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Color of Money Live With Michelle Singletary
Get Out of Debt Now!
with Steve Rhode, president of Debt Counselors of America

Tuesday, March 14, 2000 at 2 p.m.

Michelle Singletary
Michelle Singletary

It's tax time and millions of people can't wait to get their hands on their tax refund. So far this year the average tax refund has been over $1,700. For some such a large refund is good news. But is it really? Probably not, according to experts. Consumers shouldn't use their tax refund as a forced savings plan. Its better in the long run to get the money during the year and invest or save it. And now the new trend is refund anticipation loans, also known as RALs. RALs are an "advance" on your tax refund. In return for this "loan" consumer pay a "loan fee" to the financial services company or professional tax preparer lending the money. The more money you borrow, the higher the fee might be.

Michelle Singletary
Steve Rhode (L)

RALs are in high demand in this fast-food world of ours. But they too come with caution. The effective interest rate on these loans can top 100 percent. Just think about this. If you are in need of your refund so bad that you are willing to pay extra to get it in your hands right away you have deeper financial problems you should be addressing, debt experts warn.

So what should you do to handle your debt? Join me Tuesday at 2 p.m. with guest Steve Rhode, president and founder of Debt Counselors of America, to talk about strategies to best use your tax refund and avoid other debt problems.

Michelle Singletary: Here we go. Thanks for joining me today with Steve Rhode. Ready for your questions.

Arlington: I have amassed a lot of debt. No big things but a lot of small stuff that has added up. The hardest part in dealing with it is organizing it. A friend suggested I go to a counseling center but I saw a news report that these places are in kahoots with the credit card firms and such and are really just collection agencies in disguise. Can you recommend a legitimate service that will truly help. It's no that I don't want to pay my debt its just I don't know where to start.

Steve Rhode: I can understand your concern. Check our our site for a list of questions to ask any credit or financial counseling organization you are considering. www.getoutofdebt.org/questions.htm

Work with an organization you feel comfortable with.

The advantage of working with a counseling agency is that a lot of the cost of their service is offset by contributions from creditors. If you feel uncomfortable with that and would rather pay for the full cost of the service out of your pocket you should discuss that with them.

Upper marlboro: I'm tired of arguing with my friend about his big tax refund. He calls it his debt reduction-vacation fund. He runs up his charge cards all year and pays them off with his tax refund; any money left over is used for a vacation. He acts as if it's some gift from Uncle Sam; I tell him he's stupid to let the government use his money for a year. Do you agree with me?

Steve Rhode:
Yes. It is silly to use your tax refund as a forced savings account. Why not keep the money in your bank account during the year and get the benefit of compound interest? What would happen if there was a problem with the tax return and the refund didn't arrive as expected? Your friend would be in a real pickle!

Maryland: I fell behind on my credit card payments, and the company sent me a 1099-C form reflecting
the $3,000 that I owe them. The company says it has canceled the debt and that I have to pay income tax on that amount. Can that be possible?

Steve Rhode:
It is absolutely true. Forgiven debt is treated like income and you will owe tax on the money. You need to watch out for the same thing when you settle a debt. The amount of debt that was forgiven is income to you and you will have to pay tax on it. Visit our web site and look at our publication "Beware of the IRS if you settle or default on a debt" www.getoutofdebt.org

Washington, DC: My friend and I have a disagreement. She says I should not pay off my student loans early, since the interest is so low and should invest in stocks instead. I think that I should pay those loans off as quickly as possible to reduce the interest. What do you think?

Steve Rhode: Can your friend guarantee what the stock market will return. At least paying off the student loan has a guaranteed return to it. Only invest money you don't need to get at or are wiling to lose.

WDC: Hello, all! I'm resubmitting this question in the hopes that you will have a chance to answer - my wedding is almost a month away.

My fiance is around $20,000 in debt. He's been making payments on time, and recently worked with DCA to optimize his payment schedule. He will be debt-free in 2003! -sounds like a slogan, doesn't it?-

My question is this: is there any way I could become liable for this debt? Our plan is to maintain separate bank and credit card accounts once married. Are there any other steps I could take to protect myself?

Much thanks!!

Steve Rhode: One thing that you can do is to have a written agreement with your significant other. Take a look at our publication "The living together contract" at www.getoutofdebt.org

The only way you would be liable for your fiance's debt would be if you were an authorized user or co-signer on their credit cards.

Henderson,Nevada: My husband and I would like to buy a house in the near future, but ou debt to income ratio is too high. How can I pay my loans off faster so we can get approved?

Steve Rhode: Pay more then the minimum on a consistent basis.

Washington, D.C.: I want to consolidate my debt onto one credit line and at least double the minimum payments every month and cancel just about everything else. It'll take a couple of years, but it will lower my payments and save some interest. My question: how bad does it look on a credit report to transfer balances often? I can't pay off everything right away, but I pay at least the minimum on time every month. P.S. The reason I still have the debt is transferred balances I didn't pay off right away. I've learned my lesson!

Steve Rhode: Be careful in transferring balances from card to card. You could get stuck on a card with a high balance. Also when you are switching to low rate cards the minimum payment goes down accordingly so you never make any progress. If you are going to switch to a low rate card, divide the balance by the number of months on the reduced rate and pay the card off in full before the rate increases.

Michelle Singletary: Now, if a credit card company writes off your debt and sends you a 1099-C form can they still try to collect the money later? If so what do you do having having claimed the debt on your income taxes. Or can you tell the credit card company or their debt collection company to kiss off?

Steve Rhode: Well I don't know if you want to use the words "kiss off" LOL. You have a couple options , you could repay the debt to clear it up on your credit report rather then have it show up as a negative remark. You will then have to file an amended tax return to get the money that you paid back. If you paid income taxes on that money as forgiven debt it should not be collected on again.

Dupont: My annual salary is close to $48,000, but my debt is close to $50,000. I lived excessively for a number of years, and now it's overtaking me. I've cut back using my credit cards, although sometimes they're used to make ends meet. In my retirement savings plan from a prior job, I have about $35,000. If I cash out, I think I may end up with around $16,000 after taxes. Should I do it and take the $16,000 and pay some of my debt down? I borrowed from the plan about six years ago and paid off some of the cards, but I obviously didn't get the message. I am 49 years old and single. Any advice?

Steve Rhode: Don't borrow from the retirement account. It is easy to take the money out, it is hard to put it back. Let the money ride and earn you a fortune. If you take the money out of your retirement account you are also faced with significant tax penalties. Don't do it. Contact Debt Counselors of America to put together a repayment plan that can work for you.

Washington, DC: I've been reading books and articles about getting debt free and starting an investment
program. One thing I'm confused about is the advice to pay off my credit cards first. Shouldn't an emergency fund be done first, to avoid using those credit cards?

Steve Rhode: Do both at the same time! Paying off your credit cards is a guaranteed return.

Michelle Singletary: Just a note to WDC. While I agree with Steve be careful not to merge your honey's debt with yours once you get married. For example, if you want to keep his debt separate (just in case he runs off with a sexy babe) don't transfer his credit card debt to a joint credit card (like those offering really low interest rates.) Likewise, don't consolidate debt under both your names. Also be sure to get regular copies of your credit report just to make sure he hasn't done anything (like apply for credit in both your names without your permission. Not that you don't trust him but you are smart in trying to keep his premarried debt separate (your mamma certainly didn't raise no fool!!!!)

Baltimore, MD: I went to a seminar on debt management, but when I found out they wanted me to get a second mortgage on my home, I became a little apprehensive. I want to reduce my debt without putting up my home as collateral. Any suggestions?

Steve Rhode: You want to be wary of acquiring debt in order to pay off debt. Kinda counter productive. Why not look for a repayment plan to help you pay off that debt without putting your belongings at risk. Take a look at our web site for a number of programs. www.getoutofdebt.org

The simplest way to get out of debt as fast as possible is to sent more then the minimum payment every month.

Washington, DC: What is the bets way to transfer real estate as a gift. My understanding that if I give my daughter a house valued at $250,000 she has to pay full sales tax on the home, which puts a huge financial burden on her? Any tips?

Steve Rhode: Contact a licensed tax professional in your area.

WDC: My fiance has $50,000 in student loans. When we get married and apply for a home loan, will this affect our chances of approval?

Steve Rhode: If you apply for the loan jointly, it may.

Landover, MD: My father gave me money to pay off my debts following a difficult divorce. My attorney suggested settlements with the creditors or filing bankruptcy, and I opted for settling and paying 50 cents on the dollar. The problem is that I received three 1099-C forms from the creditors. The settlement reduction was added to my income and I have to pay tax on it. No one told me about this last year and I hope you can explain it to me.

Steve Rhode: The problem is that creditors may suggest a settlement offer to you without informing you that you have a tax liability. In the past I've directly asked some creditors why they don't inform their consumers and they said "We are not tax advisors".

You also need to watch out for settled debts appearing as negative marks on your credit report.

Gaithersburg, MD: Please tell me how credit counseling programs affect your credit rating while you are paying off the debt and after?

Steve Rhode: If you are entering a debt management program then a comment may be made on your credit report stating that you are working with a counseling organization. Only a future a creditor can decide how they will view the info on your credit report, and whether or not to extend you credit.

Debt Counselors of America offers a number of different programs for different situations. Many of these don't carry the risk of the comment.

Downtown DC: Hi, Michelle
While I am convinced that debt can, in general, be harmful, I'm not convinced that all debt in all times in all places is bad. My own debt is a home mortgage, a rental property mortgage and two leased vehicles for business.

Steve Rhode: What would happen if your income stream suddenly dried up?
Do you have enough spare cash laying around to feed your debt monster? :)

Michelle Singletary: Hey Baltimore, send me an e-mail about that debt management seminar. I like to hear more about it and whether you or other readers have had similar encounters. I hate companies that entice you like that without fully disclosing their true purpose, which was probably to pitch to you a home equity loan. My e-mail address is singletarym@washpost.com

Michelle Singletary: Many people fear using a credit counseloring service such as DCA because they worry it will be reflected on their credit report. Does working with such a service mean there will be a special code reported on your credit report? You may be bias on this next question, but...would it be better to try and work out your debts yourself with your creditors?

Steve Rhode: People should always try to work out a solution to their financial problems on their own if that is what they are most comfortable with. At Debt Counselors of America we provide a lot of self help information that can be downloaded right from the web site. We also offer programs and services to help people if they are having debt problems.

Think of it this way.... you can either mow your lawn yourself or you can get somebody else to mow it for you. Which is the better way? :)

Baltimore MD: I had a credit card account, and the balance was charged off several years ago. Since it is more than seven years old, that account recently fell off of my credit report. I recently received a notice from a collection agency stating that it bought this old debt and is trying to collect the original amount plus interest. Do I need to pay this new collection agency? It hasn't appeared on my credit report yet, but I'm afraid that it will.

Steve Rhode: Just because it no longer appears on your credit report doesn't mean that you don't still owe the debt you defaulted on. These days companies are buying old collection accounts and actively collecting on them. You should not disregard their notices. Get self help or contact a professional for assistance.

Michelle Singletary: Can consumers negotiate with creditors about placing a comment on their credit report if they are in a debt repayment program. Can they ask that a comment not be posted?

Steve Rhode: The problem is the creditors have agreements with the credit bureaus to report true and accurate information. While the creditor would like to receive the money and may be willing to consider some type of negotiation often times their hands are tied when it comes to removing past negative information.

Your credit report should contain a true and accurate accounting of your past credit history. This might include some blips that you have had in the past. Be honest about your credit history. Make payments on time and in full will go much further to improving your credit history then eliminating an old comment.

Dupont Circle: Welcome back Michelle and Hello Steve: I have about $4K in my 401-K- account and I changed jobs. When asked about rollover I realized that the amount would pay off an IRS debt, and two student loans. Should I withdraw the money and pay off the loans or should I keep it there and continue to pay down the loans monthly?

Steve Rhode: If you take the money out of your 401K account you will have approx. a 30 percent tax penalty. And how will you get the money back in your account? Both the IRS and your student loans are willing to talk about repayment plans you can afford.

Washington, DC: Why shouldn't I use my tax refund as a forced savings plan? I have two choices--get the money in one lump sum, or have it come to me in dribs and drabs throughout the year. I am realistic enough to know that if it's in the bank account, my wife spends it--so there is no third option. Each year, I look forward to a $5000 tax refund to pay off a chunk of other debt. I'm aware that I lose interest on that money throughout the year, but it is a cost well worth incurring, in my view.

Steve Rhode: Rather then give the money to the IRS who earns the income on it why not have the money automatically deducted from your paycheck each pay day and put into a savings account that you have control of?

New York, N.Y.: I've gotten my credit report before, and the information was correct -- no late payments, all account closures by me, etc. I do, however, carry some high balances I'm working to pay off -with regular raises and budgeting, the payments I'm making are getting bigger-. I've never had a hard time getting an apartment or a car loan. How do I tell if my rating is good?

Steve Rhode: Get a copy of your credit report. (You can find a link to where to get one on our web site www.getoutofdebt.org) Once you get your report call the customer service number and have them help you review it. Remember that getting a single report from a single agency is not a true reflection of your credit history. Get a consolidated report which contains all three major credit bureaus. Sounds like you are doing a good job! Keep up the good work! :)

Rosslyn, VA: We recently applied for a credit card with a lower interest rate with the intention of transferring our balance from a higher-rate card. We were denied by the bank because the credit report showed two negative things. The first was an erroneous rent-collection filing that originated in 1989 and that I have tried unsuccessfully over the years to get taken off my credit report. The second was what the bank said was a high ratio of revolving balances to revolving credit limits. What is this? Is there a magic line in the sand that we should not cross? How can we resolve this and get the card?

Steve Rhode: Get a copy of your credit report (see our response to the other chatter about consolidated reports)

If the information on your credit report is not accurate contact each of the credit bureaus that has the wrong information and supply them with your statement and any documentation you have to support your position (make copies). They will use your information to make a decision about removing the entry.

Once you get your credit report you will probably find that you have open lines of credit that you are not using. These accounts are hurting you! Close them out. Make sure they are reflected on your credit report as closed by the consumer. Don't close them all at once. Space it out over a couple of months.

Washington, DC: I had to file Chapter 7 bankruptcy because of an overload of debt . I lost my house, credit
cards, everything but the car, which I will still pay on. Can I claim this loss on my taxes ?

Steve Rhode: I don't believe so but check with a licensed tax professional in your area.

Chicago, IL: I have a credit card debt of approximately $5,300. This entire amount is on one card with an annual percentage rate of 21.4 percent. My minimum amount due each month is barely more than the interest payment alone. I am not reducing my principal at all while I'm paying this institution roughly $100 each month. On a very regular basis, I receive applications for additional credit cards in the mail offering an introductory interest rate of between 7 percent and 8 percent. This introductory rate is good for only the first six months.
Could I do the following? transfer my full balance to one of these cards with the lower rate and continue switching cards every six months? If my calculations are correct, I can continue to pay $100 each month, but I would reduce my principal by more than $800 in the first year -and continue reducing more and more each year-. The $100 each month, for somewhere around five years, would eliminate my debt. Am I foolish for thinking that this would work, or am I foolish for not taking these actions a long time ago? - JJ

Steve Rhode: What happens if interest rates go up and creditors become less lenient about extending low introductory rate offers? You could get stuck on a credit card with an even higher interest rate. I have seen cards with much higher interest rates. You might be better off just paying your debt off as quickly as possible rather then gambling that you are going to get a better card in the future. The only exception to this would be if you could apply to a low intro rate card and pay off the balance before the intro rate expires.

Arlington VA: I am currently trying to pay off all my credit card debt. I've stopped charging on my cards -except for a monthly gym fee, which is charged automatically and which I pay off each month-. In addition, I'm paying the cards all my monthly income that doesn't go to paying for living expenses. Consequently, I have no savings. Should I cut back on the amount of my monthly payments in order to save, or should I keep sending in all my money and begin saving once the cards are paid off?

Steve Rhode: Do both. :) Pay off your credit cards and save money at the same time. Split the extra cash you have each month and divide it between the two objectives.

Washington, D.C.: I'm carrying a good deal of debt -- which I'm paying off -- but I'm paranoid enough to want to keep money in my savings account. Right now there's a couple of months' salary in there. Bad decision? Should I take a chunk of it and throw it on a bill? Also, can you recommend a type of savings account -- like a money market or some other -- that will be a smarter place to park my money than a regular ol' savings account? Or should I dump the savings account idea altogether and just assume my 401K is enough security?

Steve Rhode: I wouldn't take money out of the savings account and pay down the debt. Keep your emergency money fund at least at the current level. You might want to stop saving and use your extra cash to pay off your debt in TURBO mode. Always take advantage of company sponsored 401K plans where they provide matching funds. This is an immediate 50 to 100 percent return on your money. Isn't life grand?!?!?

Michelle Singletary: With those low interest credit cards once you transfer a balance aren't you locked into that low rate at least for the introductory period? Is is smart to shop around for the longest intro period and then transfer a high balance giving yourself a longer period to pay it down or off?

Steve Rhode: Any interest can be changed with as little as 15 days notice. There is no such thing as a "locked in rate" these days. It is smart to shop around for the best terms you can find.

Silver Spring: Just wanted to say that I love your column and think you are one of the most level headed writers! Of course, Bob Levey SAYS he is frugal -or is that just cheap-, but I love the way you use your family as examples of both good and bad financial managers. It makes you seem much more than a byline. In addition, I have learned a lot more about the African-american culture -- for example, that the member with the "good" job would be called upon to help out the less fortunate in the family. I would like you to address in a future column the concept of "making a living without having a job," to show wage slaves that they do not have to juggle daycare and those additional expenses. For example, I have a paper route. Although it is only 1oK a year, I don't have to pay daycare, wardrobe, and other business related expenses -like late fees for picking up ten minutes late from the sitters, fast food 'cause I am too tired to cook, etc.-. And maybe investing for teens. I wish I had done something else with my money when I was in high school besides put in a savings account! Great job.

Steve Rhode: Anybody who doesn't love Michelle will have to answer to me!!!

Chevy Chase: I am interested in finding out about purchasing a property that my daughter will occupy. My daughter and I would purchase the property together, and we would share the expenses. Since she will be residing in the house, she will pay me one-half of the market rent. We will share all expenses associated with the property 50-50. I have two questions: First, what kind of mortgage financing is available for this type of arrangement? Second, am I able to deduct one-half of all the expenses associated with the property?

Steve Rhode: Talk to a real estate attorney, a mortgage broker and a licensed tax attorney in your area.

Michelle Singletary: Well, can't believe our time is up already. Thanks so much to Steve and thank all of your for sending some really good questions. Just remember anything is possible even paying off your debt. You can do it!!! Now come back again. See ya.

© Copyright 2000 The Washington Post Company

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