Avoiding the Debt Trap: Renting to Own, Student Loans, and Depreciating Assets

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Photo courtesy of TJDee

As we noted last week, it’s a rare person who is able to pay for everything they want and need with straight up CASH. Oftentimes, even people with eye-popping incomes find it difficult to live within their means, perpetuating the saying: “the more you have, the more you want.” Which underlines our point. Almost everyone is indebted to someone.

With that being said, not all debt is created equal. “Good” debt is defined by several factors, not the least of which is a low interest rate. Generally, if you’re making an investment in something that’s value will increase over time, you’re investing wisely. Also important: being able to comfortably afford the monthly payments.

As a continuation of last week’s post, we’re going to turn our attention back to the dark side of debt in order to help you avoid making costly mistakes that will drain your bank account quickly. “Bad” debt almost always comes with a high interest rate, and typically is incurred when purchasing things that lose their value quickly. Also: any debt is automatically a bad idea if you can’t even make the monthly payments.

Renting to Own – Let’s say you really want to own a home, but can’t afford it or won’t be approved for a mortgage due to a low credit score. By renting to own, you enter into an agreement with a seller wherein you pay a monthly rent that’s higher than market value. The extra money you pay per month supposedly goes toward a down payment. Sounds great, right?

Well, it could be great. But it could also take a turn and go terribly wrong. After your lease is up, what happens if you still can’t afford to buy the home, or a lender still won’t give you a loan? The seller gets to keep all the extra rent money you’d been paying.

Also, because the homeowner will realize you’re in a tough spot with few options, chances are good that they’ll price their home way above what it’s really worth. Because you’ll be renting to own first, you may not know the true value of the home (i.e. having it appraised) before it’s too late and you’ll suddenly find that no bank will finance a home that’s priced out of the market.

Consider this: what happens if the homeowner takes your rent payment each month but doesn’t follow through and make the mortgage payment? That’s right: the home will go into foreclosure. That leaves you out on the street and out all of your money, with no rights whatsoever regarding ownership of the home.

Excessive Student Loans – Don’t misinterpret this to mean that you shouldn’t borrow any money in order to get an education. Most of us couldn’t afford to write a check or hand over wads of cash and then head off to a four year college. This type of financial obligation slides from the “good” to “bad” debt column when people give themselves carte blanche.

The general line of thinking is that all student loans are fine and dandy because, after all, you’re bettering yourself! You’re getting a degree, which will then open all sorts of doors for your career, increasing your income by leaps and bounds!

That attitude is extremely dangerous, as it gives individuals (and families) the rationalization they need to ring up astronomical amounts of student loan debt. Here at Veitengruber Law, we’ve seen this scenario too many times to count, which is why we tell clients to be prudent when it comes to taking out student loans.

The New York Times has reported that the amount of student loan debt is now higher than credit card debt in the U.S. A college education is very expensive, with the average per year price at a public school coming in at nearly $9,000, and that’s not including room and board, which adds an additional $9,500. Attending a public school for four years costs around $36,000, if you can live at home with mom and pop. Want to experience dorm life? You can, for a mind-numbing price of just $74,000 (for four years).

To put it into more relatable terms: many of us will still be paying off student loans when our own children are going off to college. Dealing with huge amounts of student loan debt has been dubbed the “anti-dowry” in some circles, leaving young people staying single longer, waiting until they’re financially stable to start a family.

The worst thing about student loan debt is their permanence. No one wants to declare bankruptcy, but for those who do, their debt is virtually erased, giving them the chance at a do-over. One of the only debts that cannot be wiped out via bankruptcy? Student loans. Once you’ve got that education, you can’t give it back, either. You might be able to sell the high priced car you can’t afford, or short sell your home, but you’re pretty much stuck with that high-priced education, any which way you look at it.

Financing an expensive asset that you can’t afford – Once you’ve gotten the degree, hopefully by attending a local college and living with your parents, you will, with any luck, be out in the work force. In order to make it to your job every day, you’ll need transportation. The most affordable (and also environmentally friendly) option is public transportation.

Assuming you don’t have access to a reliable form of public transport, you’ll need to buy a car. A mistake made by many young graduates is to “celebrate” their new state of employment by financing a grandiose, brand new, fully loaded vehicle, whose value begins to depreciate sharply the second it’s driven off the lot. This means you’ll be making high monthly car payments on a car that’s becoming less and less valuable the older it gets.

Our best advice on this topic is to avoid as much “bad” debt as possible, or keep it at a manageable level. If you’ve already found yourself caught in a debt trap and need help setting yourself free, we can help. We’ll even consult with you at no cost, to review your “bad” debt and let you know what we can do. You’ll find our contact page here. Also, please take a moment to visit us on Facebook, our website, or follow us on Twitter for helpful daily tips to keep your financial future looking bright.

Avoiding Debt Traps: Pay Day Loans, Rapid Refunds & Co-Signing

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Virtually everyone is living with some form of debt today. Quite honestly, living 100% debt-free is nearly impossible, and in fact, some debt is necessary and is highly likely to pay off in the long run. Some examples of good and ‘healthy’ liabilities include student loans, (they will enable you to make more money in the not so distant future), car loans (they will enable you to have transportation to and from that job that your college degree helped you land). The truth of the matter is that, if you’re living in middle class America, borrowing capital as an investment in a better future is definitely not a bad thing.

However, if you’re not talking about getting an education, investing in your own company or getting approved for a home or auto loan, you may very well be taking on problematic debt that you should steer clear of at all costs. Instead of leading you toward a better life and financial comfort, these forms of indebtedness will slowly weigh you down with payments you cannot handle, potentially snowballing until you’re dealing with a veritable debt crisis.

Do your best to avoid the following situations at all costs:

Pay Day Loans – Essentially ‘cash advances’, these short term loans are unsecured and have insanely high interest rates – ranging from 100% to 650%. In order to be granted a pay day loan, you only need to provide proof of employment. The idea is that you’ll pay the lender back what you borrowed (plus a ton of interest) the next time you get paid. Generally considered a last resort, people who get pay day loans do so to avoid the embarrassment of turning to friends or family for financial assistance, or to avoid downsizing and living within their means. Although pay day loans may seem like a good short term option, the majority of pay day loan borrowers can’t afford to pay back the money right away, meaning sheer financial disaster. If the borrower fails to repay the loan in full, s/he gets slammed hard with those high interest rates mentioned above. Within five months, a pay day loan can rack up $500+ in interest charges alone.

Co-signed Loans – The only people you should ever consider co-signing a loan for should be your spouse or your grown children. Otherwise, we have four words of advice for you: “Just don’t do it!” Putting your John Hancock onto a significant loan document does not benefit you, aside from feeling good about yourself for helping someone out. It’s important to remember, though, that by co-signing on a loan, you are 100% responsible for repaying the borrowed money if the primary borrower defaults on the loan, for any reason. Trying to find a positive reason to co-sign is difficult, because even if the primary borrower makes all the payments on time, it does very little to raise your credit score. High risk with slim benefits. Just say “No!”

Refund Anticipation Loans/Rapid Refunds – It’s true that recent legislation now prevents banks and other tax preparation companies from enticing consumers with ‘rapid refunds’, because of the exorbitant amount of money people were losing due to steep interest rates.

However, be aware that tax professionals, who are now losing money due to that new legislation, have found ways to bend the rules.

With so many Americans literally living paycheck to paycheck and counting on that tax refund, the faster they can get their tax money in their hands, the better. Desperation to pay rent or buy food for a family means people will take the money and run, without much more than a glance at the fine print:

  • Refund anticipation checks (very short loans of the fees charged by the tax preparer) mean that the preparer “loans” the fee s/he would normally charge for tax services, agreeing to take their payment out of the refund when it arrives. While saving consumers money up front, this type of loan once again comes laden with tremendous fees that the preparer then gets to pocket.
  • Personal lines of credit – Some of the bigger tax preparation companies have started offering these, taking extreme care not to make any mention of the loan relating to the consumer’s tax refund. They claim that these ‘personal loans’ are extended based solely on a good credit score, not on a big tax refund in someone’s near future.

The mere fact that tax preparation companies are offering loans is something to scratch your head over, though, and for good reason. With high monthly fees of up to $9.99, interest rates of 35%+, fees starting at $35 for late or missed payments, and $10 just to move the money from its original location (offered by the tax company), to your own bank account,

Naturally, there are exceptions to every rule, but consider yourself forewarned about the high financial risks associated with pay day loans, alternatives to rapid tax refunds, and co-signing on a loan for a friend. And please, should you so much as think about engaging in one of the above situations, please give our office a call first and run through the details with us.

Be sure to read our other posts in this series about debt traps – on the topic of excessive student loans, renting to own, financing assets that are depreciating, and borrowing from your pension.

 

Can My Bankruptcy Petition be Denied?

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If you have recently found yourself in what appears to be an ever-increasing pile of debt, the good news is that at least you recognize you’ve got a problem. Perhaps you’re in this situation due to unexpected unemployment, an out-of-control spending habit, a mounting mass of medical bills, or divorce. The reason behind your unfortunate ‘lack of funds’ is less important than the fact that you’re seriously considering filing for bankruptcy in order to give yourself the fresh financial start that you need.

As many people before you have realized, the decision to file for bankruptcy is not an easy one to make. It is only natural to go through a period of feeling embarrassed about what you’ve gotten yourself into. It’s important to keep reminding yourself that you are making the best decision possible, and that filing for bankruptcy will enable you to turn your situation around and get you back on track for a successful financial future.

Once the concept of erasing the majority of your debts sinks in, most petitioners feels a giant sense of relief that this safety net exists today. Bankruptcy essentially is a saving grace for a huge number of people who have experienced a significantly rough financial patch. With that being said, it’s of the utmost importance that you file your petition with integrity and precise attention to detail. What many people do not know is that a bankruptcy petition does not have to be excepted by the bankruptcy courts. In fact, there are many bankruptcy blunders that can and will cause your petition to be rejected. It is important to be sure that you are well-versed on all of the rules and regulations regarding each type of bankruptcy, especially the type that applies to your case. Working with a qualified and experienced bankruptcy attorney will ensure that these blunders are avoided so that your debt can be discharged successfully.

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Some common reasons that bankruptcy cases may be closed without discharge include:

  • Missing important deadlines by which bankruptcy paperwork must be filed
  • Submitting incomplete paperwork to the bankruptcy trustee
  • Failure to provide your filed tax returns for the four years immediately prior to your bankruptcy petition
  • Submitting paperwork that contains incorrect information, whether intentionally or by accident
  • Failure to complete any credit counseling courses required by bankruptcy court
  • Failure to show adequate proof of identity to the bankruptcy trustee
  • Failure to abide by bankruptcy rules and regulations or terms that were set about in your bankruptcy case (payment schedules, etc.)
  • Failure to work cooperatively with the bankruptcy trustee, i.e. not providing him or her with additional requested information, refusal to relinquish certain assets, etc.
  • Submitting fraudulent information on your bankruptcy complaint, including but not limited to: marital status, falsified income reports, failure to acknowledge ownership of additional real estate, maintaining hidden secret bank accounts, secretive transfers of funds to friends or family members before filing for bankruptcy, failure to disclose knowledge of an upcoming settlement, inheritance, or other significant financial windfall
  • Proposing a chapter 13 repayment plan that is unrealistic

When you’re contemplating filing for bankruptcy, chances are high that you think you can’t afford to work with an experienced attorney – or any attorney, for that matter. After all, you’re broke, right?!? Look for bankruptcy attorneys with high success rates and positive client reviews. Most bankruptcy attorneys fully understand that your financial situation is dire at the moment, and while they will expect to be paid, they want to help you get your feet back on the ground first. Payment plans that work with your financial situation are very common. Have more questions about filing for bankruptcy? We’d love to hear from you!

Photo courtesy of Every Stock Photo

Government Shutdown: What it Means for You

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Photo courtesy of Bryan Mills

Here at Veitengruber Law, many of our close friends, family members and dear clients have been negatively affected by the Government Shutdown of 2013. The most amazing thing about the shutdown is just how far-reaching its effects truly are.

Naturally, if you’re a federal worker, you’ve most likely been furloughed for what may be a second time in as little as five months’ time. This group of employees is undeniably the hardest hit, given how much of their paychecks have already been withheld this year. Thankfully, The House of Representatives has voted to issue back pay to those workers who’ve been furloughed. That is, they’ll be paid, just as soon as the government reopens. When that will be is still a mystery.

In an effort to prevent the shutdown from causing  an internal collapse of important military systems like health care, family programs, training, commissaries, acquisitions, contract logistics and supply chain management, certain Department of Defense civilians have already been called back to work. Still, this leaves tens of thousands of government employees out of work and without a paycheck.

If we look slightly beyond those directly affected federal workers, it quickly becomes all too clear that the government shutdown has initiated a domino effect – and it’s already moving and gaining speed toward non-federal workers.

One group of Americans that has been told “not to worry” are those who receive Social Security benefits. Social Security payments will still be issued. Oh, but they may or may not be issued on time, due to the decreased number of processors working at the moment. Same goes for unemployment checks. Hopefully there are a lot of understanding landlords and mortgage companies; otherwise, that’s going to add up to a lot of late fees and potential evictions or foreclosures.

Small business owners are reporting a dramatic decline in their profit margins – especially those businesses that provide goods or services to the government or its employees. Applying for a federal loan to help them continue to pay their employees isn’t an option because there’s no one in the office to process new applications. Recently disabled Americans can also forget about sending in their Social Security Disability applications because they are currently not being accepted either.

If you’re currently furloughed and looking for some inexpensive ways to fill your suddenly free schedule, remember that all national parks, historic buildings, museums, monuments and zoos are currently closed because all of their workers are also sitting at home, just like you are. (Don’t worry – enough employees were retained to feed and care for the animals.)

You might be better off rummaging through your old junk and selling some of it on eBay. The postal system is still up and running, so it’s inevitable that bills will soon be arriving in your mailbox like clockwork. Gotta make ends meet somehow.

If you’ve got a tough creditor that simply won’t give you any slack while you’re furloughed, give my office a call. Veitengruber Law can take a look at your situation with you and tell you what your options are in this difficult time. There are things you can do – just make your move before the last domino falls down.