Until recently, if you got a Social Security check from the federal government, there were limits to what the government could do to take money out of your check to pay off debts you may have owed to Uncle Sam. According to a recent story in the Wall Street Journal, defaulted student loans, unpaid farm or small business loans, unpaid income taxes, and even money veterans may have owed the government for health care were just some of the government debts that could have been paid out of that check.
Until recently, one of the biggest limitations was that in most cases the government could only collect on debts that were less than ten years old. Because of changes in the law caused by the 2008 Farm Bill, that is no longer the case. Prior to those changes, only federal student loan delinquencies weren't subject to the ten year statue of limitations.
While the news will be bad for some, it doesn't have to be catastrophic. For example, for most debts, the government can withhold a maximum of 15% of your benefits, and the reduction in benefits can't drop below $750 per month.
Why is the government doing this?
As is often the case with changes in federal laws and regulations, if you follow the money, the changes may make sense. The Wall Street Journal reported that in 2001, roughly 1.6% of the delinquent debt collected by the Treasury Department came from withholding Social Security payments rather than other sources like federal tax refunds. In 2008, the percentage went up to 10.8%. Given the aging of the population and increasing unemployment, perhaps the Treasury department and elected federal officials are looking to Social Security payments as a bigger growth area than tax refunds, and and changing the rules to make it easier to put their hands on it.
What if you are affected?
The good news is that if you the government starts to hold back some of your Social Security payments, and you think that they might be wrong, you have the right to review and copy your files, negotiate a different payment arrangement, and apply for waivers due to a disability or other hardships.
March 7, 2010
You may still owe money after a foreclosure or short sale
So your house was under water and you thought you could deal with your problem by having a short sale and moving on with your life. Maybe you got foreclosed on and you thought that the nightmare ended then. Think again. You may be on the hook for paying off part or all of the remaining mortgage, even years later.Foreclosure is not the end of the story
Most states, like Florida where about half of the homes are underwater, allow mortgage holders to collect on the unpaid portion of the mortgage after a foreclosure. In Florida, the courts give mortgage holders up to five years to seek a favorable judgment, and up to 20 years to collect. It may be different in your state, Arizona, California, and about one in three of the remaining states prohibit collection efforts on a primary residence after foreclosure.
The government may help you, but not that much
The federal government started the Home Affordable Modification Program to help homeowners who have financing their mortgage at a lower rate, but it is pretty restrictive. Your first mortgage can't be more than 125% of the current market value of your home, your mortgage has to be guaranteed by Fannie Mae or Freddie Mac, and you have to have no late payments in the previous 12 months. If you are either seriously underwater by more than 25%, or if you are already in the foreclosure process, you're (sorry) out of luck.
Who is most likely to get hit?
Not surprisingly, banks and mortgage holders would prefer to go after people who have assets or income. Homeowners who can afford to make payments, but decide to walk away from an underwater mortgage, sometimes called a rational default or a strategic default, are at risk if they don't have any other serious financial issues and have otherwise good credit.
Short sellers, who get lenders to forgive a portion of the debt in order to complete a sale, are also at risk because lenders will often leave their options open to come back and collect later. If you are involved in a short sale, make sure to review your agreements carefully, preferably with the help of a competent professional.
Those who have been foreclosed upon may also be at risk. Because the details of each foreclosure are very different, if you have been foreclosed upon or at risk of having that happen, check your mortgage agreement details very carefully to get a realistic idea of what issues you may be facing down the road.
Photo credit: respres
March 2, 2010
Short Sales and Taxes - IRS Gives You a Break
If you have to sell a house with an underwater mortgage, your lender may forgive a portion of the debt. If this happens, the IRS looks at the forgiven debt as income that may be taxable. The good news for many homeowners is that the government may cut you some slack and not may you pay taxes on the forgiven debt.
The Mortgage Debt Relief Act of 2007 allows many homeowners to exclude income from the discharge of debt on their principal residence. This isn't only for short sales. You may get a tax break even if you debt is reduced through mortgage restructuring, or if part or all of a mortgage is forgiven in a foreclosure.
This provision applies to debt forgiven from 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion if you are married and filing jointly, and $1 million if married filing and separately. This tax break applies only if the forgiven debt is directly related to a decline in the home’s value or the taxpayer’s financial condition.
The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, the amount that you didn't pay back is normally reportable as income because you no longer have an obligation to repay the lender.
Here’s a simple example of forgiven debt. You borrowed $10,000 but defaulted after paying off $2,000 of the principle. If the lender can't collect the remaining $8,000, that amount is considered taxable income in most cases.
When is cancellation of debt not taxable?
The most common situations when cancellation of debt income is not taxable is when it involves:
What if I don't tell the IRS?
Don't count on getting away with it by not telling the IRS. The lender is usually required to report the amount of the canceled debt to you (using Form 1099-C) and to the IRS. The amount of debt forgiven must be reported on IRS Form 982 and this form must be attached to your tax return. If you don't report it, and the IRS expects to see you mention it in a tax return, you could be headed for an audit.
Related Resources
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
The Mortgage Debt Relief Act of 2007 allows many homeowners to exclude income from the discharge of debt on their principal residence. This isn't only for short sales. You may get a tax break even if you debt is reduced through mortgage restructuring, or if part or all of a mortgage is forgiven in a foreclosure.
This provision applies to debt forgiven from 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion if you are married and filing jointly, and $1 million if married filing and separately. This tax break applies only if the forgiven debt is directly related to a decline in the home’s value or the taxpayer’s financial condition.
The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, the amount that you didn't pay back is normally reportable as income because you no longer have an obligation to repay the lender.
Here’s a simple example of forgiven debt. You borrowed $10,000 but defaulted after paying off $2,000 of the principle. If the lender can't collect the remaining $8,000, that amount is considered taxable income in most cases.
When is cancellation of debt not taxable?
The most common situations when cancellation of debt income is not taxable is when it involves:
- A qualified principal residence (This is what the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
- Debts discharged through bankruptcy.
- Insolvency (when your total debts are more than the fair market value of your total assets).
- Non-recourse loans, which is a loan where you are not personally responsible because the property being financed is used as collateral.
What if I don't tell the IRS?
Don't count on getting away with it by not telling the IRS. The lender is usually required to report the amount of the canceled debt to you (using Form 1099-C) and to the IRS. The amount of debt forgiven must be reported on IRS Form 982 and this form must be attached to your tax return. If you don't report it, and the IRS expects to see you mention it in a tax return, you could be headed for an audit.
Related Resources
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
February 26, 2010
How to Avoid Mortgage Repair and Rescue Scams
During the boom times, one of the biggest dangers for consumers were the shady mortgage companies that offered mortgages that were bad for homeowners but very good for the mortgage companies.
Scammers are targeting people having trouble paying their mortgages. Some claim to be able to “rescue” homeowners from foreclosures, while others promise loan modifications for a fee. If you get this kind of a pitch, watch out.
What does a scam look like?
Every scam is different, but most have some kind of of promise that sounds too good to be true, like the following:
“We can stop your foreclosure!”
“97% success rate!”
“Guaranteed to save your home!”
Scams often involve you paying an up front fee for a promise of saving you more money later. Don't believe it. Don’t pay any business, organization, or person who promises to prevent foreclosure or get you a new mortgage. Some might give you sweet sales pitch and after you pay up they stop returning your phone calls. Others may string you along before disclosing their charges. Bottom line, if they ask for a fee, walk away.
Deal with your mortgage servicer directly
Some scammers offer to handle financial arrangements for you, but then just pocket your payment. Send your mortgage payments ONLY to your mortgage servicer.
Don’t Pay for a Second Opinion
Have you applied for a loan modification and been turned down? Never pay for a second opinion. Instead, look for options that don't involve you paying someone to look for a solution for you
Make sure you deal only with official organizations
If you are looking for help or advice from a local, regional, or national government organization or nonprofit group. Make sure that you are dealing with a real one and not a fake. Some con artists use names, phone numbers, and website addresses to make it look like they’re part of the government or of a nonprofit. If you want to contact a government agency or a nonprofit, don't follow any links in an unexpected email or on a suspicious looking web site. Type the web address directly into your browser and double check any address you're not sure about. Use phone numbers listed on agency websites or in other reliable sources, like the Blue Pages in your phone directory. Don’t click on links or open any attachments in unexpected emails.
The federal government also wants to take these scam companies out. Check out this interview with the Federal Trade Commission from early February 2010.
Scammers are targeting people having trouble paying their mortgages. Some claim to be able to “rescue” homeowners from foreclosures, while others promise loan modifications for a fee. If you get this kind of a pitch, watch out.
What does a scam look like?
Every scam is different, but most have some kind of of promise that sounds too good to be true, like the following:
“We can stop your foreclosure!”
“97% success rate!”
“Guaranteed to save your home!”
Scams often involve you paying an up front fee for a promise of saving you more money later. Don't believe it. Don’t pay any business, organization, or person who promises to prevent foreclosure or get you a new mortgage. Some might give you sweet sales pitch and after you pay up they stop returning your phone calls. Others may string you along before disclosing their charges. Bottom line, if they ask for a fee, walk away.
Deal with your mortgage servicer directly
Some scammers offer to handle financial arrangements for you, but then just pocket your payment. Send your mortgage payments ONLY to your mortgage servicer.
Don’t Pay for a Second Opinion
Have you applied for a loan modification and been turned down? Never pay for a second opinion. Instead, look for options that don't involve you paying someone to look for a solution for you
Make sure you deal only with official organizations
If you are looking for help or advice from a local, regional, or national government organization or nonprofit group. Make sure that you are dealing with a real one and not a fake. Some con artists use names, phone numbers, and website addresses to make it look like they’re part of the government or of a nonprofit. If you want to contact a government agency or a nonprofit, don't follow any links in an unexpected email or on a suspicious looking web site. Type the web address directly into your browser and double check any address you're not sure about. Use phone numbers listed on agency websites or in other reliable sources, like the Blue Pages in your phone directory. Don’t click on links or open any attachments in unexpected emails.
The federal government also wants to take these scam companies out. Check out this interview with the Federal Trade Commission from early February 2010.
February 24, 2010
Gift Card Rules Will Change, But Not That Much
Starting on August 22, 2010, rules on prepaid gift cards will change, but not all that much. The biggest changes are that they can't expire within five years of activation (unless the agreement explicitly says otherwise)
Inactivity fees will be limited, but not eliminated. You can't be charged any kind of inactivity fee or service charge unless there has been no activity for a 12-month period, or unless the fees or charges were disclosed up front (read the agreement carefully). If there are fees, there can be no more than one per month.
If it looks like a gift card, it may not be a gift card when it comes to these rule changes. These expiration rules don't apply on prepaid phone calls, reloadable cards, loyalty or award cards, cards issued for special events or venues like an amusement or theme park, or cards issued in paper only.
The bottom line is before you buy a gift card, or if you receive one for whatever reason, be sure to read the fine print to make sure that the card will work for you.
February 21, 2010
Under 21? - Getting a Credit Card Just Got Tougher
Last year, the US Congress passed a law that makes it a lot tougher to get a credit card if you are under 21. How tough is it? Starting February 22, 2010, several things will change:
- You will need income, assets, or a cosigner: You will have to show proof that you have the means to pay your credit card bill, such as income from a job or other assets. If not, you will need to have an adult cosigner on your credit card. That cosigner will be fully responsible for paying the bills of the card holder, so unless that person really loves you or trusts you, don't count on them being a cosigner.
- No more offers in the mail: Credit card companies will no longer be allowed to send prescreened credit card offers in the mail to anyone under 21.
- Fewer college giveaways: Companies marketing credit cards to college students can't give away free stuff on or near the college, or at college-sponsored events.
How bad is this for students and younger people? Mortgage311.org thinks it is a good thing for most younger people. Those that do have the income or the assets won't be affected, and those that don't should either be motivated to have an income or to create financial assets, or to manage life without credit cards.
Having a cosigner, typically a parent, for a young person should not be an issue if that young person is both financially responsible and has a parent who can provide financial support as well as guidance for the responsible use of credit.
The biggest losers are the credit card companies who will have much less of an opportunity to convince financially inexperienced young people with no money or job that having and using credit is a good thing.
January 16, 2010
Are You and Employee or a Contractor? - What You Don't Know Can Cost You
If you're working as a contractor with a company, one thing you have to do is make sure that you are classified correctly so that you don't get into tax trouble. There are two general kinds of workers, employees and independent contractors. The big difference between the two is how you get paid and who is responsible for paying your taxes.
Tax Issues for Employers and Contractors
Employers are responsible for paying certain state and federal income taxes for their employees. Independent contractors are responsible for paying for all of their taxes. If you think that you are an employee when in fact you are some kind of independent contractor, you may have unpaid taxes and that could get you in serious trouble with the IRS. You may owe the taxes plus penalties, and if you can't pay, it could lead to other problems you don't want to have.
Are You Really a Contractor or an Employee?
If you were hired as a contractor, you may really be an employee. To find out if you are an employee, look at how the company is treating you. To figure that out, look at how the company is controlling your behavior, how finances are handled, and your relationship with the company.
Behavior
You are probably an employee if the company controls:
* When and where to do the work
* What tools or equipment to use
* What workers to hire or to assist with the work
* Where to purchase supplies and services
* What work must be performed
* What procedures to follow when performing your work
Finances
You are probably an employee if the company:
* Buys or controls most or all of the equipment and resources
* Reimburses you for most or all of your expenses
* Guarantees you a regular wage
* Pays you when resources to do your work are not available
* Doesn't allow you offer or provide your services to others
Relationship
You are probably an employee (even if your contract says that you are an independent contractor) if the company:
* Has employee-type benefits like paid vacation and sick days
* Hires you for an indefinite period or on a permanent basis
* Can control or direct what you do for the company
IRS Classifications
The IRS classifies workers into several categories, and if you are not sure what class you are in, review the for basic IRS classifications below:
Employee
Independent Contractors
Statutory Employee
Statutory Nonemployee
What to Do if You have a Wrong Classification
If you thought that you were a contractor and realize that you are really an employee, you should discuss this with your company and straighten things out. If you no longer work for that company, you should take some steps to deal with your possible tax situation. If you visit the IRS web site, you can find some basic steps to take to make sure your former employer pays its share of your taxes. You should also talk with a tax professional to see if you will need their services.
Tax Issues for Employers and Contractors
Employers are responsible for paying certain state and federal income taxes for their employees. Independent contractors are responsible for paying for all of their taxes. If you think that you are an employee when in fact you are some kind of independent contractor, you may have unpaid taxes and that could get you in serious trouble with the IRS. You may owe the taxes plus penalties, and if you can't pay, it could lead to other problems you don't want to have.
Are You Really a Contractor or an Employee?
If you were hired as a contractor, you may really be an employee. To find out if you are an employee, look at how the company is treating you. To figure that out, look at how the company is controlling your behavior, how finances are handled, and your relationship with the company.
Behavior
You are probably an employee if the company controls:
* When and where to do the work
* What tools or equipment to use
* What workers to hire or to assist with the work
* Where to purchase supplies and services
* What work must be performed
* What procedures to follow when performing your work
Finances
You are probably an employee if the company:
* Buys or controls most or all of the equipment and resources
* Reimburses you for most or all of your expenses
* Guarantees you a regular wage
* Pays you when resources to do your work are not available
* Doesn't allow you offer or provide your services to others
Relationship
You are probably an employee (even if your contract says that you are an independent contractor) if the company:
* Has employee-type benefits like paid vacation and sick days
* Hires you for an indefinite period or on a permanent basis
* Can control or direct what you do for the company
IRS Classifications
The IRS classifies workers into several categories, and if you are not sure what class you are in, review the for basic IRS classifications below:
Employee
Independent Contractors
Statutory Employee
Statutory Nonemployee
What to Do if You have a Wrong Classification
If you thought that you were a contractor and realize that you are really an employee, you should discuss this with your company and straighten things out. If you no longer work for that company, you should take some steps to deal with your possible tax situation. If you visit the IRS web site, you can find some basic steps to take to make sure your former employer pays its share of your taxes. You should also talk with a tax professional to see if you will need their services.
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