Get the details on here if youre comfortable to get a wide range of input. First a few more questions: -How many open credit cards does she have? What is the balance-to-limit amounts on each? -Do you and her live in a house, and if so, do you have a mortgage? -How much does she owe in taxes? -What does she owe on her car and whats the IR? Taking an early withdrawal (and therefore a penalty) on the 403B is a mistake if you can absolutely avoid it. You make more money overall on the amount you put away between 25-35 than between 35 and 65 on your retirement plans. Before you have her do anything, have her check her monthly or quarterly statements and make sure she isnt losing money in her 403B month-to-month. The resolution of the tax debt should be her first priority, as it will impact her credit score the most. The IRS is surprisingly good about setting up tax payment plans rather than hunting you down and taking your shit like an aggressive bank would. Usually the plans are set up in 1-year, 2-year, 5-year type deals. A lot of times, theyll even help you settle a porton of what you owe and charge you the difference down the road. Does she at least make the minimum payments on her car? Even if its mostly paying off interest and only a fraction of the principle, it will help raise her credit score over time.
First off, thanks for the reply. -She only has one credit card with a low limit (around $1000). I think she only owes around $700, which she's planning on paying off soon. -We are renting, so no mortgage. -I believe she owes somewhere around the $20,000 mark in taxes, but I'll have to double check with her. -She owes $10,000 on her car at about 20% Other info: I had her call a couple of places to see if she could just refinance the car at a lower rate. So far two banks have turned her down and I think she's reluctant to keep getting denied. Her dad is a CPA who had been doing her taxes. I'm not sure of the specifics, but it appears that he didn't prepare her for the fallout of not having your income taxes taken out of every paycheck. He says that he's going to try and work something out with the IRS for her, but from what I've seen he doesn't seem to be doing very much at all. I would like to see her work out some kind of deal with them that doesn't require a lawyer and I don't think we can rely on her dad for any sort of reliable information. Thanks again.
I generally don't advocate taking any money from a retirement plan, but just so you have some facts. The good 1 Taking out a loan from the plan is not a taxable event and will not be reported as income (you won't even get a 1099) 1a There is no tax penalty or income tax to be reported on a loan from your retirement plan as long as you pay it all back 2 Defaulting on a retirement plan loan will not impact your credit score 3 The interest you pay on the loan goes directly into your account, you keep it 4 Loan payments will be deducted directly from your paycheck so you won't even have to physically pay it back The Bad 1 Not paying it back in full is a taxable event 1a you will get a 1099 and the balance of the loan will be reported as income 1b On top of the income tax from the balance, you will pay a 10% early withdrawal penalty 2 If she leaves the school or non-profit with a balance, the only way not to default on the loan is to pay the entire remaining balance within a very small window (60 - 90 days or something, I forget). You can't even partial pay, it's all or nothing and I'm willing to bet the tax implications are far worse than the interest she's paying on her other stuff. 3 Opportunity cost: You miss out on the potential investment earnings of the money 3a This is what the interest is suppose to offset, so you basically are paying more money to get to where you should have been without taking out the loan. 4 This would probably be a pain in the ass to figure out, but some funds may make her pay a penalty depending on her trading history, basically, if she does a lot of short term trades she may get hit with a small fee. Feel free to ignore this, but why did her father advise her not to pay taxes throughout the year? Edit: Er, not why he advised, but how did she end up in a position where she wasn't having it deducted or paying quarterly taxes for being self employed?
Just to add, a downside to this is that she's unable to suspend payments for any period of time if she's still actively employed, so unlike a car payment she can't pay it late and deal with the penalty but get by, it comes out like a garnishment. I've taken more than one phone call where someone was nearly in tears because they can't afford to pay their rent/car/medical bills etc if they didn't defer this one payment. I've never seen an exception made to this on the 401k side of this and I don't think it's different on the 403b side.
Thanks for the reply. That's some good stuff to ponder. I'm also concerned with her taking on another payment without actually paying her car off, committing her to more payments over the course of the next five years. Personally, I think it's just smarter to make a larger car payment and that way if she needs to go a month with a lower payment, she can without penalty. However, she thinks a loan worth half the car at a lower rate is a better idea. To answer your question about her not paying taxes: I'm not sure about the specifics. I think that she had some bills that she could not pay and her father suggested she not have taxes removed from her check to she could pay off that debt. He doesn't seem like he thinks things through very well, and although he's a nice enough guy, he seems relatively unconcerned with the financial situation his daughter is currently in. If you know anything about negotiating with the IRS to lower interest, payments, or balance; we'd love to hear about that as well. Also interested in any general advice about dealing with debt and high interest too. Thanks.
Franks 100% correct. As for getting out of debt, all self-help guides and advice boils down to the same basic approach. Figure out the lowest loan/account balance that you need to pay off, and try to pay it off as soon as possible. Once that's done, go to the next lowest one and roll the money you would have used for the other one into that payment. Keep doing that until you have nothing to pay off except the biggest one. I personally have roughly 50k in debt from college and credit cards. But, its completely manageable and I'm paying off the smaller loans one-by-one. It seems very overwhelming, but if you approach it tactically, it's really not as bad as you think. For your IRS trouble, simply find some customer service number and ask them about an installment plan, I think you legally have the option for one.
Here is the installment agreement from the IRS website. From there, she can even setup monthly payments to be taken from her checking account so that way there'll be no missed payments. Try getting that setup as soon as possible. Like the others said, if you are straight up with the IRS and make an effort to pay back what you owe, they'll usually be willing to meet you halfway.
Unfortunately I don't know anything about dealing with the IRS, but one other avenue you could approach is peer to peer lending, places like prosper and lending club, they have pretty good rates and even with her low score it's possible she'll get something better than at a bank or something. Other than that, I agree with IWSJ.
Damn, and he's a CPA? Does he do individual returns? Beyond the obvious fact that most people don't have the discipline to save up for taxes like that she would have signed a W-4 asking for a shitload of allowances she wasn't eligible for. The IRS could have made her organization force her to prove she was eligible for them and then charged her interest and fines for under-withholding. I'm not trying to be a dick here, just wanted to give you (and everyone else) a heads up not to do that. Especially with the low interest rates we have today.
He works for State government, but as far as I know he does at least a few personal returns. For what it's worth, I don't really think you're being a dick. I think she's trying to find the easiest way out of all of this, and to her it's borrowing against her 403b for only partial what her car is worth. Even if there are no deficits against doing that, I can't help but think that have two loans to pay back instead of just paying more on her loan is a bad idea. Once upon a time, I used to be decent at math, but for the life of me I have no idea how to calculate out what the difference would be. She knows that she's in a situation, and I keep stressing to her that she has to face it now to start getting out of it. It's just going to suck for a few years while she does. I think the fact of accepting that her financial life will suck for years is difficult, which is fully understandable. Thanks for all the input. If there's any other advice out there, I'm all ears. Also, if anyone has any other ideas for refinancing her car loan at a much lower interest rate, we're interested. Both Prosper and Lending club (as far as I can tell) don't cater to people with a credit score in her range. Thanks again.
Hey everybody. Long time, no see. I'm surprised by the lack of debate on here. There are so many events that have gone on recently that would make great fodder. MF Global and the many angles it presents such as the end of the rule of law and the fact that the rich are now trying to eat the rich. Europe imploding before our eyes. Greek bond haircuts turning into decapitations and how long before investors call in the swaps. What happens when it's Spain's turn in the barrel or France's? Will the EU survive? What about U.S. housing? Never a better time to buy? What about shadow inventory? I can't find the link right now but it is alleged that Fannie Mae has approximately 350,000 properties in Florida alone that they expect to take possession of. Extrapolate that number nation-wide....not pretty. What does that do to everyone else's property value?
Does anyone use an online bank, or any other alternative to a traditional bank? I am tired of BofA's nonsense. Their occasional fees hadn't been much of a bother, but they hit me with a couple new ones lately. It's just obnoxious to spend time on the phone with them to have the fees removed, given how much money I have between my checking/savings at the moment. Plus there are no BofA ATMs anywhere remotely near my new office. So fuck'em. I've looked at Ally, ING Direct, and a couple non-bank alternatives like Fidelity's Cash Management Account (I like that idea because I already have an IRA open with Fidelity, but it seems like its really a brokerage account. I'm not sure what drawbacks that might entail). If any of you have used an online bank and would like to share an opinion about the pros/cons of yours specifically, I am eager to hear it. I've asked a few friends, but they're all still using brick and mortar banks, so I figured it couldn't hurt to throw a question up here.
Do you have any credit unions nearby? We recently switched and couldn't be happier. They (at least ours) are very up front about any fees.
Charles Schwab has free checking subject to some deposit requirements. I do not know anything more about it.
I highly, highly recommend Schwab checking. It really is free -- checks are free, additional checks are free, there are no ATM fees. There may be a minimum deposit, that I'm not sure, but I only keep $2-3k in there and no fees have ever occurred as a result. I was hesitant to make the switch at first, but after about two years cannot say enough good things about them. It's everything I want in a bank, with none of the fees or hassle that I had at BofA. The only real negative I've had is that I basically can't deposit cash. My workaround has been to have a friend write me a check, and then deposit that, which is now even easier to do with the electronic check deposit they offer on their mobile app. I can't speak to their customer service, as I don't use the debit card and haven't had any fraud issues.
I'm about to start grad school, which will probably mean student loans. I need some advice, because I have zero credit. I'm 27, and I've never had debt. My credit is actually a little shitty because of an unpaid medical bill and a cell phone that got lost in the shuffle between countries (they were billing the wrong address, despite having the right one in the online account) a few years ago (2006-7). I don't have any bills in my name currently, no credit cards, nothing. I've had car insurance, health insurance, cell phones, electricity/cable and rented safely before, if any of that matters. I do have some assets in cash, and a pair of vehicles. I need to know how I can get student loans without being up-fucked in 2 years. Also, any ways I can establish a line of credit without paying through the nose? Most credit cards I looked at wanted to basically charge me $300/year for the privilege of a $500 credit line that I don't plan on using. Any advice will be highly prized.
Seriously consider sucking someone's dick for a graduate assistantship while you are going to school. If they are similar to what mine is, it saved me many thousands of dollars. Depending on your income you'll probably qualify for government loans, which are subsidized, so I don't know that you'll have too many problems with that portion of the debt. Fill out your FAFSA and see what comes up. I'd be surprised to hear if you didn't qualify for gov't loans. Do you know your credit score? How fucked are you?
No grad assistance. I should know about my financial aid package by the 1st of the month. I've done a Fafsa, I qualify for gov't loans, but I'm hoping that I can minimize the amount I have to borrow if at all possible. I don't know my credit score, but I can't imagine it's pretty. I thought no debt was a good thing? Since it's easier to shake off herpes than a student loan, I'm guessing that a shitty credit score does not mean I will necessarily get fucked by the loan. However, if I can make moves while I'm in school to improve that score without spending a lot of cash, I am open to suggestions.
If the question boils down to improving your credit score, generally, then i can at least tell you two things that helped mine. First, my stepfather put my name on a card linked to his account. The credit reports think it's my card and that helps my score because it looks like I am responsible with credit by never carrying a balance since he never did. Second, I have a credit card of my own that I use only for things I would otherwise just buy outright. But by using it and then paying it off immediately via my checking account it builds a history of using credit responsibly. And gets some points on the side as a minor side benefit. Just avoid any kind of annual fee. If your credit is bad enough that you can't get a card, even just to use to pay your regular bills and then pay back, I believe there are cards out there that you prepay or "load" with money and over time can help restore your credit score and are easier to qualify for. Disclaimer: Not a financial professional.
The good news is, the unpaid bills that negatively impacted your credit rating are about to wiped out as items are erased after 7 years; which from the timeframe you indicated, is right around the corner. Heres what I would do in your situation: 1. Find out your credit score, but forget sites like Free Credit Report (dot com) and the like. They will give you a credit rating from the 3 agencies, but only after you pay for 2 out of 3. If you have a bank account with a bigger bank like Chase, Bank of America, etc they can usually help you through their customer service on working with the agencies. Legally, youre entitled to free credit rating every year or two years. If you dont bank with them, then go to Transunion, Experian, or Equifax directly. In the US, some states mandate that you can receive a free annual credit score report, but it just depends on where you live. 2. Get a credit card. Even if you have nothing negative, no credit is still considered "bad" (relative term) credit. Its actually beneficial to have a small, manageable amount of credit debt that you pay off each month, or at least a hefty portion of the balance. The card terms you mentioned are insane, stay away from them. $500 annual fee? Forget it. There are small limit, medium interest cards out there for people in your situation and for ones that are just starting out. If you go to one of the bigger sites like Visa and Mastercard bearers, they have programs that will find you a card based on your criteria. 3. How soon were you planning on going back to school? If not for 6 months or a year, I would spend that time really focusing on building up your credit. If you dont want a card, then buy a big ticket item you can afford (TV, Car, etc) and deliberately finance it with the company. Its basically the same as a credit card, except your making the purchase only once and all at once. However, be aware that the interest rates doing this are usually higher and will skyrocket if you miss even one payment, and Im talking from the 29.99% to 39.99% range. One way you can do it, is some student loans companies will allow you to pay with a credit card. This will offset the sting of paying back up front and will help build your credit at the same time. Companies like Sallie Mae only allow payment through a checking/savings account. I hope this helps, and if you have any questions, you can PM me.