Debt Collection Tops FTC List

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Michelle Singletary
Thursday, March 27, 2008; 11:46 AM

Given the current economic downturn, it probably won't surprise anyone that one industry experiencing a lot of growth is debt collection. Unfortunately, with that growth has come an increase in complaints from consumers on how they are being treated by the companies or attorneys trying to get them to pay up.

In some recent columns, I addressed both the rights of debtors (What Debt Collectors Can't Do) and what to do when a creditor calls (Ignoring the Calls Won't Make Debt Go Away).

Last week, the Federal Trade Commission released its latest report to Congress on the Fair Debt Collection Practices Act. This act prohibits deceptive, unfair, and abusive practices by third-party debt collectors.

The FTC reported that in 2007 consumer complaints about debt collectors increased both in absolute terms and as a percentage of all complaints filed directly with the Commission. To read the complete report click here.

The FTC received 70,951 debt collection complaints in 2007. And 19.7 percent of the complaints alleged that collectors harassed them by calling repeatedly or continuously. The FTC reported that almost one out of ten complaints claimed that a collector had used obscene, profane or otherwise abusive language.

You certainly should pay people what you owe to the best of your ability, but you don't have to put up with harassing methods. So contact the FTC to register your complaint. You should also contact the Better Business Bureau, which is in a better position to help you mediate a problem you are having with a collector.

Debt Ridden

If you're wondering why people are so deep in debt you should read "Why We Borrow Until It Hurts." Post reporter Michael S. Rosenwald examines America's love affair with leverage.

As Rosenwald writes, "We are leveraged from here to China. U.S. consumers spend more than 14 percent of their after-tax income just to stay current on household debt."

The question is: Why are we debt addicts? Rosenwald reports that financial journalist Jason Zweig may have the answer in his book "Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich." Zweig studied several experiments that examined people's brains when they made personal finance decisions.

As Zweig says: "When you borrow money, you are thinking not about the long-term consequences, but the short-term result: You have more cash in your pocket. The pain you are going to experience down the road of having to pay -- that's in the future, it's remote, it's abstract."

Well, all that debt isn't abstract anymore, is it?

Asking for Money

What do you typically say when someone asks you what to buy your kid for his or her birthday?

Do you politely say, "Oh, please get whatever you would like."

Or do you respond, "Well, little Johnnie has a college fund that needs a boost. Here's the account number."

One mother took offense to the latter and wrote to Ask Amy to complain about a relative's request that she donate to a college fund for the couple's two-year-old son.

"I find it shocking that they would ask us for assistance for their son's education," the woman wrote to Amy.

This month, another mother wrote to Amy to weigh in on the issue. She wrote in part: "Be glad to have the opportunity to give something that will be put to very good use. My nephews have asked that we do that in lieu of gifts that may be played with a couple of times then forgotten. They live in a small house, are smothered with gifts and don't need more. I try to give something small or $5 for the child to spend with a $20 bill tucked in for the college fund."

What do you think? Is it rude for parents to ask that you give money for a college fund? E-mail me with your thoughts. Send the e-mail to colorofmoney@washpost.com. In the subject line put "College Fund or Busted."

Tax Tips 2008

Earlier this year, I hosted a Web chat with Paul V. Thompson, president of Premier Accounting & Tax, Inc. Here are some leftover questions Thompson answered after the chat:

Q: I will soon be purchasing another car, and I'm trying to figure out what to do with my current vehicle. It's very old and has some issues. I doubt that anyone's going to offer me much for a trade-in. I want to explore the option of donating it and taking a tax deduction. I know that I need to get some sort of appraisal. Do you have any advice on documentation and the appraisal cost?

A: Charitable contributions of motor vehicles are covered by strict rules for claimed deductions in excess of $500. The allowable deduction depends on how the donated vehicle is used by the charitable organization. Check out IRS publication 561 on their Web site. To get an appraisal, you can use one of the on-line Web sites such as Edmonds.com. If the organization sells the vehicle, the deduction is generally limited to gross proceeds of the sale.

Q: Should we buy a condo or wait and buy a house? Is there any simple rule of thumb or online calculator that can be used to determine what, if any, the tax benefit will be?

A: The deduction rules are the same for condos and houses - if it's your primary residence. The "Tax Benefits" will depend on your individual tax bracket each year. For example, if you are in the 28 percent federal tax bracket, the tax savings could be 28 percent plus the state tax rate.

Q: When is an inheritance taxable? And if you receive stocks as part of an inheritance and liquidate them, what is the taxable value?

A: An inheritance is usually not taxed at the time you receive it. Some examples of what may be taxed are retirement accounts, annuities, earnings on investments after the date of death and interest from life insurance proceeds. If you receive stocks, bonds, real estate, etc., your tax basis is the date of death value. If you later sell the items, your taxable gain or loss is based on the selling price and any selling expenses. Improvements made to property after the inherited date is also taken into account.

Q: I recently relocated to Southern California and my house in Maryland is up for sale. Will I get hit with an out-of-state resident tax now if and when the house is sold?

A: If you meet the IRS sale of residence rules, then you will not owe taxes to Maryland on the sale of your personal residence. Basically, you must have lived in the primary residence two of the previous five years and your gain must not be over $500,000 for married couples and $250,000 for single individuals. Any gain in excess of these amounts would be subject to tax.

Q: My son and his girlfriend bought a townhouse. The title is in both their names. However, the mortgage is in her name alone. He pays half of the mortgage. Is he eligible for half of the mortgage interest deduction?

A: Check out this paragraph from IRS publication 936. My answer would be no. If they get married then it would be OK. You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor-creditor relationship between you and the lender.

Q: My daughter has a UGMA/UTMA account set up by her grandparents worth about $20,000 of a blue-chip stock as a college fund. I would like to sell the stock and put it in a diversified fund. My understanding is that since she will be turning 18 this year in October, we can sell the stock now and it will be taxed at her long-term capital gains rate, which I believe is only 5 percent. Am I missing anything from a tax perspective?

A: Beginning in 2008, the rules regarding the age at which a child's investment income may be subject to tax at the parent's tax rate was changed to include a child who is age 18 or a student under age 24, whose earned income is not more than one-half of the child's support. My advice is to seek a tax professional and discuss your options.

Q: I sold a piece of land for $15,000 in 2007. How much tax am I looking at? Is it the same tax as the capital gains tax? The land was a gift to me.

A: When you receive property as a gift, your tax basis is the lower of - the donor's tax basis or fair market value. So if the donor's basis is $10,000, then you have a capital gain of $5,000. The maximum capital gain rate is 15 percent ($750) and you also would pay tax to the state at their rate.

Also, this year I've written a few tax-related columns. Check them out:

* A Tax Rebate? Feed Piggy.

* Rebate Fact and Fiction

* Use Your Foolish Refund Wisely

You are welcome to e-mail comments and questions to singletarym@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.


© 2008 The Washington Post Company

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