Tag Archives: Personal Finance

How to Survive a Long Flight With Kids

How do you take a long-distance flight with three kids without losing your sanity (or your savings account)? That’s what we’re looking at this week.

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Should You Buy a Car With a High Interest Rate or Lease Instead?

Should you settle for a high interest rate on an auto loan, or are there better financing options? That’s what we’re looking at this week.

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This Free And Easy App Can Prevent You From Getting Ripped Off At A Car Dealership

There is all kinds of websites, platforms and startups that are supposed be “disrupting” the whole car buying process, yet every day people end up with bad deals. But the most powerful tool is something buyers have had for a while, and they don’t even have to download it.

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What Really Happens When You File for Bankruptcy

What Really Happens When You File for Bankruptcy

Bankruptcy is a last resort for people and businesses, including Gawker Media, the company that owns this site. Many companies, like United Airlines and General Motors, file for bankruptcy and continue business as usual. Individuals file for bankruptcy and often emerge in one piece, too. There’s a lot of confusion and misconception about bankruptcy, so let’s talk about how it affects your finances.

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The Differences Between Chapter 7, 13, and 11

In general, people file for bankruptcy when there’s no way in hell they can meet their debt obligations. Popular assumption is that those people are bad with money and take out too much credit card debt. Sure, that happens, but often, people and companies file bankruptcy after a major financial blow. It might be a lawsuit debacle. It might be digital obsolescence. It might be an unexpected illness.

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A lot of people think bankruptcy wipes out any and all debt obligations, but that’s not the case. You still have to pay up, and how you’ll pay up depends on what kind of bankruptcy you file: Chapter 7, Chapter 13, or Chapter 11. There are other types of specific bankruptcies, too (Chapter 12 is for farmers and fishermen, for example), but these three are the most common.

With Chapter 7, you may have to liquidate certain assets (like a car or a second home) to pay off at least some of the debt. Most of your assets are probably exempt, but it depends on your state, your financial situation, and whether or not that asset is essential. You have to meet certain eligibility requirements to file, and income is perhaps the most important one. As legal site Nolo explains, there’s a whole set of criteria to determine your income eligibility, but generally, you have to have little to no disposable income.

With Chapter 13, you get a plan to pay off your debts within the next three to five years, but you get to keep your assets. After it’s all said and done, some of those debts will likely be discharged. You have to qualify, though, and that means your secured debts can’t be more than $1,149,525 and your unsecured debts cannot be more than $383,175. Secured debt is debt that’s backed by collateral, like your house or car.

Chapter 11 bankruptcy works kind of like Chapter 13, but it’s reserved for businesses, and basically means a reorganization or restructuring for the company. Businesses can file for Chapter 7 bankruptcy, too, but again, that means a liquidation of assets, so Chapter 11 is usually a more attractive option. Companies get to keep their stuff and keep their creditors at bay while they continue their operations, but they have to come up with a plan to pay off at least some of their debt, or get it forgiven.

What Happens When You File

When you file for bankruptcy, you get an “automatic stay.” Basically, this puts a block on your debt to keep creditors from collecting. While the stay is in place, they can’t garnish your wages, deduct money from your bank account, or go after any secured assets.

Ironically, bankruptcy isn’t free. The filing fee alone is a few hundred bucks for Chapter 7 and 13, and nearly $2,000 for Chapter 11. And then there are the attorney fees. You can file without a lawyer, but it’s not recommended since bankruptcy laws can be tough to navigate. Upright Law estimates the fees for Chapter 7 are $1,000-$2,000, and Chapter 13 are $2,200-5,000. Chapter 11 costs a lot more. Over at Forbes, attorney Robert Bovarnick explains:

In my experience, attorney’s fees run about 4% of annual revenue. If your company has $2,000,000 in revenue, expect to pay between $75,000 and $100,000 to your bankruptcy lawyer–and there may be expenses for accountants and other professionals on top of that.

You’ll also have to take a class or two. The government requires individuals to take credit counseling 180 days before you file, and you also have to take a debtor education course if you want your debts discharged.

A couple of weeks after filing, you’ll have to attend a “creditors meeting,” which is basically what it sounds like: a court meeting between you, your bankruptcy trustee, and any creditors who want to attend. They’ll all ask you questions about your financial situation and decision to file bankruptcy.

Your Assets Get Liquidated With Chapter 7

Nolo says that in most cases, Chapter 7 debtors don’t have to liquidate their property (unless it’s collateral) because it’s usually exempt or it’s just not worth it. They explain:

If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property — which means that you get to keep it, even though it is nonexempt…Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt…

After the creditors meeting, your trustee will figure out whether or not to liquidate your stuff. If it does get liquidated, that means you’ll have to either surrender it or fork over its equivalent cash value to pay back your debt.

You Get a Payment Plan With Chapter 13

With Chapter 13, you get a plan to pay off your debts, and some of them have to be paid in full. These debts are “priority debts,” and they include alimony, child support, tax obligations, and wages you owe to employees.

Your plan is based on how much you owe and what your income looks like, and it will include how much you have to pay and when you have to pay it.

The “Best Interests Test” for Chapter 11

After filing for Chapter 11, the company has to come up with a reorganization plan for their business and finances. While they can continue operating as normal, they do have to run major financial decisions, like breaking a lease or shutting down operations, by the bankruptcy court. Creditors and shareholders can offer their input on these decisions, too. This plan is basically an agreement between the debtor and creditors about how the company will pay its future debts.

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The plan also has to pass a “best interests” test. This test ensures creditors will get as much money under the Chapter 11 as they would if the debtor filed for a Chapter 7 liquidation.

Filing usually takes a couple of months to wrap up, but it takes considerably longer for the actual bankruptcy to come to a close. According to Credit.com, Chapter 7 bankruptcy is generally pretty quick and closes in a few months. This makes sense, since Chapter 7 liquidates your stuff to pay off debts quickly. Chapter 13, on the other hand, can last up to five years. According to Nolo, some Chapter 11 cases can wrap up in a few months, but six months to two years is a more common time frame.

What Happens to Your Credit

Your credit score will plummet with a bankruptcy. The higher your score, the more you’ll fall. FICO estimates someone with a score in the mid 700s might see a drop by over 100 points. Of course, a low score can make your life difficult in many ways.

In general, Chapter 7 and 11 bankruptcies remain on your credit report for ten years, and Chapter 13 stays on for seven.

After bankruptcy is all said and done, most debts are discharged, but not all of them. Student loans aren’t typically dischargeable in bankruptcy, for example. Here are a few other non-dischargeable debts, according to Sutton Law:

  • Tax debts
  • Alimony and child support
  • Divorce-related debts, including property settlement debts.
  • Debts for some fines or penalties.
  • Debts for personal injury or death caused by drunk driving

In some cases, student loans are dischargeable after a bankruptcy, but you have to pass a federal test for hardship, and the Department of Education says it’s rare.

https://studentaid.ed.gov/sa/repay-loans…

Bankruptcy is usually a desperate remedy to a helpless situation. Knowing how it works and what to expect can help you navigate some of the misconceptions and figure out what the process actually entails.

Photo: Kaspars Grinvalds (Shutterstock)

What Zombie Debt Is and How It Can Come Back to Haunt You

What Zombie Debt Is and How It Can Come Back to Haunt You

On Last Week Tonight, John Oliver bought $15 million in outstanding medical debt just to prove how easy it is to start a debt buying company. It was debt that regular people owed, presumably from surgeries, hospital stays, medical procedures and so on. Instead of buying the debt to turn a profit, Oliver forgave it. All of it. The segment outlined the many flaws of the debt and credit industry, but specifically the concept of “zombie debt,” or old, forgotten debt that somehow resurfaces.

As legal site Nolo explains, zombie debt is debt that “is very old or no longer owed.” It’s debt that comes back to life when a collection agency buys it for cheap. It’s not the same as maxing out a credit card and being unable to pay or being flooded with bills you can’t haggle down. Zombie debt is often invalid, and collectors use intimidating, sneaky tactics to get people to pay.

How Zombie Debt Works

Debt collectors make money when they buy old debts incredibly cheap and get people to pay a portion of the original amount that’s bigger than what they paid themselves. Theoretically, that doesn’t sound so bad, right? Collectors just help companies reclaim lost funds, and, after all, we should all repay our debts. Fair enough.

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In practice, though, debt collecting is a very shady business, and zombie debt exemplifies this. The Federal Trade Commission (FTC) lists some common types of zombie debt:

  • debts you already settled with a company or other debt collector
  • debts that were discharged in bankruptcy
  • time-barred debts you may have forgotten or overlooked that are past the statute of limitations
  • debts that no longer show up on your credit report, generally after seven years
  • debts you never owed, like debts resulting from identity theft

It’s easy to say “If you have past debt, you should pay it.” Zombie debts don’t work this neatly. As the FTC points out, they’re often the result of identity theft and they can even be debts you’ve already settled.

How Debt Collectors Get Around Time-Barred Debts

The FTC warns that you can restart the clock on the debt’s statute of limitations if you make (or just promise to make) payments. This is important because it’s how debt collectors turn a profit.

“Statute of limitations” means debt collectors can sue you for a limited amount of time to collect your past due debt. After that time, those unpaid debts are “time-barred,” and a debt collector can’t sue for time-barred debts. This time frame—the statute of limitations—varies depending on your state. Here are the statutes of limitations for all 50 states.

When you restart the clock, collectors can sue you, and many of them do. When consumers ignore these lawsuits, which happens often, they have to pay up, which can lead to wage garnishment.

However, don’t get “statute of limitations” mixed up with the time limit for negative items to stay on your credit report. Most unpaid debt falls off your credit report after seven years from the date it becomes delinquent, no matter how many times that debt is bought or sold. That’s separate from the statute of limitations.

How to Deal With Zombie Debt

Sadly, not all of us will be lucky enough to have a cable news show buy and forgive our zombie debt. We’ve told you how to deal with debt collectors before, and the cautionary rules are generally the same for dealing with zombie debt.

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As you can see in the Last Week Tonight segment (and as you may have experienced yourself), debt collectors can be nasty. They use all sorts of tactics (and in some cases, intimidation and outright lying) to intimidate you into paying, from calling you nonstop to contacting your friends and family members.

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Thanks to the Fair Debt Collection Practices Act (FDCPA), debt collectors are not allowed to call during certain hours, use foul language, or make threats, though. So if you’re dealing with an agency breaking the rules, you can report them to the FTC. Also, abusive or threatening language are also red flags, so make sure you don’t have a scam on your hands, and here are a few questions you can ask to expose a fake debt collector. The FTC lays out your rights in dealing with debt collectors.

Assuming the agency is legit, your next order of business is to tackle them head on and make sure the debt is valid. Check out your credit report and see if the debt is listed. If not, the zombie debt may be a result of identity theft, and you can find sample letters to help dispute the debt at identitytheft.gov.

From there, ask for a “Validation Notice.” Consumer Reports explains how this works:

Even if the caller gives plausible-sounding answers, request a “validation notice” to verify the debt. The notice, which must be sent within five days of initial contact, must include the amount of the debt, the name of the creditor, and a description of your rights under the federal Fair Debt Collection Practices.

The Consumer Financial Protection Bureau offers sample request letters, too. To avoid restarting the statute of limitations, don’t even discuss the debt until you receive that notice.

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If you do indeed owe the money and believe you need to pay, dealing with collectors can still be tricky. We’ve written a guide to help you navigate the process, though.

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In most cases, dealing with zombie debt is easier said than done. A quirky television host might come to your rescue, but don’t count on it. At the very least, you should familiarize yourself with your credit report, know the statute of limitations on any past debts, and understand your rights.

Photo by Ryan Jorgensen – Jorgo

Financial Literacy Alone Won’t Fix Your Money Problems

Financial Literacy Alone Won’t Fix Your Money Problems

Unless you were born into riches, you’ve probably dealt with money troubles. Financial problems can be a struggle, and “financial literacy” is the go-to solution to building good money habits. Create a budget, learn some basic rules, and poof! Our money woes are cured. That’s not all it takes to improve your finances, though. Not by a long shot.

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Financial literacy is, in a nutshell, understanding how money works. It’s very important, and it’s not difficult to learn. In fact, there are a handful of free resources to help you learn all about money. Those lessons can be helpful tools. However, if it were as easy as learning some basic math and rules, we’d all be awesome at money. Less of us would struggle with debt, live paycheck-to-paycheck, or overspend on stuff we don’t need.

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Many people assume financial literacy is the key to fixing these problems, though. For example, we recently wrote about the first thing you should do to get your money in order (figure out why you want to get it in order). Many of you had other ideas, like:

  • Figure out how to budget
  • Pay off your debt
  • Record all of your transactions
  • Learn about compound interest

These are the basics, and it’s absolutely important to have this knowledge in your arsenal. But these answers miss the point. Personal finance goes beyond this knowledge: it’s personal. And it’s important to understand why money is such a challenge for so many people. That way, we can tackle that challenge at full force and learn how to use those tools.

Money Is More About Behavior Than Basic Rules

Whether it’s basic budgeting, negotiating salaries or lower prices, or investing for the future, people often ask “why don’t they teach this in schools?” Well, they do teach this in schools. The problem is, teaching it is not that simple.

Years ago, I interviewed Laura Levine, President of Jump$tart Coalition, an organization dedicated to bringing financial literacy to classrooms. She told me one of the biggest challenges they face is deciding exactly who should teach financial literacy lessons:

There isn’t a way to identify where all the finance teachers are. If you teach algebra, there’s very little debate that’s in the Math Department. But personal finance might be social studies or consumer science or business. There are a lot more variables…Personal finance and financial education are very complex and very nuanced. We want to make sure we’re really assessing and seeing what makes it effective. But we’re not waiting for a perfect solution to get started.

In other words, money isn’t just math. It’s also behavior. Here are a few behavior-related lessons that helped me get my finances in order more than any rules:

Some financial solutions are indeed pretty straightforward, but in general, if you assume money is as easy as setting up a budget, you’ll probably be really frustrated and disappointed later, when you have trouble sticking to that easy budget. It’s not hopeless, though. When you acknowledge just how much money management money depends on habits, willpower, and other behaviors, you can better focus your energy and effort.

The Rules Don’t Always Work

There’s another reason basic financial rules (like “spend less than you earn”) won’t solve everything: they don’t always work.

For example, when I was in student loan debt, I bucked the “save 3-6 months of expenses for an emergency” rule. Instead, I saved a few hundred bucks for an emergency and focused on paying off my debt instead. I wanted to pay my loans asap so I could properly save for the future, and I had a safety net (moving back in with my parents) to fall back on if times got really tough. I took a chance and bucked the rules, and it gave me the confidence to take control of my finances. Plus, I saved a lot of money on interest. It’s not a smart move for everyone, and not everyone agrees with it, but it worked for me.

The point isn’t to break the rules for the sake of breaking the rules. The point is that life is complicated, and the rules are often oversimplified to the point of being ineffective, just so they can be easily taught to others. They’re so oversimplified, in fact, financial experts rarely agree on them.

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Don’t get me wrong—education is important, whether it’s history, grammar, sex ed, or financial literacy. However, unlike grammar rules, personal finance isn’t cut and dried. A lot of it depends on your individual situation, which makes it complicated.

You have to consider your own financial situation and mindset and do what works for you. Sometimes, that means bending the rules. For example, let’s say you start to pay off debt using the stack method (paying off high-interest debts first). It makes the most sense on paper because of compound interest, but let’s say your debt is so overwhelming, you get discouraged and give up on it altogether. The debt snowball (paying off smaller debts first) may work better. The snowball method bucks the basic rule of compound interest, yet research shows it works better for most people because the psychology matters more than math. In short, people aren’t computers.

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What to Focus on Instead

Okay, you get it. Money management is more about behavior than rules. How do you learn to be good at money, then? Like most habits and behavior, it comes down to practice.

In high school, I was on the soccer team, and I sucked. My coach, bless her heart, explained how it all worked. I had to kick the ball with my foot at the right angle. I had to account for my position when I passed. I followed these rules meticulously, yet I still sucked. Finally, my coach told me, “Forget the rules. Practice your skills.” She put me in more games. She made me practice longer and harder. Eventually, I got better (not great, but better).

You can say the same for money, I think. The rules are useful and necessary, but without practicing your real-world skills, they will only take you so far.

Like a lot of habits and behaviors, the sooner you get started, the better. This is why it’s important to teach kids solid money habits early on (another thing Jump$tart is trying to do). For example, you could:

Many of us don’t grow up learning money skills, though. Our parents were just as bad with money as we are. If you didn’t get these basics yourself, yes, you need to learn the mechanics of building a budget, but more importantly, you need a solid reason to motivate yourself. If you don’t see a need to worry about money, what’s the point in learning skills or rules?

Before anything, it’s important to have a clear idea of why you want to get your money in order, whether it’s to travel more or to support your family. Without motivation, you’re just learning rules for the sake of learning them, and that won’t be nearly as effective as learning the rules to reach an important goal.

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From there, you build better habits when you navigate your weak spots and challenges. For example:

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It’s impossible to nail down the exact habits you need to improve your finances, because, again, so much of it depends on your own situation and personality. The overall point is: when you’re ready to fix your finances, it helps to be prepared for the work that goes into it. When we understand that money is more about mindset and behavior, we’re in a better place to fix the real issues so we can use those rules to our advantage.

Illustration by: Sam Woolley

Beware the “Productivity Spending” Trap

Beware the “Productivity Spending” Trap

It feels good to get stuff done, but sometimes we trick ourselves into thinking we’re accomplishing tasks that aren’t actually very important—like buying stuff we don’t really need.

Personal finance blog Brooklyn Bread explains:

If you can put a purchase off and it is not saving you money to buy it now, then the smart thing is to delay. But my busy-infected neurons are telling me that I am accomplishing something by incurring the cost now…Like checking email 100 times a day, hitting click on a purchase is an easy way to feel like we are doing something that we need to do. If I really wanted to be productive in that small free moment, I should have planned out dinner for the next two nights. That actually would have been productive, and saved money by ensuring I did not order out. I am trying to be a lot more aware of those purchases that my brain disguises as “getting stuff done.”

This post hit home for me. I’ve been spending a crazy amount of cash on Amazon lately, ever since I moved into a new place. Adding a few house-related items to my cart here and there somehow made me feel like I was getting stuff done. In a way, marking these items off my shopping list gave me a productivity high. The problem is, I was wasting a lot of time consuming, plus, the cost of this “high” can add up.

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It’s not to say you should never buy things you want or need. However, it’s easy to convince yourself shopping is productive, and that can be a dangerous trap for your finances. To read more about this, head to Brooklyn Bread’s full post at the link below.

The Productivity Spending Trap | Brooklyn Bread via Rockstar Finance

Photo by Robbert Noordzij

Five Key Rules to Follow When Lending Money to Friends and Family

Five Key Rules to Follow When Lending Money to Friends and Family

Getting hit up for a loan can make you feel like you’re stepping into a minefield. In today’s economy, it’s easy to understand how someone can find themselves in a dark place financially. On the one hand, you want to help out a loved one who’s in need.

This article originally appeared on LearnVest.

On the other hand, you’ve heard the stories about loans gone wrong, with friendships ruined and families torn apart. Also, you may be depleting funds that you might need yourself, says Irene S. Levine, Ph.D., psychologist, author and producer of TheFriendshipBlog.com. Even if you’re sure that the asker will pay you back, it’s hard to know if you should proceed.

To help guide you toward making the right decision, we asked financial experts to share five key things to consider before cracking open your wallet.

Rule 1: Only Say Yes if You Mean It

If you feel guilt-tripped into making the loan by the asker (“I’m desperate!”) or you question your own hesitation (“I must be a bad person or I wouldn’t feel conflicted”), then turn her down, says Levine.

If you do cough up the cash when you aren’t sure you want to, you risk feeling resentful, and that can cripple the relationship before it’s even time for her to repay you. Not going through with the loan doesn’t make you selfish or a bad friend; the response may actually protect your bond, she adds.

Levine suggests graciously declining with a sentiment like, “I’d really like to help, but I don’t have the extra money to loan right now.” If you feel like you need to explain further, mention an unexpected expense you were recently hit with, such as higher health insurance premiums, or something you have to save for, like your kids’ college education.

Offering to help brainstorm other sources for the loan or ways to bring down her debt (if that’s the situation) can be a thoughtful next move. A true friend or relative will be willing to accept no and then thank you for any additional help. If she doesn’t, better that your relationship sours before you’ve forked over any funds.

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Rule 2: Lend Just What You Can Afford to Lose

Your friend or family member may check all the boxes for being trustworthy, financially stable and reliable, but “things can happen that prevent them from paying you back as originally planned,” says Byron Ellis, a Certified Financial Planner (TM) and managing director at Ellis and Ellis, a division of United Capital Financial Advisers in The Woodlands, Texas.

If your loanee does get in a bind, a best friend or family member is going to be relegated to the end of the payback line, “behind the mortgage company, the credit cards, the auto loans, etc.,” says Ellis. Now, imagine your stress level and the tension that would rise between you both if you actually needed that money—and she couldn’t repay you.

Bottom line: Be prepared for the worst by giving only an amount that, if never returned, wouldn’t jeopardize your own savings goals, bill-paying ability or other relationships.

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Rule 3: Create a Firm Repayment Timeline

Ten years ago Emily White,* 43, lent her younger sister $20,000 to buy a house near their elderly parents, without discussing a repayment date for the loan. “I loved that my sister would be there for my parents, and the idea was for her to pay me back once she got settled and found a new job, since she had moved from out of state,” recalls White.

But as it turned out, White’s sister appeared to have another idea in mind. “Now she’s been working for years, yet she hasn’t mentioned anything about payback,” says White. “I had no idea we were on a 10-years-and-counting plan. I wouldn’t be upset, but now I’m considering some investments and that money would help.”

White’s mistake was thinking she and her sister were on the same page when it came to repayment—a situation that could have been avoided if she had a thought-out plan.

It might seem too businesslike, but “set specific terms for the loan that everybody can agree to,” says Ellis. “Discuss how much money will be loaned, interest rates and how long they will have to pay it back.” This way, she’ll know when she needs to come up with funds, and you’ll know when the money will be back in your account.

By nailing down this schedule, there’s also no mistaking this money as a gift, adds Ellis. The loanee also can’t postpone repayment indefinitely and claim she didn’t know you needed it so soon.

As Ellis mentioned above, it’s also wise to charge interest and work that into your repayment schedule. Depending on the amount, loaning money can involve complicated tax rules; failing to charge interest might get you in trouble. To avoid this, you may want to charge the borrower the Applicable Federal Rate (APR) as interest.

Rule 4: Always Put the Loan in Writing

Memories fade, priorities get shifted and clashing opinions over what you originally agreed to can cause problems between friends or family, says Priyanka Prakash, a finance specialist at Fit Small Business and a former business attorney.

Another benefit to having the amount and conditions in writing: Drawing up an official loan document makes it more likely that the borrower will take the loan seriously and pay it back on time. “So if you miss a payment, this is the piece of paper that we’ll look at that’ll help us to decide what to do, so it moves the friendship out of the way,” adds Ellis.

When registered nurse Lisa Schloeder, 49, decided to help a colleague enroll in a nursing assistant program, she wanted the $1,500 loan agreement on paper. “I saw this woman at the office every day, but I still thought it was best to put everything in writing to make sure we both understood what we were getting into,” remembers Schloeder.

Her foresight paid off. “There was a check waiting for me every two weeks as we had agreed, and I felt great seeing what an amazing nursing assistant she became for our practice,” she says.

You can draft a simple personal loan agreement without hiring an attorney, Prakash says. But more complex deals—for example, if they involve collateral or involve more than $10,000—may require a lawyer to be involved.

Ideally, a loan agreement should be dated and state the loan amount, due date

for paying it back in full, the payment schedule and any agreed-upon late payment fee (see Rule 5) or interest. Full contact information for the loaner and borrower and both of your signatures, either handwritten or electronic, are important, says Prakash.

If loaners need help pulling a formal document together, they can opt to search online for a promissory note template, which states the promise to pay someone back and can help ensure that all the important details are covered. In most states a promissory note just needs to be signed by the borrower to be valid, but it’s better if you sign, too, so that the intent of both parties is clear should you have to go to court, Prakash says.

Rule 5: Never Let the Due Date Slide

If your dinero doesn’t show on time, ignoring the lateness or making excuses for not confronting the borrower would be a mistake. She might continue going along as if the due date you set is a loose guideline rather than a rule.

Make it more businesslike, so neither of you feels like you’re taking advantage of the other. “I did this the last time I lent money to a friend,” says Ellis, who suggests putting details about a late penalty in your written agreement; a friend would have to pay the penalty on top of the regular payment. This tactic would hopefully save you from having to send reminders… and save you from regretting your decision to play banker.

A five-day grace period, says Ellis, is reasonable before hitting your friend with the fine, since things do happen. If signs are pointing to more serious delinquency—a number of scheduled payments have been missed and numerous follow-up emails or phone calls from you are ignored—it might be a good idea to consult with an attorney. ”If the borrower still doesn’t pay, you can take them to court,” says Prakash.

In the scenario where one lump-sum payment is being paid back after a long-term loan, it never hurts to send a reminder email a month in advance of the due date to show her that you’re sticking firm to the terms. For example, “According to the agreement we signed, the loan I gave you will be due on June 15. I’ve attached an original copy, in case you’d like to refer to it. So glad I was able to help my cousin out.”

*Names have been changed.

The Golden Rules for Lending Cash to Close Friends or Family | LearnVest


LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company. Image by Julia Tim (Shutterstock).

What You Should Know About the New Social Security Rules

What You Should Know About the New Social Security Rules

Social Security is already a hot-button issue, and recent changes have people really freaking out about it, which makes it tough to get past the outrage and just navigate the facts. Here’s what you should know about the changes.

If you’re not familiar with how Social Security works, it’s okay—the program is complicated and frequently misunderstood, but the basics of taking benefits are simple to follow. Last year, the government signed the Bipartisan Budget Act into law, and the bill included some changes to the rules for collecting Social Security benefits. Those changes recently went into effect, and they axed some smart strategies that helped people maximize their benefits.

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What’s Changed

If you retire after your full retirement age, you usually get 8 percent more until age 70. In other words, the longer you wait, the higher your payment. The SSA refers to this as delayed retirement credits. Up until recently, married couples used a couple of “loopholes” in the rules to get even more out of these delayed credits. The new changes closed the loopholes and eliminate these strategies.

You Can No Longer “File and Suspend” to Activate Benefits for a Spouse

Known as the “file and suspend” strategy, the loophole allowed married couples to delay one spouse’s benefit while the other spouse received a payout on that same benefit. It’s a little confusing, I know, but here’s how it worked in practice.

Basically, one spouse (usually the one who earned more money) would file for Social Security once they reached their full retirement age. Once they filed, Spouse #2 would then file for a spousal benefit, usually half of the full benefit. Spouse #1 would then suspend the benefit, postponing their own payout and letting their benefit grow 8% every year.

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In other words, they file, take the spousal benefit, then suspend. Meanwhile, Spouse #2 gets a check every month, but the main benefit earns interest. You get the best of both worlds.

With the new rules, which took effect May 1st, this is no longer an option for most of us. According to the SSA:

… if you take your retirement benefit and then ask (on or after April 30, 2016) to suspend it to earn delayed retirement credits, your spouse or dependents generally won’t be able to receive benefits on your Social Security record during the suspension. You also won’t be able to receive spouse benefits on anyone else’s record during that time.

When you suspend benefits, you can no longer receive spousal benefits. The new rules don’t apply to people born after April 30, 1950, however. This gives recent retirees a chance to take advantage of the strategy they may have been counting on for income.

No More “Restricted Applications” to Collect Benefits While Sitting On Future Payouts

Along with “file and suspend,” some used a strategy called “restricted applications” to optimize their benefits. Going back to the previous example, this allowed Spouse #2 to receive spousal benefits while delaying their own Social Security benefits, which are separate. This way, both spouses could enjoy the annual 8% increase and still get paid every month.

Not anymore, though. The new rule, which applies to anyone born after 1954, eliminates restricted applications and forces you to take both benefits at the same time. Here’s how the Social Security Administration puts it:

if you are eligible for benefits both as a retiree and as a spouse (or divorced spouse), you must start both benefits at the same time. This “deemed filing” used to apply only before the full retirement age, which is currently 66. Now it applies at any age up to 70, if you turned 62 after January 1, 2016.

So if you apply for one benefit, whether it’s a spousal benefit or your own Social Security payout, you apply for both. Sounds fair enough, but here’s the kicker: you basically only get the higher benefit. The Motley Fool explains:

…that person won’t have the option to collect spousal benefits if his or her own benefit amount is higher. That person will therefore be left with a choice: Start taking benefits and lose out on the 8% annual increase for delaying, or hold off on taking benefits to capitalize on those delayed retirement credits and forego Social Security income in the interim.

That’s not exactly how the SSA puts it, but that’s the gist of what happens and why so many people are up in arms about the changes. Couples could lose out on hundreds or even thousands of dollars every month.

Even though the “Social Security Crisis” is overblown, it’s probably fair to assume that the rules are meant to maintain Social Security funds.

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What Hasn’t Changed

People have strong opinions about Social Security. Many of the articles covering the changes seem to imply there’s been a huge overhaul that eliminates basic perks. This isn’t the case—spousal benefits and suspended benefits haven’t been eliminated or even reduced. However, the rules have changed to close some the loopholes that allowed people to really take advantage of those perks. Those changes could make a big difference for a lot of retirees (or soon-to-be retirees).

The most important takeaway, though, is that delayed retirement credits still exist. You still get an annual increase if you delay your Social Security benefits past your full retirement age. And this perk is the backbone for most Social Security withdrawal strategies. In other words, it’s still possible to strategize your benefits and get more out of them.

Your own approach to collecting Social Security depends on your own situation: how much you earn in retirement, when you plan to stop working, how much your living expenses are and so on. The Motley Fool suggests one common strategy, though:

If you want to take advantage of those delayed retirement credits but can’t wait that long to start receiving Social Security income, assuming both spouses worked, you could have one spouse (ideally, the higher wage earner) hold off on taking benefits while the other claims them earlier. This way, you get some income when you need it while allowing the higher wage earner’s benefits to grow.

The SSA also has a handful of calculators that can help you get an idea of what your own benefit amount will be, depending on when you take it and how much you earn.

Illustration: Angelica Alzona

The Best Metro Areas in the U.S. for Recent College Grads

The Best Metro Areas in the U.S. for Recent College Grads

Where you live can have a big impact on your finances. This is especially true for recent college grads, who are presumably looking for work and paying for new living expenses. Trulia teamed up with LinkedIn to rank the best metro areas in the U.S. for recent college graduates.

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They released their “Graduate Opportunity Index,” which includes info from Trulia’s housing market data and job listing information from LinkedIn. Based on this data, they determined three criteria in their rankings:

(1) the LinkedIn New Grad Job Score, which rates metros based on the share of job openings suitable for recent college grads

(2) Trulia’s New Grad Affordability Score, which is the share of rental units considered as affordable to a new grad based on their median salary, and

(3) the share of total population that is between the ages of 22 and 30 with a college degree.

In general, they found that the East Coast offers better incentives than West Coast cities for recent grads. Pittsburgh, for example, came in as the top city, because of affordable housing rentals and job opportunities. Many of the weakest markets for grads were in California: Los Angeles, Sacramento, San Diego, and San Francisco, for example.

You can read their full methodology at the link below, where you’ll also find detail about the median income for grads in these cities.

Go East Young Grad: America’s Most Grad Friendly Markets | Trulia