Ask The Money Coach

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If it was just a matter of evaluating the wisdom of using your life insurance to pay off your charge card debt, I would be inclined to tell you that it would probably be a smart move. However, there is a big wrinkle in the whole equation: namely, you stated that your job is ending soon. Normally, I would have counseled you to seriously consider paying off the debt quickly while you can – especially since taking a loan from your whole life insurance policy should have no tax consequences to you. However, the bigger issue is your looming unemployment status.

Use Insurance as a Cash Cushion in the Future

If you don’t find another job or a replacement contract, you will have to consider how you will pay all your normal monthly obligations – housing, food, utilities, transportation, and so forth. I assume you have little to no savings (or some of that likely would have paid the debt already). Unfortunately, it is taking people longer than ever to find jobs. And with 10% unemployment, 1 out of 3 job-hunters has joined the ranks of the “long-term unemployed.” This means they have been out of work for at least six months. So given the current economic environment, and the fact that your credit card debt is carrying an extremely low interest rate right now, I would suggest continuing to pay on that debt as aggressively as you can, but don’t yet tap the cash value of your whole life insurance policy. Keep it untouched for now, as a standby cash cushion that you can access in the future if things get especially tight and you can’t easily replace your income.

Without knowing the details about your situation, it’s very hard to say the impact that working overseas will have on your income taxes. It depends on several factors, not the least of which are: the exact country in which your husband will be working, how he is compensated, and whether or not he is deemed to be an employee or an independent contractor. Regardless of these considerations, U.S. citizens are legally required to pay taxes on all income, no matter where it is derived or generated (i.e. either domestically or overseas).

Lowering Your Tax Bill

To potentially lower your tax bill, find out three things:

•    Is There a Reciprocal Tax Agreement With the U.S.?
Some nations have reciprocal tax treaties and agreements with the United States; other countries do not. If a U.S. worker is employed overseas in a country that does have a reciprocal tax agreement with American, then that worker may be eligible to get a tax credit for taxes paid to that foreign country.

•    Is His Pay “Grossed Up?”
Many employers will “gross up” an employee’s pay when that person is working overseas, relocating, or doing something else to benefit the employer – which in turn, may negatively impact the employee, from a tax standpoint. So it’s important to know whether your husband’s pay will include added compensation to essentially cover his income tax bill.

•    Is He Considered an “Employee” or an “Independent Contractor?”
Your husband’s taxes will also be determined by his employment status as either an “employee” or an “independent contractor.” Each has its pros and cons form a tax standpoint. And each may be afford certain tax benefits and deductions not provided to the other. For instance, an employee may get a deduction for relocation or moving expenses; whereas an independent contractor may be able to write off some of the same business expenses as entrepreneurs and self-employed individuals.

Once you find out the answers to these three important questions, then you can begin to do some appropriate tax planning. Also, since this situation involves a far more complicated set of financial and tax considerations than normal, I would strongly advise you to also consult a qualified tax professional.

Under the law, any loans you co-signed for with your husband are both of your responsibilities. So even though your husband did not pay the bills before his untimely death in 2007, this means that you are legally on the hook for all the debts you mentioned – including the three rental properties you owned together, the car lot, and that $17,000 bank loan that was in both of your names. Filing bankruptcy will only exacerbate your credit problems. You stated that you can’t secure financing for anything now. That will only get worse if you file bankruptcy.

The Sting of Bankruptcy Will Last Longer Than Defaulted Loans and Foreclosure

You also stated that there is no way you can pay back all that was owed. In my opinion, it would be better to let those negative marks stay on your credit for four more years or so, and then the damage will have been done. It does not sound as if creditors are harassing you, trying to garnish your wages, or attempting to seize your assets. In this case, if you owned a home and were trying to protect it, and you had many other mounting debts you could not pay, then a Chapter 13 bankruptcy filing would shield your own home from foreclosure and give you some financial protection from creditors. But that does not seem to be an issue. You already have 3 foreclosures on your credit report based on the rental properties that went unpaid. Don’t make your situation worse by filing bankruptcy – which will stay on your credit report for up to 10 years.

When people get turned down for a bank loan, the natural tendency is to think that the bank is wrong – and isn’t giving your application proper consideration. Realize, however, that bankers specialize in making loans for profit. In the current economic climate, they’re doing everything in their power to limit losses, especially by being picky about to whom they lend money. A low credit score is a big red flag for a mortgage lender, particularly when the borrower isn’t seeking money for his or her principal residence, but for an investment property. Bankers know that owners of investment properties tend to have higher mortgage default rates than do owner-occupants. That’s logical, when you think about it. After all, if times get tough and something has to be sacrificed, the average real estate investor will sacrifice his rental property by paying the mortgage on it late, or not at all. However, that same real estate investor will try his very best to pay his own mortgage on time, in order to keep a roof over his head.

What to Do if You Don’t Get Approved

So what should you do if one or more banks say “No” to your loan application, or they approve you for such a paltry loan amount that you can’t possibly afford to buy other homes/investment property in your area?  In my opinion, if you get a flat-out “No” from a bank, you should take that as a serious sign that you are not ready to acquire additional real estate because of one or more shortcomings. Don’t take a “No” personally and don’t feel like the bank is forever rejecting you. Look at a “No” as if they bank is saying: “No – not today.” That doesn’t mean you can’t come back later – in six to 12 months – with a much stronger application. If you are turned down, take the opportunity to ask the bank directly what deficiencies you have as a potential borrower and work at correcting them. Once you find out what areas you need to shore up, and take steps to do that, you’ll substantially increase your odds of getting approved down the road. In the vast majority of cases, you should be able to get approved in one year or less, if you do what is necessary to strengthen your mortgage application.

Take Time To Improve That Credit Rating

Let’s say the bank told you “No” because you have bad credit. Now you know that you need to pay off delinquent bills, reduce debt to boost your FICO score, fix any lingering errors on your credit report, or possibly negotiate with your creditors to have negative information deleted from your credit file. I also suggest you seek help from a reputable, free, or low-cost credit counselor. “If you get denied because of your credit, first go to a credit counseling agency, because sometimes in three to six months they can help you fix any credit problems you have,” says Bob Schultz, president of New Home Specialist Inc. in Boca Raton, Florida. Schultz started selling new homes in South Florida in 1968, and has been in the business for nearly 40 years. He now works with builders and realtors, and has been recognized by Builder Magazine as one of the “50 Most Influential People in Home Building.”

“Get your credit back on track, and while doing that, start disciplining yourself to save more money toward a down payment,” Schultz advises. “Six months later, when your credit is improved and you have more money in the bank, that looks good to the bank.”

Consider a Strong Co-Signer … But Know the Pitfalls

Take heart in knowing that by waiting just a short time to fix any problems in your loan application, you’ll actually wind up saving yourself many thousands of dollars. That’s because even if you did get approved for a mortgage with a weak application, you’d be forced to pay a higher interest rate and probably additionally fees just to get the loan.

If you absolutely dread the thought of waiting six months or more, here’s another possible strategy that Schultz recommends: “Get a strong co-signer: Mom or Dad, or someone who trusts you enough so that they’re willing to make the payments if you can’t.” Should you take this route, be absolutely certain that you can make your mortgage. If you don’t, you’ll jeopardize your own credit standing, and your co-signer’s – something that could ruin a relationship for life.

If you’re already working, but need some extra cash, there are lots of ways to raise money. Here are a few of them.

Sell Stuff You Don’t Want, Need or Use

Are there pants, sweaters, dresses or suits in your closet that you haven’t worn in a month of Sundays? That clothing would be far more valuable in the hands of someone less fortunate than you. Here’s a case where you can do well by doing good. Donate unused or unwanted clothing, electronics and other household goods to charity – and get a tax deduction for your generosity. Alternatively, you could have a garage sale and instantly pocket the cash, then use the money toward vanquishing your credit card debt. In addition to clothes, you can sell unwanted or unused toys, furniture, appliances, and other household items.

Turn a Hobby Into Cash

Whether you turn a hobby into a cash-making business, sell new or used products online, or stuff envelopes for another business, the key is for it to be a no-cost or low-cost venture that can be operated exclusively from the privacy of your own home.  Why these characteristics?  For starters, you don’t have the money to buy tons of products. You also don’t want to have to hire anybody or lease space. You want to keep all the money you earn, right?

Adjust Your Withholdings at Work

If you’re getting a big income tax refund from the government each year, you are squandering a precious financial opportunity. Currently, the IRS reports that the typical tax refund check tops $2,500. For those of you who routinely receive tax refunds, instead of giving the government an interest-free loan, get your money now. Go to your HR office at work and adjust your W-4 withholdings so that your employer takes less money out of your paycheck. This way, you’ll have more money coming in every pay period, and you can use that extra money to knock down your debts. Check out IRS publications 505 and 919 at www.irs.gov to learn how to properly adjust your withholdings so that you don’t take out too much money and end up owing taxes.

Get a Second Job

I realize that most people already work really hard, and might even be covering for recently laid-off co-workers, but if you can fathom the idea, consider getting a second job or part-time work, even if just for three months.  This may seem like a burden, but trust me, this option can work wonders. Having additional income can not only provide you with money to eliminate credit card debt, it can also help you build an emergency savings fund – hopefully before you’ll ever actually need to tap it.

Squeeze money from your residence

Whether you rent or own, getting a roommate or housemate is another way to generate income. If you can tolerate having an extra person around, you’ll likely find takers willing to lease out a spare bedroom or space in your attic or basement, especially given the high rate of people being put out of their homes these days due to foreclosure or inability to get a mortgage for their on place.  Taking in a roommate will provide you with extra cash to pay toward your debts. However, before forging ahead if you are a renter, be sure you’re not violating any clauses in your rental contract by letting someone else live with you.

Leverage The Internet To Spend Less

Many of us routinely may too much for goods and services that we could get for far less money, if only we’d take the time to comparison shop. Thankfully, with the power of the Internet, you can easily cut your spending and apply the savings to your debt by comparison shopping online. Here’s what to do: Come up with a list of at least five things you can do to curb your spending. Also think about major categories of spending where you’d like to be able reduce your costs. Then visit the financial website http://www.lowermybills.com, which helps you comparison shop to save money in 18 categories of household bills, ranging from home equity loans to auto insurance to long-distance telephone service. They do the hunting for you to make recommendations about where you could be saving money. But don’t rely exclusively on leveraging the Internet. Consider this area a unique challenge. Get creative about your finances. Look at ways you can save money by shopping around or by modifying some of your spending habits, whether it’s checking out books from the library instead of buying them at a bookstore, or using a movie service like Netflix instead of going to the movies.

Whatever cost savings you achieve – including doing things like clipping coupons or canceling unnecessary magazine subscriptions – make sure you apply that “extra” money to your debts, save it, or spend it in a positive way, as opposed to just blowing the money.