Your greatest investment, and your greatest albatross

Last year David and I pulled off a financial trick I thought we never would: Buying an apartment in New York City. There's a ton I learned along the way, and I've been meaning to write up the full story, as reference for those who are also taking the plunge and trying to decipher the cryptic process.

But there's a certain irony in finally starting to tell the story now. One of my closest friends called this afternoon to talk over a big financial decision: She's going to strategically default on her mortgage.

She and her partner bought their place right before prices peaked, at a time when they felt their only option was to buy a compromise "starter house" they didn't love or be priced out of home ownership forever. But right after they bought, prices started plunging -- and my friend lost her job.

With just one income and a significantly underwater house, they easily meet the guidelines for a loan modification, and my friend has applied for one, twice. But because they're still eking out the monthly payments and haven't gone late, the bank isn't interested in discussing a mod.

And my friend has had enough. Keeping up on the house payments means they have no money left for any kind of savings, including retirement savings; now, facing five-figure bills for needed maintenance and local housing market forecasts that suggest their house won't get back to the break-even point for another decade, she's decided to write off the sunk costs, let the bank come take its collateral, and move on.

Meanwhile, my best friend is also dealing with an albatross house -- one her soon-to-be-ex-husband fought to keep when they split, but couldn’t actually afford and promptly started missing payments on. Two years later, the foreclosure drama keeps dragging out.

I'm still thrilled beyond belief about my apartment, and this week I'll start posting the blow-by-blow tale of our 87-day warp-speed journey from making an offer to taking possession of the keys to our new home.

But my friends' stories are a sobering daily reminder of just how damn fraught the whole thing is.

The next lending crisis

The New York Times had a good column this week spotlighting the dangers of student loans through one family's story: an undergrad NYU education that left $100,000 of loan debt in its wake.

Almost everyone I know has student-loan bills, which vary in severity from "enh, it's not that bad" to "holy god, that's more than rent." But there's one clear similarity in all our stories: No one knew what they were getting into.

It's the undergrad debts that make me wince the most. You take those loans on when you're 17 or 18, and I don't care how academically smart you are, I've yet to meet any college-bound 18-year-old able to make sound judgment calls about loans, debt, estimated paychecks and so on. How can you? At 18, you haven't had the experience of trying to line up all your bills and make them fit within the bounds of one fixed monthly income number -- and until you actually do that, month after month, it's all hazily theoretical.

You can sign on a dotted line saying "yes, I understand that if I take on this loan I'll owe $200 a month to repay it," but is $200 a lot or a little? To me at 18, who considered $20 a windfall, it would have sounded staggeringly huge -- but me at 18 (circa 1996) hadn't ever had a job paying more than $6 an hour. I had no framework at all for making adult financial decisions.

I guess this is where parents enter the equation, but at 18, you're supposed to start making your own decisions -- and what 18-year-old is going to listen to the parent who says "this expensive school you got into and want to go to? Sorry, you can't." You spend all of high school hearing that college will be exciting, life-shaping, career-door-opening and so on. The last thing you want to think about at that point is what's cheapest.

I basically got lucky. My parents scrapped together the cash and took on the debt themselves to pay for most of my trip through the pricey college I wanted to attend. I helpfully repaid them by dropping out right before my senior year. (Thanks, Dad, for not driving up to NYC and strangling me when I told you that ...) The consolation prize is that I dropped out because the college basically did what it was supposed to: Help me get a good, full-time, decent-paying job in the career field I wanted to pursue. I left to take the job.

My three years at Barnard resulted in loan debt of $11,000, which required monthly payments of around $90. That was manageable.

But five years later, after a few halfhearted stabs at night classes, I finally decided to go back and finish off my degree. And once again, I didn't want to make practical-and-affordable choices -- I wanted to do what I wanted. Which, this time, meant going to the school best set up to deal with working students. That turned out to be New School University -- which cost about five times more than I would have spent finishing my degree at Hunter or another state school.

Result: Three years after graduating from New School (much to my Dad's delight -- I finally got the BA!), I'm currently sitting on a student-loan balance of $21,664.59. I now pay $250 a month for my loans, and have been paying that for almost five years. I have ten more to go. If I'd done the less-expensive thing, I would instead have my loans fully paid off about two years from now.

Was it worth it? In my case, maybe -- I can afford the $250, and my previous efforts to finish the BA hadn't actually worked. If New School was what it took to get me through, it was probably a sensible thing.

But really, all it boils down to is that I got lucky. I don't even remember signing the loan papers for my first set of loans, for Barnard. I definitely didn't do it with any "this will cost me X dollars each month" idea of what I was obligating myself to. The second time, when I took on the New School loans -- this time, as a working adult, and even a personal-finance blogger -- I again didn't do any precise monthly cost forecasting. I just eyeballed the total sum and said "well, it looks manageable."

Which is why I get nervous every time friends of mine talks about going back to grad school. There are, for sure, financially responsible ways to do it. You can use savings, go somewhere very inexpensive, or pursue a degree that has a very clear payoff in your chosen career field.

But you can also spend a small fortune on a degree that's hard to monetize -- or, worse, trains you for a field with salary prospects that don't align. To pick on my own alma mater and career field: A journalism or creative-writing master's degree at Columbia will cost you about $40,000. A typical entry-level journalist or any-level fiction writer would be lucky to make $40,000 a year -- and managing a $350/month loan payment on a take-home salary just north of $2,000/month starts to get pretty restrictive.

I don't see any obvious solutions, but it's scary to see a whole generation of 20- and 30-somethings (and on into their 40-somethings) chained to massive debts right out of the starting gate.

Serial bank dating

I always intended to come back to the story of how my attempts to abandon Chase are going, but kept getting distracted. So I wrote it up over at Make Love Not Debt: Taking a Break from Monogamy.

Meanwhile, as we prepare to pay our Very First Mortgage Payment, the kitty decided now would be a great time for a dental emergency. He's lost a tooth -- and unlike when five-year-kids do this and it's an exciting milestone, with five-year-old cats you end up feeling like a horrible, neglectful parent who didn't realise that your cat's teeth are dissolving. So poor Kea is getting hauled off to the vet tomorrow to have what's left of his teeth cleaned, and likely removed.

Because what we really needed right now was a random $500 bill. Sigh. At least he's cute.

Things you learn along the way

At some point I will get my head together and start properly describing the real-estate adventure. Basically there's two things I learned along the way:

1) buying real estate is insanely complicated and involves an epic ton of paperwork and logistics; and

2) like having a kid, this is a really complicated and responsibility-fraught thing that anyone who wants to can manage, no matter how ill-prepared they are for the task. David and I knew nothing going in, right down to the basics of "ok, we want to make an offer ... um, how do we actually do that? E-mail the seller's broker and say 'hey, we'd like Apartment X, how do you feel about [insert made-up number here]?' Fax? Call? Send carrier pigeon?"

And yet, roughly 90 days after deciding we wanted to buy an apartment, we got to move into our newly owned condo.

Saturday is May 1, when we'd typically write our rent check. But one of the Things Everyone Apparently Knows But I Didn't is that when you take on a mortgage, you don't make a payment the first month. Because unlike rent, which you pay in advance at the beginning of the month, mortgage is collected in arrears, after it's owed. So because we closed in April (and at closing prepaid the interest the loan would accumulate in April), our first payment is due in June, to pay off the debt we incurred in May.

Practical upshot: A month in which we owe no mortgage or rent payment. Hooray!

Reality check: Like any new homeowner, we had a ton of stuff we had to buy to make the place functional. Including a couch, 7 chairs, a deck table, a bench, lamps, a bedside table, and roughly a dozen boxes of cleaning supplies. Our Amex bill for the month was about what the mortgage would run. So much for spare cash.

But hey, we did what the government hoped we'd do with the first-time homebuyer credit -- economically stimulated every retailer within a half-mile blast radius.

$48,986.93

... is what it costs to transfer one piece of residential real estate, the apartment David and I are buying tomorrow (if, *fingers crossed fingers crossed* the close doesn't get delayed again).

None of that sum is the down payment, or any piece of the actual sale price. It consists entirely of title costs, attorney fees, broker commissions, taxes, and every other bit of this transaction that some third-party is managing to carve a piece off. I knew going in that this was going to be pricey, but damn. I'm impressed. And boggled.

Happily, we're not on the hook for all of that cost (merely the vast bulk of it), and some we financed into the mortgage loan. But still. This is not some Donald Trumpian multimillion-dollar real estate deal. It's a standard-issue, six-figure home loan, one in which I fought hard at every step against junk fees and avoidable "extras" we could opt out of (I now speak fluent GFE, HUD-1, RESPA and TIRSA Rate Manual).

That is an impressive amount of price padding from what you see on the sticker.

How to celebrate the anniversary of screwing up your taxes: Do it again

"We have a letter from the IRS saying we owe them money!" is not what you want to hear when you pick up the phone to answer a call from your spouse.

Ten years ago, the first year we were together, David and I managed to short the IRS to the tune of three grand and unexpectedly owe it all come April 15. The culprit was W-4 confusion: We both checked "married," not realizing that would set our withholdings as if we were each married *and* the family's only wage-earner. Throw together two salaries and a higher tax bracket and you have an expensive oops.

Since then, I've been pretty meticulous about the taxes, and we traditionally come in for a hefty refund. (Yes, intentionally -- we both would rather use the forced savings of overpaying the IRS than cut it close and end up owing. I realise that's financially foolish, but so far, the money I'm "losing" this way isn't enough for me to care.) This year's refund landed in my bank account just three days before David's panicky phone call.

It turns out what we owed money for was our 2008 taxes. "The income and payment information that we have on file does not match entries on your 2008 Form 1040," the letter sternly informed me.

"Calm down, wait till I get home, and I'll go through the records," I told David.

"Please give the IRS money so nothing bad will happen!!!" he replied. I admit, I shared a bit of the panic -- stiffing the IRS sounds like one of those things the federal government takes a very dim view of.

The form had one slightly reassuring line in it, though. "If this information is correct, you will owe $508," it said.

Okay. Suddenly owing $508 is no fun, but it's not like we were being told "cough up $10,000 and prepare for a stint in the debtors' gulag, and by the way, we're now gonna audit EVERY FORM YOU'VE EVER FILED WITH US, you untrustworthy tax-dodging leech."

The letter's "summary of proposed changes" showed two income payments unaccounted for on my 2008 taxes, but apparently very accounted for in documents the paying parties sent on to the IRS.

The first was $1,200 from Time Inc. for freelance work I did before I joined the staff, and for which I'd been paid on a 1099. When I went back in my records, I realised to my chagrin that the IRS was right. The work was done in late 2007 and paid in early 2008, and I'd totally forgotten about it by the time I filed my 2008 taxes -- which I did before the 1099 arrived in the mail. I hadn't included it. Note to self: Mint.com columnist Matthew might be on to something with his checklist manifesto.

The second entry in the IRS list was "taxable dividends" of ... $13. This came from the Sharesave account I cashed out just eight months after I started, because I left the company long before the shares vested. Apparently I made $13 in interest off it. I have no idea if that's true or not -- my dim recollection is that I got back exactly what I'd put in -- but since the taxes due on $13 are about what a cup of overpriced coffee costs, I had no interest whatsoever in digging out records or trying to fight that charge.

Happily, the penalties on stiffing the IRS -- at least for the three-figure amount I did -- are completely minor. The IRS says I owe $489 in taxes on the $1,213 I underreported, and $19 for a year's worth of interest. That's it. No "pay this draconian fine so you learn to never again shortchange the taxman" fees. I'd owe more interest and possibly some penalties if I didn't pay up straight away, but if I sent the check before March 31, I'd be back in Uncle Sam's good graces.

I cut the check that night. ("I will take this to the mailbox right this second," David said, sealing the envelope as he changed out the door.) The Treasury cashed it yesterday.

And I hope to never again be a tax scofflaw. I mean, I'm pretty sure the government (current debt: $12,644,040,577,175) kinda needs the cash.

Notes from the trenches

I'm now midstream on the buying-real-estate process. Almost every email I've sent in the past week begins with "EEK!"

The status: We made an offer. We haggled. The seller counter-offered not just a different dollar figure but an entirely different apartment. (It's a big building, about 250 units, of which a bit more than half are sold.) We liked the new (cheaper!) apartment much better and asked why we hadn't been shown it before. Answer: Because the asking price was vastly higher than the one on our original target. But since the square footage is a tad lower, the developer will take a lower price on it -- despite it having various other advantages that made it, to us at least, more attractive.

NYC real estate is insane.

Someday I will have a proper blow-by-blow, but here's what I've learned so far:

-NYC real estate is insane but the closing costs are off the planet. My whole real-estate quest started because I got envious of my friend's story of buying a Baltimore townhouse with an FHA loan and total cash costs of $4,500. My cash costs? We will be damn lucky to get out for $40,000. That includes 3.5% down and -- the really ouchie part -- NYC's smorgasboard of closing costs. Corcoran has a breakdown that seems accurate in my limited experience so far.

-If you're buying NYC real estate, do anything you can to get a CEMA (Consolidation, Extension and Modification) from the seller. I'm told they're more work for the banks and the lawyers, but they also save you vastly on the tax costs. Originating a new mortgage costs you almost 2% of the sale price in New York taxes. A CEMA transfers the seller's existing mortgage to you -- you only own taxes on the difference between their mortgage and your new one. We got a CEMA, and it's saving us a five-digit sum.

-On other hand, even with a CEMA you'll still get hit in New York with property transfer taxes. In our case, that also equals just under 2%, which has to be paid at close. Did I mention how much NYC real estate bites?

-If you're planning to tap investment or retirement accounts, start setting things up as early as you can. I'm pulling money from my IRA (Fidelity) and David's IRA (Vanguard).

When we went to transfer funds to cash in his IRA, we found that Vanguard didn't have proof of his taxpayer ID. That required sending in a W9. We're now waiting for it to process.

In my IRA, direct deposit of funds you're withdrawing requires activating a connection with your checking account. Fidelity claims that takes seven days, but I activated last Wednesday and my account says it won't be ready for transferring until this Friday. Then the actual transfer can take up to five days to process. I imagine I'll be paying the $15 fee to wire cash, which I could have saved if I'd set up the electronic account connection sooner.

Selling investments to move the money to cash also takes time. I did that too last Wednesday and am still waiting for my VWO trade to settle.

-If you can avoid an FHA loan, do it. It's pricey, costing 1.75% of the loan amount upfront (you can fold the cost into your loan, but you still have to pay it) and a monthly premium of up to 0.55% of the loan amount (calculated annually, paid monthly). It takes the place of PMI, which you don't pay on FHA loans. In our case, the premium adds $260 a month to our payments. If you have the money for a more substantial downpayment (we don't), you can avoid all this.

-EEK!

Hold breath, leap

Last time I posted, I was consumed with changing bank accounts. (I'm trying Schwab now, btw. Will report back soon on it.) Life is odd in how damn fast it changes.

We're trying to buy an apartment.

I kind of don't want to say much in case I jinx it, but if this works -- or if it irrevocably doesn't -- I'll post all the gritty details. The short version: The annual lease on our apartment runs out Feb. 28, and we'd planned to move. I **loathe** moving, but after five years here, I can't pretend any longer that two people, two cats and 2,000 books fit into a glorified studio with one (ONE!) closet.

I grumpily started scoping out rentals. I pretty much assumed that these days, if you can't put up 20% for a downpayment (and in NYC, that means six figures), you're toast. But one of my friends recently bought a house (in Baltimore) with an FHA loan. And I'd been hearing about various Brooklyn condos getting FHA approval. So I did a bit of poking around -- and found, much to my shock, that it has suddenly become a somewhat viable option.

You lock yourself out of most listings if you need to go the FHA route. I'm told getting approval for single family houses is very hard (many still exceed the loan-size caps, even though they've been raised), and you flat out can't do a co-op, which is what vast swathes of the NYC apartment market are.

But there's a half-dozen high profile Brooklyn condo projects that now have the fast-track FHA approval. And there's one I'm really drawn to. And we found a unit in it that is really, really intriguing for us. And I spoke with the building's preferred lender, and he gave us the green light for a loan with his bank. (5.5% interest! at worst! he thinks maybe less!)

So after two days of incessantly banging on my HP 12-C to work out all possible fees, contingencies, etc ... we're about to ready to put in a bid.

EEK. This feels like jumping off the high diving board.

Financial shocks

Today's fun money stat: Your ATM is a drug dealer.

From the AP:

Chances are there's cocaine in your wallet. Researchers looked at 234 bank notes from 17 cities in the U.S. and found that 90 percent had small traces of the illegal drug.

Bills from larger cities, such as Baltimore, Boston and Detroit, were among those with the highest average cocaine levels. Salt Lake City had the lowest.

Not surprising on either the high- or low-end front -- glad to see my semi-hometown, Balmer, is representin'.

Also not surprising: The notice I got in the mail today from American Express today about their terms crackdown. In the face of growing defaults and next year's looming credit card reform laws, Amex, like most other credit-card companies, is looking to pry higher profits out of its remaining customer base. My APR is about to jump from about 11.5% (8.24% plus the prime rate) to 17.24%. If I'm late on a payment, it vaults to 27.24%.

I've never been late on this Amex, but I did go late on a Providian card payment about three years ago when I was traveling and lost track of dates. I'm usually careful, but I can't swear I will never for the rest of my life miss a deadline.

Should I do that, I'll also be whacked with a $39 late payment fee.

Meanwhile, Chase-- the bank with which I have a backup card that thankfully has no balance -- has yoinked minimum payments up sharply, in some cases more than doubling what people owe. Three guesses what happens when someone owes a larger monthly payment than they can afford to pay? Oh look, late fees and higher APRs!

I realize credit card debt is a problem people opt into, and bear responsibility for. But also -- arugh. This is gonna be ugly.

Shining light on financial monsters

The thing about this recession is that I know almost no one unaffected. All around me, I've got friends who have been laid off, had their salaries cut, seen their hours pared back, or finished grad school just in time to hit an epically bad job market. My own household is down one job, with an income that's half of what we had a year ago.

My friend Rose recently put up a blog post I found fascinating: Talk about how financially screwed you are. I think it's great, because hearing so many stories helps dispel the thing that perpetuates financial problems. Shame.

When the numbers are awful, you don't want to look at them. After college, when I had a monthly income that fell a few hundred dollars short of what I'd need to pay rent, student loans, living expenses and the bare minimum on a credit card debt that felt insurmountable, I threw bills out unopened. Sure, paying things months late trashed my credit score and racked up late fees and yet more interest charges, but the whole thing felt so hopelessly out of control I psychologically couldn't cope.

Two things finally broke that cycle: 1) David, who had just moved in with me, said that he couldn't stand that approach, and if I couldn't deal with taming my finances, he'd do it for me. He called my credit card companies and dealt with all the logistics of figuring out the size of the problem. 2) David got a job just a month after arriving in the U.S., and suddenly our household income doubled. Step 1 was critical in getting a handle on the problem, but there was no way we could possibly have addressed the financial shortfall without more money.

With the economy at a standstill, most of us can't do anything right now on Step 2, Increase Household Income. But Step 1 is do-able. The first step toward getting rid of the monster lurking under the bed is looking at it. Without letting it make you feel ashamed or afraid or like a bad, horrible person for having a lurking monster -- because hey, recession? Right now, lurking financial monsters are fashionable! Everyone is having money problems! You have company!

(Financial Monsters are spikey and they drool. I also strongly suspect they are purple. The illustrative Financial Monster pictured above is borrowed with permission from Mac McRae's extremely awesome monster gallery.)

This isn't something you have to do alone. If you have a stack of credit card, student loan or medical bills that you aren't paying, or that you don't even know how much you owe on, or the rates are stratospheric but you can't stand the thought of calling to negotiate -- enlist a close friend. Other people's stacks of intimidating bureaucracy are so much less daunting than your own. Have a friend over -- someone with a penchant for organization is perfect -- pour a glass of wine, and dive in. Once you know the shape of the problem, it generally stops feeling like a scary vortex of failure and shame, and starts becoming manageable.

On that note, I'm buckling down tonight to finally sort out our chaotic mess of retirement accounts -- the goal is to turn our two abandoned 401(k)s into IRAs. And over at Rose's, there's a followup post about what people are doing to tackle their financial demons.

And if you're doing financial debugging, here's two past posts that may prove useful:

-Debt statute of limitations - what they are and how to use them, plus a debunking of the apparent myth that contacting a debt collector restarts the clock

-The simplest good investment strategy for your 401(k) (aka "why management fees matter")

In which I help bridge New York's budget shortfall

This is one of the simplest tax years I've had in ages: one W-2 for me, one W-2 for David, some charity deductions (we don't have a mortgage, but we pay so much in state & local taxes that we do an itemized return anyway), and that's it. I had a 1098-E form for my student loan interest, but didn't get to deduct it this time around -- I seem to have capped out on that.

The 1098-E was a bit eye-opening. It reported that I've paid $1,407 in interest on my student loans this year. Considering that I paid about $2,600 total toward my loans this year, that sounded like a hell of a lot of interest. And my loans are at reasonable rates! I have two, one consolidated at 4.7% and one fixed about a point higher. So how on earth did I end up spending more than half my payments on interest when my rates are single digits?

... and then, with the help of my trusty 12C, I finally got it. What is, or should be, blazingly apparent to anyone who pays a mortgage. A single-digit percentage of a Giant!Sum is still a Large!Sum, and interest isn't a proportion of your payments. Whoever is loaning you the cash is making sure to get their interest payments first, in full and up front, each year on the total debt. The only way to make progress paying down the principal is to a) pay extra specifically toward it each month, or b) get the total due down to a small enough figure that your monthly payments equate to a significant chunk of it.

When I finally did that depressing math, I realized it'll be years before I make any significant headway paying down my student loan debts, unless I allocate extra cash to paying them down each month. (I've always rounded up just to make the budgeting simple and paid $20 or so extra each month, specifically marked on the online payment form as "allocate toward principal, not toward next month's payment," but clearly, that $20 isn't going very far.) Kids: When your parents gripe about ever-rising tuition costs, listen to them. I did my final year of undergraduate college credits 10 years after I did the first three -- and I had to borrow twice as much to cover that final year as I had left on my loans for all of the first three. Ow.

Still, since my loan rates are reasonable, I think saving for an apartment downpayment trumps paying down extra loan debt. So, it lives on with me, for about 8.5 more years.

Also new this year: We owed New York money. Back in college (the first time, lo that decade-plus ago), I remember ending up owing New York money every year. It wasn't much, usually $50 or so, but it was still irritating. I always took 0 allowances; how did I end up owing? New York just seems rigged like that. Thinking back on recent years, I have a vague recollection that my tuition and loan debts were all that got us from the owing-money territory and into refundland.

Fortunately, the Feds owe us way more than we owe New York (that whole 0-allowances thing), so doing taxes was still a happy experience overall. Still, I grumped a bit* when I read the quote this morning in Reuters from New York budget spokesman Jeffrey Gordon that, unlike California, New York "is not 'running on fumes' and revenues are coming in every day."

As I IM'd a friend: "Yes, revenues are coming in every day, and today, $151 of them came from me!"

*(I am generally ok with paying taxes in exchange for the happy civic things my tax cash buys. David is even more so. None of his tax-and-spend liberal sentiments were harmed in the making of this post.)

Oh the irony

Amazon appears to have a new widget where it invites you to "Treat Yourself." It's like it's sitting there whispering "C'mon, whip out the plastic, do some impulse buying ... you know you want to ..."

So what book from my wish list (which I basically use to bookmark things) is it recommending I splurge and buy? Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders.

Stimulating things

Since I'm editing and occasionally writing coverage of the stimulus deal, I suppose I ought to stay Switzerlandish in my commentary on it. So. Er. $600 rebates. Hooray, the economy is saved?

When my check arrives, I'm going to have to be one of those naughty consumers who socks it away into savings or paying down debt, since I've already done some premature economic stimulating.

A few weeks back I went to Seattle with my sister, who had never been there. In addition to visiting friends, we had two express purposes for the trip: eat at the planet's best sushi restaurant (I have been to sushi restaurants on Tokyo; this one still wins - how can it not, with that URL!?) and go see a gallery show by one of my favourite artists. My intention was just to look, of course. It had to be - most of his paintings are priced around what my college education cost. But ... the gallery had prints ... and I have this theory that art you love is one of those things you never regret purchasing ...

So, um. I have a print now. Yay! And my art budget for the entire year is officially blown. Good thing The Planet's Best Sushi is so reasonably priced.

Women, money and divorce

It's been an eventful fall here, with all sorts of big changes on the horizon (more details later this week -- I'm about to have a lot of finance blog fodder). One of them has been a really sad, frustrating change: One of my best friends is getting divorced.

It's painful on all fronts. I'm kind of stuck standing by helplessly, knowing there's not a lot I or anyone else can do to cushion the grief and misery that comes with losing the partner you've been with for more than a decade and had expected to be with for the rest of your life.

It's also been painful financially. I've had other friends go through major breakups and even divorces, but we're all young enough that these usually fell into the "starter marriage" camp: two people splitting who had little in the way of Major Complications, in the form of kids or significant assets. It's still an emotional wrench, but it at least clears one major hurdle to separation when you each have a job and don't have any big investments to wrangle about dividing.

This wasn't that. It's what previously, naively, seemed to me an almost antiquated kind of divorce: the kind where one partner's earning power so outstrips the other's that the financial imbalance creates its own big nasty complication. There are many other issues at play here, but what it boils down to is: because my friend jointly signed financial papers when they were married -- loans, the mortgage on their house, etc -- she's going to be on the hook for payments to maintain the lifestyle of a partner she is no longer with.

That is ... wow. Ouch.

I suppose this is no different than what men historically went through with alimony, watching part of their paychecks disappear to an ex-spouse they were no longer with and may not have remained on anything resembling amicable terms with. But it's a shock to me to see the same dynamic play out now, in an era in which I've grown accustomed to greater independence in marriage.

It's also a nasty wake-up call. I know marriage is a serious legal commitment. I know joint-signing financial obligations is a serious legal commitment. But it's sobering to see how much those decisions can bite you when things turn in an unexpected way with the person you're committing to and with. And I hate that in so many of the breakups I've seen this year, the women consistently get screwed.

It seems like this is the odd dark side of our relatively comparable earning power. I remember a smattering of divorces among my parents' friends -- a few, in particular, that were the classic cliché of Man Throwing Over Steadfast Wife for Shiny New One. In those cases, alimony and other financial obligations made sense: if one partner had no opportunity to have a career and was left stranded without one, then yes, the departing partner should still have obligations. And obviously, it's a whole different game when kids are involved, since there's no question that parents have responsibilities, financial and beyond, that persist even if their marriage does not.

But in the breakups among my friends, what I'm seeing is a trend of women left on the hook for obligations incurred by boyfriends or husbands who are simply failing to be fully functional, financially responsible adults. (I'm not saying that judgmentally. God knows I have been through periods of being Fiscally Unsound, and I'm fully aware that a lot of luck is involved with me being as relatively financially secure as I now am.) For example, many of my friends have co-signed loans for partners with weak credit -- and then, when the relationship dissolves, they're stuck with that obligation.

I don't know exactly where I'm going with this train of thought, or what the answer is. I suppose the flat reality is that divorce is messy and inevitably unfair, in any era or set of circumstances. But it has driven home the point that before you put yourself on the hook for any major financial obligation, to anyone, even your spouse, you need to think through all the worst-case-scenario ramifications and make a conscious decision about your willingness to risk them.

Resetting myths about resetting debt statutes of limitations

I've been a very remiss blogger lately, and the culprit is, as usual, travel. San Francisco this week, Vegas last, and a crunching work deadline on a feature piece in the midst -- I'm behind on everything, oy. But! The end of the insanity is in sight! And I have lots of financial thoughts scampering around in my head.

Starting with an update on the "repairing your financial sins" series about rebuilding damaged credit. The common word of caution to people thinking of repaying or resuming communication about old debts is "proceed with caution," because doing so can reportedly "reset" and restart the clock on the statute of limitations. Regular reader Karawynn linked in comments to a Consumerist article saying that's a myth, and that the statute of limitations runs from the date payment initially became delinquent, no matter what happens later. Their sources: a nonbinding opinion from the FTC ("because the commencement of the seven year period is now described with some precision by the statute, it is our opinion that none of the subsequent events you listed -- sale of the charged off account by the creditor, or a payment on or dispute about the account by the consumer -- changes the allowable period for a [credit reporting agency] to report a chargeoff") and a direct comment from a TransUnion spokesman, who said (paraphrased) 'paying the account after a delinquency has been reported by a credit grantor will not have the impact of "resetting" the item.'

However -- these comments relate only to what can legally happen on your credit report, not a) what can actually happen (in practice, unscrupulous debt collectors have been caught running all kinds of skeevy stuff up the flagpole to see what flies) and b) what payments do to reset the debt legally. By reinitiating activity on an old debt, you may bump it back into the active column and restart the statue of limitations for the debt's legal expiration (the point at which the creditor no longer has any legal right to pursue you for payment).

The key point to bear in mind is that a credit report is different from a legal accounting of your debts. Some creditors never report debts to credit agencies; that doesn't mean you don't legally owe the debt. Some statutes-of-limitations expire before the seven-year window used for tracking credit-report items; that doesn't mean those old delinquent debts can't continue to haunt your credit rating, even after you no longer legally owe anything on them.

It also explains why paying a delinquent debt doesn't remove it from your credit report, and may not do anything useful for you at all, from a credit-rating standpoint. (It can certainly be useful if it clears a debt you're still within the statute of limitations on and legally liable for.) Remember, the purpose of a credit report is to help credit-granting agencies judge how easy it will be to get money back from you. If you let a debt go delinquent, that makes you a pain for the creditors to deal with -- and even if you later get everything together and clear those delinquencies, there's still a legitimate red flag, since you did incur the delinquency in the first place.

On the other hand, credit reports and credit ratings do take recent history into account. A two-year-old delinquency will hurt you far less than a two-month-old one. As the problem ages, it becomes less harmful. And if you have recent problems, the best thing you can do is reach some sort of arrangement with your creditors before the account is charged off. (When that happens varies, but it's almost never less than 90 days or more than 365 days after the debt became delinquent.) Charge-offs are the really black smirches you want to avoid, and they're often preventable -- creditors will be pretty flexible about payment arrangements so long as you're active about negotiating with them.

Underwater homes (not the fun, aquatic kind)

With adjustable-rate mortgages coming home to roost and the subsequent, entirely predictable and long-predicted collapse of the subprime lending market, the dark side of buying real estate is getting a public airing in the press. But there's not just the risk of taking on a mortgage bigger than you can afford -- there's the risk of being really locked in to the house you buy. In a culture that pushes homeownership as an almost essential step in building financial security, it's a risk that's not often highlighted.

The Washington Post has a piece today on "upside-down homes," where sellers end up owing the bank the difference between the mortgage they took on and the lower price they're able to sell for. The idea that housing prices can go down as well as up isn't a novel one, of course, but I admit that the reality of the consequences that can have didn't hit home for me until I read through a few of the article's examples:

Jeffrey Taylor and his wife bought their dream home in Purcellville for $538,000 last August. Now they have to sell it because they are getting divorced and neither one can afford the mortgage alone.

The most they could get for it was $430,000. After paying all the real estate commissions and taxes, they will still owe the bank $118,000.

When David & I (eventually) get serious about buying an apartment, our plan has always been to buy a place we can envision staying in essentially forever. We probably won't be leaving Brooklyn, and neither of us has any interest in getting a "starter apartment" and trying to flip upwards. But the article did prompt me to proceed with caution and be really damn sure we're both committed. The tales of people being forced by circumstances (usually divorce) to have no choice other than selling into a less-frenzied market than the one in which they bought -- and to actually end up owing money to sell a house -- are pretty scary.

How to mess up an Amex payment and destroy your finances

Lest my personal-finance blogging imply I have all of our financial matters nicely in hand, here's a fun cautionary tale about how I firebombed David's bank account.

Because David and I have separate checking accounts and budgets, we each pay in each month to pay off the charges we've run through our main credit card, my Amex. I use Amex's Pay Online option, which lets me directly debit money from linked bank accounts. Two weeks ago, I sat down to pay David's portion of this month's bill. I calculated what he owed, cleared the amount with him, typed in the amount, hit the "pay" button, and clicked on "confirm and pay."

As I whizzed past the confirm screen and said yes yes pay, I realised -- literally the second I was hitting the button -- that I'd put in an amount almost twice what I actually intended to put in. An amount substantially greater than what David actually had sitting in his bank account.

I caught the mistake the instant I hit the button -- but by then, it was too late. Amex's online payments are instantaneous. Once you've confirmed, you can't change or revoke the payment.

I got on the phone right away to Amex's customer service, which threw up its hands and said to call Citibank and arrange a stop-payment.

Citibank's customer service center is in India, and is impressive in its level of cluelessness. Dealing with them has rarely proved helpful, and this experience was no exception. The center put in a stop payment order. A week later, we learned -- painfully -- that Amex payments don't work like typical check or debit payments, and can't be halted with a stop payment.

This whole mess was compounded by David's lack of access to his account info. In a separate incident, he lost his debit Paypass keychain thingie right after my payment debacle and had to cancel his debit card and get it reissued. Doing that temporarily cut off his access to Citibank's online banking site -- meaning he couldn't check and see what happened with the Amex charge. It took more than a week for his replacement card to arrive.

When it did, Tuesday, David hit the ATM and found that his account appeared untouched: the Amex payment had apparently bounced or been stopped. Figuring we'd worked through the mess, I went in that night and put in another payment on Amex's website, for the amount I'd originally intended to pay.

Insert hollow, dark laughter. Yesterday morning, David found his account hugely overdraw. So, instead of dealing with the Indian call center, David went to a Citibank branch to ask: What happened?

The original Amex payment was never stopped. It can't be. Online payments of the sort I made are apparently handled as direct electronic transactions between financial institutions, routing through the Federal Reserve system. If a payment doesn't go through because of insufficient funds, it tries again. Three times.

So, we now have the original payment making its second or third attempt to go through, plus the second payment I made last night starting its attempts. We're even further into the hole than when we started. And presumably every time one of these payments fails, it will generate another bounced transaction fee, on both sides, from Amex and from Citbank. Amex already socked us with one $38 fee for the first bounce. I'm praying each subsequent bounce won't incur another.

The obvious way to solve this mess is to throw enough money into David's account to let all the Amex payments suck out the money they're trying to. But, er. We lack the cash. My clever plans to create an emergency fund haven't actually come to fruition yet, partially because taking just five credits this semester
(I'm almost finished, yay!) killed my ability to get loans and all my free cash is temporarily tied up paying for the credits my company will soon reimburse. So, for the moment, we're just kind of financially screwed.

I think we can dig mostly out of the hole with this Friday's paychecks. It'll be months before I crawl out of the guilt hole, though. I owe David lots of extra niceness in return for temporarily completely destroying his bank account :(

Journalistic probings of the debt and heath care messes

Pulitzer Prize jurors will meet next week to mull over the best of this year's journalistic offerings, and one series getting notice is the Boston Globe's in-depth Debtor's Hell investigation. I've been reading through the pieces during my downtime; there's a lot of material, and it's excellent. The Globe documents both the skyrocketing growth of the problem -- between 2000 and 2005, the number of debt-collection lawsuits filed in Mass. averaged out to one for every five households -- and the catastrophic flaws of an overwhelmed regulatory system that lacks the resources and manpower to keep abuses in check.

I love rigorous work like this that shows off journalism at its best. When regulators, politicians, and the courts fail to protect citizens from predatory practices and ensure just outcomes, we need media attention to focus a spotlight on the problem. Accountability begins with awareness.

In the spirit of spotlighting, I also wanted to point attention to a fantastic piece from last spring in the New York Review of Books: "The Health Care Crisis and What to Do About It". Ostensibly a critical look at several recent books on the U.S. health-care system, the article is really a rigorous examination of what's going wrong, why, and what issues reform measures will need to address.

And if anyone needs another example of why the heath care status quo is not acceptable, just take a look at today's Washington Post: "For Want of a Dentist". The unwritten rest of that headline is "... a ten-year-old boy died from a toothache."

A sample 'cease communications' letter to debt collectors

My posts about debt expiration and statutes of limitation weren't wholly theoretical. I've been dodging calls for the last few months from a collector trying to shake out money for a debt from 2000 that I don't consider valid. (It's a long story, as these things generally are.) Instead of running through hoops trying to track down all the paperwork to prove that the debt is well and truly not legitimate, I opted to wait out the clock till 2007, at which point it became an indisputably expired debt.

This collector is fairly low pressure; their main tactic seems to be leaving automated messages on my answering machine every few weeks. Still, the calls stress David out and I'd also like them to stop, so I figured it's time to formally issue a "cease communications" request, as allowed by the Fair Debt Collection Practices Act. Under that law, you can at any time tell a collector to stop contacting you, and they have to oblige. Once you've made the request, the only communications they're legally allowed to send is a notice of specific actions, like filing a lawsuit.

In case anyone else can use it, I'm posting the letter I'm sending. I'm citing the New York state law that sets the statute of limitations on debts; if you'd like to find a local law to cite, the Fair Debt Collection website has good pointers to state laws.


[Date]

[Your Address]

Dear [Collector]:

I am writing regarding your attempts to collect a debt of $XXX for XXXX (account #XXX). I do not acknowledge the validity of this debt, which, in any case, is beyond the six-year statute of limitations for collection in New York, as laid out in the New York State Consolidated Law & Rules (chapter 8, article 2).

In accordance with the Fair Debt Collection Practices Act, Sec. 805(c), I am requesting that you cease any further communication with me on this matter and discontinue phone calls. If I receive any further communication -- other than a written notice that further collection efforts are being terminated -- I will submit a complaint about your organization to the Federal Trade Commission and the New York Better Business Bureau.

Sincerely,


[Your Name]

Repairing past sins, part II: Rebuilding your credit score & report

My last post was about your legal responsibility for old debts, particularly those that are beyond the statue of limitations -- meaning you no longer have any legal obligation to pay. (Er, is it still "tomorrow"? Pretend I posted this Thursday ...)

This one is about how to minimize and repair the damage to your credit report and your FICO score. (Remember, your credit report is different than your credit score -- and you actually have three FICO scores, one each from Equifax, TransUnion and Experian. The FICO post explains the basics.)

First, to reiterate a point made at the end of my last post: Be very, very careful about paying anyone anything on an old debt. If you're four months late on your Visa bill, by all means, call the provider and start negotiating a payment plan you can afford that will get you current. (Remember, providers want to help you find a way to pay your debts. If they have to charge them off, they get much less than they will by working with you.) If you're four years late, ignoring the debt and refusing to pay anything might be the soundest strategy for protecting your credit report.

That's because credit reports track charge-offs (when the original creditor consigns your debt to "bad debt" and takes it off its books; this almost always happens within one year of you not paying) and accounts referred to collections (when that bad debt is sent over to an agency to hunt it down). But FICO scores and credit reports care very little about what happens after that. Depending on what's actually showing up on your individual credit report, the effect of reviving an old debt to settle it will probably range from "very mildly positive" to "crushingly bad."

MSN Money has an article that does a good job of explaining all the various pitfalls of trying to settle an old debt. The gist is that it's a murky minefield.

Basically: avoiding having items sent to collections and charge-offs is very, very good. Do that if you possibly can. (If there's interest, I can do a post on negotiating with creditors over current debts you're behind on paying.) But once an item has gone that way, the value to *you* of clearing the debt goes down dramatically, and continues dwindling as it ages.

So if you've got old black marks, what do you do?

The first step to rebuilding a good credit rating is having credit. As anyone without any loans or credit cards learns the first time they apply for credit, you don't get brownie points for not incurring debt. The only way to build a good credit rating is to actually have a credit line, with activity on it. Opening a Visa and never charging a penny on it won't do much for you.

The easiest, safest, fastest way to build a credit record is to be an authorized user on the credit card of someone else who uses the card in credit-score-improving fashion -- someone who charges purchases on it, keeps the usage below about a third of the card's total credit line, and always pays at least the minimum balance due each month, on time. (It's even better if it's a longstanding account. FICO scores weigh the length of time an account has been open as a positive factor.) There are two types of "joint" credit card accounts: actual joint accounts, where each party shares liability for the account, and "authorized user" accounts, where an individual adds someone else as an authorized user on their own account.

Authorized user accounts are pretty interesting from a credit-reporting standpoint. They get reported to credit agencies like a joint account -- ie, the activity on them will affect the credit report, and score, for the authorized user. But, unlike a joint account, the authorized user has no legal responsibility for the account, or any debt incurred on it. All responsibility remains with the individual account owner. So, if you're an authorized user on some else's account, and you run up a bill on it, they're the ones with the legal responsibility for it.

However, there's no requirement that the account holder actually give the authorized user a card to use. If you need to repair a besmirched credit report, and you have someone you're close enough to request the favor from (a parent, spouse, relative, etc.), you can ask to be added as an authorized user on one of their accounts. If they (or you) don't trust you(rself) with the credit line, cut up the card. So long as there's positive activity on the account from the main user, you'll benefit. (Credit reports don't track whose card is used for purchases; if the card you're issued as an "authorized user" is never used, it doesn't matter a bit.)

Another option is a secured credit card. The first resort for people with lousy credit, secured cards require you to pay a deposit, typically 50 to 100 percent of the card's credit line. The credit card company holds this deposit in a savings account. If you default on paying, the company can withdraw what you owe from your deposit. Because the credit provider has that security, secured cards are easy to get, even if your credit rating is in tatters. And, because it's a credit card, activity on the card affects your credit report. If you pay at least the minimum due on time each month, your credit score will start recovering. Bankrate has a list of secured cards; if you have a checking account, your bank probably offers them as well.

Those are two of the aboveboard ways to start fixing bad credit. You'll be surprised how fast your score can change; as I mentioned in an earlier post about FICO scores, I've seen mine jump 60 points in a month when I did things it recorded as positive. (In my cast, that was increasing my Amex credit limit so my utilization percentage tumbled, and paying off a balance on another card.)

The other tactic you can use is slightly sneakier: Challenge negative items on your report, even if they're accurate. The Fair Credit Reporting Act gives you the right to dispute anything in your report you think is incorrect. Once you send in a dispute, the credit reporting agency (TransUnion, Equifax or Experian) has 30 days to investigate the dispute. If at the end of 30 days they can't confirm the information, they're required to remove it from your report. This tactic can be like going to court to fight a speeding ticket; if the cop who wrote the ticket doesn't show up to affirm it, you win by default. If the creditor, collections agency, etc. doesn't provide the credit reporting agency with validation of the debt and nonpayment within the 30-day window, the item is legally supposed to disappear.

In practise, getting the agencies to honor their obligations can be a horror show. The Boston Globe had a great piece recently about one consumer's nightmare of trying to untangle an identity fraud case. Still, challenging negative items costs you nothing, and can work in your favor. You can even dispute items online now -- here are the links for Experian, TransUnion, and Equifax.

Whew, that was long. This set of posts (continued from Wednesday) was prompted by a question from a friend about repairing a bad report. I'm happy to go investigate stuff in response to questions; anyone interested can reach me in comments or by email (stacy at covehurst dot net). Discretion guaranteed, of course.