Short Sales - What you need to know about mortgage debt forgiveness.
With the value of properties dropping over the last couple of years many people have been forced to sell their homes for less than they owe on the property. When this happens, the bank can require that the people who owe the mortgage still owe the outstanding balance or it can forgive the outstanding amount, called mortgage debt forgiveness. While having the bank forgive the outstanding mortgage balance sounds great, there are other considerations that you need to think about first.
Generally, any debt that has been forgiven is considered taxable income by the IRS. However, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 which forgives taxes on the amount of mortgage forgiveness if a few conditions are met. First, the property sold on which mortgage forgiveness was given must have been the taxpayers primary residence. Second, if the debt forgiven was for a refinance, the income from the debt forgiveness can only be forgiven if the refinance was used to improve or repair the primary residence. Thus, if you refinanced and used the money to pay off credit cards or other debt, the debt forgiven would still be taxable as income for IRS purposes.
Discharge of Debt - Cutting my Credit Card Bills
There are many companies out there offering ways to reduce credit card debt. While this sounds like a great idea, you need to get more details. After all, if it sounds too good to be true, it probably is.
What these companies are not likely to tell you is that they usually reduce your income by getting the credit card companies to discharge some of your debt. Which may sound great but will have a very negative effect on your credit score. Thus, while it may help you in the short term, in the long term doing this will result in higher interest rates the next time you try to get a card, vehicle, or house.
In the past, many people dealt with credit card debt by taking out second mortgages on their house to pay off the debt. Now, however, it is difficult if not impossible to do that in many states due to the declining home values and reluctance of banks to lend money.
The best way to get rid of debt without negatively affecting your credit score is to not accumulate debt in the first place. However, if you do have the debt, you need to come up with a plan to get rid of it. Start budgeting to pay a certain amount of the credit card each month and don’t put anything extra on the card. It is nearly impossible to pay off a large credit card debt if you keep putting more debt on the card. While that can be very tempting this time of year, to get ahead you have to say no.
One way to keep from spending on your cards is to keep them in a safe or drawer rather than your purse. If the credit card isn’t always right there tempting you to use it, you will be more likely to just buy spend wisely because you know the money is coming directly out of your account rather than thinking about a bill that will have to be paid someday in the future.
Once you get out of the habit of reaching for the card for impulse purchases, you will be amazed to realize that you don’t really need the credit card as much as you thought. Try living without a credit card for 3 months. At the end of that time, you will likely realize that you haven’t even missed it and that your finances are in a better position because you are watching your spending more carefully.
The best way to get rid of credit card debt is to not have it in the first place, but if you do have debt that you need to get rid of, put the card in a place you won’t be tempted or cut it up. Then, set aside some money each month to start paying down the balance. I would also recommend using any extra money you receive such as your income tax return or some extra cash from friends or your boss at Christmas to pay down a little extra on the debt. Life really is much simpler and less stressful without the debt. Try it and I’m sure you will feel the same.
Mortgage Problems? Check this out!
To combat the issue of rising foreclosure, Congress recently enacted HOPE for Homeowners. This program is designed to help homeowners who are at least three payments behind on their mortgage but have not filed for bankruptcy.
If you qualify, the program extends the terms of the loan, meaning you will be paying a lot more interest over the term of the loan but will have lower monthly payments. This plan helps the taxpayer by keeping the monthly payments lower so that hopefully the taxpayer will be able to continue to make the payments and avoid foreclosure. Also, the extended term of the loan does increase the interest payments, however, that interest can be deducted from the taxpayer’s federal income tax.
As long as the taxpayer isn’t trying to move anytime soon this sounds like a great alternative. However, for taxpayers who might be moving in the next few years, this option means that you will likely be trying to sell your house for less than your mortgage. Because the program extends the term of the loan, taxpayers are paying less each month on the balance of the loan and instead a large chunk goes to interest. Thus, due to the lower housing values if you try to sell in the next few years, your mortgage will be more than the value of your house.
It is great that Congress is coming up with programs to help prevent foreclose, but this plan won’t fit everyone’s needs and you need to be aware of the limitations when considering whether it is right for you.
Going, Going, Gone. House sold for $10,000!
Pinch me, I must be dreaming. A 4 bedroom 2.5 bath home with over 2,000 square feet built in 2006 is going on auction starting at $10,000. This isn’t just a rare deal, there are plenty of others available as well.
In this current market life is pretty tough if you don’t have any savings to fall back on. For those that do have a little cash lying around though, there are plenty of opportunities to invest for retirement. One of the best options that I have seen is the Florida housing market. Yes, house values are falling like crazy in Florida and getting a mortgage is incredibly difficult, however, rental rates have not fallen and people who have been foreclosed on still need a place to live.
The Cape Coral/Fort Myers area has 58 houses and 44 lots going up for auction this month. Many of these homes have never been lived in and the auctions are starting at $10,000 or $25,000 for houses and $1,000 for a lot. With so many homes being auctioned at once and the market already saturated, it is very possible that people will be walking away next weekend with a house for only $10,000 plus closing costs!
A quick check on Craigslist shows that houses in the area are renting for $950 a month for a house or $500 a month for a two bedroom condo. Even if you rent the house out for $500 a month, the potential for future earnings is enormous.
Florida isn’t the only area in the country with some great auctions going on. Check out the following website for more info.
http://www.williamsauction.com/Search/SearchResultsState.aspx?statusid=1&CategoryID=1&p=1.2
Making a Budget Stick
Budgeting is like dieting, people always start out with good intentions but often fail to see it through. One reason for this is unrealistic expectations. The best way to budget is to make it a life change by doing a lot of little things to save money and live within or under your means.
One problem I have noticed is debit cards. Yes, they make life easier, but people no longer keep track of everything in the bank account. With checks you saw the money coming out of your account with each purchase, at least if you kept a running balance in your checkbook. If you aren’t keeping track of what you make and what you spend, you will be more likely to run up excessive fees for overdraft or other bank goodies. One way to avoid this is to create envelopes.
Envelopes? Yes, when you deposit your check, take out your money budgeted for food, groceries, and other items you usually purchase with your debit card. Put the amount for each category into an envelope and when you go to the store, don’t take your debit card. Instead, take only your envelope so that you can’t spend more than budgeted. This way, when you are tempted to purchase those chocolate chip cookies and the roasted chicken, you will have to decide what you can really afford and which item you can live without.
As an added bonus, put all the money left in the envelopes at the end of a month in a special savings account to save for a rainy day and watch the funds grow.
Work with Creditors and Cut Back
With the economy going downhill and difficulty getting a paycheck, it can be hard to fix finances. One key thing to remember when you are living paycheck to paycheck, is to work with your creditors. Many of them will work with you to make a partial payment. Even if you pay just a few dollars on the debt, that is better than nothing. It shows them that you are really trying.
Cancel anything that is not absolutely needed. If you have multiple credit cards, cancel all but one. Focus on paying off the other cards and then cut them in half. Make sure to send a written letter to the finance company or credit card company to let them know of the cancellation.
Do you really need DVR service? Do you really need that extra tier of cable service? Could you do without the call waiting, extra minutes and unlimited text on your cell phone for a couple of months to get caught up on bills? Look closely at what you spend on and think of ways to cut. Cutting out expenses will help the most for fixing finances. Living within your means and taking steps to get out of debt, not only creates a better financial situation, but often a better and less stressful lifestyle.
Avoid Going Into Debt To Improve Your Credit Score
Many people try to fix finances by going into debt to improve their credit score. They think that the more credit cards they have; the better. This is not the case at all. Having a lot of debt in comparison to what you make is not a good thing. In fact, it will only serve to hurt your credit score and you end up paying a great deal of money in interest.
If you can afford to pay a large down payment on an item, such as a car, do so. Taking out a car loan just to improve your credit score is a recipe for disaster. You cannot fix finances by adding more debt to your current debt. This ends up digging you further and further into debt and risking an even lower credit score.
Use Your Hobbies to Create Income Streams
Whether your goal is to pay off debt or build wealth, chances are you can use some of your interests to generate extra money. Some of the ways to make money with your hobbies are to offer lessons, blogging, selling arts and crafts or providing services.
If nothing else, monetizing your interests can offset the costs of enjoying them in the first place, leaving more money for an emergency fund or investments.
Etsy and Silkfair.com are two Ebay auction alternatives to look into if you’re crafty. Rather than looking for the “best deal”, customers are looking for beautiful handmade items and recognize fair prices.
Are you a hobby photographer? Look into selling microstock pictures. Prices are low and buyers pay no royalites, but you cna sell the same picture hundreds of times. One major player is IStockPhoto.com, which requires quality approval, but a search on microstock brokers will yield many results.
Selling services related to your hobby is another way to build wealth. For example, if you are an animal or nature lover, advertise on places like Craigslist for dog sitting or organic landscaping. Painters can translate their experience to mural painting and faux finishes for peoples homes. Musicians can give lessons. Are you great with computers? Or writing resumes? The possibilities are endless.
Blogging about your hobby can also yield small amounts of money that add up. Pay per post forums, paid blogging networks, or monetizing your own blog with adsense are all ways to make money online with writing. Sites like Ehow pay your for your “How to’s” via revenue share and Associated Content pays $3-$20 plus a page view bonus.
While you won’t “get rich” from most hobbies, you can enrich your life by incoporating them into other income streams. How does an extra $50 a month towards debt or savings while still being able to enjoy your interests sound? Priceless.
Feeling bad about yourself won’t help your situation
One of the first things that happens when you stop avoiding your debt and look it head on in an effort to fix it is an overwhelming feeling of guilt.
You feel like you should have started sooner, done more when you could, wasted less money on worthless stuff when you were younger. You feel like you should have never gotten yourself into this mess and it can be very, very overwhelming.
Those feelings are natural, but until you get over them they are just as paralyzing as avoiding your debt altogether. If you do not forgive yourself for your past mistakes (that can’t be changed, because they’re in the past) you are going to just feel bad and still be in debt.
Once you’ve come to forgive yourself, you can make real, positive decisions about how to chisel away at your debt little by little. From looking at getting a second job to looking at getting rid of cable television, there is always something you can do to make a little more money or spend a little less. Even if, in the beginning, you can only pay an extra $20 toward a past-due bill or credit-card debt, do it!
You won’t be able to go from a financial wreck to a financial superstar overnight, so don’t judge yourself harshly for taking baby steps. Everyone has to take baby steps, how else you learn to walk. Eventually it will go faster, but it requires patience in the beginning to lay the groundwork.
Do You Have Too Much Debt?
Do you owe more than you make? Unfortunately this seems to be the case for people more and more these days. There are some things you can ask yourself to determine how close you are to being “In over your head”.
For starters, Do you know how much debt you have? If not, you need to! Make a list, as upsetting as it may be, so you know exactly who you owe and how much.
Do you have any savings? If not, you need to. Work out a new budget that includes some sort of savings for you each week, no matter how much or little the amount is.
Do you only make the minimum payment on your credit cards each month? You need to be paying more than the minimum to bring down the debt!
Are you still making more purchases on your credit cards while trying to pay it off? You need to stop. Now.
Do you have at least one credit card that is near, at, or over the credit limit? You need to pay on it every month, but do not use it at all.
Are you starting to be late in making payments on bills, credit cards, or other expenses? A sure sign that you are getting too far in debt…be careful!
Do You use cash advances from your credit cards to pay other bills? You need to figure out a way to make payments while not using cash advances. This will only increase your debt load.
Are you bouncing checks or overdrawing your bank accounts? A sure sign of troubled finances. Do not let the situation get worse. Sit down asap and go over your income and debt and see where you can make changes for the better. Maybe look into a second job, even if temporarily. Cut out all extra expenses you can, and save the money.
Have you been denied credit? Stop trying to get more credit. Denials will hurt your FICO Score, and you should be focusing on paying off the debt you have, not creating more!
Are You lying to friends or family about your spending and debt? You are getting in, or are already in, way too deep. You will feel better about yourself if you get tough and make changes and decisions that will improve your finances. If you need to change your lifestyle a bit, then so be it. When you can stop making excuses, pay bills every month, and stop lying, the increase in your self-esteem will be the greatest gift you can give yourself!
Take a hard look at your answers to the above questions. If you see financial troubles looming, then take action today!