create a realistic budget. This is likely true of your mother, and it’s probably true for you as well. Read this article I’ve written on budgeting and this post too, to get some ideas on how to budget to better manage your finances. Additionally, read this post about budgeting and financial planning when you go thorugh a layoff or have reduced income.

So what about the house? The fact that you’ve both faced foreclosure at least twice, and have even refinanced twice since 2004, yet you have still wound up deep in debt and deeply underwater tells me that you can not truly afford this home. I assume you refinanced in recent years to take advantage of relatively low interest rates. But I also suspect that you took cash out of your home as well. I could be wrong. But that’s certainly what many people did during the heydey of the housing market. How was that money used? Did you pay off debt, set aside any savings, or do something else with it? I recognize, of course, that part of the reason your house is likely under water is because home prices have fallen greatly in many parts of the country. But the fact that you owe twice as much as your home is worth signals that something else was going on.

If I were you, I would investigage the prospects of a short sale or a deed in lieu of foreclosure. I don’t know where you live, but it’s highly doubtful that your home will “come back” in value anytime soon. Unfortunately, short sales and deeds in lieu of foreclosure do have negative ramifications for your credit. But these are short-term hits from which you can recover, if you’re prepared to move on and do the right thing financially in the future.

You asked about the loan you got while you were unemployed. I don’t know of any way to legally get this loand eliminated or removed from your credit reports. Just because someone loaned you money at a time when you weren’t working doesn’t make the loan a “predatory loan.” Unfortunately, scores of lenders all across the country did this — both reputable lenders and not-so-reputable ones. Honestly, I don’t know which camp your lender falls into.

Nevetheless, again, I want you to be willing to take responsibililty for your own actions, and not put the blame elsewhere. You stated to me that you knew you shouldn’t have applied for the loan in the first place but that you were “desperate.” Plus, the reason you applied for the loan was because you were in arrears on your mortgage. That’s certainly not the fault of the lender that gave you the $10,000 loan. So it’s not fair to now accuse them of “predatory” lending. Predatory loans are characterized by unreasonably high interest rates, abusive pre-payment penalties, or excessive loan fees including enormous commissions for lenders or mortgage brokers.

Don’t worry about paying off 5-year-old debts at this point. You’ve got enough on your plate to try to pay your current bills. And trust me: In the long run, you will be far better off if you take my advice and deal first with these issues before you attempt to pay off old debts or improve your credit rating in order to try to get another place to live.

I’m not opposed to filing for bankruptcy protection, but I think it should be a last resort — done after you’ve tried other things.  In your case, a bankruptcy filing may be in order, based on all the circumstances you described. From what I understand, you are currently unemployed, and have been out of a job since July 2009. You had a $70,000 a year salary, but you’ve not run through almost all your savings.

Although you are currently working as a real estate agent, you’ve not successfully closed on any deals, which means you haven’t earned any income there. You didn’t say whether or not you were able to collect unemployment, but I assume that any unemployment compensation you may have gotten has now run out. Since
you also indicated that your credit score has dropped from 750 to around 530, I can tell you that a bankruptcy filing won’t do as much damage to your credit rating at this point as it would’ve done if your credit scores were still in the mid 700s. With $40,000 in debt, a Chapter 7 bankruptcy filing would help you to wipe out those credit card bills. You did the right thing also to get a loan modification from your mortgage company. That was a smart move.

Anytime you have a substantially reduced income, or an outright elimination of income, it means you have to completely overhaul your budget. A few tweaks, changes and minor pullbacks here and there just won’t do. You’ve indicated that your income is off by 50%. As a result, you must drastically slash your current or previous spending, and also think about creative ways to raise cash. Otherwise, you risk falling deeper into debt.

How to Overhaul Your Budget

Before you look at “extras,” and any “luxuries” you may be spending money on, start by examining the very basics: like your phones, housing and car. Often, the things that we think are “necessities” have to be sacrificed just temporarily when there is a major shift in income. Since you are a self-employed as a massage therapist, it may be the case, for example, that you have multiple phones. Perhaps a cell phone, a business phone and a personal home phone. If so, consider which one – or maybe even two – of those phones you can live without on a temporary basis until you restore your income. This is the kind of thinking that will help you figure out how to get through this economic rough patch. This advice is also applicable to anyone who:

•    Has been laid off recently, for a long time, or expects to be unemployed soon
•    Has seen a big decline in self-employment income
•    Has had has their hours on the job cut
•    Has had their hourly salary or regular pay slashed
•    Has found a new job that is substantially less than the income previously earned

Lifestyle Choices

Overhauling your budget also means making tough choices about your lifestyle. An example of a major lifestyle change might be considering where you live. Do you rent or own? Can you find cheaper housing, a less expensive neighborhood, or is bringing in a roommate an option? Also, what about the car you mentioned? You said you drive only when you must. Can you sell the car and use public transportation? If you have car payments, is getting a friend or relative to take over those car payments at all feasible? I recognize that these are big shifts. But sometimes you have to dig deep when things are far more challenging than the norm. That’s why I usually recommend these strategies for people who are extremely deep in debt, or for those who have had major reductions in their income.

Negotiating and Bartering

As you consider your options, don’t forget about one of the best budget-saving strategies of all: negotiating. Whenever you are about to buy something, ask for a discount. Ask for a discount for paying for goods and services, like medical care, in cash instead of with credit. Ask for a discount if you’re at a store and you’re buying two or three of an item, instead of just one. You can even ask for, and negotiate, to receive products and services free of charge – if you’re willing to exchange your time, talents and services as well. For instance, you said you are a massage therapist. I imagine this is a stressful period for accountants. Instead of paying a CPA to do your business tax returns, maybe you can offer to provide a one-hour massage or treatment to your accountant. The idea is to think creatively about how you can both exchange value – without exchanging dollars. That’s a win-win situation for both parties and one that will help you to more quickly bounce back from your economic slump.

Under section 6501(a) of the Internal Revenue Code, the IRS is required to assess tax within three years after a tax return is filed. Therefore, most people need only keep tax records for three years after filing a tax return, because that is the time period during which:
a)    a taxpayer can amend a tax return to claim a credit or refund; or
b)    the IRS can assess additional tax

As you are self-employed, however, there are a few circumstances in which you should keep records longer. Keep employment-related tax records for at least 4 years. Also, if you ever under-report income by 25% or more of the gross amount shown on your tax return, then you should keep records for at least six years after you file a return. In such as case, the IRS has six years to assess taxes – not just three. What’s more you should keep tax records indefinitely if you file a fraudulent return, or if you do not file a return at all. But I assume that these last two scenarios don’t apply to you.

According to the IRS, “the exact length of time you should keep a document depends on the action, expense or event the document records.”

The IRS further offers this guidance:

1.    You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2.    You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
3.    You file a fraudulent return; keep records indefinitely.
4.    You do not file a return; keep records indefinitely.
5.    You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
6.    You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7.    Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Here’s the direct link to exact page on the IRS’s website that answers the question: How long should I keep records? www.irs.gov/businesses/small/article/0,,id=98513,00.html

Bankruptcy would not solve either of the problems you mentioned – defaulted student loans or a lack of a job. So based on what you’ve stated, no, bankruptcy would not be the right thing to do. There are three types of financial obligations that generally can not be wiped out in bankruptcy court: student loans, taxes and child support. But right now, you don’t even have a job. So don’t let creditors worry you sick over the prospect of them potentially trying to garnish your wages once you become employed. Recognize those pressure tactics for exactly what they are: hypothetical threats, which may or may not materialize in the future. Your real issue is finding work. Focus on that and getting your student loans out of default. Read on for an article I wrote concerning what to do with defaulted student loans and wage garnishments.

How to Fix Defaulted Student Loans and Wage Garnishments

In this tough economy, an increasing number of college graduates (and college drop-outs) are falling behind on their student loans. According to the Department of Education, federal student loan defaults were up to 6.9% in 2009, well above their 2008 of 5.2%. For those carrying private loans, defaults hit 3.37% in 2008 versus 1.47% in 2006, according to Sallie Mae, one of America’s largest providers of private loans.
As you probably already know, defaulting on a student loan is a very serious matter. A federal college loan falls into default status if you are supposed to make monthly payments, but have not done so for 270 days. For those whose student loan payments are less frequent, a default occurs once you haven’t made payments for 330 days. In either case, the government has the right to take your federal tax refund check or garnish up to 15% of your disposable pay in order to collect on a defaulted federal student loan. Defaulted student loans also negatively impact your credit.

Appealing a Wage Garnishment

The good news is that you can appeal a wage garnishment and request a hearing on the matter in order to demonstrate why it is that you can’t afford that the payments and wage garnishment your lender or guaranty agency is seeking. The U.S. Department of Education Debt Collection Services Office (DCS) holds the hearing after you fill out a “Request for Hearing” form regarding your wage garnishment, and send it to the Department of Education. Find the document online at: www.ed.gov/offices/OSFAP/DCS/forms/Request.For.Hearing.pdf

Your hearing can be done in-person, over the telephone, or in writing; the choice is up to you.

IMPORTANT NOTE: When you submit your Request for Hearing, make sure you also send another EXTREMELY IMPORTANT document. It is the “Financial Disclosure Statement,” a 3-page document in which you must document your income and itemize all your expenses.

Here is a link to the document online: www.ed.gov/offices/OSFAP/DCS/forms/fs.pdf. This “Financial Disclosure Statement” form will be critical in the hearing/appeal process, and will be closely evaluated, so take the time to carefully list all your bills, and provide copies of those bills as requested.

On page 3 of the Financial Disclosure Statement, you will notice a line that says: “Based on this Statement, I think I can afford to pay $               per month.” This is where you have an opportunity to essentially offer a counter-proposal to the Department of Education about your student loans. Regardless of what you’ve been asked to pay in the past, here is where you should realistically evaluate your budget and come up with a number that you can undoubtedly pay (without a huge financial strain) month after month.

The Department of Education will make a decision about your case within 60 days after your hearing. But in the meantime, any wage garnishment that has already started will continue to be in force.

Four Options to Cure a Defaulted Student Loan

Now, in order to get your student loan(s) out of default, you have four options:
•           Consolidate the loan(s)
•           Enter a loan rehabilitation program;
•           Pay the loan(s) off completely
•           Get the loan(s) totally discharged or cancelled

The last two are probably not realistic options. I know you don’t have the money to pay off the loan(s). That’s why you’re in this predicament; and loan cancellations are rare (though they can be obtained).  You’ll likely have to “rehabilitate” your loan(s) or consolidate.

Should You “Rehabilitate” Your Loans or Consolidate?

Before you can consolidate, you have to bring your loan(s) out of default status. You do this by making just three monthly payments — on time, and in any amount that you and your lender agree upon. To find out if you qualify for loan consolidation, contact the Federal Direct Consolidation Loan Info Center at 800-557-7392 or go online to loanconsolidation.ed.gov. If you call, the staff there should be able to tell you what your monthly payment will need to be for those three months while your loan is in repayment. The one drawback to consolidation is that your credit remains tarnished. Even though your loan will be paid off and listed as “paid in full” on your credit report, you’ll get a new loan through consolidation and that previous default still shows on your credit report for seven years.

An alternative, to fix your credit, and have all past negative information about your student loans completely deleted from your credit file is to go through loan rehabilitation.

In a nutshell with rehabilitation you make 9 or 12 on-time payments on your student loans in an amount you can afford. You make nine monthly payments on Direct Loans and Federal Family Education Loans, or 12 monthly payments on Perkins Loans. This, in my opinion, is the preferred route as it will help you restore your credit in a big way, so your past default won’t haunt you for years to come.

For more details about various alternatives to cure your student loan delinquency, check out the Department of Education’s guidebook called “Options for Financially-Challenged Borrowers in Default.” Here is a link to the guide online: www.ed.gov/offices/OSFAP/DCS/forms/2004.Borrower.Options.pdf

Get Help From an Ombudsman

Additionally, you should know that if you ever have a dispute with your lender or loan servicer about anything related to your federal student loans, there is a government agency that may be of assistance in resolving that dispute. It’s called the Federal Student Aid Office of the Ombudsman (www.ombudsman.ed.gov). Always try to work things out first with your lender by using this online “Self Resolution Checklist” from the Ombudsman’s office: ombudsman.ed.gov/resources/toolschecklists/selfresolution-checklist.html. But let’s say you think your loan was mistakenly placed in default by your lender – maybe you were in school at least half-time, you had a loan deferment or forbearance, or you actually made payments on your loan – and you can’t get a satisfactory resolution of the issue, then it’s time to reach out to the Ombudsman’s office.

Here is a link to the section of the Ombudsman’s website that gives you more information about handling defaulted student loans: ombudsman.ed.gov/loandefault.html. Also, this link gives you more info about wage garnishments: ombudsman.ed.gov/garnishment.html.

No matter what economic challenges you’re facing, you don’t have to live with wage garnishments and blemishes on your credit report because of defaulted student loans. Reach out for help today, and start the process of turning that college debt problem around.