Anyone who saw the news this weekend saw the incredible act of generosity by billionaire philanthropist Robert F. Smith, the commencement speaker at Morehouse College, in Atlanta. Mr. Smith paid the student loan debt of the 2019 graduating class- a total grant of about $40 million dollars. For most graduates, however, student loans will follow them long after the diploma is received.

Many students are on the “Student Deferment” program for their loans, but after graduation, payments begin in six months. What do they do next?First and foremost, students must have a plan. They must have a budget. Then three steps: 1. get to paying as soon as possible on a repayment plan, 2. get out of the student deferment before it statutorily ends and, 3. stay out of forbearance in the future. Going into and out of forbearance is the fastest way to grow a student loan balance. Why? Because the interest capitalizes every time the loans go into and out of forbearance, and when students change payment plans. Capitalization means that the outstanding interest becomes a part of the principal balance, and you then pay interest on the new principal. This is a reason that student loan balances balloon.

The first issue, that few borrowers truly understand, is that during student deferment unsubsidized student loan interest already capitalizes quarterly for the length of the deferment. Four years of loans every semester, unsubsidized interest amounts capitalizing every quarter. This is why students graduate with thousands of dollars of student loan debt amounts over what they actually borrowed. So, during school, these loans are growing. After graduation, many students are faced with large payments they cannot afford on the “Standard Repayment Plan” over ten years, so they immediately put the loans into “forbearance” and a payment is no longer due. But once again that unpaid interest will capitalize every time the loan goes into and out of forbearance.

So, what to do? Here are a few first steps.

1. Have a budget and include in the budget the biggest student loan payment you can afford. Things may be “tight” again for a little while but getting right into payments and staying out of forbearance will make loan payoffs faster and less expensive.

2. Download the Student Loan Guide, “Do You Have the Right Student Loan Payment” from my website and follow the steps to retrieve your total federal student loan data from the National Student Loan Database (NSLDS). From there, check your loans CARFEULLY, to make sure they are, in fact, yours. Look at the disbursement dates, and make sure you were attending. Mistakes sometimes happen.

3. Use the Debt Snowball for the individual loans. If you can avoid consolidation, you can stack your loans from lowest total amount to highest, and attack the debt using a “debt snowball.” As each loan is paid, you will have a huge sense of accomplishment, and the motivation to keep going.

4. Avoid Forbearance. If you cannot make any payment at all AFTER your student deferment period ends- call your servicer and get into a payment plan, do NOT go into forbearance. If you graduate this month, you have a few months before the first payment is due. Get moving on these, but if there is an unavoidable reason you just cannot make the payment, get into Income Driven Repayment, or some other plan, and make sure you absolutely re-certify every year. When you go into and come out of IDR, guess what? Your interest capitalizes.

In my humble opinion, it is this interest capitalization that is making student loans hard to pay off. And when people enter into forbearance, it is because there is a short-term issue causing a hardship or some other issue. The servicers will happily put you into forbearance, “so you don’t have a payment due for six months” but in the long run, it actually hurts the borrower financially. We need stronger disclosures.

Best of luck to the class of 2019! May you find your joy and excitement felt during “Pomp and Circumstance” lasts for years as you leave college and embark on the rest of your journey!


image credit: gocollege.com

 

I had the amazing privilege to attend the Consumer Assembly last week in Washington DC, and there was a panel discussion on credit scoring. The panel was actually a discussion on a group of American consumers that are dubbed by the industry the, “Credit Invisibles.” These are people who cannot get a “good” credit score in the typical way, by having open lines of credit that are at least six months old. The industry that scores credit, including the Fair Isaac Corporation (FICO), the developers of the FICO credit scoring models, and Vantage Score Solutions, LLC, the developers of the Vantage credit scoring models, feel that “credit invisibles” are disadvantaged in receiving access to credit products. And they are, but this new model by FICO to address the credit invisibles and those with marginal credit is not good for consumers.

I first blogged on the new “UltraFICO” score back in October in a two-part article series. The first was an introduction to the scoring model and the second was on some unspoken dangers related to judgments and bank account attachment when the credit reporting agencies have you bank account information, which you must consent to disclose under this model.

During last week’s panel discussion I learned more about the purpose of the model, and some facts that have me re-thinking my original posts about how this score may be “OK” for a mortgage product. And I was wrong in my previous posts. The model is not “OK” for any credit. None.

Before I move on to the specifics, I have to take a moment and point out that the panelists, including the VP from FICO from whom I received the information directly, entered into the lion’s den of an audience of consumer advocates, and spoke openly and answered questions about their products. That was a very nice thing to do, and I am appreciative of their honesty. I also know that in their “heart of hearts” they believe that they are helping consumers. It is at that point, I cannot disagree more. Remember, the credit scoring businesses are in the business to help people get and stay in debt. Any model that they can create to help consumers access credit is good for them, not necessarily for you. They sell these models. You are denied under one, they offer a second. Here are five “Fun Facts” about the UltraFICO:

1. The “UltraFICO” will be marketed, and is intended, for all types of credit not just secured, collateralized mortgages. In my original post, I speculated that the releasing of banking information to show the history of cash transactions might be “ok” or even great for mortgage lending, the only good use I could envision for this model. Well, when you apply for a mortgage, the banks take your last months of bank statements anyway. So, for that credit product, this appears to be moot. The UltraFICO will be available to all creditors who wish to purchase it.

2. The UltraFICO is intended to be a “second chance” credit scoring model. This little piece of information was new to me, and this is the first indication that it is not good for consumers. I originally believed that borrowers could just “opt-in” to this model by consenting to include their banking info. Actually, this is intended to be an option for people who would be denied credit in the original model. The credit denial becomes a “maybe” and the borrower has the option to “consent” to include their banking info in the hopes that their credit score will go up and they can be approved.

3. The Premise of the UltraFICO by Fair Isaac is faulty. One telling thing about this model is the statement by the panelist that the checking account information would be reliable because, “Consumer’s are in control of those accounts.” I disagree. I had a debit card number stolen and used in a fish market in Mexico. Filed the report, got the money back, but in this day and age of data breaches, I would never make the statement that consumers are always in control. FICO assured us that their model would be able to determine these little situations and not count them, but the scoring models are not transparent. All types of situations can arise where a consumer, for a period of time, may not be in complete control of every transaction in their account.

4. The UltraFICO model needs two to three years of banking information. Ah, another tidbit of info I was previously lacking. To use this model, consumers must 1. not have bounced a check in the last twelve months 2. Have at least two to three years of checking account information available for the model and 3. Have an average balance of $400.00. Good to know. 78% of consumers live paycheck to paycheck. There are many consumers that cannot maintain an average $400.00 balance after bills are paid and groceries are purchased. The VP assured us that in the beta-testing, using Experian as the Credit Reporting Agency (CRA), most consumers had their score increase under this model. But this now provides the information that a consumer may know they do not have, and “opt-out” of the model, rather than be denied AND have a score decrease.

5. Your banking info will be out there to the CRA, including “new” Finicity, who will become a CRA to comply with the Fair Credit Reporting Act. A fourth CRA will enter into the picture, Finicity who will be the CRA for these UltraFICO banking information providers to FICO for scoring. Because FICO never sees anything but the “raw data” they have zero, none, no liability for what happens to your info. Under this model, FICO assures us that it will be a “single use” calculation of the borrowers banking info. Okay, what happens then? The CRA and the creditors are responsible for protecting the data and are subject to the FCRA, so, it’s good. Or is it?

Data breaches have recently revealed sensitive info that an identity thief can use to create an account, such as social security number and date of birth. But now, a breach can put your banking info at risk, no need to create a fake account when they can raid yours, or use the UltraFICO themselves. How many additional hours will consumers add to the identity theft cleanup mess when the bank must investigate everything, and to close that account could subject the consumer to bounced checks and whatever else. But, you can file a dispute with the Credit Reporting Agency online. Eyeroll.

If you are purchasing a house, find a bank who will perform manual underwriting, and do not use the UltraFICO to provide your banking account information. Please. Your info will be out on the internet for who knows how long. Even if the CRAs pinky swear to delete it. For other types of credit, if you are going to be denied without this info- you are going to be denied. The interest rate is likely higher than you would expect anyway once the UltraFICO model is used. And for the car dealers and others who will “deny” people initially to access their banking information for approval, we know, we know. If you give a mouse a cookie, he will want a glass of milk. Protect your banking from the UltraFICO.

 

“The hospital is saying that if we need a lower payment, we have to take out a loan.” I wouldn’t have believed it myself, but that statement came from my client. I actually was at a loss for words. “So, if you do not make the minimum payment the hospital has set you up with on the “plan” they won’t accept any payment at all?”  Apparently, that is what the hospital told them. So, what to do if you are faced with this issue? Let’s talk about it.

First of all, the hospital is not required to carry your debt balances. They can decide that they will make payment plans with patients, provided the debt is paid in 12 months, or 6 months, or whatever. To be honest, medial providers of all types, private doctors, hospitals, labs, etc, are often very quick to turn an outstanding medical debt to collections. It is that fear of collections that can cause consumers to make mistakes in handling these debts.

About 18 months ago, on September 15, 2017, the three credit reporting agencies, Equifax, Experian, and Transunion changed the way they report medical collections on the consumer’s credit report. These changes were designed to help consumers who are paying medical bills on a payment plan or are waiting for insurance to pay some or all of the outstanding debt. I wrote about this briefly in an earlier article, it is not unusual for insurance claims to be filed with errors, and payment is delayed.

What to advise my client? Well, if you cannot afford the payment, and it was a very large payment, the bill will probably be sent to collections, but until it is, make your lower payment amounts to the hospital. Do not stop paying because you cannot afford the amount they are asking. And I gave them the same option I am going to share here. These are the things to consider if your hospital is threatening to send you to collections because you cannot afford their plan.

First, DO NOT take out a loan or put the balance of a medical debt on a credit card. It changes the “character of debt” from medical to “personal loan” or “credit card debt.”  The reporting agencies will not report a medical collection on the consumer’s report for 180 days, that’s six months, after the account is sent to collections. This gives consumers six months to pay the debt in full. If you change medical debt to anything else, you are adding interest, and any late payment can be reported.

Second, many medical collection accounts can be removed, once they are paid. In certain scoring models used by creditors, paid medical collection accounts do not factor in at all, even if the paid debt is not removed.

Third, there will be more flexibility to lower your payment each month with a collection agency. Collectors want a payment. Period. If it takes longer than six months, see above.

Fourth, do not make the medical debt payment at the expense of any of the family’s “four walls.” Food, utilities, rent or mortgage, and transportation are the priorities with your income. PLEASE do not put your “FICO” in front of the electric bill or pay the debt before you get food in the pantry.

The last little tidbit of news here is that the credit reporting agencies must remove any medical collection account within 45 days after it is paid in full by insurance. As I said earlier, mistakes in claim filing, not by the consumer, but by the provider, can delay payment beyond the six months.

 

I am a lawyer, so it may be odd that I recommend to many people that they should try financial coaching as an option before filing for Chapter 13 bankruptcy. It is also, in many cases, an unpopular opinion with both consumers and some lawyers. I’ll get this out of the way upfront. Yes, I can take a bankruptcy matter, but I find there are many cases where it may do more harm than good. It is also tax refund season, and many people wait for their refund to file so they can afford the bankruptcy filing fees. In fact, I have received a few calls in my practice about it lately, so I thought I would get my rationale into an article.

First, a few bankruptcy basics. When most people think about filing bankruptcy, they are referring to a Chapter 7. A Chapter 7 bankruptcy (meaning filed under Chapter 7 of the Bankruptcy Code) wipes out or “liquidates” almost all of the debtors unsecured debt, but there are exceptions. As well as some rules regarding secured debt such as cars and mortgages. It’s not just a wave of a magic wand, and since 2008, requires the debtor “pass” means test, if the household income is below certain thresholds. There are of course special exceptions, and what law doesn’t have exceptions?

What if the consumer “fails” the means test? Then the bankruptcy code they are eligible to file under is a Chapter 13. A Chapter 13 is basically a court approved repayment plan to creditors. The bankruptcy filing creates an estate, and a bankruptcy trustee manages the repayment for three to five years until it is completed and the bankruptcy (estate) is discharged.

So now we know the basics, why coaching before filing? My top three reasons.

First, the consumer keeps control of his or her income while debt is paid. When a consumer files bankruptcy, all of the debts and all of the income are listed on various “schedules.” The consumer’s assets, meaning property, bank accounts, disposable monthly income, etc. become the “bankruptcy estate.” This includes the consumer’s income, because it is what the filer is promising the bankruptcy court he or she will use to repay the debts. A repayment plan is submitted to the court, and if approved, the estate (with the payment plan) will be managed by a bankruptcy trustee, who works for the court.

So, the consumer no longer gets to control his or her income. It is an asset promised to pay debts, and all debts are paid from this estate for the length of time that bankruptcy is in repayment. This also means that any income increase, such as a raise or bonus, at any time the estate still exists will belong to the trustee. The trustee may demand that more money be paid to the creditors, particularly if the increase exceeds 10% of the consumer’s current income. And you cannot lie to the court. Never a good idea. And most of the time the consumer must submit personal tax returns to the court annually anyway. This is for as long as the estate exists.

Only after discharge will the consumer regain control. While it is true a certain percentage of the debt can be discharged at discharge, most of the debt must be repaid. The general rule is that at least as much of the debt that would have been discharged if the consumer qualified for a chapter 7, and the court can order more based on disposable income and assets.

Another note, if the consumer owes family money, and pays some of it back in the months preceding a bankruptcy filing, the trustee, under what is known as a “claw back,” can demand the family member return the money so it can be added to the estate. This is because the court will presume that the money was paid to a “preferred” creditor.

Second, coaching can help change attitudes and habits, a bankruptcy often doesn’t. Consumers are already required to go through a credit counseling type personal finance class before filing any bankruptcy and again before it can be discharged. I can’t speak to the effectiveness of these courses. But you can potentially see the limited change in money habits these courses have by looking at the average of Chapter 13 bankruptcies that successfully make if the full five years to discharge.

Only about one in three approved payment plans makes it through to discharge. Yup. Only about 33%. Yikes. Another statistic? Approximately 8% of bankruptcies are from re-filers, which account for about 16% of annual filings. More than 1 in 20 filings each year are from consumers who already filed once before. Yes, life can happen to anyone, and I am not here to judge, but if the consumer worked with a Ramsey Preferred Coach, I would take a bet that there would have been an emergency fund prior to that second filing.

When someone works with a coach, the repayment of debt comes not from fear of the court or trustee, but from a sincere desire to change from habits that can be personally harmful, to those habits that give peace of mind. The “not owing a monthly payment to anyone who charges a $39.00 fee if you are one second late with a payment” peace of mind. Also, a coach can keep you accountable. How can you forget to budget if you meet with a coach each month for a while? What if something comes up and you have a question? There is a coach walking beside you for support. Coaching is not forever either, and many people don’t even need three to five years of coaching, unlike a Chapter 13.

Third, the consumer may be asked about filing a bankruptcy long after it is removed from a credit report, and it may affect future opportunities. I find this to be a heartbreaking fact that many people do not really consider prior to filing. Everyone is thinking about the credit report, the “ten years” hit in the “public records” section. But that is just one part. Consumers are often asked on a job application, mortgage loan application, security clearance application, “Have you ever filed bankruptcy?” Which is not the same as, “Have you filed bankruptcy in the last ten years?” And the “have you ever” question must be answered YES. This can lead to loss of some future opportunities that were never even thought of before.

Jobs in law enforcement, for example, are difficult to obtain after filing. Not to lie, even getting a license to practice law can be a challenge because an applicant may not pass the Moral Fitness requirement. Military or government jobs requiring a clearance may be an issue. So, while there is protection against losing your job during a bankruptcy, and protection from discrimination at your current employer, no such protection exists if you try to change jobs later in private industry.

And that’s it. My three biggest reasons for advising consumers to try coaching first, before filing a chapter 13 bankruptcy. If you or someone you know is in a financial situation where bankruptcy has been raised in conversation, you (or they) may want to have a chat with a financial coach, first.

The Fair Issacs Corporation, the creators of the mysteriously calculated FICO Credit Score, are changing the scoring method using new criteria, again. In early 2019, a new scoring method will allow consumers to contribute their banking information to a third party, Finicity, which, “allows Americans to benefit from positive financial behaviors.” The idea is that if you are newer to credit, or have a lower score, the credit bureau can have a look at your checking, savings, and money market accounts to check your credit worthiness. One argument in support of this new approach is that consumers do not currently have any input into their credit scores, because the FICO is calculated only on debt account data submitted by creditors and lenders.

Fair enough. What could possibly go wrong?

From my lowly perch, a lot. First of all, while the consumer will have a choice of accounts to include, they will not have any control over how it is collected, and whether the information is kept by the credit bureau. The process, as published in the Wall Street Journal, is as follows,“Experian will compile consumers’ banking information with help from financial-technology firm Finicity and will distribute the new score to lenders.” Yeah, read that again, Experian will send a summary of consumer bank accounts to lenders. FICO won’t keep any of that information after the score is calculated, but the credit bureau will have your banking Information.

Anyone hear about the hack on Equifax? Anyone? Of course, you have. Well, have you heard about the Experian hack? 15 Million T-Mobile customers personal data was hacked via Experian, including social security and passport numbers. Lovely. Since I don’t use T-Mobile, I am already standing in line to provide my banking info. Eyeroll. It’s already happened once, and they will not be less of a target if they are the bureau with your bank accounts.

Cybersecurity aside, who here believes that when the UltraFICO is available, creditors will accept the FICO? Lenders know the consumer can opt in banking information, so why not rely on the UltraFICO for lending decisions? This is the plot from the classic children’s book by Laura Joffe Numeroff, If You Give a Mouse a Cookie. The lesson? If you give a mouse a cookie, he will want a glass of milk, then a straw, then a napkin, and on and on.

So, why the change? Benevolent Credit Bureaus? Hardly. Since the housing melt down, the pool of traditionally “highly qualified” borrowers shrunk. The change is due to lenders requesting, “credit-reporting firms and FICO to figure out a way to help them boost lending without taking on significantly more risk.” Oh.

As a consumer law advocate, I see danger ahead. Who would be “at fault” if banking information is compromised? Any hack could mean consumer’s accounts are cleaned out until the necessary fraud investigations are completed, and the money is returned by the bank. Missed or late mortgage, car payments, or utility bills can have consequences and mean financial insecurity for the most basic needs of a family. Will your mortgage company waive the late fee if it isn’t your fault? Will the electric company leave the lights on? If not, late fees on every bill owed by the American family could add up to hundreds of dollars. And over 75% of families already live paycheck to paycheck. In my humble opinion, a “free” 12-month credit monitoring product is not going to repair that mess. Or, maybe I am just a cynic and Fair Isaacs is looking out for consumers.

 

photo:credit.org

This past weekend consisted of various discussion with the (grown) children about Halloween costumes for the grands and some early planning for the holidays, and it hit me, we are close to the 2018 holiday season. This year has flown by, way too quickly. And now there are only 12 weeks until Black Friday, or for many people, six paydays. But before you close this article, call me “scrooge”, and delete me from your friends list because I want to chat about the Black Friday in September, give me a moment, and I will explain. So why is “Black Friday” my measure of the season and not the actual festivities on, say, Christmas or Hanukah?? Because that shopping day after the turkey traditionally “kicks off” the holiday season. And the spending begins for many. And we love to spend.

In 2017, consumers spent an average of $967.00, between Black Friday and Cyber Monday, accounting for approximately 20% of ALL annual online shopping those days. The amount budgeted on gifts for children has averaged about $500.00 per child, relatively unchanged over the last few years. But gifts aside, there are other expenses around the big season from food, wrapping paper, shipping costs, travel expenses, and new outfits that don’t always make it into the average household budget. In fact, last year almost two-thirds of the average holiday budget went to “non-gift” spending.

All these articles quaintly mention the “holiday budget” as if this was planned in advance. I really don’t know anyone, myself included, who likes a holiday budget. Because sometimes I see something and think, “wow, this is great for…”and want to purchase that thing. For many people, the total holiday cost is really only unveiled after the revelry as the statements start coming in the mail. And the reality comes in January that for too many people, they blew out past the budget, and accumulated quite a bit of debt for the season. The average American woke up in January 2018 with over $1050.00 in DEBT. Not what was spent as a whole, but what they spent in the hole to finance the season. For the 78% of average American families living paycheck to paycheck, an additional $1000.00 in debt, and at incredibly high interest rates, is a burden.

Good news, we all have twelve weeks, or an average of six paychecks to squirrel away some cash. But even better? Companies with seasonal hiring opportunities are at the best it has been in years, and with low unemployment, retailers are competing for seasonal employees. The reported average wage is $12.00/ hour for temps, but Costco is reportedly paying $20.00 and hour!

It’s not too early to start to plan the season. And not just where you are going for dinner on which days. It’s time to think about how to pay for it. Too many people raid emergency funds and take loans from retirement accounts to fund the holidays. And because these holidays come every year, it can become a vicious cycle. But, with all this time available before the shopping and revelry begins, that second job, or extra shift, or part-time side hustle may be just what you need to make this season “Merry and Bright.”

source: imtresidential.com

 

Around this time last year, the three credit reporting agencies had to change their rules (due to an agreement with several state’s attorney generals in 2015) surrounding reporting of a consumer’s medical debt in collections. Now, they basically have to give consumers a standard 180 day “grace period” before reporting medical collections on the consumer credit report. Another reporting change requires the bureaus to remove a past due medical bill that is later paid by insurance.

For many Americans, the increase in medical debt is due to higher deductibles and out of pocket costs for healthcare, timely payment by insurance to providers, and the decision by insurers that a provider was “out of network” resulting in a lower reimbursement and the outstanding costs passed on to the consumer. A fun little statistic related to the rules change is that up to 80% of bills submitted by providers to insurers are incorrect the first time. So insurance doesn’t pay them, the bills must be corrected and resubmitted for payment. This results in delays in settling medical bills. Sometimes for months.

The 180-day reporting delay is good for consumers with medical debt because these bills are often passed to collections quickly, within 30-60 days after the payment was due. Faster than many creditors will pass off non-medical debt accounts. This allows time for consumers to deal with insurance, pay their medical bills, and work on billing disputes even if the account is with collectors.

It is important to note that, while it is true that it will no longer have as big an impact on the “FICO” and VantageScore credit scoring models for 180 days, other credit scoring models that lenders use have not adopted this approach. So, you still need to watch your credit report if you are facing medical debts in collections.

Here are a few other things to consider if you or someone you know is facing medical debt:

• You are not alone. Around 43 million Americans had medical debt on their credit reports last year. The average amount of medical debt in collections was $579.00 last year. With 78% of Americans living paycheck to paycheck, this is a large enough number to cause financial hardship.

• While medical debt should NOT be ignored, if you are struggling with debt, it should be given a lower priority than other consumer debt, such as credit cards and personal loans. To do this, the medical debt must remain a “medical-debt,” meaning do not borrow or pay these debts with a credit card.

• Collectors will often try to push you to pay the bill, even suggesting you just put the balance on a card. But if you pay the medical debt with a credit card, you can limit your ability to settle the debt, or seek financial assistance from the hospital or other agency. You can stop collectors from calling by making your request in writing. You just need to send a letter.

• There are statutes that protect consumers who owe medical debt from being turned away from the emergency room for medical care. And, according to the National Consumer Law Center:

“If you request financial assistance from a nonprofit hospital, the hospital cannot deny you care in any part of the hospital because of an old bill until it determines whether you are eligible for financial assistance. You usually have about eight months (240 days) from when you first received the old bill to request such financial assistance.”

• Medical debt is a big reason for bankruptcy, but not why you think. When people are too ill to work, income plummets, savings can be exhausted and often medical debt was transferred to credit cards.

Remember, you now have 180 days to get medical bills handled before they hit your Equifax, Experian, or TransUnion credit report. You can dispute anything erroneously reported and have the records of medical bills that were paid by insurance removed.

NOTE: I am not an insurance agent, I don’t sell any policies, and that is best left to the professionals in the field. This is just mine and my husband Mike’s story. A story about what we wish we knew to protect our family as small business owners. I am sharing primarily because it is a money topic, and many, many people have small businesses that generate at least part of the family’s income each month. I am just going to share our raw story, and our mistake that closed our company, threw us into severe financial difficulty, and took three and a half years to dig out. Also, this post is not about life insurance, the most obvious, or even insurance for our physical business. I want to share the types of insurance that we didn’t know about but can perhaps prevent financial ruin for another family. 

When Mike wanted to start a consulting business in 2011, I was so excited. And it was great. It really was. Mike and I followed the state guide, took all the legal steps, got our licenses and set up our office space in our home. Then we took courses through the Small Business Administration, met with awesome advisors through SCORE. In short, we followed the “rules.” We had a business plan, a (now defunct) website, worked hard, read everything, learned a lot, make a ton of rookie mistakes, embraced them, kept going. After about a year or so, we thought we had it figured out. And for the business, we sorta did.

But today we talk about UNEQ Consulting (pronounced unique), LLC, in the past tense. Because it’s been gone since March of 2014. Because on November 1st 2013, Mike was working at a site in Eufaula, Alabama and fell head first 18 feet off of a ladder. Onto concrete. Yup. In three seconds, our life was changed forever.

Here’s why it’s important. Because what we didn’t do, and really never thought about, was protecting our family as self-employed small business owners. Mike survived the accident. Thank God. Had he passed? This is a different conversation. But Mike survived, with a severe head injury and years of rehabilitation ahead.

So, here’s the short list of what we wish we knew:

• What types of insurance we needed to protect our family- not just the business
• The importance of disability insurance on Mike, or “business continuity” or Key Man insurance.
• That in many states, unemployment insurance is for the employed- just not the self-employed
• And that Social Security has an “exclusionary” period for around five months, where even if you are approved, there is no back pay
• Oh, that we shouldn’t incur debt, because we had debt. For example, credit cards “we paid off every month” until the deductibles started needing to be paid, and I had to choose
• We wish that for all of the business preparation, that we would have been told to go and speak with someone about what we may need for this unlikely situation.

This November 1st 2018 will mark five years since our life changing event. Mike has made an amazing recovery, but it has taken years of digging in and working hard to recover financially. We paid it all in full, including the IRS lien on the house (for back self-employment taxes), and have sworn off debt. We hope that this post reaches just one person who needs to read it. Please share our story with every self-employed person and small business owner you know.

When a debt is in default to a federal agency, notably student loans for many Americans, a debtor’s wages can be garnished without a lawsuit through a process known as “Administrative Wage Garnishment” (AWG). This process is different from garnishments based on having a judgment against someone after a lawsuit, because the Treasury does not need to obtain a court order to have an employer withhold up to15% of an employee’s “disposable income.”

Now, there are specific rules surrounding these processes to get you to pay back the debt. For example, an employee must be at the current job for at least 12 months, and the employee left the previous job involuntarily through something like a layoff. But generally, they can take your money, right out of your paycheck, without taking you to court. And it can be frustrating and scary because the agency is in control of the money, and you are short and have other bills to pay.

The Debt Management Service

The Debt Management Service and their Office of Debt Management (ODM) is basically the Treasury’s collection agency. In addition to AWG, there are other processes that can be used to collect on debts owed to the government, such as taking tax refunds to apply to debts, called an “offset.” If you are a Veteran receiving disability compensation, or a retiree, your money can be garnished to satisfy an ODM debt. In fact, your entire monthly disability compensation benefit can be taken. If you receive a Social Security check, and are, or your student borrower is, in default, they can garnish your social security check. Not kidding here.

This post is meant to be a strong reminder that nobody should ignore federal debts. Again, getting a letter from a government agency can be frightening. Period. The Internal Revenue Service (IRS) is the best known, and there are a ton of ads on tv for help with “tax debt.” But these other types of federal debt? Many people are surprised at the power these other agencies have. Not unlike the IRS.

If you are being garnished, and you do not owe a debt to the agency, my suggestion is to contact a lawyer immediately. You may be a victim of identity theft, or the treasury may have wrong information about the debtor, and you are unfortunately targeted. There are stories of two “John Smiths” with a single digit off on the Social Security or account number. Make sure you do not ignore the notices that you may think are just mistakes, you may end up with a paycheck surprise. Not in a good way.

Steps You Can (and should) Take

Student Loans- if you are more than a few months behind in payments, know that after 270 days they CAN intercept your tax return and garnish your wages. If you take steps, such as contacting the servicer, there are steps to take. If you are already in garnishment, get some legal or financial help to see what you need to do to “rehab” your account and stop the garnishment.

Other Federal Debts- similar advice, contact the Treasury Department in charge of collecting your debt, or get legal or financial help in dealing with the agency. For Veterans there may be an option for a waiver, or a payment plan so you receive a portion of your compensation while paying back principal debt.

Final tip. Remain calm and respectful. If you receive a letter, call the numbers on the letter. If not, here is the general contact site for the Treasury Collections Department. You can take back control of your money, even if you are being garnished by a government agency. Get a plan, get help if you need it, and you can get through it.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Law Office of Dawn K. Kennedy or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

 

 

This post is primarily for rising seniors and their parents. First and foremost, congratulations, you are almost done! This is that big year with lots to do and lots to plan. This is THAT year of Senior Prom, Yearbook quote, and ditch day (but not by YOU of course.) You have worked hard, and graduation is right around the corner. With school starting again in a few, it’s getting real. This fall you will likely start the application process for your next step. But before you race off to the exotic out of state private school, I want to talk a moment about the one thing often overlooked at this time in your life: College is a business decision.

Every investment requires thoughtful consideration, and education is an investment. With the student loan debt in America approaching $1.5 Trillion, and graduates being saddled with college debts as long as 25 years, your selection should take some real cost-benefit examination. A quality education does not only come from the expensive private schools. I hear all about the “College Experience” students “should” have,however, student loan debt is currently being blamed for 1 in 8 divorces in the United States. Turns out high student loan debt gets in the way of buying cars, homes, and starting families.

Know the Cost of Attendance Vs the Cost of Tuition (per Credit Hour)

The high education figures we all see thrown around in the news are typically the amounts published in the estimated Cost of Attendance. Each school publishes the cost estimate per year for parents and students, but primarily because, “This estimation may also be used by financial aid offices and loan companies to evaluate how much money they should loan a prospective student based on how much money they will actually need to attend. Each year, the average cost of attendance typically increases.” The cost of attendance estimates room and board, fees, transportation, tuition, and books and materials.

The actual cost of your education, the Cost of Tuition, can be determined by looking at the cost per credit hour, which is a very different number. Published in an article by Student Loan Hero last January, here are the current national averages of costs per credit hour:

• Four-year, public: $324.70
• Two-year, public: $135.09
• Less than two years, public: $281.17
• Four Year Private: $1039.00

Keep in mind, these are the national average, and your state or private school credit hour cost may be higher or lower. But let’s do a little math here. A four-year bachelor’s degree is around 120 hours or so. A four-year public school at $324.70 is about $38,964.00 for all four years. That’s under $10,000.00 per year. Compare that to the four-year private school average, the same 120 hours will run approximately $124,680.00. Before you buy a book, get a sandwich, or go to your science lab. In many parts of the country, that is the cost of a starter home. Still, $10,000 a year for a four-year public school is a lot of money.

Another option is to get your pre-requisites, such as English, Social Sciences, Western Civ and Math courses done at a two-year college. Let’s math again. If you complete 60 hours at Community college, you’ll pay an average of $135.09 a credit and $8,105.40 total. A little over $4,000.00 a year, and a savings of 60% off the four-year public university option. For many families, this is a wise decision.

Even more wise, is to “cash flow” or pay for tuition in cash each semester. With a full-load averaging 15-16 credits, each semester would cost about $2,161.44. Add books and fees, and you are still probably coming in at about $2,800.00 a semester or $5,600.00 a year. If you start working this fall, you need to save about $467.00 a month to fund your first full year at a two-year public school.

So, Why Cash?

Using Loans increases that cost per credit once interest is added! Looking again at the cost per credit hour, each credit costs more, when you take out a loan to pay for it. As of the article published in January 2018, the Department of Education has interest on federal Direct Loans at 3.76% APR. That is an effective rate of about 20 percent over 10 years. Adding that interest to each credit changes the cost:

• A two-year public-school credit at $135.09 would cost $162 over 10 years ($27 in interest)
• A four-year public-school credit at $324.70 would cost $390 over 10 years ($65 in interest)

Mathing again, the 60 hours at Community College can grow to $9,720.00. An increase of $1,614.60, then interest is also added on the books and fees if you have a loan for each semester to cover those as well! Think how great it would be to finish college without debt. To make that investment in yourself in cash, it takes planning. A combination of work and saving, living cheaply or at home, and getting any shortfall through scholarships (try My Scholly) should all be part of your smart education investment. Enjoy your senior year!