Never, Never, Never Co-Sign

Never, Never, Never Co-Sign

 

A couple of times each year I am asked by one of our clients what I think of he and his wife co-signing for a son or daughter to buy a car, a boat, pay for vacation (fill in the blanks).  My advice has consistently been never, never, never co-sign.  While the child might be upset with you for a week or two because you refused, their disappointment should soon fade, and if it doesn’t, do you really want your relationship with your child to be based upon how much you can loan to them or secure a loan for them from some third party?

 

The alternative that I sometimes suggest is that the client actually loan the money to their child and take back a security interest in the article purchased.  For example, if they purchase an automobile, which is a frequent item involved in these transactions, you can retain the title with an endorsed lien so that if your child does not continue to make the payments you have the right to “foreclose” and take the vehicle back and sell it to satisfy their obligation to you.  But this advice applies only if you have enough money to loan to your child or friend. If your resources are limited, it is best to return to my original point of never, never, never co-signing or loaning money that you can’t afford to lose to a child.  If you choose to take the route of loaning money to a child, you can always get it back upon death.  No, I don’t mean your child’s death.  I mean yours.  Just revise your Will to take into account that any amount received by that child upon your death will be reduced by the amount loaned and unrepaid.

 

But before I leave this subject, let’s return to the basic premises of never, never, never co-signing for a loan.  At first blush, you might think the only exposure you have on the loan is the principal outstanding, and you might also think that you will never have to pay this since there is little possibility that your child or best friend would default on the loan, especially in view of the fact that you will be left on the hook.  Actually, you would be wrong on both counts.  To begin with, when your friend or child borrows money, their loan may be based on their credit score and, as a consequence, at a higher interest rate than if the loan was in your name.  As a consequence, if you get stuck paying the bill it could be more costly than if you borrowed the money yourself.  Second, if your child or friend defaults on the loan, you may not realize that a default has even occurred.  I have had situations where a car or other piece of property has been repossessed and sold at auction before the co-signor is even aware of the default.  Since your credit rating and credit score, which is the basis for all of your financial transactions in the future, is impacted by this default whether or not you actually defaulted, your credit score may be impacted which will result in any future loans that you want to secure costing you untold dollars in additional interest.  In addition, a recent study by the Federal Trade Commission concluded a shocking 75%, or 3 out of 4 of all sponsoring co-signors, wind up paying the loan off themselves.  After the security is sold, the creditor will most likely pursue you first rather than the person for whom you co-signed.  Why you may ask?  Because you are the one with the stronger credit.  You are the one with assets.  You are the one with bank accounts.  That is why you were asked to be a co-signor.  You have assets and/or income that the lender can pursue.  He is not being evil, he is simply being practical and protecting either his members in the event of a credit union or his investors in the case of a bank or commercial credit company.

 

Finally, there is the issue of treating your other children unfairly.  We have encountered situations where school loans were guaranteed or co-signed by the parent.  The parent dies and the children seek to conclude the estate only to find that there is claim against the deceased parent’s assets for loan guarantees still outstanding for a loan to one of the children.  As a consequence in some instances, this can result in as much as all of the assets of the estate being consumed by these outstanding obligations with no hope of repayment or rebalancing by the child who received the original loan proceeds.

 

So take my advice and never, never, never co-sign for a loan.  Unless, of course, the offer is made by your friend Vito, and Vito makes you an offer you can’t refuse.

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Scam Alert!

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Avoid this scam!  After recording a deed to real property, this mailing has been received by many of our clients.  This mailing offers you a copy of your deed for an $89.00 service fee. BEWARE!  In reality, not only should you have obtained a copy of the Deed directly from the Recorder of Deeds or your attorney’s office, but in the event that you did not, you can obtain a copy directly from their office for a minimal, per-page copying fee.  Please view the attached document for reference.

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Reverse Mortgages

Reverse Mortgages

 

The second category of commercials I find irritating are those for reverse mortgages, always touted by a well known personality who tells you that they will enable you, the homeowner, to “live the life you deserve”.  Included in this group of personalities is Robert Wagner, better known to some as the widower of Natalie Wood, James Garner from Maverick and The Rockford Files, Fred Thompson from Law and Order, Wayne Rogers from MASH, and last, but not least, Henry Winkler, “The Fonz”, from Happy Days, one of the few individuals whose TV persona has a longer biography than the person who plays him.

 

None of these personalities knows what you deserve, but the thing that troubles me most about these commercials is that none of the actors involved can possibly know anything, or at best very little, about the intricasies of “Home Equity Conversion Mortgages” – the original name of Reverse Mortgages.  Granted, Fred Thompson’s mother is said to have had one because her wealthy actor son refused to take care of his mother in her old age, and Henry Winkler had a Master’s Degree from Yale (although it was Yale Drama School), but it takes much more to comprehend the involved financial formulas required for reversed mortgages.

 

I find little comfort in the fact that these mortgages are structured by the Federal Housing Administration, another agency brought to us by Congress.  You know the same Congress that gave us Freddie Mac and Fannie Mae which in turn brought us the housing bubble and collapse during the past few years not to mention enumerable foreclosures.

 

Reverse mortgages do, however, serve the purpose of enabling an elderly person to stay in their home.  In fact, you must be elderly to qualify for one.  That is if you consider 62 elderly.  Next, your home must be clear of pre-existing liens, although the new mortgage can be partially used to pay off existing ones.   In addition, the Reverse Mortgage cannot be foreclosed, but the homeowner must pay all taxes, insurance, maintenance, and, in some instances, flood insurance.  An attractive quality for some homeowners is that there is no credit score and other qualifying standards since the lender pays the borrower instead of the typically reverse arrangement.  Although trailers do not qualify, most other single family homes do, as well as doubles if one is occupied by the borrower.

 

But all is not roses.  If the borrower enters a nursing home,the terms of the reverse mortgage may require the property be sold and the obligations of the mortgage holder cease.  In addition, there are usually steep upfront fees and the interest rate paid to you as the borrower is usually less than stellar.

 

Finally, the mortgage becomes due, if not sooner, upon death and that event, in addition to being untimely to you, may be untimely for refinancing or sale of the property.  Although this might be irrelevant to you because of the benefit of the reverse mortgage, don’t sign up until you know the downside.  Talk to your attorney or financial advisor and make certain this is the right product for you.  We realize that staying in the family home is attractive to most people, but downsizing is not always a negative.  Selling that large home where you raised your children may scratch that nostalgic itch, but it may not be in your best interest.  A smaller home means lower taxes and utility bills and usually less maintenance costs as well.  Assisted living facilities also meet the medical and personal needs of the elderly rather than constantly depending on your children or friends.  Regardless of the attraction of remaining in your home, consider these alternatives before making a choice that is not going to stand the test of time.

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Term Life Insurance

There are two advertisements that appear frequently on television that I find more annoying than most simply because they are so misleading.  You’ve seen them both if you ever turn on your television during the day.  One starts with a woman asking another how she is doing after the recent loss of her mother.  That woman responds that she is okay because she had just received a check from her mother’s life insurance policy that enabled her to pay her mother’s bills and as a consequence that relieved her of all kinds of financial  responsibility.  What annoys me most is that there is no law that automatically makes the daughter personally responsible for the debts of the mother.  The one expense that cannot be avoided is that for funeral expenses.  The advertisement, which is AARP sponsored, ignores other, and possibly less expensive alternatives, to pay funeral expenses such as a term life insurance policy from another less advertised insurance company.  You should know that really is what you are purchasing, but the ad gives you the impression that the product advertised is something unique because it’s from a company approved by the AARP and has a well known spokesperson.  Unfortunately, it means only that the AARP and the spokesperson are getting a piece of the profits at the expense of you, the purchaser.  This highlights the fact that what you are purchasing is an expensive term life insurance policy.  If you fail to make the payments, the policy will lapse and be worthless.  Another alternative available to pay for those funeral expenses is a prepaid funeral from a local funeral home.  This alternative may “freeze” the cost and also enable “mother” or the deceased, to specify the arrangements that she wants and not those that the children and/or grandchildren can possibly argue about.

 

The third alternative to the advertised product is not incurring debt, paying off your mortgage and start saving as soon as your children are out of diapers so you don’t burden them in your old age.

 

I’ll let you guess my choice for the second most annoying advertisement directed at the elderly until my next blog, but in the meantime don’t get sucker punched by a slick television ad.   Before you buy anything, ask yourself why a product that so benefits the company selling it is being touted by the AARP, an organization that pretends to protect the elderly but apparently is more interested in earning a profit for itself, and check out the alternatives outlined above.  If you have trouble finding an acceptable quote from an insurance company or funeral home, call our office and we will be pleased to provide you with some phone numbers or websites.

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The Basics of Paying or Receiving Support

The Basics of Paying or Receiving Support

The term “support” encompasses a wide range of payment possibilities and different scenarios.   No two people’s scenarios are necessarily the same and consultation with an attorney regarding your specific situation is imperative.

A support order can be for child support and/or spousal support.  Entitlement and amount of child support depends on a variety of factors, including but not limited to: shared physical custody, primary physical custody, overnight visitation, income disparity of the parties, health insurance premiums, childcare costs, paternity and earning capacities. Entitlement and amount of spousal support also depends on a variety of factors, including but not limited to: amount awarded for child support, health insurance premiums, income disparity of the parties, earning capacities and wrongdoing of the parties.

 

Establishing the Support Order

 

A support action is commenced with the Plaintiff/Payee filing a Support Complaint at the local County Domestic Relations Office.  After entitlement to either or both forms of support has been established, the support order amount will be determined in a conference by a support conference officer at the County Domestic Relations Office.  A conference officer is an individual trained to calculate support orders based upon all relevant factors presented.  The support order will not be entered over a maximum percentage of the payor’s total income from all sources no matter the income from all sources of the payee.  The support order is typically effective as of the date the Plaintiff/Payee filed the Support Complaint, leaving the Defendant/Payor with an arrears balance which he or she is typically required to pay at a set amount per payment period until the arrears are paid in full.

When a support order has been entered by Domestic Relations, a wage attachment is typically entered and the support is paid by the payor’s employer directly to the Pennsylvania State Collection and Disbursement Unit, which then disburses the payment to the payee. The Payee receives their support payment by check, on a debit-type card, or direct deposited into the financial institution of the Payee’s choosing.

 

Modification

 

The initial amount entered as the Support Order will be the amount that the Payor will pay until such time as it is changed by further action of Domestic Relations.  This change can be initiated by either party (Payor or Payee) and can be changed for various reasons, including, but not limited to: change in physical custody, change in income, change in employment, loss of employment, entry of a divorce decree, graduation of a child, change in childcare costs, change in insurance premiums.  To change a support order, the party seeking the change must file a Petition for Modification with the Domestic Relations Office that is handling the Support Order.  A support conference is again held with a support conference officer to review the changes in circumstances and enter a new Support Order based upon those changes.  Some changes will lead to a change in Order, Including the loss of a job due to no fault of the party liable for support, but the Order will not be reduced if there is a voluntary loss of income to attempt to evade support payments. Even if you are unaware of any changes, the Support Order is entitled to annual review initiated by either party.

Failure to pay may result in a finding of contempt which is punishable by imprisonment up to six months.

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