Does It Pay To Pay Your Bills?

[+ Lucky]

Reading the news, I see that many people are behind on their bills. The NY Times today reports that 10% of homeowners are delinquent, and that does not count those in foreclosure.

 

Yet other articles talk about mortgage programs that wipe out debt, credit card companies settling for much lower amounts than owed, and people "short-selling" their home, wherein the bank agrees to take less than is owed.

 

When the market was at its peak, I wondered how so many people were buying expensive homes and expensive cars. It seemed that everyone had a Lexus SUV. Some people could afford to take escorts on weeklong cruises! (oops, they always have been able to do that!)

 

So, why pay your bills? Why not live the high life and then get your debts restructured or wipe them out in bankruptcy?

[josephga]

I think it depends allot of the banks got greedy. Allot of the banks doubled and in some cases tripled the interest rates on credit cards. I always paid my credit card on time and never missed a payment still they tripled the interest. In my case the credit card was used for medical purposes. I called the company a number of times asking for a reduced rate and the wouldn't have any talk of it. So after 2 years of paying 500.00 a month I made the choice last month after a final talk with citibank to just walk away.

[Guest zipperzone]

Yet other articles talk about mortgage programs that wipe out debt, credit card companies settling for much lower amounts than owed, and people "short-selling" their home, wherein the bank agrees to take less than is owed.

 

I've read that if you "short-sell" your home, the IRS considers the amount you did not have to pay, as income and will assess you taxes on it. If true, this could be a disaster for the unemployed.

[Luv2play]

Back in 2003 before the madness got completely out of hand, I was having a coffee (or was it a vodka and tonic) with an American friend of mine and he asked me out of the blue what would happen if he just stop paying on his credit cards. This from a small business owner who was in his 60's! I replied that it would wreck his credit standing.

 

It turned out he was fully maxed out on his multiple credit cards and he had just been turned down on a second mortgage application on his store (since he was under-reporting his sales and income he did not qualify).

 

Shortly thereafter he went into bankruptcy, under the old law. He was able to liquidate all his credit card debt and he did a number of manouevres with his property such that he was able to emerge from bankruptcy with a nice condo and a new Mercedes. He did have to sell off the Andy Warhol and his grand piano and other assorted baubles.

 

I called him the poster-boy for bankruptcy reform, which George W Bush was intent to implement. Under the new law, my friend would not have been able to jettison his credit card debt the way he did.

 

His story has now played over for millions of Americans who got carried away with the consumerism mania of wanting it all now. No-one was saving or investing anymore. What investing was going on was more like speculation and flipping properties with no skin in the game. When the whole game became unsustainable, the collective house of cards collapsed.

 

It is going to take a long time for people to repair their credit and secure their financial situation. For the baby-boomers, time is running out before they will be forced into retirement and will face inadequate income to carry them through their so-called "golden years". For many of them, it looks like a job at Wal-Mart or at MacDonalds is in their future.

[operalover21]

Reading the news, I see that many people are behind on their bills. The NY Times today reports that 10% of homeowners are delinquent, and that does not count those in foreclosure.

 

Yet other articles talk about mortgage programs that wipe out debt, credit card companies settling for much lower amounts than owed, and people "short-selling" their home, wherein the bank agrees to take less than is owed.

 

When the market was at its peak, I wondered how so many people were buying expensive homes and expensive cars. It seemed that everyone had a Lexus SUV. Some people could afford to take escorts on weeklong cruises! (oops, they always have been able to do that!)

 

So, why pay your bills? Why not live the high life and then get your debts restructured or wipe them out in bankruptcy?

 

It's called being a good citizen and contributing to the greater good. Not paying your bills makes you a deadbeat. I can't even imagine contemplating such a thing.

[operalover21]

I think it depends allot of the banks got greedy. Allot of the banks doubled and in some cases tripled the interest rates on credit cards. I always paid my credit card on time and never missed a payment still they tripled the interest. In my case the credit card was used for medical purposes. I called the company a number of times asking for a reduced rate and the wouldn't have any talk of it. So after 2 years of paying 500.00 a month I made the choice last month after a final talk with citibank to just walk away.

 

This tripling of interest rates that most of the credit card companies do when you miss a payment is really one of the most disgusting practices they engage in. They harm the very people who can least afford it. It makes no sense to me at all.

 

It's one of the reasons I have never, ever carried a credit card balance. I pay the bill in full each month. Always have, always will.

 

My favorite trick of the credit card companies is something they did to a former boyfriend of mine. He had an Amex card with a 2500 credit limit. He was at his limit, but always paid on time including the minimum payment. Then Amex "decided" to do a review and they reduced his credit limit to 1000. Then they started charging him a $50 monthly "overlimit" fee for going over the new 1000 limit even though it was created after the fact. But they were legally able to do it.

 

I advised him to continue to pay but continue to deduct this $50 fee and when you get to the end just write them a letter saying why these fees are not valid and hope they go away. They eventually did but it was a hassle.

[josephga]

I never missed a single payment and they tripled my interest. However I have been advised by a financial adviser that If I don't pay the credit card debit once citi bank discharges the debit that I possible would receive a 1099 and that debit would be considered income and id have to pay tax's on it.

[Scorpio]

I've read that if you "short-sell" your home, the IRS considers the amount you did not have to pay, as income and will assess you taxes on it. If true, this could be a disaster for the unemployed.

 

In general, forgiven debt (which is what would happens in a short sell) is taxable income. There are, however, numerous exceptions such as bankruptcy and insolvency that exempt you from this income tax.

 

The Mortgage Debt Relief Act of 2007 provides specific exemptions for short sales, which are in effect through 2012.

 

http://www.irs.gov/individuals/article/0,,id=179414,00.html