Our Trillion Dollar Debt

U.S. NATIONAL DEBT CLOCK

The Outstanding Public Debt as of 28 Apr 2010 at 12:53:12 AM GMT is:

The estimated population of the United States is 308,273,298
so each citizen's share of this debt is $41,797.24.

The National Debt has continued to increase an average of
$4.12 billion per day since September 28, 2007!
Concerned? Then tell Congress and the White House!

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How Foreclosure Impacts your Credit Score

By Les Christie, staff writer

NEW YORK (CNNMoney.com) -- If you're delinquent on your mortgage, your credit score will suffer. Everyone knows that. The question is, by how much?

Until recently, those answers were hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much impact different foreclosure types of mortgage delinquencies have on scores.

Recently, Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.

Here are the average hit your credit will take:

30 days late: 40 - 110 points

90 days late: 70 - 135 points

Foreclosure, short sale or deed-in-lieu: 85 - 160

Bankruptcy: 130 - 240

To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.

See the chart above to see how each scenario affected each borrower.

Notice that for both borrowers a single one-time black mark results in steep drops, but it is when they fall further behind that things get really harsh, according to Craig Watts, a spokesman for Fair Isaac.

"The lending industry tends to regard an account differently when it has become 90 or more days late," he said, "The likelihood that consumers will resume paying their overdue obligations drops off significantly after the delinquencies have reached 90 days."

One reason credit companies were so closed-mouthed is that they often can't definitively state how much each delinquencies will affect scores because there are too many variables.

Some borrowers will fall much more steeply than others for the same payment problem, according to Maxine Sweet, vice president for public education at Experian, one of the nation's main credit bureaus.

"If you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more," she said. "For me, one missed payment would just be a blip."

The point loss also depends on the borrower's starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.

Of course, it just gets worse when you face foreclosure.

Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale, where the home is sold for less than than is owed and the bank (generally) forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

Sweet said credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor, she said, is that "it's reported that you paid less on a settled account."

Some borrowers may think that because they never missed a payment, they can "walk away" from their homes with relatively little impact on scores. Not true. "When a deed-in-lieu or short sale is reported as a partial payment, it's treated as a serious delinquency," Watts said, "just like a foreclosure."

Even if borrowers made payments faithfully for years before short selling or doing a deed-in-lieu, their credit score will still take a hit. The total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score.

Mortgage debt, combined with other financial problems, can send borrowers into bankruptcy, the worst thing that can happen to your credit score.

The effects are long-lasting, according to Sweet. In a Chapter 13 bankruptcy, which involves partial repayment over several years, the stain will take seven years to remove. A Chapter 7 bankruptcy, which involves liquidation, takes 10 years to get over.

It's gonna cost you

Absorbing a big credit-score hit can make many transactions more costly. It's not just paying more for credit card debt and auto loans, insurance can cost more as well.

The average savings for someone with a good versus mediocre credit score is about $115 a year for auto insurance and $60 for home, according to Loretta Sorters, of the Insurance Information Institute.

A low credit score can even make it harder to rent a home because landlords often use credit scores to weed out prospective renters.

Despite the problems a poor credit score can cause, Experian's Sweet recommends that people who are in financial dead ends, like totally unaffordable mortgages, it's better to recognize that and cut your losses quickly; don't prolong the problem.

"You need to do what you need to do to get your finances back in order," she said. "Don't worry about your credit score."

Foreclosed? Here comes the tax man

By CNN Money Les Christie, staff writer April 14, 2010: 5:24 PM ET

NEW YORK (CNNMoney.com) -- Did you lose your house to foreclosure this year? Did your lender forgive some of your mortgage debt because you sold it for less than it was worth? If so, you could be facing a big tax hit.

It is IRS policy to tax forgiven debt you are personally responsible for as if it is income. Say, for example, your credit card company settled a $10,000 debt for 50 cents on the dollar. You'd have a debt forgiveness of $5,000, which the IRS would count as income, just like your wages.

The same policy held true for most mortgage debt until 2007, when Congress passed the Mortgage Forgiveness Debt Act. That ended the liability for many homeowners -- but not all.

In general, if you lose your home to foreclosure or short sale, where you sell your home for less than you owe, the IRS won't add insult to injury by counting the difference as income. At least until 2012.

There are four major exceptions to the rule:

1. You did a cash-out refinance and splurged.

Many homeowners took cash out when they refinanced their homes and used the extra dough to pay for new cars, boats or vacations. Say you did that and then got into trouble, losing the house through a foreclosure or short sale. Even if your lender waived the remaining debt, the IRS will treat as income the portion of the forgiven debt that you took out as cash and spent. Only the funds used to actually improve your home won't be taxed. Yes, even if you spent the money on paying off your student loans or credit cards.

The IRS' reasoning is that only the money spent on home improvement actually added to your home's value. And that, presumably, diminished the difference between what you owed on your mortgage and the value of your home when it was foreclosed.

Beware: Some lenders made refinancing offers contingent on homeowners paying off credit card debt, according to Kent Anderson, a Eugene, Ore.-based attorney and tax expert. If you took one of those deals, the refinance money will be reported to the IRS and you will owe taxes on it.

2. You have a home-equity line of credit.

During the boom years, many homeowners tapped soaring home equity to make all sorts of consumer purchases. But the same rules that apply to refinancings also apply to home-equity loans: The IRS will only forgive the tax liability if the loan money was spent improving your home. And, tax experts advise, you'll need to show receipts to prove you did.

3. You lost your vacation home or investment property.

So the market tanked and you lost your vacation home. Unfortunately, if you didn't use it as your primary residence for at least two of the previous five years, you're going to pay the tax man.

More common, however, may be the case of investment properties gone sour. During the housing boom, buying homes for investment purposes soared, accounting for 28% of all sales during 2005, according to the National Association of Realtors. (Vacation homes made up 12%.) And many of these purchases were made with little down payment.

When the bust hit, second home prices cratered. The median price paid for investment properties fell 43% to $105,000 in 2009, from $183,500 in 2005, according to NAR. For vacation homes, the median price paid dropped 17% to $169,000.

If an investor bought a property in 2005 at the median price and sold it in 2009, he could have run up $75,000 or so in forgiven debt. If the investor is in the 25% income tax bracket, that would add nearly $19,000 to their tax liability. Ouch!

4. You owned a multi-million-dollar home.

It may be hard for Americans struggling in this weak economy to sympathize with anyone wealthy enough, at one time, to afford a multi-million-dollar home. But owners losing one could be on the hook for a huge tax bill.

Only the first $2 million in forgiven debt will be voided under the relief act; all the overage is taxable as income.

So, say, for example, you're Scarlett Johansson. You paid $7 million for your Hollywood Hills villa in 2007. (With a 100% mortgage; this is hypothetical, remember.) But now, you have it on the market for $4.59 million.

Say you can't unload it, your movies tank and you have to a short sale. (Hey, it happened to Nicholas Cage; he went into foreclosure.) If you sell it for $4 million, leaving a $3 million balance, the IRS would forgive the first $2 million. But the remaining million? You better hope you have a good accountant and a lot of deductions.

The good news? Even if you fall under any of these four scenarios, you may have a way out, according to Anderson. "If the taxpayer was insolvent at the time of the foreclosure, the forgiven debt can be excluded for tax purposes," he said. "It can also be discharged in a bankruptcy and approved by court order."

And then there is California

Until last week, California still made you pay taxes on forgiven mortgage debt.

The state, which has endured some of the worst price declines and foreclosure rates in the nation, previously authorized relief, but only for the 2007 and 2008 tax years. But there were struggles trying to extend the benefit through 2009.

One attempt at passing an omnibus "conformity" bill resulted in a veto by Gov. Schwarzenegger for reasons having nothing to do with mortgage debt forgiveness. The governor objected to a different provision covering erroneous tax reporting by businesses.

But the problem was worked out and a new bill signed by Schwarzenegger just before the tax-filing deadline

Credit Cards: Pay off that debt quickly!

Most of us use credit cards these days on a daily basis.  In fact, its practically impossible to transact online without one.  But, what most people don't realize is that unless your paying off your debt each month, those purchases are going to cost you big time in the long run.  On a credit card with interest charged at 16.75% APR where the minimum required payment on the balance each month is 2.25% a $1,000 credit card debt would take a little over 18 years to pay off.  Whether your credit card debt is $1,000 or $100,000 here's some ways to get out of that credit card debt faster.

1. Pay more than the minimumFirst, break the habit of paying only the minimum required each month. Paying the minimum -- usually 2% to 3% of the outstanding balance -- only prolongs the agony. Besides, it's precisely what the banks want you to do. The longer you take to repay the charges, the more interest they make, and the less cash you have in your pocket. Don't play their selfish game.

Instead, bite the bullet and pay as much as you can each month. If your minimum payment is $100, double that to $200 or more. Examine your normal expenses -- you can find the money. Skip eating out at lunch, and bring it from home instead. Eliminate desserts. Give up happy hour. We all have "luxuries," and you know what yours are.

Make a few sacrifices, and you will find the extra dollars needed to increase your debt repayments dramatically. Those increased payments will save you hundreds, if not thousands, in interest payments. Plus, you will get out of the hole you've dug for yourself much more quickly. Is it fun? No. But it sure beats living a hand-to-mouth existence, fearing bills each month.

2. Snowball your debt paymentsTake a long, hard look at all your credit cards. Pay particular attention to the one with the lowest interest rate. Have you reached the maximum limit on that card? If not, consider transferring a higher-interest bill to that one. Many credit cards permit this, and it's better to trade an 18% debt for one at 12%.

If your entire balance is too large to fit on one low-interest card, pay at least the minimum amounts due on all of your cards except one. Funnel the majority of your debt repayments into that one credit card and pay it off as quickly as possible. When the balance on that card reaches zero, move on to the next with the same aggressive repayment plan.

Lather, rinse, and repeat. This method of repayment is aptly called "snowballing." As your debts decrease, the amount of money you have to attack them increases. Your payments snowball until all of your debt is pummeled. Pretty neat, eh?

Another way to transfer higher-interest debt to a lower-interest card is to take advantage of the promotional offers many banks use to entice you to their line of credit. You've seen the come-ons. "Transfer all your credit card balances to us, and pay just 5.9% until next January." It could be worth it. Moving to 5.9% from 18% interest could mean substantial dollars to you. And the money saved in interest could then be applied toward the principal each month, thus reducing your outstanding debt balance even further.

Take care, though, before you act. Examine the offer closely. Look for the hooks. Will the interest rate after the introductory period be higher than you're paying now? If so, you may have to switch again at that time. That, in turn, could give rise to another surprise. Banks have caught onto the charge card hoppers who switch from card to card to take advantage of the low introductory rates. Many of these offers now stipulate that if you transfer balances from the new card within a 12-month period, the normal interest rate will be applied to all outstanding balances retroactively. That proviso could be a bitter pill to swallow for someone short on cash, and it certainly doesn't help the debt repayment schedule. Read the fine print.

3. Cash out your savings accountYou could cash out your savings and investments and use the proceeds toward debt repayment. Yeah, no one wants to do that. But sometimes it makes sense to do so. Even when debt interest is at 12%, your investments would have to pay more than 18% before federal and state taxes to equal that outflow of dollars. We doubt the dollars in your savings account are earning anywhere near that rate of interest. Pay off the debt, and it's the same as getting that 18% return without any risk on your part. The higher the interest rate on your debt, the more attractive repayment versus investment becomes.

4. Borrow against your life insuranceDo you have life insurance with a cash value? If so, borrow against the policy. Yes, you're borrowing your own money. But the interest rate is typically well below commercial rates, and you can take your time repaying the loan. Do repay it, though. If you die before it's repaid, the outstanding balance plus interest will be deducted from the face value of the policy payable to the beneficiary. While that seems a small price to pay to get out of debt now, it could be burdensome to your loved ones should you sleep the eternal sleep before paying it back.

5. Finagle family and friendsPerhaps your family or friends could float you a loan. Who else knows, trusts, and loves you like they do? Unless you're really the black sheep of the flock, chances are you'll get a very favorable interest rate. They may even tolerate a late payment or two. But if you want to maintain the relationship, it's best to keep things on the straight and narrow by using a written agreement. You should clearly establish the interest and repayment schedule in writing to avoid misunderstandings and hard feelings. And it goes without saying that you must be scrupulous about adhering to that schedule. Otherwise, you can forget the family reunions and birthday presents.

6. Get a home equity loanDo you own your own home and have equity that's accumulated through the years as you've paid off the mortgage? If so, now's the time to consider a Home Equity Loan (HEL) line of credit for the maximum amount possible.

A HEL gives you two ways to save. First, by using the loan proceeds to pay down your debt, you trade something like an 18% loan for a 6%-7% loan. Second, if you itemize deductions on your income tax returns, HEL interest is a deductible item under most circumstances. In a 25% marginal tax bracket, the 6% loan really has an effective rate of 4.5%, and that's probably the cheapest interest rate you'll see on personal indebtedness.

The danger here is falling into a common trap. Many get an HEL, pay off existing debt, and then ring up the charges on the credit cards all over again. Now they have the HEL to repay on top of the credit cards. The hole just got much deeper. You should use the HEL to pay off the credit cards, and then keep them paid off until the HEL is repaid.

7. Borrow from your 401(k)Do you participate in a 401K qualified retirement plan at work? Most 401(k) plans have a feature that lets you borrow up to 50% of the account's value, or $50,000, whichever is smaller. Interest Rates are usually a point or two above prime, which makes them cheaper than that found on credit cards. Thus, 401(k) plan loans may be a  option to debt repayment. Not only is the interest typically much lower than that on credit cards, the best part is you pay it to yourself. That's right, every dime in interest paid on a 401(k) loan goes directly into the borrower's 401(k) account, not the lender's.

But there are drawbacks. First, the loan and interest will be repaid with after tax dollars, but the interest will be taxed again when you withdraw money from the 401(k) years later. Additionally, you must repay this loan within five years. If you leave your employment prior to full repayment, the outstanding balance becomes due and payable immediately. If it's not repaid, that amount will be treated as a distribution to you. You'll be taxed on that amount at ordinary rates. And if you're under the age of 59 and one-half years, you will also be assessed an additional 10% excise tax as a penalty for an early withdrawal of retirement funds. Accordingly, ensure any 401(k) loan can be repaid before you leave your job.

8. Renegotiate terms with your creditorsOK, you've done all you can. Savings are gone; relatives have been tapped out; you don't have a home or 401(k) to borrow against. You feel like you're against that proverbial wall. The money just isn't there. Is bankruptcy the only way out? No way. Try pulling an  ace out of your sleeve prior to taking that step. What ace? The threat of bankruptcy, of course.

Let your creditors know your situation. Tell them that if you are unable to renegotiate terms, you'll have no other recourse but to declare bankruptcy. Ask for a new and lower repayment schedule; request a lower interest rate; and appeal to their desire to receive payment. Faced with the prospect that you may resort to such a drastic step, creditors will do what they can to protect themselves against a total loss.

Indeed, many will negotiate away the farm before they'll write off your debt. As lawyers love to say, everything is negotiable. Therefore, what do you have to lose, except time? It's worth a try. And if you don't wish to do this yourself, organizations exist that can do it for you.  But remember, often debt forgiveness is treated as income by the IRS so you might end up paying taxes on it.

9. As a last resort, file bankruptcyWhat if you decide you can't pay down your debt using any of the methods listed above? What should you do? The absolute last resort is bankruptcy. We firmly believe everyone has a moral obligation to repay their debts to the utmost of their ability. There are times, though, when repayment may be impossible. In those cases, bankruptcy may be the only available course of action. Nevertheless, be aware of the significant drawbacks.

Your credit record will contain this information for 10 years, thus ensuring you will have a tough time obtaining credit you can afford during that period. Additionally, as odd as it seems, it costs money to file for bankruptcy. Attorney and court filing fees cost in the hundreds or thousands of dollars, and they must be paid to obtain the relief sought. Finally, bankruptcy laws have gotten a lot tougher in recent years, so you may not qualify for complete relief.

There are two types of personal bankruptcy relief: Chapter 7 and Chapter 13.   Chapter 7 is straight bankruptcy that allows the discharge of almost all debts. Those that aren't discharged are alimony, child support, taxes, loans obtained through filing false financial statements, loans not listed in the bankruptcy petition, legal judgments against the petitioner, and student loans.

While Chapter 7 relieves you of the responsibility of repaying most creditors, you may have to surrender much of your property to help satisfy the debt. However, different states have different laws that grant you exemptions on certain types of property, such as a certain amount of equity in your home, a low-value vehicle, small amounts of jewelry and other personal property, and tools you use in your trade or business. These exemptions usually aren't huge, but they do mean you won't have to start over with absolutely nothing.

Chapter 13, sometimes called the "wage-earner plan," is different. You keep your property but surrender control of your finances to the bankruptcy court. The court approves a repayment plan based on your financial resources that provides for repayment of all or part of your debt over a three-to-five-year period. During that time, your creditors are not allowed to harass you for repayment. You also incur no interest charges on the indebtedness during the repayment period. When all conditions of the court-approved plan have been fulfilled, you emerge debt-free from the bankruptcy.