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Debt Collections: Do You Have To Pay?

This article was written by Flexo in Debt Reduction. 6 comments.

People who borrow money generally understand that they will eventually need to pay borrowed money back to the lender. This understanding, whether codified in a contract or not in any particular case, makes lending and borrowing money work as an economic mechanism. It’s interesting that regardless of what’s written in a contract, most debt can be legally ignored. Borrowers may feel bound by their pride to honor commitments, but every state in the country has laws that prevent lenders from chasing after deadbeat borrowers after a certain amount of time.

Time-barred debts are subject to a statute of limitations. After a certain amount of time passes with a borrower unable or unwilling to pay back a loan, the lender will no longer be able to sue the borrower for uncollected debt. The lender can still contact the borrower and try to convince him or her to pay back the loan, but the lender’s legal rights to the funds are limited.

This doesn’t mean that it’s a good idea to wait for the statute of limitations to pass on all your debt in order to avoid your obligations. There are consequences if you don’t pay back debt. Most importantly, the three credit reporting bureaus will significantly decrease your credit score, and it could take a long time for that number to return to normal. This will affect your ability to qualify for more loans, mortgages, and credit cards in the future.

This is a dilemma many homeowners have considered recently; with the market value of houses sharply decreasing in the last few years, and the resulting financial reality of owing the bank more on the mortgage than the house is worth, some in this situation have considered walking away from the house and mortgage. In some cases, this could be a tactic that is more financially responsible than continuing to sink money every month into a depreciating asset. Families considering this option have to weigh the consequences, including not being able to qualify for a mortgage again for many years, against the emotion-based drive to honor financial commitments.

Although lenders are legally barred from suing borrowers after the statute of limitations for a particular debt has passed, they might still try. If you’re able to show a judge that the debt is time-barred and no longer legally collectible, you have nothing to worry about other than the consequences.

Credit cards and other open accounts like home equity lines of credit, written contracts, oral agreements, and promissory notes may have different statutes of limitations, and each differs by state, as well. Here’s a list by state of time-barred debts.

The clock starts ticking on the statute of limitations from the day you miss your first payment. The moment you send a payment to the lender, no matter how small, the clock resets. For example, if the statute of limitations on credit card debt in your state is seven years, and it’s been six years since you’ve made a payment, you may determine that it makes more financial sense to refuse to make a payment for one more year rather than negotiate with the lender. If you are in financial difficulty and don’t expect to ever be able to pay off the debt, paying even a small amount means you’ll need to wait another seven years after making the small payment before you’ll be legally protected from paying back the debt.

Not all debt is time-barred; student loans backed or issued by the government have no statute of limitations. Anything you borrow under any of the loan programs that qualify in this category can never be ignored. The lenders are often willing to negotiate the terms in order to help you make payments you can afford, but these students loans are, for the most part, legally stuck with borrowers until the lenders are satisfied.

A few questions for discussion:

Do you think it’s right that borrowers can avoid agreements by patiently waiting for the statute of limitations to pass?
Have you ever been sued for debt you didn’t need to legally pay back?
Have you inadvertently restarted the clock by paying a small amount to a lender when it might have been better to wait?
Are you dealing with the credit consequences of letting a debt expire?

Note: I am not a lawyer, and nothing written on Consumerism Commentary constitutes legal advice. Always check with an attorney before making any decisions regarding the law.

Photo: Dave Stokes
Federal Trade Commission

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Are You Concerned About the Very Poor?

This article was written by Flexo in Society. 73 comments.

Whether you agree with it or not, the reason this country has supported programs like welfare, Social Security, the GI Bill, food stamps, Medicare, government-backed mortgages, FEMA insurance, and other social programs is because a modern society benefits when as many citizens as possible have opportunities to succeed financially. Social programs aren’t perfect and don’t always provide what they promise, and there’s always a small percentage who take advantage of the system.

The push-and-pull between the focus on the society and the focus on the individual existed even before the founding of the nation, and this particular Weeble that wobbles between left and right without falling down (yet) has allowed the United States to become the biggest economy in the world in a relatively short period of time, and that’s a good thing.

From an individual perspective, it might not be that intuitive that one needs to be concerned about the “very poor.” After all, with social safety nets, one might think that the “very poor” have little to worry about. Regardless of the existence of programs — both public and private — poverty is still an issue in this country, even if you don’t see it in your daily life as you shuffle in an office building from meeting to meeting or shuttle from city to city on business trips. It’s hard to be concerned about something if you aren’t faced with it every day.

If, however, you are concerned about the “very poor,” there are ways to help, even if you don’t believe that handouts are effective. The most popular rationalization for not caring about poverty is the idea that helping another individual teaches complacency rather than responsibility, interdependence rather than independence. The incorrect assumption is that families in destitute situations have no desire to work for their money like those who have built wealth for themselves and have earned the right to let their money do the work for them and receive income from dividends and interest rather than working in the middle-class and working-middle-class sense of the word.

The real problem is tied into that psychology 101 concept I turn to repeatedly, Maslow’s hierarchy of needs. If most waking minutes in your day are spent worrying about your shelter, your food, and having a safe place to sleep, “income mobility” is a fantasy. You’re a victim of “class warfare,” but in your reality, you don’t have time or energy for political arguments about class warfare.

If you are concerned about the very poor, there are options. Helping bring attention to poverty can form provide opportunities to those without them without much sacrifice from those with opportunities.

Give money directly to organizations that run programs focusing on providing opportunities. The top-rated charities focusing on poverty according to Charity Navigator are Direct Relief International (although International is in the name, they also work to eliminate domestic poverty, particularly in disaster-stricken areas), SOME (So Others Might Eat, focusing on the D.C. area), and the People’s Resource Center (based in Chicago). If you prefer to give a hand-up rather than a hand-out, focus on organizations that provide job training and placement, programs that expand the reach of educational opportunities, and programs that present positive financial role models.
Volunteer with the organizations that run these programs. Build houses. Build schools. Help at a food bank. When you are actively involved, you get to experience the results of your work much more closely than if you were to send a check every month. No, you won’t get a tax deduction for volunteer work, but that’s not the point.
Become a community leader. When people from poor communities manage to succeed financially, they often don’t return to be the role model their community needs. This is the reason financial illiteracy is a problem that will continue from generation to generation, keeping low socio-economic status communities from thriving.

Are you concerned about the very poor? Does paying your taxes and being satisfied with existing social safety nets relieve you from any other possible responsibilities for how the country fares as a whole? Do we even have any responsibilities to anyone other than ourselves and our families?

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Fix the Tax System By Taxing Consumption

This article was written by Flexo in Taxes. 16 comments.

An elegant answer to the over-complicated tax system is to shift the basis of the system from income to spending. There have been a variety of proposals to make this happen. It’s the core of the so-called Fair Tax and Herman Cain incorporated its concept into his 9-9-9 tax plan. Other proposals have called for a value-added tax similar to the system in the United Kingdom.

Ferrari Working to earn a living contributes to society, as does investing in businesses. Taxes on income, whether wages or dividends, could discourage this type of economically-beneficial activity. Consumer spending also benefits the economy, though, and if this tax system discourages spending, it might have a negative effect on the economy initially.

Also, lower-income households and those who live paycheck-to-paycheck would bear a higher burden. When almost all of a family’s income is spent, this family would be taxed on a high percentage of their income. On the other hand, a corporate executive earning more than a million dollars does not need to spend all of his money. His tax burden is more affordable. Under today’s tax environment, someone with the means might put money into real estate, invest in businesses, and shelter assets in offshore accounts. Under the new system, a wealthy individual might stay away from buying houses if those transactions are taxed, while bringing more offshore assets back to the United States.

Rather than adding a national sales tax to determine consumption, one solution is to report all income, as is currently done, as well as all contributions to savings, just like what is done for IRA and 401(k) accounts. The difference between income and savings would be the basis on which the government levies the consumption tax. There could be a high standard deduction applied to the difference, so that lower-income families who are struggling to save do not need to pay an unaffordable tax bill, and so that the system remains progressive.

Reforming the tax system away from income tax is a tall order. Thanks to deductions for tax-advantaged savings, the income tax system has already begun to shift towards a focus on spending, but if you believe that the system could be vastly improved by focusing solely on consumption, the system has a long way to go before workers and savers aren’t punished by a tax collection system.

Would you prefer a tax system based solely on consumption?

Photo: exfordy
New York Times, Slate

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Home Mortgage Interest Deduction

This article was written by Flexo in Featured, Real Estate and Home, Taxes. 60 comments.

Although the home mortgage interest deduction is one of the most oft-cited benefits of owning a home, most taxpayers don’t take advantage of it because it requires itemizing taxes. If itemized deductions including mortgage interest paid throughout the year exceed the standard deduction, a taxpayer can take advantage of the benefit.

The benefit isn’t as great as it sounds. If you pay interest, it certainly does help to get a tax benefit, but it rarely tips the balance of the long-term financial effects of renting vs. buying a house. Don’t let the real estate industry sway your opinion about owning a house through this faulty rationale. And certainly don’t decide to take out a mortgage if you were intending to buy with cash. Since this is a deduction, your taxes are reduced by only a percentage of the interest you pay, related to your tax bracket.

The home mortgage interest deduction is currently endangered. The Obama administration and Congress are looking for ways to cut spending, and this tax deduction is on the table for consideration. Some estimated put the cost of this deduction at $100 billion each year.

Despite the cost and its overstated effects, the tax deduction has helped convince renters to become homeowners — at least among people I have spoken with. In other words, for the cost of $100 billion, the economy has seen the benefit of a growing real estate market for many years. This law has made the National Association of Realtors, a lobbying group for the real estate industry, very happy, and they are working hard to prevent the government from eliminating the tax deduction.

There are many rules that determine whether you can claim the interest you pay on your mortgage for a tax deduction. The rules help ensure that the benefit goes to home owners rather than “investors” who earn a living from flipping houses, though due to market conditions the past few years, that activity has been less of an issue.

The interest you pay for construction, purchasing or improving your primary or secondary home, whether through a mortgage, home equity loan, or home equity line of credit, qualifies. There are limitations, though. You can deduct interest paid on up to only $1,000,000 of home acquisition debt. For home equity debt, which is any loan that was taken not to construct, purchase, or improve a house, you can deduct interest paid on up to only $500,000 of this debt or the fair market value of the home, whichever is less. For taxpayers who are married, filing separately, each of these limits is reduced by half.

Normally, the total of all of your itemized deductions are limited by income, but that income limitation was lifted in 2010. It could be lifted again if the benefit is not eliminated.

Question for homeowners: Do you take the home mortgage interest deduction? Question for everyone: Should this deduction be eliminated for the sake of reducing the national budget deficit?

Photo: Wonderlane

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Frugality Plays Role in Bringing Tech to New York City

by Flexo

Michael Bloomberg, the king-slash-mayor of New York City (will he increase term limits again to stay in his position?), has announced that Cornell University and Technion-Israel Institute of Technology will be transforming 11 acres on the southern tip of Roosevelt Island into a graduate school for technology. Classes will begin as early as next year ... Continue reading this article…

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More Homeowners Can Refinance

by Flexo

Thanks to some changes to the federal Home Affordable Refinance Program (HARP), more homeowners can qualify for government-endorsed refinancing. Previously, the program only offered refinancing options for households where the mortgage value was up to 97 percent through 125 percent of the home’s market value. This did help families who have become underwater, having more left to ... Continue reading this article…

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The Financial Planner Who Lost His House

by Flexo

Carl Richards is one of today’s best writers focusing on personal finance. Originally keeping a great blog at behaviorgap.com, The Behavior Gap has moved to the New York Times, and early next year, Carl will release his first book. Look for The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money on January ... Continue reading this article…

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Wealth Gap: Young Vs. Old

by Flexo

The wealth gap is growing, and if the Occupy Wall Street and its satellite protests are any indication, those not within the top one percent of income earners are not happy with their circumstances or the policies that help foster the wealth of those at the top. It’s been called class warfare, but there are ... Continue reading this article…

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