When I started writing this blog I thought I was doing pretty well with my money. I was due to have my credit card debt paid off in a few months and I was ready to start investing.
Most of my businesses had break even or positive cash flow monthly. I paid to join the Kiyosaki Rich Dad education program so I could go to the next level with my money smart skills. This course put me back into credit card debt but I felt the Rich Dad education would be worth every penny.
Well, how quickly things can change. Within 2 weeks of starting the Kiyosaki Rich Dad education program my tax bill came in twice what I expected, the timing belt broke on my diesel Jetta, destroying a perfectly good engine.
Suddenly my positive cash flow monthly was significantly negative. I was reeling from these events, but the final straw came when my property manager called and told me my renters had skipped. My only rental property has already been a challenge because of the economy and losing the renters may cost me the house.
So, how did I handle these setbacks? I cried. Yep, it took me 24 hours to digest this last blow and then I had a major meltdown. Unfortunately, my good friend and business partner took the brunt of it through absolutely no fault of her own. She handled it well. Everyone should be blessed with such a good friend.
Crying let off some pressure but did not make the problems go away. The saving grace is that I have been in this place before and I know this too shall pass.
My plan to regroup looks like this:
1. Pray – Not for God to rescue me from my mistakes, but for Him to guide, support and love me through the process of dealing with the fallout.
2. Cut every expense possible – I will sell my car after it is repaired. This will give me a small amount of cash and save on insurance. I do have my 1 ton truck to drive. I have cut my direct TV to absolute minimum and there will be no eating out for a while. While these steps will not get my cash flow monthly positive, every dollar counts.
3. Increase cash flow monthly – Having several businesses allows me to increase my efforts when I get in financial trouble. I have to resist taking on more veterinary clients because this work will take me away from my efforts to increase my cash flow monthly.
This concept was one of the most difficult ones for me to grasp in my Kiyosaki Rich Dad education. Working harder on my S quadrant self employment job will not increase my long term cash flow monthly. No more casual business building with my Xango networking.
Many or the most successful leaders in the company came into the business with severe financial challenges. I will have to get busy and work harder and in a money smart fashion.
4. Seek help from professionals – I plan to take full advantage of my Kiyosaki Rich Dad education coaches to help me figure out how to handle my rental property. It is hard to admit all the mistakes I made when I bought this property but now I know.
For many this kind of roller coaster financial ride may be too uncomfortable but for me I see it as a learning process. I have made many financial mistakes but each mistake has eventually brought me closer to my goal of having my cash flow monthly higher than my expenses.
Until I get my cash flow monthly where it needs to be I will still struggle with finances. The Kiyosaki Rich Dad education program has helped me understand this
]]>The bankruptcy statistics in America are alarming. The past few decades have seen a dramatic rise in the number of people that are unable to pay off their debts, and Congress has recently addressed the issue with legislation that makes it harder to qualify for this status. Following is a list of the most common causes of bankruptcy in America today.
1. Medical Expenses
A study done at Harvard University indicates that this is the biggest cause of bankruptcy, representing 62% of all personal bankruptcies. One of the interesting caveats of this study shows that 78% of filers had some form of health insurance, thus bucking the myth that medical bills affect only the uninsured.
Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills – bills that can quickly wipe out savings and retirement accounts, college education funds and home equity. Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not.
2. Job Loss
Whether due to layoff, termination or resignation, the loss of income from a job can be equally devastating. Some are lucky enough to receive severance packages, but many find pink slips on their desks or lockers with little or no prior notice. Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous.
The loss of insurance coverage and the cost of COBRA insurance also drain the job seeker’s already limited resources. Those who are unable to find similar gainful employment for an extended period of time may not be able to recover from the lack of income in time to keep the creditors at bay.
3. Poor/Excess Use of Credit
Some people simply can’t control their spending. Credit card bills, installment debt, car and other loan payments can eventually spiral out of control, until finally the borrower is unable to make even the minimum payment on each type of debt. If the borrower cannot access funds from friends or family or otherwise obtain a debt-consolidation loan, then bankruptcy is usually the inevitable alternative.
Statistics indicate that most debt-consolidation plans fail for various reasons, and usually only delay filing for most participants. Although home-equity loans can be a good remedy for unsecured debt in some cases, once it is exhausted, irresponsible borrowers can face foreclosure on their homes if they are unable to make this payment as well.
4. Divorce/Separation
Marital dissolutions create tremendous financial strain on both partners in several ways. First come the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support and/or alimony, and finally the ongoing cost of keeping up two separate households after the split. The legal costs alone are enough to force some to file, while wage garnishments to cover back child support or alimony can strip others of the ability to pay the rest of their bills. Spouses who fail to pay the support dictated in the agreement often leave the other completely destitute.
5. Unexpected Expenses
Loss of property due to theft or casualty, such as earthquakes, floods or tornadoes for which the owner is not insured can force some into bankruptcy. Many homeowners are likely unaware that they must take out separate coverage for certain events such as earthquakes. Those who do not have coverage for this type of peril can face the loss of not only their homes but most or all of their possessions as well. Not only must they then pay to replace these items, but they must also find immediate food and shelter in the meantime. Furthermore, those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs.
The Bottom Line
There are many reasons why taxpayers are forced-or choose-to declare bankruptcy. But many times, common sense, sound financial planning and preparation for the future can head off this problem before it becomes inevitable. Those who are contemplating this possibility should seek a credit counselor or financial planner before choosing this alternative.
]]>From time to time a person can come up a little short on cash before their next paycheck is due to come in. One solution to this is a payday loan.
There are several different places that offer payday loans. It works somewhat like a cash advance only it comes through a different business rather than through your employer. These are specialized businesses set up to give you loans based on the fact that you are going to receive another pay check.
Some are based on the Internet, others are businesses that you walk in to and do business with face to face. The money that they offer can be used anywhere from one to four weeks.
These companies may seem like an easy way to get rid of a bounced check, avoid a late payment, or even help yourself out of a bad credit situation. Many of them will even give you a loan if you have bad credit, no credit at all, or even if you have claimed bankruptcy. As long as you have an income and can prove it they will likely give you a short-term loan.
The biggest problem with these loans is that they have a very high interest rate. Their excuse is that it is because you are borrowing the money for a very short time. The average rate of these loans is usually 300% APR. Because of this you will actually end up owing more in interest than what you borrowed in the first place. Many people will end up having to extend the loan, which will cause them to go more in to debt than they were when they went to the loan company.
When you go to the loan company to get the loan you show them proof of employment and then write them a postdated check for the amount that you are borrowing plus a fee. This fee is a lender fee but it does not include the interest rate. The fee really isn’t that high but the interest rate will be. If you don’t pay the interest rate the loan company will begin calling you or your place of employment to collect on the outstanding money owed.
If you need money and need it fast there are much better ways to go about it. This way may very well get you in a bind later on. The first way is to get a credit union loan. Many credit unions offer small loans much the same way as the payday loan companies do. There is one big difference though, the credit union loans will only charge about 15% APR as compared to 300% of the short-term payday loan companies.
This, of course, makes them at least possible to pay off, unlike the short-term payday loan. If you all ready have an account with the credit union you have the option to borrow from your own account. If you do this you have an even lower APR rate. You even earn dividends back on your savings when you pay back the loan if you do it this way.
Another way to avoid going to a payday loan company is by using a credit card advance. This means taking money out of your credit card and paying it back later. The APR is a little higher than with the credit union solution but still much less than with the payday loan company. The interest rate here would be about 20-25%.
This option is something that you probably only want to do if you have a good credit score so that you don’t make your credit score look bad. Especially if you think that you might not be able to pay it all back by your next payday.
You can also avoid going to payday loan companies by using resources that are all ready available to you. Many banks have overdraft protection available to their patrons. This means that if you write a check without funds in the checking account the bank will give you an automatic loan for the amount of the check to cover it. Then you pay back this loan over time.
It may also be just as effective to talk to the people where you owe the money. They may be very willing to cut you some slack and take partial payments on what you owe or give you a grace period. Many places can be very flexible.
While payday lenders can be a very convenient way to get money the huge interest rate and the automatic permission that you give them to contact you and your employer when you sign the papers for the loan. This is an instance where the end may not justify the means.
]]>In today’s economic conditions, more and more people are swimming in debt. At last check the average American household is carrying over $8,000 in credit card debt.
You may be one of those people carrying the debt however you are still entitled to some dignity in how you repay your debts. In other words you have rights and you cannot and should not be pressured into the manner in which you repay your debts. The Fair Debt Collection Practices Act(FDCPA) is what gives you these rights. If you are in debt and are being called by creditors then keep reading to make sure your rights are not being violated.
Did you know?
The FDCPA was created to counteract the abusive practices of collection agencies.
The FDCPA applies to all types of debt incurred by a household including mortgages, auto loans, credit cards and even retail store cards.
The FDCPA applies only to 3rd party collection agencies. For example if you have a huge medical expense and someone from the hospital calls you regarding repayment, that is not covered under this act. If they send this to a collection agency or law firm for collection then this act goes into effect. By the way it is very rare you would get abusive treatment directly from a store or credit card company because they want to keep you as a customer.
What can’t they do?
They cannot contact any 3rd party about your debt. They can’t call your cousin, mother, father, neighbor or anyone else.
They can’t make idle threats to intimidate you. For example they can’t say we are going to repossess the items you purchased unless they actually intend to do it.
They can only call you during reasonable contact hours. Those hours are between 8:00 AM and 9:00 PM. They also cannot continuously call your phone number over and over.
They can’t call you at work unless you give them permission.
They can’t insult you or use any type of profanity, or racial or ethnic slurs. So calling you cheap, lazy or a bum is out of the question.
They can’t ask for a post dated check and threaten you if it bounces. Well my question is why would you want a post-dated check anyway? If I’m in debt I don’t like the odds that the post dated check will clear.
They can’t charge you any excessive collection fees. This has always puzzled me about debt repayments. If I can’t pay the original bill how is adding fees and penalties going to allow me to pay it off any faster
They can’t lie to you by pretending to be something they are not, even though we will often lie to them by saying I’m not home right now when I am the one they are talking to. They can’t pretend to be a lawyer or a court official or any type of misrepresentation. They can’t use any type of documents that look like they are official court documents. They also can’t pretend to be taking a survey to get information about you.
Finally they can’t threaten to have you arrested if you don’t pay the debt. By the way I don’t know how you can repay if you are in jail.
So those are your rights, know and use them if you must. By the way companies face serious penalties and legal action if they violate these rules. So if you are in debt and are working to repay them don’t be afraid to enforce your rights if they are being violated.
]]>Every day, tens of thousands of individuals up to their necks in debt emotionally make the wrong decision. In pure desperation, they feel as though they can’t take another month of the debt. Throwing away their biggest ally (brutal rationality), they decide to “just do something.”
“Just do something” is the worst financial advice you can take. Every step of your financial journey should be founded on cautious, rational analysis. The situation won’t change regardless of how we feel about it. Emotions don’t change reality.
Listed below are a collection of actions that many seemingly overwhelmed individuals take. Make sure to tread carefully — a slip up can literally set you back years. Below are some of the top “debt reduction” mistakes often made:
1. Getting “Debt Consolidation” Loans.
Debt consolidation is extremely popular in a lot of circles for a reason: most people who encourage you to “consolidate” your debt will make money if you do. Basically, a debt consolidation is when someone agrees to “consolidate” all of your debt into a new debt with lower interest rates. The only catch is that they’ll force you to stay in debt longer, and you’ll pay more money in the long run. So much for helpful advice.
The only time a debt consolidation is a “good” choice is if you simply cannot pay current interest rates. This is rarely, rarely, rarely ever true. Chances are, there’s a better way to pay the payments than a consolidation.
Getting a debt consolidation is basically a level of surrender, meaning you’ll be paying more money over a longer period of time. Remember, debt consolidation is also a type of loan — in other words, you’re literally fighting fire with gasoline. Not a good idea.
2. Trying “Debt Elimination” Scams.
If someone offers to “eliminate” your debt without analyzing your situation, just run away. It’s a scam, and they are literally out to get you. There really isn’t anything more to say. The hard truth is that there’s no way to “eliminate” your debt without finding ways to make more or save more money.
3. Closing Credit Card Accounts.
One of the biggest mistakes sounds like it makes sense. Closing a credit account sounds like one is taking control, telling the debtors “no more debt” and is taking a step in the right direction. Unfortunately, it can hurt your credit rating.
By closing a credit account, creditors see that you’re moving away from debt and can’t handle the “temptation” — bad sign. If you feel the need to live without credit, just shred your cards — but keep the accounts open for the sake of your credit score.
4. Making Only Minimum Payments.
Minimum payments are your enemy. The entire reason companies are willing to loan you money is that they’ll be making more. They’re literally selling money for more than it’s worth. The way they make money is through you not paying off your debt as soon as you get it.
There’s also a reason the minimum-payment requirement is so low: the lower it is the longer you’ll be in debt. The longer you’ll be in debt, the more they can charge you. Don’t pay the minimum — make up your own minimum and pay that instead. Shoot for triple the minimum payment, at the very least. Otherwise, you’ll be in debt prison for years longer.
Conclusion
Financial planning is the crux of financial security and freedom. If you want to find a comfortable lifestyle, then it can’t be overstated how much you need to master the basics of financial planning. Without a clear, concise plan for how you are going to manage your money, your chances are slim of ever achieving your goals.
]]>NEW YORK (CNNMoney.com) — Rising unemployment is pushing strapped U.S. borrowers over the edge, with delinquencies and balances on delinquent credit cards surging — that’s according to an industry report. Here’s your step-by-step guide on what to do if you can’t afford your credit card payments.
1. Contact your lender
Let’s say you’ve lost your job, or are looking at a steep medical bill, and worried you won’t be able to make your credit card payment.
Make sure you call your lender and explain the situation. The sooner you contact them, the more willing they may be to work with you.
More and more credit card companies are willing to negotiate. Realize that they’re not being charitable — they’re just trying to get what they can out of you.
So, what can you ask for? If you can make some sort of monthly payment, ask your issuer to lower your rate and possibly waive your fees. Also ask to work out a payment plan.
If the first person you speak with can’t help lower your rate or make adjustments to your account, ask to speak with a supervisor. Persistence may be necessary to find the person who can or will help you.
Document all conversations, including the name and title of the person you spoke with, date, time and results.
Go to helpwithmycredit.org — a Web site operated by credit card companies for more information on dealing with debt issues.
2. Get your debt forgiven
Increasingly, credit card issuers are accepting dimes, if not pennies, on the dollar as payment in full. But if you’re striving to get a debt forgiven, don’t expect a sweetheart deal.
Generally you have to meet certain criteria. For example, most cardholders have to be delinquent for at least 90 days and — usually — your credit report needs to show that missing payments isn’t a common occurrence. But that doesn’t mean that once your debt is settled, there are no consequences.
Closing an account due to settlement is bad for your credit score and will affect your score for several years. If the forgiven debt is more than $600, you must pay income taxes on that amount.
If you’re looking for guidance on negotiating with your credit card company, go to the National Foundation for Credit Counselors at NFCC.org.
Don’t waste your time with third party debt settlement companies. These companies charge you fees for a service you can do yourself — for free.
3. Prioritize your payments
If you’re having trouble making your monthly bills, it’s time to prioritize.
First, look at your immediate needs. Pay your mortgage or rent bill, keep making payments to your utility company and keep food on your table.
Then start to think about paying down your credit card balances. Find out which card has the highest interest rate and pay that one off quickly while making modest payments to your other credit cards.
Remember that credit card debt is unsecured debt — meaning that there’s not much that the credit card company can take away from you if you’re delinquent. You should always strive to pay off your debts. And stop using your credit cards until you pay off your current balances.
– CNN’s Jen Haley contributed to this article.
]]>Garry Marr, Financial Post
It was a stinging rebuke. I took it on the chin last weekend as I waited in line for a ride with my child at an amusement park in Toronto.
”My dad has a BlackBerry,” the little monster gloated in front of my own boy as he looked at my bottom-of-the-line cellphone.
I hate having a cellphone but my spouse says it is a must in case of emergencies. (I’m not sure how my mother ever got a hold of my father in emergencies back in the 1970s. He didn’t even have a walkie-talkie).
I tried to explain to the young lad that I spend as little money as possible on my cellphone, opting for a $50 piece of junk that lets me pay per call — something I don’t do much of usually.
“Don’t you know you can get a BlackBerry for free,” he said, looking at me as if I am the dumbest adult on the planet.
Of course, I don’t expect a child to understand that signing up for a “free” cellphone means a commitment to three years of payments that could easily add up to more than five times the cost of the phone that you got for “free.”
Adults understand the deal. They just don’t care. Everybody wants a free BlackBerry or next-to-nothing iPhone today if they can pay for it tomorrow.
The enormous debt levels in Canada, now 140% of personal disposable income, do not even include all the financial commitments and contracts we have from cellphones to car leases, says Doug Porter, deputy chief economist with Bank of Montreal.
“Most of the traditional measures are the classic borrowing on credit cards, consumer loans and mortgages,” says Mr. Porter. “In the early 1990s, debt was underestimated because it did not take into account the leasing of cars.”
Terry Leon, chief executive of Leon’s Furniture Ltd., proudly claims his company pioneered the whole “do not pay until” programs, which allow consumers to walk out of stores without putting up one cent.
“We are going on as long as 100 weeks in honour of our 100th anniversary,” says Mr. Leon, referring to the fact consumers can now buy something in his store and not pay for almost two years.
There is a difference from most debt with his store because Leon’s does not charge interest. That $1,500 couch is the same price whether you pay for it in full the day you buy it or wait the full 100 weeks before making your full payment.
On its anniversary, more than half of Leon’s customers decided not to pay that day. That’s not hard to understand. Why would you empty your pockets when you don’t have to?
Credit, or temptation, is still everywhere. Even after what has been described as one of worst recessions in history, I’m still being offered financing for everything from fixing my smile to buying a new television set.
I get an offer for a new credit card about once a week and the list of things I can charge on that credit card expands every day. If I was worried about that monthly cellphone commitment, all I have to do it is tack it on my credit card.
I was incredulous when a friend told me he was able to gamble on horses at the racetrack with his credit card. “It just comes up as a charge like it would if I bought something at the Bay,” he told me.
Not that I doubt my friend, but I went online to see if I could set up a gambling account with my credit card. It takes about three clicks, once you plug in all your information.
Scott Hannah is president of the Vancouver-based Credit Counselling Society, a non-profit group that helps consumers find their way out of debt. He notes a strong surge in demand for its services. “Compared to a year ago, the demand for our services is up 118% from last September,” says Mr. Hannah.
With debt levels as high as they are today, consumers have little cushion to deal with any downturn in the economy. “They just can’t handle any bumps in the road,” says Mr. Hannah.
Those bumps hurt a lot more when you have no cushion or savings.
If you’re going to be in debt, why not look for the best deal? The Financial Consumer Agency of Canada has a great website (fcac-acfc.gc.ca) that compares credit card benefits.
]]>It’s a common scenario in the debt-collection world: you find yourself saddled with credit card debts or medical bills you can’t get out from under. When a debt-collection agency comes calling, it will pull out all the scare tactics needed to put you on the defensive – and make you to pay up, no matter what your hardship. The truth, however, is that while bill collectors are full of bluster, they lack real legal muscle.
What does this mean for you? Options. Whether you negotiate for yourself or opt to hire a professional debt negotiator, there are more options than you might think for surviving this experience without sacrificing your financial future. Even if you owe a lot, a creditor will almost always settle for something over nothing when it comes to payment of outstanding debt. So take your time, recognize that you do have some power, and use it wisely.
Negotiating With Collectors
Negotiating your own debt settlement is a viable option for many people. Here are some tips to consider for dealing with creditors.
Prioritize your bills.
No matter what a debt collector insists, that unpaid credit card bill is probably not your No.1 priority this month. Always consider the fundamentals – rent or mortgage, feeding yourself and your kids – before you start handing money over. There’s no point trying to appease one creditor if it means putting yourself in the bad graces of others, or jeopardizing your ability to keep earning more.
Keep records of each interaction.
Note the date and the details of every phone call (and in general, avoid the phone in favor of written communication). Copy and save any letters you receive or send out and, when you’ve come to a payment agreement, be sure to outline it on paper, sign it and save copies, just like a contract or formal agreement. Never send money until you have a written agreement in hand.
Drive a hard bargain.
Estimate how much you can actually afford to pay, and offer less (a relatively common baseline is 25% of your actual debt, though this does vary). Don’t be surprised to get angry or outright rude phone calls and threatening letters. No matter what a debt collector says, keep cool and stay focused on the negotiation. The more in control you appear, the more likely you are to achieve your desired outcome.
Hiring a Debt Negotiator
If confronting your lender isn’t your style, you might want to hire a debt negotiator; just know going in what each side can expect from the partnership.
Make your selection arefully.
Be cautious, especially of those telephone calls or emails that arrive out of the blue from debt negotiators offering their services. Reputable credit and debt professionals usually rely on past clients for referrals, so they don’t need to solicit your business through television, telemarketing or spam emails. Interview several agencies before making a choice, and don’t be afraid to ask around for recommendations.
Also, ask for a clear presentation – in writing – of the fees you will be charged and what they’re based on. As a rule of thumb, debt negotiators are paid on commission – if they save you 40% on an overdue bill, they may charge anywhere from 10- 20% of your total debt. Monthly fees vary according to state law, which the agency should be able to explain. Ask yourself this question: When you add up the fees, does an agency make sense for you, or will it merely add to existing debts?
Protect yourself.
For real protection against potentially unscrupulous debt negotiators, contact your state attorney general’s website or your local Better Business Bureau. Each can provide useful data on debt negotiators, especially if there are any consumer complaints against such firms.
Also, check with your attorney general’s office to determine whether your debt negotiator is required to have a professional license to operate in your state. While state laws on debt negotiators vary, most have statutes against debt negotiation firms that stick you with high fees but don’t follow through, that fudge the terms of a debt settlement plan, that don’t explain certain costs or that tell you that you’ve signed over your home or car as collateral for one of your debts.
Enforce Your Rights
Overall, the key is to know your rights – the more informed you are, the better you and your money will be protected. Contact the Federal Trade Commission, the National Consumer Law Center and/or your state’s attorney general for free information on what both debt collectors and debt negotiators, if you choose to use one, can (and can’t) do in your area and situation.
Also, don’t be rushed. Never act too eager to settle, never accept a first or second settlement offer and, most importantly, never let the debt collection agency think that it has the upper hand. It will push for instant payments, but don’t send anything until you have an agreement in writing.
Here’s one last-minute tip – negotiate at the end of the month. Because debt collectors’ commissions are based on their totals at the end of each month, you may be able to talk them into a good deal when it’s close to deadline time.
Conclusion
Whatever you do, take action! The long-term ramifications of unpaid debt are staggering. According to the National Bankruptcy Research Center, 1 in every 59 U.S. households filed for bankruptcy in 2007. Thankfully, with a little planning and a lot of education, your financial future should be significantly brighter.
~ Brian O’Connell
]]>What do you do when a family member becomes unemployed? Or suffers an unexpected injury and can’t work or has insufficient insurance to cover mounting medical bills? How do you respond when you learn a loved one can’t pay their bills?
Let’s take a look at a few options you can consider to help your family members in trouble - without hurting yourself financially.
1. Give a cash gift.
If your loved one is having a short-term cash flow problem, you may want to give an outright financial gift. Decide how much you can afford to give, without putting yourself in financial jeopardy, and then either give the maximum amount you can afford all at once (and let your loved one know that’s the case) or perhaps give smaller gifts on a periodic or regular basis until the situation is resolved.
Make sure it’s clearly understood that the money is a gift, not a loan to be repaid, so you don’t create an awkward situation for the gift recipient. If you’re considering giving them a substantial sum of money, you’ll need to keep an eye on the annual gift exclusion set each year by the Internal Revenue Service (IRS).
2. Make a personal loan.
Your family member may approach you and ask for a short-term loan. Talk frankly, clearly write out the terms of the loan on paper, and have both parties sign it. This helps both parties be clear on the financial arrangement they’re entering into. Some loan details you’ll want to include are:
- the amount of the loan
- whether the loan will be one lump-sum payment, or if it will be divided and paid out in installments upon meeting certain conditions (i.e. securing another job, paying down existing debt, etc.)
- the interest rate you will charge for making the loan and how it will be calculated (i.e. compound or simple interest)
- payment due dates (including the date of full repayment or final installment due)
- a recourse if he or she doesn’t make loan payments on time or in full (i.e. increasing interest charges, ceasing any further loan payments, taking legal action, etc.)
If you are going to lend more than $10,000 and/or you’re going to charge an interest rate that is substantially different than the going rate for most borrowers, you may want to talk to a tax professional. There can be unique tax implications for low interest loans among family members.
If you’re worried about potentially straining your relationship by having to administer the loan (i.e. collect payments or call when the payment is late), consider using a service, such as Prosper.com or VirginMoney.com. These companies can draw up the contracts and even collect automatic payments from your loved one’s bank account.
3. Co-sign on a bank loan.
Your loved one may be interested in obtaining a loan or line of credit (LOC) to help with short-term financial needs but what if his or her credit requires getting a co-signer? Would you be willing to co-sign on a bank or credit union loan or LOC?
Before simply saying “yes” and essentially lending a family member your good credit, it’s important to realize that there are legal and financial implications to co-signing on a loan. The most critical thing to understand is that you are legally binding yourself to repay the loan if the other borrower fails to do so.
The lender can take legal action against you and require that you pay the full amount, even if you had an agreement between you and your family member that you would not have to make payments. This delinquent loan will also now affect your personal credit. So if your sister/brother/uncle fails to make payments on the loan on time and in full the lender can report the negative account activity to the credit bureaus to file on your credit report which, in turn, can lower your credit score.
Co-signing a loan is serious business. The fact that your family members need a loan co-signer means that the lender considers them too great of a risk for the bank to take alone. If the bank isn’t sure they’ll repay the loan, what guarantees do you have that they will? It may also mean that you could have more difficulty getting a loan for yourself down the road, since you are technically taking on this loan and its payment as well.
Before co-signing for a loan, make sure you:
- Ask for a copy of your family member’s credit report, credit score, and monthly budget so you’ll have an accurate picture of his or her finances and ability to repay the loan.
- Meet with the lender in person (if possible) and be sure that you understand all the terms of the loan.
- Get copies of all documents related to the loan including the repayment schedule.
- Ask the lender to notify you in writing if your family member misses a payment or makes a late payment. Finding out about potential repayment problems sooner rather than later can help you take quick action and protect your own credit score.
4. Create a budget and help create a bill-paying system.
Often, people in a financial crisis simply aren’t aware where their money is going. If you have experience using a budget to manage your own money, you may be able to help your family in creating and using a budget as well.
To break the ice you may want to offer to show them your budget and your bill-paying system and explain to them how it helps you make financial decisions. As you work together to help them get a handle on their financial situation, the process will point out places where they can cut back on expenses or try to increase their income to better meet their financial obligations.
5. Provide employment.
If you’re not comfortable making a loan or giving a cash gift, consider hiring your family member to assist with needed tasks at an agreed-upon rate. This side job may go a long way towards helping them earn the money they need to pay their bills, and help you finish up any jobs that you’ve been putting off.
Treat the arrangement like you would any other employee – spell out clearly the work that needs to be done, the deadlines and the rate of pay. Be sure to include a provision about how you’ll deal with poor or incomplete work.
6. Give non-cash financial assistance.
If you’re uncomfortable or unwilling to give your family member cash, consider giving non-cash financial assistance, such as gift cards or gift certificates. You’ll have more control over what your money will be used for and you can easily buy gift cards in varying amounts at most stores.
7. Prepay bills.
You may want to consider prepaying one or more regular bills your loved one receives (i.e. rent/mortgage, utility bills, insurance premiums, etc.) to help them during their current financial crunch. Offering to do something, such as paying their car payment may help them avoid a short-term crisis and give them the little extra time they need to work out of their situation.
8. Help them find professional assistance and local resources.
You simply may not wish or be able to provide your family member with financial assistance or hands-on help. But you can still play a key role by helping them find local professionals that can steer them in the right direction, such as:
- Career counselor and employment agencies
- Welfare agencies and similar services
- Credit and debt counselors
- Lenders who can provide short-term solutions
Conclusion
As always, the most important step is sitting down with your loved one and asking specifically what help they need to work their way out of their current situation. From there you’ll have a better idea of the type of information and assistance they need. For example, if they need to make more money you could help them lookg for jobs and update their resume. If they need help repaying credit card debt, you could call local credit counseling agencies to learn what services they offer, how much it costs and how it could benefit your family member.
Family members and money aren’t always a good mix. But, in tough economic times or when faced with unexpected emergencies, your loved ones may truly need your financial assistance. Before you commit to helping, be sure to think through what you can and can’t afford to do. Remember, if your own resources are limited, there are meaningful, effective, and creative ways to help your family member(s).
]]>By Jonathan Stempel
NEW YORK (Reuters) – One in five U.S. homeowners with mortgages owe more to their lenders than their properties are worth, and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis, a new study shows.
About 8.31 million properties had negative equity at the end of 2008, up 9 percent from 7.63 million at the end of September, according to the study, released Wednesday by First American CoreLogic. The percentage of “underwater” borrowers rose to 20 percent from 18 percent.
Another 2.16 million properties could go underwater if home prices fall another 5 percent, the study shows.
First American said the value of residential properties fell to $19.1 trillion at year-end from $21.5 trillion a year earlier, with half the decline in California. Forty-three U.S. states and Washington, D.C., were included in the study.
While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation.
“The economic slowdown is broadening,” said Sherrill Shaffer, a banking professor at the University of Wyoming at Laramie and a former Federal Reserve official. “As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country.”
Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio remained the most stressed states, with 62 percent of underwater borrowers and just 41 percent of mortgages.
Other areas, though, also face more stress. Connecticut, for example, saw a 25 percent increase in homes with negative equity, while Washington, D.C., had a 44 percent increase.
“Even I continue to be surprised at the tentacles of this financial and economic debacle,” said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. “More people are being laid off, resulting in reduced income and therefore less consumption. That leaves fewer people with money to buy homes, and the mentality is that people believe they should wait six months rather than buy now. Less demand means falling prices.”
Roughly 68 percent of U.S. adults own their own homes, and about two-thirds of these have mortgages. Many economists expect the nation’s unemployment rate to rise above 9 percent before the recession ends, up from January’s 7.6 percent.
CALIFORNIA, NEVADA UNDER STRESS
California had 1.9 million borrowers with negative equity at year-end, more than any other state, followed by Florida’s 1.28 million. About three in 10 borrowers in both states were underwater.
By other measures, Nevada was the most stressed, with 55 percent of owners having negative equity and borrowers on average owing 97 percent of what their homes are worth. About 28 percent owe more than 125 percent of their homes’ value.
Michigan had 40 percent of its homeowners underwater, while Arizona had 32 percent.
New York fared best, with just 4.7 percent of borrowers with negative equity and an average 48 percent loan-to-value ratio, though this could change as employment and bonuses slide in the financial services industry.
According to the S&P/Case-Shiller Home Price Indices, prices of U.S. single-family homes slumped 18.5 percent in December from a year earlier, the biggest drop in the 21-year history of the data.
Many lenders are taking steps to keep borrowers out of foreclosure. The Obama administration has backed legislation that could broaden powers of bankruptcy judges to modify mortgages for troubled borrowers. Among major lenders, only Citigroup Inc has supported such a plan.
MacIntosh expects housing prices to keep falling until “well into” 2010. “There is no magic bullet or magic arrow here,” he said. “It is a question of trying to come up with ideas and seeing what happens. It could take a long time.”
First American CoreLogic is an affiliate of title insurance and real estate services company First American Corp.
(Reporting by Jonathan Stempel; Editing by Bernard Orr and John Wallace)
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