It’s time once again to reach into my virtual mailbag to pull out a few questions from you, my dear readers!
A recent opportunity for readers to weigh in on what they like best and want they want to read more of here at Everyday Cheapskate revealed that answering reader mail is right up at the top of your favorites! (It’s mine, too!)
Dear Mary: I have a Dodge Durango gas guzzler and I owe way too much money on it. Foolishly I financed it for 72 months, and now I owe a lot more on it than I could possibly sell it for.
If I sell the vehicle outright, I could probably squeak by just $5,000 in the hole. If I trade it in, I would be about $9,000 in the hole. What should I do to get out of this mess?
I could put the shortfall on a credit card, but I know that is a bad idea for so many reasons. We have an old pick-up truck and an older Subaru that will be okay for now, but how do I get out of the upside down loan and the Durango?
And how can I sell it to someone without a clear title? What should I do to pay the difference to get out of this mess?
Any help will be appreciated. Linda
Dear Linda: There’s no perfect solution here, but here’s a plan that might work:
Before you do anything, go to your bank or credit union and see if they will pre-approve you for a fixed-rate, short term loan to cover the shortfall. Explain your situation. Now you can feel comfortable advertising the car for sale.
Once you locate a willing and able buyer, call the bank and have them prepare the papers for the exact amount that you need to pay off the vehicle.
Ask the buyer to bring his funds and accompany you to the lender’s office to pay off the vehicle and to transfer the title to the new buyer. You will walk away with a new loan, but shorter in term than the auto loan you have now and with a smaller payment, too.
Dear Mary: In light of the surge in identify thefts, how can parents protect their children’s identities? More importantly, how can they detect a breach of confidential information, such as the use of their child’s Social Security number?
Since it is illegal for someone (a parent) to obtain personal credit information on an individual (a child) other than themselves, how are parents ever to know if their child’s identity has been stolen? Shane
Dear Shane: It is not illegal for parents to obtain any legal information on their child. However, to order your minor child’s credit report, you must prove your relationship. You will need to fax the credit bureau your child’s complete name, address, date of birth, and a copy of the minor child’s birth certificate and social security card.
Additionally, include a copy of your driver’s license or other government-issued proof of your identity, which includes your current address, and a current utility bill containing your current address.
Generally, the response you want when requesting a child’s credit report is that no file exists. Keep in mind, however, that your child could have a credit file if you have added him or her as an “authorized user” on a credit-card account.
My colleagues at LifeLock take a more proactive approach and say that kids and students are some of the most vulnerable to identity theft. That’s because thieves realize if they steal a child’s identity no one will know until the child turns 18 and is eligible to apply for credit. Students and other young people can be denied jobs, college loans, homes and apartments, and even face imprisonment.
LifeLock offers identity theft protection for children. As I write, children under age 16 are $5.99 a month, with any adult enrollment. If you are interested, we have negotiated a handsome discount for my EC family on the cost of LifeLock Memberships.
Dear Mary: I recently received what appeared to be junk mail discussing U.S. 801(k) plans. It sounds too good to be true. I didn’t find anything on the IRS website about this, but they are supposedly better than 401(k)s and IRAs, just not publicized by the government. I would like to know if this is legitimate. Grace
Dear Grace: You were wise to see this as junk mail. Someone has found a way to make money selling people something they can do for themselves and by themselves. These so-called 801(k) plans are simply Dividend Reinvestment Programs (DRIPs)—not a secret IRS-approved Deferred Retirement Account.
Many corporations—usually big, stable ones—sell their stock directly to shareholders (bypassing brokerage fees) with an agreement for regular, ongoing investment and the reinvestment of all dividends. You invest a set amount, usually every month, not unlike with a mutual fund investment program, and the share price doesn’t matter because they’ll issue partial shares.
If you are interested in DRIPs investing, you can do this on your own. You don’t need someone to call it 801(k) investing and charge you big fees to be the middleman.
There is plenty of good basic info on DRIPs out there—including from The Moneypaper, The Motley Fool, and others. Most companies require you to be an owner of at least one share listed in your name already; some don’t or will help you to get that share.
Dear Mary: In 2001, my wife made an agreement with her bank to pay off the balance of an account she owed at about half the face value. The amount she did not pay the bank wound up on a 1099-C and we ended up owing taxes and penalties on it to the IRS.
The IRS notice read, “If a federal government agency, financial institution, credit union, or other lender cancels or forgives a debt you owe, you must include the canceled amount in your income on page one of your tax return.”
The debt was written off by the bank in 2002, who reported it to the IRS three years later in 2005 (we never got the 1099-C). This triggered an audit and after going back and forth for three months, we ended up adding almost $5,000 to our taxable income. This pushed us into another tax bracket, and left us with a $1,600 bill for back taxes (including penalties and interest).
Is this right? Shouldn’t we have known about this first, before the bank reported it to the IRS? David
Dear David: Banks and lenders are required by law to report loan forgiveness to the IRS. It is not a choice, nor are they required to notify you because it’s just part of the lending practice.
For years I have been warning my readers about this law. Even if the bank were to miss reporting loan forgiveness, taxpayers are required by law to report the event whether they receive a 1099-C or not. When it comes to the IRS, igno- rance of the law is no excuse.
Your wife borrowed money. She spent it freely. But when she negotiated with the bank to not pay it back, it became ordinary taxable income. That’s the law and something every responsible borrower needs to know.
Dear Mary: I need help cleaning several suede jackets that have stains on the collars from normal body oil and make-up. How can I remove the stains and make the jackets wearable again without spending a fortune sending them to a professional leather cleaner? Levada
Dear Levada: This is one time I suggest you not attempt a do-it-yourself shortcut. Suede because of its nap and finish, can be tricky. Any DIY suggestions I might have for you could easily backfire because there are just so many unknowns. The stain might come out, but leave a much worse situation if the color is harmed If you care about your fine suede leather items, take them to a pro.
Dear Mary: My husband and I have two kids and rent a two-bedroom apartment. We want to buy a house. We have about $2,500 in credit-card debt, two car loans that total $12,000, and school loans of about $22,000. I want to pay off the debts first, but he wants to buy now because he says it’s the same as renting, except we will be building equity which is a valuable asset. What do you think? Tirzah
Dear Tirzah: I think your husband has never been a homeowner or he would know the costs and responsibilities associated with owning a home are far greater than renting. I agree with you that you need to pay off those debts first before you buy a home.
You don’t mention a down payment, which makes me nervous. I hope you are not looking at any kind of zero-down or interest-only programs (yes, they’re back). You need at least 20% of the purchase price in cash to make sure you have a mortgage you can afford, comfortably
Given what you’ve told me, I see homeownership to be out of your reach right now. But if you really buckle down and live more frugally than ever before—you’ll be able to get your debt paid and your down payment saved much sooner than you may have imagined. But it’s going to take both of you working toward the same goal and with all the determination and creativity you can muster—together as a team running a race, determined to win,
I’ll leave you with this: A bad rental situation is better than being over your heads in a house you can’t afford. I’m certain that many of your fellow readers are nodding in agreement.
Got a question?
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