Lynn Brenner's Family Finance

Can My Creditors Seize My Daughter's Trust Account?

Q: I've gotten into trouble with creditors because I've been unemployed for some time now. I manage a New York State trust for my daughter, which was set up by my parents. It is registered using my Social Security number. Can my creditors invade or freeze this account? -- FW via email

A: No. Your creditors have no legal claim on this money because it doesn't belong to you.

As the trustee, you're responsible for managing the account and distributing its assets to your daughter according to your parents' instructions, but you don't own it. You should take two steps to make this clear.

First, the title on the trust account should reflect its actual ownership. If your daughter's name is Charlotte, for example, and your name is Frances, the title of the trust account should be something like 'Charlotte Smith Trust, Frances Smith trustee.'  Ask the bank, brokerage, or mutual fund company where the account is set up to use the appropriate language; every institution has its own wording.

Second, the trust account shouldn't carry your Social Security number. That's going to confuse the Internal Revenue Service, as well as your creditors, because any income earned in the trust account that's reported to the IRS under your Social Security number will be reported as income to you.

A trust is a legal entity, and should have its own federal tax ID number. You can apply for one online. To learn more, go to www.irs.gov and download IRS Publication 1915, 'Understanding Your Individual Taxpayer Identification Number'.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.
(c) Lynn Brenner, All Rights Reserved.

Should I Tap My Savings Account to Pay Off a Loan?

Q:  I have $28,000 in the bank earning 1.4%, and I also have a car loan on which I pay 5.75% interest. The remaining balance on the loan is $8,751, in forty-two more payments of $208.37 per month. But if  I pay the loan off right now, I'd only have to pay $7,775.  So I could save $976.

I have no other debt, my FICO score is good, and I'd like my credit record to be super clean. I pay off my credit card every month. I've been advised by a friend that paying off this car loan would be a good idea. Your thoughts? --LW via email

A: I agree with your friend. Paying off the car loan is a good idea.

People who are careful with money, as you clearly are, sometimes consider a savings account almost sacrosanct, and don't want to tap it for anything but an emergency. But as your situation shows, this doesn't always make financial sense. 

The basic rule of thumb for figuring out whether to keep your money in an investment or use it to pay off a loan is compare the interest on the loan with the interest you can earn on the investment.

If the loan costs you more than you're earning on the investment, it's sensible to pay off the loan.

(Bear in mind that comparing the cost of a loan with an investment return is valid only when you're talking about a predictable investment return. The cost of the loan is a sure thing. To make a bona fide apples-to-apples comparison, the return on the investment must also be a sure thing -- i.e., a guaranteed fixed rate of return. Or to put it another way, it's unwise to borrow, even at a low interest rate, to invest in a stock that's certain to triple in value within the year, or to put money on a horse that pays 20 to 1 and can't lose.)

You're earning 1.4% on your savings account, before taxes. The car loan costs you 5.75% after taxes. The interest isn't deductible unless this is a business car, notes Barry C. Picker, a Brooklyn NY tax accountant.

Paying off the loan makes sense. In addition to reducing the total cost of the loan, an immediate repayment will put an extra $208 a month into your pocket -- and in a perfect world, says Picker, you'll deposit it in your bank account.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Is This the End of Credit Card Rewards Programs?

 

Q: I charge virtually everything on my credit card -- groceries, gas, subscriptions, clothing, gifts, etc.  I pay no annual fee. I pay no finance charges because I pay my balance in full before the due date. I get air miles with no restrictions. The card issuer checks my account for suspicious charges, and sends me an annual print-out at tax time and numerous mailings during the year.

 I’ve sometimes wondered how it benefits the card issuer to keep me as a customer, since they seem to be giving me all this for nothing. Now, I’ve heard some card issuers are saying they won’t be able to give people like me a `free ride’ anymore because the law is going to limit what they can charge people who are less creditworthy. Is that true? -- MH, via email

 

A: ‘Free ride’? Give me a break! Credit card companies make a ton of money on customers like you. Despite their threatening noises, I doubt they’ll risk losing your business by taking away all your perks.

 Congress is about to enact a new law that will curb some of credit card issuers’ most outrageous practices. You haven’t suffered from these practices because you pay your balance in full; but they've trapped millions of Americans into ever-spiraling debt.

 Among the changes:

Under the new law, card issuers won’t be able to retroactively change the interest rate on an existing balance until the account is at least 60 days delinquent. And they won’t be able to let you go over your credit limit and then charge you a fee for it, unless you’ve specifically agreed to pay for over-the-limit transactions.

 One thing the law won’t do is cap interest rates. Card issuers can still raise them – just more slowly, and with greater disclosure.

 Nevertheless, the credit card industry is unhappy about the new restrictions.

Some industry spokesmen have said card issuers will make up lost revenue by imposing new charges on cardholders who pay their balances in full.

They’ve even had the gall to suggest that until now people like you have been enjoying a free ride.

Want to know how these companies make money?

Their biggest chunk of revenue is the interest paid by people who carry balances -- an estimated 60% of all cardholders.

Then there are cardholder fees: annual fees, late payment fees, over-the-limit fees, etc. (And until the new law takes effect, paying your credit card bill even a day late can automatically trigger a higher interest rate on your outstanding balance.) Issuers even charge you a $5 to $15 fee for the privilege of paying your balance on time by telephone – another practice the new law will ban.

 But they also have another important source of revenue: They collect fee income from every merchant who accepts credit card payments.

 And that’s where customers like you come in.

 The card issuer gets about 2% of every dollar you charge on your card, says Greg McBride, an analyst at www.bankrate.com.  When you make a $100 purchase, the merchant only gets $98. The credit card issuer gets $2. 

You can be sure that merchants add this extra 2% cost right back into your purchase price whenever possible.

For most merchants, this is a worthwhile trade-off even if they can't build the entire cost into their prices, because accepting credit cards boosts their sales. (But as you've doubtless noticed, some businesses still don't take credit cards. A great steak-house or a beloved local veterinarian, for example, won't lack customers even though if it only accepts cash and checks.)

 Merchant fees are the credit card industry's second biggest source of revenue, says McBride. It’s an especially valuable source of revenue, too – because it’s stable and predictable. The card companies'  interest income is bigger, but it fluctuates along with interest rates.

 That's why your credit card issuer has gone out of its way to keep you happy: You put everything on your card -- and your purchases generate a steady stream of merchant fees. My prediction: most card issuers will stop short of changing their fees and rewards in any way that would seriously risk losing that income to a competitor. 

(For a terrrific column about how incredibly badly the credit card industry treats its best customers, see Mark Gimein's piece here: http://www.thebigmoney.com/articles/money-trail/2009/05/19/their-own-interest )

 

How Far Can A Collection Agency Go to Collect A Debt?

Q: How far a collection company can go – legally -- to collect a debt? There’s a company calling our family members and even our neighbors. They’re looking for my son, who owes a debt. Is this legal? How can we stop them? My son is away in school and unable to pay at this time. -- CE, via email

A: The quickest way to get the collection company to stop calling is for your son to respond to them.

His first step should be to ask them to send him a written statement that includes the amount they say he owes, the name of the creditor, and the procedure he should follow if he thinks that in fact, he doesn't owe this debt or has already paid it.

Everyone who gets a call from a collection agency should request all this information in writing.

You’re legally entitled to receive it under the federal Fair Debt Collection Practice Act.

The same law prohibits collection agencies from calling you at home at ‘unreasonable’ times. That means they can’t call before 8 a.m. or after 9 p.m.

The law also says they can't call you at work at any time if you ask them not to.

It's also illegal for them to curse, insult or threaten you.

They are allowed to call your friends, neighbors and relatives -- but only in order to locate you. They can't call these people repeatedly. And unless they have your permission to do so, they can't tell anyone except your spouse, lawyer, or cosigner that you owe a debt.  

 If a collection agency violates any of these rules, you should complain to the New York State Attorney General's office (at 1-800-771-7755) and/or to the Federal Trade Commission (at 1-877-382-4357). If you had the time and the money, you could even hire a lawyer and sue a collection agency for breaking the law.

 To get creditors to stop calling you, you have to send them a 'cease and desist' letter.

 The letter should say that according to the Fair Debt Collection Practices Act, you are requesting that they stop communicating with you. You can explain your situation. (For example: ‘I recently lost my job and can’t pay this debt until I find a new one.’) Be sure to include your name, address, account number, and the name of the creditor.

 The law says that after the collection agency receives that letter, it can call you one more time to let you know what action it intends to take in response.

 Be warned: A cease and desist order doesn't excuse you from paying your debt. In fact, the response may be, ‘Okay, we’ll see you in court.’

 "Creditors have rights, too," says Heath Berger, a Woodbury New York bankruptcy attorney. "They can sue you, and if they get a judgment against you, they can garnish your salary, take a bank account, or take your car and sell it to get their money."

If your son does owe this debt, the best solution may be for him to negotiate an agreement to repay it, perhaps in very small amounts over an extended period of time.

 You don't say whether you and/or your spouse co-signed for your son’s debt. If you did,  you should know that the creditor can demand payment from you, says Anthony Sabino, a Minneola New York bankruptcy lawyer.

 Many people don't understand that a lender can collect from anyone who signed the loan document. Or they assume that the lender will only come after them as a last resort.

But co-signers often are the first target, not the last. The reason is simple: They’re easier to collect from. The co-signer has financial resources and a track record of paying bills. The primary borrower doesn’t; that's why he needed a co-signer in the first place.

 If you co-signed for a loan, the lender can sue you to collect payment, win a judgment, and sell your assets to recoup what you owe. So if you did co-sign for your son’s debt, you should pay it. And then you should make a written agreement with your son for when and how he will repay you.