Archive for the Controversies Category
Till November 6th the hottest conversation subject for Americans everywhere had been the presidential race. Now that people know who is going to be sitting in the Oval Office for the next 4 years, the bit of news that America is currently obsessed with is the so called fiscal cliff.
Like the presidential race, the fiscal cliff is just as important minus all the unnecessary media overexposure. Moreover, it is of immediate importance as the clock ticks towards the 31st of December, 2012, the day after which some analysts and economists have theorized that America might be headed towards another financial crisis.
How was the fiscal cliff born?
In 2011, the Congress reached a census whereby tax rates and certain other sources of Federal revenues were adjusted in order to modify the debt ceiling. The resolutions and Acts passed in order to put the measures into effect were signed into law with an expiry date of December 31st 2012.
Unless Congress is able to reach a consensus again before the end of the year and manage to find a way out of the problem, the sudden financial drain on the American economy as a result of higher taxes on middle income groups and loss of federal backing for businesses, is going to push the country off this ‘fiscal cliff’ and down towards another recession.
So how is the fiscal cliff going to affect the people at large? Here are a few foreseeable scenarios.
Although the US is one of the countries with a relatively low income tax rate, the condition of the economy is such that more than 53 percent of Americans would feel the burn pretty badly if taxes were to go up. The current tax brackets read starts at a low 10 percent and the maximum is set at 35 percent. Unless the government can bring in a suitable tax plan and the clock is allowed to reset on the 31st of December, the lowest income tax rate would be reset to 15 percent. In other words, middle income families are likely to pay almost $2000 extra per year.
Higher tax on investments
The tax cuts introduced during the Bush administration also lowered the rate of taxation on investments. Once they expire on the 31st of December, tax rates applicable for long term capital gains are going to up from 15 to 20 percent. Moreover, individual marginal tax rates would become applicable on qualified dividend instead of the currently fixed 15 percent. This is one of the main reasons why retail investors, senior citizens or anybody for that matter who withdraws from brokerage accounts and qualified retirements plans like Roth IRAs.
Increased unemployment rates
The current unemployment rate is about 7.9 percent as of October 2012 which is significantly better than what it was (10 percent) during the same period in 2009. Analysts and economists believe that nearly 3.4 million people would be faced with unemployment and job loss after the 31st of December which would be triggered by budgetary cuts slowing economic growth. The national unemployment figures may go up as high as 9.1 percent.
Reduced tax exemptions and benefit cuts
As of 2012, amounts up to $5.12 million were exempt from estate and gift taxes and anything above is taxed at 35 percent. After the end of the year, the exemption ceiling will drop to a low $1 million and anything above it will be taxed at the rate of 55 percent.
As a result of the 2008 financial meltdown, the Federal government provided extensions on benefits to the unemployed who had already eaten up their state allowed benefits. The program is set to expire at the end of the year and as a direct result, an estimated 2 million Americans are going to be affected with another 1 million following suit in April of the next year.
The economy of the country is still suffering from the blowback of the 2007 Economic Meltdown. US budgetary deficit has hit a record high of $1.4 trillion. The public debt load of the nation stands at a little over $15 trillion. That directly translates into $49, 868.61 per citizen. Since September 28th of 2007, the national debt has increased on an average by $4.02 billion per day. The statistics are a direct reflection of the financial condition of the country as well as her people. Debt has crept into every household and as of now, poses a serious threat to personal finance and the economic wellbeing of the average American family.
Most people caught in a difficult financial situation don’t think of filing bankruptcy as the primary debt solution. They would rather try to negotiate with their creditors or seek credit counseling. In doing so, most debtors run 2 major risks. One, they just might get sued by their creditors which would make matters worse. Two, debtors might resort to methods which would end up creating severe problems in case they do wish to file bankruptcy. Here are a few pointers which will help in easing the process of filing bankruptcy:
Cash advances and credit card run up – Most people are under the impression that all debts will be discharged if they successfully manage to file bankruptcy. It should be noted that bankruptcy laws presume certain debts to be non-dischargeable if the debt is in excess of $50000 and has been incurred within 90 days prior to filing bankruptcy. Since bankruptcy laws are also designed to protect creditors, the court won’t discharge the debt if they find that you have ‘transferred’ your outstanding balance from a credit card company to another credit card company. The creditor can dispute the claim in court since it is technically a cash advance.
Savings and retirement funds – Retirement funds like the 401(k) and other such federal savings plans are sometimes cashed in by people in a desperate attempt to get out of debt. Needless to say, it’s not a very good idea in case you want to have a shot at filing bankruptcy. Most savings funds in qualified ERISA accounts are exempt or rather ‘sheltered’ assets. Liquidating a retirement or benefit fund to pay off debt will simply result in unnecessarily destroying an asset to make payments on debts which are already out of control.
Manipulation of facts and disregard for court proceedings – People think that they can avoid the entire legal system and procedure simply by not appearing in court on the appointed day. It only tends to complicate matters and makes the process of filing bankruptcy even tougher. Truthfully divulging details pertaining to assets and their worth are essential to the filing process. Manipulating facts and figures can lead to imprisonment, fines, loss of assets and denial of the bankruptcy case.
New line of credit – This is one of the most common mistakes that people caught in a debt trap tend to make. Simply put, borrowing money to pay a debt is not advisable at all. In doing so, the debt ditch grows deeper and deeper until there is no way out. Getting a second mortgage or a new credit card is really not a good option in case filing bankruptcy is a probable way out of debt.
Property transfer – A transfer of property within 4 years of filing bankruptcy can be viewed by the court as an attempt to hinder, delay or defraud a rightful creditor. This will attract severe penalties and the motion to file bankruptcy maybe rejected altogether. A bankruptcy trustee can undo the transfer of property at will.
Bankruptcy can be a good solution to alleviate your financial worries but in a large number of cases, debtors fail to do so simply because they unknowingly make major errors. These errors culminate towards nullifying the debtor’s effort to file bankruptcy. Such simple mistakes are easily avoidable if the debtor is armed with the basic knowledge of how to handle a bankruptcy proceeding.
The volatile nature of the economy is something which is surely causing sleepless nights for millions of people all over the country. Working hours and subsequently, wages are also decreasing and credit conditions are tight as a result. Even though spending has decreased, most of the working people are finding it seriously tough to cope with the slow economic growth, especially when it comes to retirement planning and savings.
Moreover, according to the Employee Benefit Research Institute, more than 54 percent of the work force tends to participate in employee sponsored plans like the 401(k) and over the last couple of years, they have witnessed their portfolios shrink. Although the market forces are acting unpredictable and generally turbulent, there are certain investment vehicles which might be able to help you get on track with your retirement planning.
These annuities were a big hit during the economic problems at the end of 2000. After almost 7 years, when the economy was faced with the worst financial downturn in more than half a century, fixed annuities continued to gain popularity among investors as a ‘safe’ investment vehicle.
Generally, a lump sum is locked in for a certain period of time, between 5 and 10 years, at a fixed interest rate. The return income can be immediate or deferred and the income trickle may flow for a certain number of years or till death. Moreover, there are tax benefits to be gained and there is also the tempting offer of guaranteed principal plus interest.
Smart investors generally tend to keep their portfolio diverse in order to reap profits in case the market takes a sudden upswing as a result of decreasing economic volatility. Variable annuities make good investment vehicles in such cases. However, there are tax liabilities and withdrawing funds in some cases before the age of 59 ½ years may result in a 10 percent tax penalty.
Investors are free to choose from a set of investment options such as stocks, bonds and mutual funds and as such the rate of return subsequently becomes variable. Moreover, capital locked within the annuity can be moved between options to take advantage of market gains. Keep in mind that the interest received with payments is taxable and moreover, variable annuities are not guaranteed by any government agency.
Treasury Inflation Protected Securities (TIPS)
Fixed income earners are at the greatest risk of losing substantially if the market fluctuates and the effect starts to snowball. In order to hedge against inflation which could be a direct result of a speeded economic recovery, investors have started opting for TIPS. The bonds come with a maturation period which may be 5, 10 or 20 years. The principal carries a fixed rate of interest and both are adjusted against the consumer price index (CPI).
Therefore, if the economy is being pulled up or pushed down by inflation, the capital as well as the interest rate grows or recedes accordingly to adjust for changing capital value. The principal returned at the date of maturation of the bond depends on which is greater, the original principal or the adjusted principal. Investors are at a small risk though since inflation and deflation forces are somewhat difficult to predict.
Banks have been the one and only place where people feel safe about storing their money and various other valuables, be it cash, bonds or shares. Over the years, banks have evolved from institutions which safeguard your money to manifold corporations extending their services into various sectors like investments and money management.
People have come to depend on banks more than just for the safety and the interest rates on offer. There are various facilities like automatic clearing houses, checking accounts, automatic teller machines and electronic fund transfers which people use on a daily basis.
Since the market crash and financial meltdown of 2008, banks have been under the strict scrutiny of the Federal government. The crash was in no less part a direct result of shady business practices attributed to the big banking corporations and the Dodd-Frank Wall Street Reform and Consumer Protection Act which came into effect in 2010 has put restrictions on certain activities which generated profits for the banks.
In order to cope with the shortfall, banks are slowly restructuring certain services which would directly affect consumers at large. Here is a short list of such changes which are slowly coming into effect:
No more free checking accounts
Most banks, as a generally recognized industry practice, provided checking accounts without charging any monthly or annual maintenance fees. The practice existed to motivate clients to transfer over savings and loan products. Currently, only 39 percent of the banks in the continental United States offer checking accounts free of charge and without a minimum balance requirement.
Right before the Dodd-Frank reform came into effect, as many as 76 percent of all banks used to provide free checking accounts. In case you are sorely missing the flexibility of a free checking account, you should know that as many as 72 percent of the largest credit unions still have that option open.
Compulsory minimum balance requirement
In order to cope with the shortfall and to retain clients, some banks have started offering free checking accounts in another format. Customers are offered free checking accounts only if they can manage to maintain a daily balance of at least $732.02 on an average. Some of the largest banks have even started charging a fee for online statements which can be avoided if a customer maintains a minimum daily balance of $1500 or make a direct deposit of at least $500 on a monthly basis.
Maintenance, ATM and overdraft fees
Overdraft and NSF fees are at an all time high averaging more than $30 for a returned charge or if your bank allows you to draw more money than you have in your account. Coupled with the payday lender epidemic that is plaguing America currently, this small change has directly affected millions of consumers everywhere and has also triggered a mass exodus with more consumers opting for credit unions.
Monthly maintained fees have also gone up several folds and are now averaging at $5.48. Banks are also lowering the number of transactions and types of transactions which are covered by the monthly maintenance fees and customers exceeding the limit are being charged extra on a per transaction basis.
Banks generally charged ATM users a small fee only in case the user was the customer of another bank. Things have taken a more expensive turn after some banks started charging their own customers for using ATMs to draw or deposit money. Although the rate of change is minute, it is set to have long term effects.
Given the current direction and policies banks are increasingly involving themselves in, one could argue that the Dodd-Frank Act might have averted a nuclear meltdown but the fallout created by proxy is affecting consumers at large.
The fiscal and domestic financial policies of the Republican Bush administration paired with the expensive war of attrition on terror and the housing bubble culminated in the greatest economic downturn in 85 years, the financial meltdown of 2008. Millions of Americans were either downsized, people lost their homes to foreclosures and credit conditions were choked to a point that the average American household debt load far exceeded the median income adding to the woes.
The Obama administration led the economic recovery process but the progress has not been adequate enough to conclusively lower the national debt and unemployment. There is still a large section of the population overburdened by debt and at least 8 to 14 percent unemployment. As a measure of relief, individuals usually resort to filing bankruptcy in order to find some breathing space and start over again. Although bankruptcy is a viable option, the aftermath can be somewhat lethal for your financial future. Here is why:
It does nothing for student loan debt
One of the primary reasons for young working professionals in their 20s and 30s is the growing burden of student loan debt. A recent survey conducted by the Pew Research Center reveled that almost one in every five average American families is carrying some sort of student loan debt. Fresh graduates have their work cut out for them as well given the tough economic situation prevailing in the country. Underemployment and unemployment has significantly reduced the ability of such fresh graduates to repay the loan on time. High interest rates and hard repayment terms does not make the process any easier.
Assuming that student loan debts (either Federal or private) are in fact one of the major underlying causes of your financial distress, bankruptcy will not be able to provide you with any kind of relief. There is no statute of limitations as far as collecting on student loan debt is concerned, it is almost impossible to have it discharged through bankruptcy and moreover the government has the power to offset your social security, disability and retirement benefits as a part of collecting on your federal student loan debt .
So basically, if you are looking to get out of student loan debt, bankruptcy is not the option you should be exploring. It is not going to root out the problem but is going to stay on your record for 7 to 10 years and trash your credit to boot.
It could hurt you socially
Filing for bankruptcy in your 20s is going to have far reaching effects since such a big move can hardly be ignored by lenders and potential employers. You will have a pretty tough time finding new credit with good rates. On a more serious note, applying for a mortgage and buying a new home will probably be delayed by a pretty long while since lenders usually decline to do business with borrowers who have filed for bankruptcy in the recent past.
The bankruptcy remark is going to disappear from your credit report in 7 to 10 years but the effects of that one single fact is quite derogatory. Since filing bankruptcy will trash your credit, you will have a very hard time finding new credit at affordable rates and an even tougher time rebuilding your credit little by little.
Early bankruptcy also hurts your future job prospects. Most employers usually do not take a peek at your credit report when you apply for a job but since you give them the right to run a background check, they have the right to do so. In case you are applying for a job which involves handling money, you might be rejected for the position if you have a bankruptcy on record. Even certain employers involved in non-monetary businesses like insurance and financial law also refuse to employ people with bankruptcy in their records.