DEALING WITH A HOME THAT YOU CAN NO LONGER AFFORD

You bought a home, took out a mortgage loan, and looked forward to the seemingly guaranteed rise in the real estate values of the decade of the 2000’s.  Then came 2007, and the recession, the drop in the stock market, and the plummet of the real estate market.  Homes that were purchased in mid-decade, when the bubble was fully inflated, are now “under water”:  their value is less than the mortgage loans that were taken to buy them.  If you bought a home for $500,000 in 2005, and took a loan at 90% of the value, then you have a loan balance of about $450,000.  If that house now sells for $400,000, then at closing you are going to need to come up with $50,000 to sell the home.  The situation was compounded if you took out a home equity loan – and financed 100% of the value of your home.  And of course, if you or your spouse have lost your job, then your ability to even keep up with the payments may be compromised.  While we all may buy that Powerball ticket each week and hope that it is the answer to our financial distress, all of us but the one winner must ultimately deal with the situation on the ground:  what are the options for getting out of a home that you can no longer afford?  In Pennsylvania, here is the general lay of the land.

With a mortgage loan, a borrower typically signs a promissory note and mortgage.  (In some commercial transactions, the loan may be “non-recourse” against the borrower, but that is rarely the case with a residential loan.)  The borrower promises to pay on the note, and if not, the lender can sue on the note or foreclose on the mortgage.  Generally they choose foreclosure – because the property has a certain value; and the borrower who is not paying on the note generally is not doing so because they cannot do so.  If the lender takes the property through foreclosure and sells it for less than the amount of the loan, then in theory they are entitled to seek the deficiency from the borrower.  They have to file that action within six months after the foreclosure sale.  If they don’t then they are barred.  The decision to do so is a business decision, and depends on whether they think the borrower can pay.  No use spending the money on seeking the deficiency, if they are unlikely to recover anything more.

Sale:  To avoid foreclosure, the borrower can first try to sell the property.  If there is equity in the property, that is if the sales price is more than the combined mortgages and transaction costs, then upon sale, the mortgage is paid, and the borrower gets the equity.  That’s the best case. 

Short Sale:  In our current market, many properties are worth less than the amount of the mortgage – they are “under water”.  In these cases, the borrower may want to negotiate a “short sale” with the lender.  A short sale is a sale for less than the amount of the mortgage balance, with the lender agreeing to accept less than the full amount of the outstanding loan balance.  The borrower markets the property, finds someone who makes an offer, and then takes that offer to the lender and negotiates with them to see if they will accept some lesser amount.  Each lender has its internal guidelines; they are dealing with these issues every day and know the market is soft.  So, lenders typically are willing to negotiate a short sale arrangement with a borrower who does not have the financial means to pay the shortfall.  Check with your lender to learn about what they are offering before starting the process.

Debt Forgiveness Can Be Taxable:  When a person is released from debt that they owe, that is generally treated as income to the debtor.  If someone tells you don’t have to pay the $50,000 you owe them, the IRS considers that you have received $50,000, and so you pay income tax on it.  In a short sale, you are being forgiven debt.  You might have to pay income tax on that amount.,  However, when the current mortgage crisis began, Congress passed the “Mortgage Forgiveness Debt Relief Act of 2007”, which essentially provides that if the debt forgiveness relates to acquisition costs for your home mortgage, then during the time this temporary law remains in effect (currently through 2012), the debt forgiveness will not be treated as income (with certain limits and conditions).  When considering a short sale, take this into account.

                                                                                          

Deed in Lieu of Foreclosure:  If the borrower cannot find a willing buyer for the property, then the next step may be to try to negotiate a deed in lieu of foreclosure with the lender.  The borrower is essentially telling the lender “I won’t fight you on the foreclosure; in fact, I’ll just give you the deed to the place.”  The lender saves the costs of foreclosure, but steps into your shoes as owner and takes the property subject to whatever other liens are on the property.  If the lender goes through foreclosure, then they are in the front of the line for lien priority – they typically have the “first lien” ahead of everyone else except federal and state taxing authorities, and a six month homeowners association lien (where applicable), and so for them, it may make more sense to simply go through with the foreclosure, and strip the other junior liens off the property.    To the extent there are not lots of other liens on the property (determined by a title search), then the lender may be interested in negotiating a deed in lieu of foreclosure.  In some cases, they may also allow you to remain in the property under a lease.  However, the lender is not in the business of owning property; they turn around and re-sell it.  If they re-sell for less than the loan balance, then there is a deficiency that is the borrower’s obligation.  Unless the borrower has been able to get the lender to agree to forgive any or all of the deficiency, then borrower is still obligated to pay the deficiency.  So, the deed in lieu transaction, without debt forgiveness, does not do a great deal for the buyer, other than to stop the ongoing default and piling on of interest, late charges, and attorneys fees. 

Loan Modification:  A lender may also consider a loan modification to make it easier for a borrower to pay the loan.  You need to ask the lender whether they would entertain a loan modification, and explore what they are offering.  There are also federal programs in place to encourage this.  Check out the “Making Home Affordable” program at http://www.makinghomeaffordable.gov/.  This government site explains various options, including modifications, refinance, and relocation assistance.  They also encourage short sales and deed in lieu transactions through the Home Affordable Foreclosure Alternatives (HAFA) Program.  
Not every option works for everyone, but you just need one that works for you. 

Fight the Foreclosure:  If a loan is in default, and the lender has begun foreclosure, then a borrower may choose to fight the foreclosure.  Since the main issue is “are you paying the mortgage loan”, and the answer is almost always “no”, the borrower is usually going to lose the legal battle relatively quickly.  However, there are times when a loan has been sold several times, and the paperwork has been lost or improperly done, and a savvy lawyer may be able to construct an argument on why the foreclosure may be ineffective.  In the rare instance, that can stop the foreclosure process.  However, typically the obligation under the note is intact, and so the lender can sue under the note as well. So, this is largely a delaying action, and only postpones the day of reckoning.  And, you must pay a lawyer to do this for you.  At the end of the process, the bank owns the home; when they sell the home, if they collect less than what is owed (loan balance plus transaction costs), then the lender may seek a deficiency judgment against the borrower.  In Pennsylvania the lender has six months following the sale to seek that remedy; otherwise it is barred.  The decision to do so is simply a business decision – do you have money, and is it worth the additional time and effort of the lender to try to collect it from you? 

Bankruptcy:  The borrower’s last line of defense is to file for bankruptcy.  The lender with a valid first mortgage on the property is not going to go away in bankruptcy.  They are a “secured creditor”, and so while bankruptcy can help a borrower by giving them time, and by discharging the unsecured creditors for pennies on the dollar, it still does not shake off the secured first mortgage lien.  A chapter 7 bankruptcy is a “liquidation”:  your assets are identified, and used to pay off your debts, until the money runs out, and the unsecured balances are discharged.  Secured creditors are protected and after some initial delay are permitted to complete their foreclosure.  A chapter 13 bankruptcy allows you to pay back your debts in a proposed payment plan over 3-5 years.  While it does not reduce your first mortgage loan, it can help your situation by stripping out a home equity loan balance, it can reduce or eliminate debt owed to unsecured creditors, and can give you time to pay your arrears on the first mortgage.  So, a Chapter 7 bankruptcy is a delaying action (measured typically in months, not years), but it may also bring the lender to the negotiating table for one of the other remedies – a modification, short sale, or deed in lieu.  A chapter 13 bankruptcy gives a borrower more options, depending on their income and their debts, and so can be useful for the borrower who is up to their waist in debt, but not up to their ears or over their head. 

Your Credit Rating:  In each of these cases, the borrower may also be concerned about their credit rating.  When the borrower fails to make payments on a loan, those failures are reported to credit rating agencies, and start impairing the person’s credit.  A bankruptcy does this as well.  If the borrower is still paying the loan on time while they are negotiating, then they are not impacting their credit.  However, for some remedies, the lenders will not negotiate with a borrower unless they are in default.  So a borrower has to go in to default simply to open the door to the future negotiations.  If that negotiation is successful, then the failure to pay continues only for a short period, and the borrower can always submit a note of explanation to the credit ratings agencies that explains the cause of the default.  That does not necessarily remove the “stain” of the default, but may help to bleach it a bit.

State Specific Programs:  Each state is developing its own programs to try to help citizens dealing with these problems.  Here are five ways that Pennsylvania is trying to help (as reported at eHow - see link at bottom) :

1. Contact the Pennsylvania Housing Finance Agency’s (PHFA) Foreclosure Mitigation Counseling Initiative. The Foreclosure Mitigation Counseling Initiative was established to provide homeowners free financial counseling to find a long-term solution to preventing the house from going into foreclosure. They will analyze the homeowner’s financial situation, as well as the current value of the property in question.

2. Look into the Homeowners’ Emergency Mortgage Assistance Program’s (HEMAP) non-continuing mortgage assistance loan. This loan is provided by the state and is ideal for homeowners who are able to make their current payments, but can not catch up on back payments still owed. The loan would have to be repaid with a minimum payment from $25 per month up to 40% of the homeowner’s gross income.

3. Apply for a HEMAP continuing loan. A continuing loan is for homeowners who have a back owed amount, and are unable to make their current payments at the present time. This is a loan, which must be repaid. It is limited to a maximum of 24 months and $60,000.

4. Refinance to an Affordable Loan Program (REAL).

[The REAL and HERO programs concluded on December 31, 2010. Applications are no longer being accepted.]

5. Homeowner’s Equity Recovery Opportunity Loan Program (HERO).

[The REAL and HERO programs concluded on December 31, 2010. Applications are no longer being accepted.]

Read more at eHow:  How to Stop Foreclosure in Pennsylvania 

For a wealth of other information on programs in Pennsylvania, go to the Pennsylvania Housing Finance Agency website. 

CONCLUSION

Sorry!  There are no easy answers.  But there are a variety of programs, and a variety of remedies available.  You need to educate yourself on what ones may work best for you.  Assess your situation, and then contact your lender, or a government assistance agency, to begin the process of finding out what’s right for you.  You are likely to be dealing with large and inefficient bureaucracies.  Remember that the people on the other end of that phone are dealing with hundreds of people with the same financial problems as you every day.  Don’t treat them rudely and try to terrorize them into responding to you.  They have piles and piles of documents just like yours, and they can decide which ones to process and one ones go to the bottom of the pile.  But, don’t be afraid to ask for names, and keep notes of every phone call.  Write follow up notes confirming important conversations.  When you personalize the contact, you create a relationship with a person, but you also hold them accountable for what they tell you.  It is more effective in future negotiations to be able to tell them exactly who you talked to, on what day, at what time, and what they said, then to simply complain that “somebody told me it was okay”.  Stay organized.  Large bureaucracies have lots of places for your file to hide.  Scan documents so that if you are asked to re-send them, you already have them scanned and in a legible form, and you reduce the frustration of jumping through the same hoops over and over again.  That is likely to be part of the process.  Don’t rage against it.  Bend with it and bounce back.  Give them exactly what they want and make their job easier rather than harder. 

You are in a hole.  You need to dig your own way out, and you need to do so one shovelful at a time.  Keep focused on the goal.   Control what you can control.  Let go of what you cannot control.  Buy the weekly lottery ticket, but until that hits, you need to do what you need to do to dig your way out.

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice at the Millridge Manor House in Bryn Mawr, Pennsylvania.  You can contact him at Tel: 610-525-7150, or via email at humeslaw@verizon.net.

The Estate Tax is Back!

Beginning in 1916, the federal government began taxing the estates of those who died each year.  Without more, people could on their deathbed give away their entire estate by gift, thus evading the estate tax.  So, the next move was to tax gifts made during life – this was added to the tax structure in the 1930’s.  At the higher estate levels subject to these taxes, the next planning device was to make gifts that skipped a generation or two.  Gifts of accumulated wealth to a grandchild or great-grandchild moved the wealth past one or two generations without taxation.  So that hole in the system was plugged with the generation skipping transfer tax – which then taxed those transfers which otherwise would have skipped a generation or two of estate taxes.  By 2001, the three-legged system applied to estates over $1 million, and applied a highest tax rate of 55% to those estates. 

In 2001 Congress enacted changes to the estate tax:  they gradually raised the exemption amount from $1 million to $3.5 million, and lowered the highest tax rate to 45%.  In 2010, the estate tax (but not the gift tax) was eliminated entirely.  In 2011, the system that was in place in 2001 was scheduled to return unless Congress acted.  In the last days of the lame duck Congress, they finally acted, and so the estate tax is back.  For estates of those dying in 2011 and beyond, if you have an estate of over $5 million, then you will pay estate tax that reaches a top rate of 35%.  Below that amount, there is no federal estate tax due.  (But remember that you are not home free in that circumstance, as many states still have an estate or inheritance tax in place.)  

In 2001, the total federal estate tax returns filed were 108,071, of which 51,736 were taxable.  In 2009, the total returns filed were 33,515, of which 14,713 were taxable.  According to the New York Times, “less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax.”  Clearly, fewer estates are being taxed because of the higher exemption rates.  However, the change is not yet permanent:  Congress has kicked the can two years down the road.  In 2013, the 2001 rates and levels will arise from the dead, unless Congress acts again.  Will they act in 2012?  That’s a presidential election year, and so it is more likely that they will not act, and we will again be playing chicken with the estate tax after the 2012 election.  But, we have some certainty for the next two years, and those to whom the revised estate tax law may apply can now plan accordingly.  For the rest of us, the estate tax is a non-issue for the next two years.  But keep your eye on that can!

©2011  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice in an old mansion in Bryn Mawr, Pennsylvania.  Contact him at Tel: 610-525-7150, or via email at humeslaw@verizon.net.

Advice for the Self Employed from our friends at the IRS

Here are the latest tips from the IRS for the self-employed (see Tax Tips below).  If you've been self-employed and filed an income tax return with a Schedule C (Profit or Loss From Business - Sole Proprietorship), then there is probably nothing new here.  But if you are considering going into business for yourself, such as consulting, hanging our your shingle, or starting a business as a sole proprietorship, then these are the handful of basic issues the IRS wants you to be aware of:

Issue Number:    IRS Tax Tip 2011-16

Inside This Issue

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Tax Tips for Self-employed Individuals

If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed and you would file IRS Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit From Business with your Form 1040.

Here are six things the IRS wants you to know about self-employment:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay Self-employment Tax. Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income. [NOTE:  SELF EMPLOYMENT TAX IS IN ADDITION TO THE INCOME TAX ON THE INCOME YOU SHOW ON SCHEDULE C.  Ed.]
3. If you are self-employed you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you may be penalized for underpayment at the end of the tax year.
4. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
5. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
6. For more information see IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at http://www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

IRS Links:

• Publication 334, Tax Guide for Small Business (PDF)
• Publication 535, Business Expenses (PDF)
• Publication 505, Tax Withholding and Estimated Tax (PDF)  

Other Resources (suggested by me, and not the IRS!):

Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants

Self-employed Tax Solutions, 2nd: Quick, Simple, Money-Saving, Audit-Proof Tax and Recordkeeping Basics for the Independent Professional (Self-Employed Tax Solutions: Quick, Simple, Money-Saving,)

TurboTax Home & Business Federal + e-File + State 2010 [Download]

JK Lasser's Small Business Taxes 2010: Your Complete Guide to a Better Bottom Line

Obamacare and Extended Coverage for Young Adults

While the Obamacare debate is reopened, here's a tip: don't take for granted that your existing health insurance coverages will automatically cover your recently graduated young adult. 


Prior to the passage of Obamacare on March 23, 2010, a child on a parent's policy was typically  dropped from coverage at either the 19th birthday, or graduation from college.  Obamacare permits the extension of certain coverage for your recent college graduates up to their 26th birthday, but with certain important exceptions.


1.  If the parents have coverage with an employer that existed as of March 23, 2010 when the health law was enacted (so-called “grandfathered” coverage), then their dependent coverage is only extended to young adults without other access to employer-sponsored coverage.  In other words, if the child can get coverage through a current employer, then the child cannot go back on the parent's policy.  This limitation remains in effect until 2014.


2.  If the parent's existing policy does not have "dependent coverage", then the employer will not be required to provide it.  


3. The change applies to plan years beginning on or after September 23, 2010.  So, if the plan year is a calendar year, then the change applies as of January 1, 2011.   Some insurers may implement the change sooner.  


4.  The employer cannot charge a higher premium for a young adult than what it had charged in the same circumstance for a child with coverage.  However, if under the existing plan, the carrier could charge an additional premium for each additional dependent, then that continues.  A premium can be charged for each young adult.  


5.  The change in law applies for basic medical care coverage. It may not apply to dental coverage and vision coverage. It depends on the employer's particular plan.  An employer may obtain a plan that permits this extended coverage for dental and vision, but these coverages are not required under the recent law changes.  


6.  Children (under age 19) can't be denied coverage for pre-existing conditions.  Beginning in 2014, when many of the new law's more sweeping provisions take effect, no one can be denied coverage based on pre-existing conditions.  But for that young adult who wants to go back on his parents policy, if they have a pre-existing condition, then according to a U.S.A. Today article:


"Some young adults joining their parents' employer-sponsored health plans can face a pre-existing condition exclusion for up to 12 months in which care for the existing illness is not covered. The rules vary by state. Once the exclusion period expires, the young adult will be covered for the illness."  


I have not been able to find the black letter law on this particular topic in the thousands of pages of law, regulations, and commentary about the changes to the law.  

So, before sending your young adults off to the doctor, or dentist or optometrist, call your employer's benefits expert (or call the coverage carrier directly), explain that your child is no longer a full time student, and specifically ask whether they continue to be covered for medical, dental, vision or any other additional coverages. If they confirm that the coverage is available, then take the name of the person you spoke with, or ask for written confirmation.  Don't rely on the fact that the child's name still appears on an insurance card or on a website as a dependent.  When the claim comes in, the carrier may challenge the coverage and deny the claim.  Then you may find yourself fighting a claim denial.  In that circumstance, the adult child, and not the parent,  may find themselves without the coverage they thought they had, and owing thousands of dollars for services that they received and that they thought would be covered.  This is a true pitfall - a hole covered by brush that you may unexpectedly fall into.  And it is a deep hole for a 20-something to find themselves in. 

Top 10 Tax Time Tips (courtesy of IRS)

Here are some tax reminders and ideas from our friends at the IRS:

It’s that time of the year again, the income tax filing season has begun and important tax documents should be arriving in the mail. Even though your return is not due until April, getting an early start will make filing easier. Here are the Internal Revenue Service’s top 10 tips that will help your tax filing process run smoother than ever this year.

1. Start gathering your records:   Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.
2. Be on the lookout W-2s and 1099s will be coming soon; you’ll need these to file your tax return.
3. Use Free File:   Let Free File do the hard work for you with brand-name tax software or online fillable forms. It's available exclusively at http://www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $58,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there's Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile to review your options.
4. Try IRS e-file:   After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers - 99 million people - used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.
5. Consider other filing options:  There are many different options for filing your tax return.You can prepare it yourself or go to a tax preparer.You may be eligible for free face-to-face help at an IRS office or volunteer site.Give yourself time to weigh all the different options and find the one that best suits your needs.
6. Consider Direct Deposit   If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check. 
7. Visit the IRS website again and again   The official IRS website is a great place to find everything you’ll need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.
8. Remember this number: 17   Check out IRS Publication 17, Your Federal Income Tax on the IRS website. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.
9. Review! Review! Review!  Don’t rush. We all make mistakes when we rush.Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.
10. Don’t panic!   If you run into a problem, remember the IRS is here to help. Try http://www.irs.gov or call toll-free at 800-829-1040. 

Ten Things Tax-Exempt Organizations Need to Know About the Oct. 15 Due Date

[This is reprinted verbatim from the IRS Tax Tips of September 30, 2010 issued by the IRS.  No use in trying to re-phrase what is already short and sweet and right on point.]


A crucial filing deadline of Oct. 15 is looming for many tax-exempt organizations that are required by law to file their Form 990 with the Internal Revenue Service or risk having their federal tax-exempt status revoked.  Nonprofit organizations that are at risk can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program.

The Pension Protection Act of 2006 mandates that most tax-exempt organizations must file an annual return or submit an electronic notice, with the IRS and it also requires that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status.
Here are 10 facts to help nonprofit organizations maintain their tax-exempt status.

1. Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15, 2010.
2. Among the organizations that could lose their tax-exempt status are local sports associations and community support groups, volunteer fire and ambulance associations and their auxiliaries, social clubs, educational societies, veterans groups, church-affiliated groups, groups designed to assist those with special needs and a variety of others.
3. A list of the organizations that were at-risk as of the end of July is posted at IRS.gov along with instructions on how to comply with the new law.
4. Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice and a voluntary compliance program for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.
5. Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N also known as the e-Postcard. To file the e-Postcard go to the IRS website and supply the eight information items called for on the form.
6. Under the voluntary compliance program, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee.
7. The relief is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.
8. Organizations that have not filed the required information return by the extended Oct. 15 due date will have their tax-exempt status revoked.
9. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status and any income received between the revocation date and renewed exemption may be taxable.
10. Donors who contribute to at-risk organizations are protected until the final revocation list is published by the IRS. 

If you are involved with a Tax Exempt organization and have any questions, I welcome you to contact ...

Very truly yours!

Doug Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice at an old Main Line mansion in Bryn Mawr, Millridge Manor House.  Doug is also a Pennsylvania notary public and offers that service as an accommodation to clients and Millridge residents.  You can contact him at Tel: 610-525-7150, or via email at humeslaw@verizon.net.

Rate Jacking - Fight Back

(first published 11-25-2009)

Tis the season … when we are all spending money on the holidays - gifts, entertaining, travel, perhaps year-end charitable donations, etc.  And when the outflow is going faster that the inflow, we have what businesses call a "liquidity crunch".   I don't know what all of you do when you are being crunched like that, but I will take advantage of the credit card offers that fill my mailbox - the ones with the promotional teaser rates - 0% through August, 2010; 1.99% through 12-31-10.  Yes, I have learned to read the fine print - and have noticed the "transaction fee" has climbed in recent years from a minimum dollar amount to between 2-4% per transaction.  But paying even 4% for the money for a year is better than paying whatever the "regular rate" is.  Right? 

Well, with online payments, with direct payments from banks, with paperless bills, there are times when I have simply lost track of my due date, and have not paid the minimum payment on time.  And of course part of the fine print in the original teaser promotion cautions you that if you have any late payments, then that wonderful deal that you signed up for, that promotional rate good through some time into the distant future, is no longer going to be honored.  If you don't keep your end of the bargain - by paying on time and not going over your credit limit - then the credit card company does not have to keep their end of the bargain.  In fact, they have already pointed out to you what happens in this event - in the smaller print at the bottom of the promotional letter, where it says: "However, all of your APR's (including this offer and any other promotional APR's) may increase as permitted by law up to the 29.99% variable default rate if you pay us late, go over the credit line, or make a payment to us that is not honored."  That's certainly not what you expected if you signed on for one of these rates.  But unfortunately, that is what you bargained for.  You made the deal with the Devil, and now he is knocking on your door for payment.  I have seen this practice referred to as "rate jacking", and it is a colorfully descriptive term for what has occurred.  Your credit card interest rate is jacked way up because you have made a simple mistake.  One day late, and your holiday goose is cooked. 

However, all is not lost.  Under the terms of the Credit Card Act of 2009 which took effect on Aug. 20, 2009, the credit card issuer must now give you 45 days advance notice that they are going to jack your rate up due to a delinquency or default or as a penalty.  Also, effective in February 2010, the issuer cannot apply a penalty rate until the consumer is more than 60 days delinquent on the account.  So, if you make that late payment just one time, they cannot then change the deal and jack the rate up.  They must send you that 45 day notice, with language in it disclosing the proposed changes; the "effective date, and, a notice that you have the right to reject the changes.  They must also disclose if they are will suspend or terminate any future use of your account as a result of your rejection of the change.  The notice will give instructions—and a toll-free number—for rejecting the change or rate increase.   Follow the instructions carefully, and if you are successful in jumping through their hoops, the telephone voice tells you that you were successful, and gives you a confirmation number.  Now get caught up on your delinquent payment.  And then go and sin no more. 

The new 45 day notice does not apply to an APR increase upon the expiration of a specified period of time, as long as the creditor disclosed clearly and conspicuously in writing the length of the period and the APR that would apply after that period.  In other words, if the original offer said "good through August, 2010, with a rate increase in August, 2010", then your credit card company does not have to give you a new 45 day notice.  Similarly, if you have a variable rate that was disclosed at the outset, then you will not be receiving a new 45 day notice each time the index fluctuates.  In addition to the 45 day notice provision, there is another beneficial (to consumers!) new requirement:  the credit card issuer must adopt reasonable procedures designed to ensure that your statements are mailed or delivered at least 21 days before the payment due date.  That gives you plenty of time to make sure that next payment is on time. 

In summary - don't pay late; if you do, don't ever pay 60 days late if you can help it.  If you get the 45 day notice telling you that you are going to be rate-jacked, then don't make any new charges on that card until you have decided whether you want to reject the change.  Read on in the notice until you get to the part about rejecting the changes.  Follow the instructions for rejecting the changes, and note the confirmation number.  If you have any doubt about the consequences of rejecting the change, first call your credit card customer service number, speak to the rep and ask the question - "if I reject this change, and pay the delinquency, am I still allowed to use the card in the future?"   Write down the date of the phone call, the customer service rep's name, and the advice that you are given.  Then make an informed decision.  The rules are changing, and you as the credit card consumer have more rights as a result of the recent changes in the law.  Don’t be afraid to use them.  That will make for a happier holiday!

©2009  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice in an old Main Line mansion in Bryn Mawr.  Doug is also a Pennsylvania notary public and offers that service as an accommodation to clients.  You can contact him at Suite 210,  Tel: 610-525-7150, or via email at humeslaw@verizon.net).