Debt Relief: How Will It Affect Your Credit?

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Many people ask, What’s the best way to get out of debt? Then they may often think, But I have good credit and I really don’t want to hurt it. There are many ways to lighten your debt load, and not all of them will have a major negative effect on your credit. But it’s also important to consider your situation and needs when weighing your options.

To help you decide which debt relief plan is best for you, we’ve provided a brief overview of each option and how they may affect your credit in the short term and long term.

A Few Things to Remember

Before we dive into the different debt relief options, understand that the debt you carry makes up just under one-third of your credit score. So when you pay off debt, especially credit cards that are close to their credit limits, you should see improvement in that part of your score.

However, understand that our analysis of credit relief plans is based on generalities. It doesn’t necessarily represent exactly what will happen in your case. How far your score drops—and how quickly it bounces back—depends on a lot of different factors. If your payment history always shows on-time payments, for example, and you suddenly file for bankruptcy, your score will probably drop more than someone who was already severely delinquent.

But it’s impossible to predict how a particular approach will impact your individual credit if you’re not familiar with your credit history—so get a free credit report from Credit.com to review that history.

With this information in mind, here are the main approaches to debt relief you may consider, along with a review of the impact they could have on your credit reports and scores.

Debt Relief Option Immediate Credit Impact Long-term Credit Impact
Debt Snowballs and Avalanches None Reliably positive
Debt Consolidation Small impact (positive or negative) Minimal
Credit Counseling None None
Debt Management Plan (DMP) Moderate impact (positive or negative) Minimal
Debt Negotiation or Settlement Severe damage Slow recovery
Bankruptcy Severe damage Slow recovery

Debt Snowballs and Avalanches

If you prefer to pay off your debt on your own, you might consider a snowball or avalanche payment method. The debt snowball is when you pay off your debts one at a time, starting with the lowest balance. The debt avalanche works similarly, except you start with your highest balance and work your way down.

It doesn’t make much of a difference whether you choose the avalanche method or the snowball method, but many find the snowball method is easier to stick to. Neither approach will hurt your credit, as long as you make the minimum payments on all of your cards on time.

Immediate Credit Impact: None

Long-Term Credit Impact: Reliably Positive

Debt Consolidation

Combining multiple card debts into a fixed-rate consolidation loan can be helpful, but it isn’t a strategy for getting out of debt in and of itself. After all, you still have to pay back the loan. A consolidation loan is more like a tool to get out of debt faster.

Because consolidation loans often offer lower interest rates than the credit cards themselves, you can pay off your debt faster. And if you have a lower monthly payment than before, you can better avoid late payments. This will help your credit score recover more quickly if you’ve fallen behind in the past.

But consolidating credit cards with a loan may have a positive or negative effect on your scores. It’s one of those “it depends” situations.

On the plus side, if you pay off a card balance that’s close to the credit limit, you may improve your “utilization ratio”—the ratio that compares your credit limits with the balances you currently have—provided you leave the card open after paying it off. But simply moving balances from one card to another is unlikely to do a whole lot for your scores.

On the other hand, you’ll have a new loan on your credit reports, and most credit scoring models will count that as a risk factor, which could mean a dip or drop in your scores.

The exception? If you take out a loan from your retirement account to consolidate credit card debt, you’re more likely to see your credit improve. Retirement account loans aren’t reported to credit reporting agencies, so your credit reports will show less debt with no new loan. However, retirement loans carry their own risks, so proceed with caution.

Immediate Credit Impact: None

Long-Term Credit Impact: Minimal

Credit Counseling

A credit counselor is a professional who can advise you on how to handle and successfully pay off your debt. A simple call to a credit counseling agency for a consultation won’t impact your credit in the slightest. But if the credit counselor or agency enrolls you in any kind of consolidation, repayment, or management plan, that could affect your credit.

Make sure you fully understand the potential impact of any debt relief program before you sign up. Don’t be afraid to ask the credit counselor how a new plan could alter your credit.

Immediate Credit Impact: None

Long-Term Credit Impact: None

Debt Management Plan (DMP)

With a Debt Management Plan (DMP), you make one monthly payment to a counseling agency, which then disburses payments to your creditors. This kind of plan can affect your credit in several ways.

Some creditors may report that a credit counseling agency is repaying the account. Don’t worry if they do. FICO, the data analytics corporation that calculates consumer credit risk, ignore such reports. An individual lender may care, but FICO doesn’t. Of course, any late payments or high balances on accounts will continue to impact your credit score.

With the help of the counseling agency, you can stay current on your payments, and that can improve your credit score. “Most major creditors will re-age your accounts after you’ve made three on-time payments in the required amount,” says Thomas J. Fox, community outreach director for Cambridge Credit Counseling.

Re-aging an account means bringing it back to “current” status, so your credit report will no longer list you as behind. Since recent late payments can really hurt your scores, getting up to date on your payments now is a smart move, especially as the sting of past late payments fades over time.

However, you’ll have to close your credit cards when you agree to a DMP, and that will likely lower your scores. How much it will hurt depends on everything else in your credit reports, including whether you have other credit accounts, such as car loans or mortgages, that you pay on time.

The impact may take time, says Barry Paperno, community director for Credit.com. He states it’s because “balances and limits won’t necessarily change right away, and utilization will be the same as before closing accounts.

He goes on to explain, “Closing an account in and of itself isn’t considered negative by the score. Over time, however, having closed the cards can hurt the score, as closed cards with zero balances are excluded from utilization and ultimately fall off the credit report much sooner than open cards that have been paid off.”

“Plan on getting a secured card when you complete the DMP so that as long as you keep a low utilization percentage on that one card, you can achieve a good score—with any [late payments] fading well into the past,” Paperno continues. “Also, your old closed cards will continue to contribute positively to your overall length of credit history for as long as they remain on your credit report (typically 7 or 10 years).”

Immediate Credit Impact: Moderate impact (positive or negative)

Long-Term Credit Impact: Minimal

Debt Negotiation or Settlement

Some creditors may allow you to settle your debt, which permits you to pay less than the full balance you owe. But creditors typically won’t settle debts with consumers who make their payments on time, so it’s a better option for those that already have several late payments on their credit report.

On top of that, “most creditors will report the settlement as something like ‘paid less than full balance’ if you settle the debt before it has been charged off,” warns Michael Bovee, community manager for DebtConsolidationCare.com. Creditors generally charge off debts when borrowers fall 180 days behind. And charged off debts often get turned over to collection agencies.

Bovee further explains, “When you settle a charged-off debt, getting it reported [with a] zero balance due will not in and of itself help your credit because the damage has already been done.” But it could help you ward off further damage from, say, a potential lawsuit.

In other words, settling an account before it gets charged off can prevent it from going to collections and adding another negative item to your credit reports—or causing other harm.

Brad Stroh, co-CEO of Freedom Debt Relief, adds, “Debt settlement hurts people’s credit scores but helps their credit profiles. [It’s] worth considering for anyone struggling to pay a lot of credit card debt, despite its negative effects on credit scores. It is far easier to rebuild one’s credit than to get out of debt, and people carrying a lot of debt likely have credit problems already.”

Immediate Credit Impact: Severe damage

Long-Term Credit Impact: Slow recovery

Bankruptcy

It’s well known that filing for bankruptcy will hurt your credit score—bankruptcies can stay on your report for up to 10 years from the filing date. However, with updates in the credit scoring algorithms, a bankruptcy isn’t the credit death knell it used to be.

Credit scoring algorithms typically segment consumers into subgroups called “scorecards.” If you experience a significant negative credit event, such as a bankruptcy, you’ll likely be compared with other consumers who’ve experienced something similar for credit scoring purposes.

That may bring a little bit of comfort, but it also means you might have a good shot at improving your credit scores if you make a real effort to rebuild your credit after your bankruptcy is discharged.

As far as your credit is concerned, you can recover from Chapter 13 bankruptcies more easily than other types of bankruptcies. In Chapter 13 bankruptcies, you typically pay back some or all of your debts over a period of three to five years, and they come off your credit reports seven years after the filing date.

So if it takes you four years to complete your Chapter 13 plan, you have to wait only three more years before the bankruptcy disappears from your reports.

However, you’ll probably end up paying more in a Chapter 13 bankruptcy than a Chapter 7 bankruptcy, where you wipe out all or most of your debts by selling some of your assets. Make sure you discuss both options with a qualified consumer bankruptcy attorney.

Immediate Credit Impact: Severe damage

Long-Term Credit Impact: Slow recovery

Getting Back on Track

Whichever method you choose, keep in mind that the ultimate goal is to pay off your debt so you can save and invest for future goals. A hit to your credit may be worth it if it means you can finally get your balances to zero. Monitor your credit, consider getting a secured card if necessary, and keep your financial situation in perspective.

“People just worry about their credit too much,” says Fox. “If your couch is on fire, would you not throw water on the fire because you don’t want to damage the upholstery?”

As you work to pay off your debts, it’s a good idea to keep an eye on your credit score to see how you’re improving. Get your credit score for free from Credit.com.

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How Much Will One Late Payment Hurt Your Credit Scores?

How Much Will One Late Payment Hurt Your Credit Scores?

You open your statement and discover you’re late on your credit card payment. Or you get a call from a collection agency about a medical bill you forgot to pay. Or you check your credit reports and discover a late payment is marring your otherwise perfect payment history.

What happens if you miss a credit card payment? How do late payments affect your credit scores? Of course, as with so many things related to credit scores, the answer is, “It depends.”

Hope for the Best

Late payments and good credit scores go together like toothpaste and orange juice—they don’t mix. But just how bad is it to miss a single payment?

First, it depends on how many days late your payment is. If you missed your credit card payment by one day, you probably don’t need to sweat it.

If you’re lucky, the lender won’t report the lapse. “Most lenders do not report missed payments until the account is 30-plus days past due,” says Anthony Sprauve, PR director for MyFico.com.

“Suppose a given credit card payment is due on May 15 [and you pay on] May 25. Technically, the payment is late, and fees and interest charges may apply. But in most cases, this late payment would not be reported by the creditor to the credit reporting agencies [CRAs].”

Or perhaps your lender may overlook the transgression. Steve Ely, president of eCredable.com, adds, “The larger creditors [like credit card companies] usually have sophisticated analytic models working behind the scenes that take into account your history of payments. If you’ve been paying on time for a long time, they’re likely to forgive your one late payment and let it slide.”

But Brace for the Worst

What if you don’t luck out and the creditor reports the late payment? Here are three questions that will help you understand the possible impact, according to Barry Paperno, community director for Credit.com:

  1. How long ago did the most recent late payment occur?
  2. How severe were the late payments (30 days, 60 days, charged off, etc.)?
  3. How many accounts on the credit report have had late payments?

“Of these three questions, the one typically having the most impact on your credit score is the first: recency,” says Paperno. “To illustrate, if a single late credit payment occurred a few years ago and all payments on all accounts have been made on time since, that single late payment will have little negative impact on your score.”

How Bad Can It Get?

To put the potential consequences in perspective, Paperno points to a study about credit scoring effects conducted by FICO that points to a scary possibility. “[A] recent late payment can cause as much as a 90- to 110-point drop on a FICO score of 780 or higher.”

Although score drops from late payments tend to rise again over time, these credit dings can remain on your credit report for seven years, according to Paperno. You can expect the effects to last for much of that time.

Sprauve also explains that the impact of a missed credit card payment or late bill on your FICO credit score varies significantly depending upon the individual consumer’s circumstances. He details some of the factors that can help determine how much a late payment will hurt your scores:

  • Any history of account delinquencies or collection references (on any account)
  • Any adverse legal items on your credit report
  • The outstanding balance on the delinquent account
  • The number of other accounts on the file that you’ve currently paid as agreed
  • The length of your credit history

The Bigger They Are, the Harder They Fall

The irony is, the better your credit, the more you may feel the sting. One slipup and your credit score may take a dive—even if you have otherwise stellar credit.

“The old [adage] of ‘the bigger they are, the harder they fall’ applies to credit scores too,” warns Ely. “If you have a really high FICO Score, you’ll take a bigger hit for a late payment than someone with a lower FICO Score.”

The best defense is to be meticulous about paying your bills by the due date. But if you do mess up, see if you can’t convince the lender or collector to remove the ding from your reports. While they may balk at first, you may be able to persuade them to change their mind if you have a good explanation—and they believe you when say it won’t happen again.

What You Can Do

If you’re concerned about how late payments could be damaging your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated each month.

[Offer: Bad Credit? The credit professionals at Lexington Law use their legal expertise to help you aim for a better credit profile. Start by getting your credit reports, then connect with Lexington Law’s attorneys and paralegals who will review your credit reports and help you dispute any errors with the credit bureaus. Get started today or call (844) 346-3296 for a free credit consultation.]

More on Credit Reports and Credit Scores:

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Who Do I Call If I Lost My Social Security Card?

social security card

If you lose your Social Security card, you’ll have to order a replacement card from the Social Security Administration (SSA). But unfortunately, a simple phone call will not do the trick. Instead, you will have to apply online using a my Social Security account or supply verification to a Social Security office in person or by mail.

Online Application for a Replacement Social Security Card

To apply online with a my Social Security account, you’ll need to meet all the following criteria:

  • You are an 18-year-old or older US citizen with a US mailing address.
  • You have a driver’s license or other state-issued identification from a specific list of states.
  • You are not requesting any changes to your card, including a name change.

In-Person or Mail Application for a Replacement Social Security Card

If you don’t meet the criteria for an online application, you have to apply in person or by mail. And you’ll need to gather a few documents to supply verification to the SSA office.

Documents must be current (not expired) and must show your name, date of birth or age, and—when applicable—a recent photograph. And they have to be originals, not photocopies. There are two separate categories of documents, and you’ll need one from each:

  • Citizenship
    • US birth certificate
    • US passport
  • Identity
    • US driver’s license
    • State-issued non-driver identification card
    • US passport

If you don’t have any of the documents from the Identity category and can’t get a replacement in 10 days, you can use another current document. It still needs to show your name, date of birth or age, and preferably a recent photograph. The following cards are often acceptable forms of ID:

  • School identification card
  • Employee identification card
  • US military identification card
  • Health insurance card other than a Medicare card

If you were not born in the US and have not established citizenship with SSA, you’ll need to provide acceptable proof of citizenship as well. 

Children’s Application for a Replacement Social Security Card

While some teens may have their driver’s license already, many minors don’t. And if your child doesn’t have a passport yet, you may have to dig around for alternative documentation.

A birth certificate may prove age or citizenship, but as the SSA states, “Social Security needs evidence that shows the child continues to exist beyond the date of birth.” Therefore, you’ll also have to produce a more recent document with their name, identifying information, and—if possible—a recent photograph. There are a few documents you could use:

  • Adoption decree
  • State-issued non-driver identification card
  • Doctor, clinic, or hospital record
  • Religious record
  • School identification card

In addition, a parent must provide their own proof of identity and, if required, their proof of citizenship or a current Department of Homeland Security document such as a green card. 

How Long Does It Take?

If you can get to a local SSA office just before opening, you can get in and out of there in about 15 minutes. If you can only go later in the day, the wait time could vary from location to location. After they process your application, they’ll give you a letter indicating that a card has been requested, which you can show to employers or other parties who request a Social Security card. Your new card will arrive within two weeks.

For online or mail requests for a replacement card, the application process could take a tad longer. But after your application is processed, you can expect your new card within two weeks.

Once you get your card, be sure you keep it in a safe place only you or trusted family members can access, such as a safe or lockbox.

Don’t Forget the Next Step

If you’ve lost your Social Security card, replacing it is just one step. A lost card could make you an easy target for identity theft, so you should take additional steps to protect your identity, especially if you suspect the card may have fallen into the wrong hands. Here’s what to do: 

  • Get a free annual credit report to make sure you recognize all information reported there.
  • Keep a close eye on your credit scores for abrupt changes, which could signal fraud. You can get a free credit report snapshot updated monthly through Credit.com.
  • If you notice suspicious activity, consider placing a fraud alert on your credit reports. In severe cases, a credit freeze may be appropriate. 

Note that monitoring your credit is an ongoing task. Once your information is compromised, it could be at risk for years to come.

If you’ve lost your Social Security card, use the information above to get your replacement. And remember to keep a vigilant eye on your credit activity to ensure your Social Security number hasn’t fallen into the wrong hands.
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7 Steps to Help You Get Out of Your Rental Lease

security deposit

Whether you’re renting an apartment, house, or duplex, your home ought to feel like a safe place—one that’s comfortable and secure. But what happens if something alters that safe space? Can you break your lease? And what happens if you do—is your credit doomed?

To help you navigate these troubling waters, we’ll cover common reasons tenants want to break their lease and what you should do if you’re ready to break yours.

Common Reasons Tenants Break a Lease

There are a variety of reasons people want to terminate their lease early—but here are just a few that could apply to you.

  1. The rental unit is uninhabitable. A landlord is obligated to perform general property maintenance and ensure the property adheres to health and safety codes. Circumstances that could make a property uninhabitable include the presence of black mold, a lack of running water, or a lack of proper waste disposal.
  2. The landlord illegally entered your rental space. Landlords must provide legitimate reasoning as to why they are entering your home.
  3. You are on active military duty.
  4. You are a victim of domestic violence.
  5. The rental space falls into foreclosure or is illegally rented to you.

What to Do If You Need to Break Your Lease

If you need to get out of your lease, here are seven essential steps.

1. Read Your Lease and Document Everything

Before you take action, be sure to look over your lease. “Read it three times!” says Joel S. Winston, a litigation lawyer at Winston Law Firm, LLC. Your lease should spell out the procedures and penalties for canceling early.

“The lease that you signed and that no one reads—that’s going to control how difficult and expensive it will be to break a lease,” Winston says.

Just don’t make up problems with the property that don’t exist to get out of your current lease. “Try to be open and honest and approach your landlord in a nice and friendly manner,” Winston recommends.

However, if there are problems and you feel the landlord isn’t adequately fixing them, put the complaints and problems in writing. Just make sure you keep a copy of the document for your records. And if push comes to shove, carefully look over your lease for details that cover what happens if you terminate the lease early, including whether you will be held responsible for the entire remaining term of the lease or a lesser amount.

In many states, landlords can’t use the fact that you left early as a windfall. However, if they can only rent the unit at a lower rate than you were paying for the remainder of your lease, you may be required to make up the cost difference. You may also have to pay for the advertising costs to find a replacement tenant.

2. Communicate Thoroughly

Let your landlord know what you want to do and why you want to terminate the lease. Some may be more flexible than others. A large property management company might be unsympathetic to your financial woes, but an individual owner might be more compassionate.

Also, as difficult as it may be, try to think of the circumstances from a landlord’s perspective.

Terminating a lease early may put an owner-landlord into a financial bind, especially if they have to spend time and money securing a new tenant. It’s not out of the question to assist your landlord in finding an adequate replacement, but it’s ultimately their decision.

3. Get Confirmations in Writing

Make sure you get written confirmation of any changes to the lease. If your landlord says you can move out early with a small penalty or no penalty, get that in writing. Never rely on a verbal agreement—otherwise it will be your word against theirs. You may be tempted to keep things cordial and light, but a handshake isn’t going to help you pay off a creditor or debt collector.

Store these written confirmations in a safe place you’ll remember. It won’t do you any good if you can’t find that information when a collection agency contacts you.  And should you end up in collections or in court, the written terms in the lease will likely prevail.

If the landlord won’t budge, won’t put anything in writing, or won’t compromise, you can still create your own paper trail by communicating in writing and keeping a record of the letters you sent.

4. Don’t Forget the Walk-Through

No matter how anxious or excited you are to move out, protect yourself from unexpected charges by doing a walk-through with your landlord and getting a written record of the results. We wouldn’t recommend leaving your rental until you’re able to do this. Should your landlord refuse to do a walk-through, take detailed pictures—or better yet, video—of the property’s status the day you leave.

5. Don’t Make Assumptions

When it comes to breaking your lease, avoid assumptions. Specifically, don’t assume your security deposit will take care of any remaining balance or fees you owe.

“When you are breaching the contract, it doesn’t always entitle the landlord to scoop up your security deposit. For example, in New York, the landlord has to go to the housing court to file a complaint in order to take that.” Winston says.

Similarly, if you live with a roommate and you pay your portion of the rent but your roommate does not, this missing payment has financial repercussions. If you both signed the lease, you are both fully responsible for the entire rent check, regardless of what the two of you have worked out between yourselves. But if your name is the only one on the lease, you may be the one stuck holding the bag.

6. Know That There Are Exceptions to the Rules

You may have legitimate reasons for breaking a lease that aren’t spelled out in the actual lease, like a safety or health reason directly connected to the property.

“Essentially, the ‘warranty of habitability’ is a landlord-tenant legal doctrine requiring landlords to maintain rental real estate in reasonable conditions that are fit for tenants to live safely,” explains Winston.

Winston goes on to say, “The warranty of habitability is accepted law in most every jurisdiction in America. In some states, the warranty has been established by decades of case law (i.e., Implied Warranty). But in other states, the warranty has been expressly established by legislation.”

There may be state-specific laws that allow you to break a lease early. For example, in Washington, one legitimate reason for terminating a lease is the landlord failing to make certain types of repairs within a specific period of time—as long as mold isn’t part of the problem.

7. Get Help

Landlord-tenant laws are state-specific. So it’s a good idea to research your rights as a tenant before signing your name on the dotted line. If you believe a landlord’s actions are illegal, you may be able to get help from legal aid programs, a local housing agency, or a consumer protection attorney in your state.

Understand that even if you do everything right, problems can come up. For example, an unknown balance can wind up in collections and you may not hear about it until the damage to your credit score is done. Or if you terminated your lease early, the leftover balance may be reported to specialty credit reporting agencies used by landlords—and these reports could catch you by surprise the next time you try to rent.

Whatever the reason, keep detailed and legible records of what transpired long after you think you’ll need them—seven years is usually safe. Also, frequently review your credit report and credit scores to make sure you’re aware of any significant changes. You can get two free credit scores updated monthly at Credit.com.
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My New Car Is a Piece of Junk. Can I Return It to the Dealer?

My Car Is a Piece of Junk. Can I Return It to the Dealer?

Once upon a time, you loved your car. You loved it so much that you agreed to the payment terms and drove it home from the dealer or, dare we say, a private seller. But now, that love has grown cold and you wish you’d never laid eyes on it. And to make matters worse, you’re bound to its existence and monetary depreciation—thanks to that sweet-little-pain-in-the-butt payment book. Or at least, that’s what you’re afraid of.

If you’re wondering if you can return your unwanted car without any more financial obligation, read on. We’ll discuss whether it’s possible and what you can expect.

Can I Return My Car?

Readers have asked us if they can just “give the keys back” and get a car that is reliable and without unanticipated problems—specifically, a vehicle they can confidently drive with their family, friends, or pets in tow. The short answer is yes, but there’s a variety of potential repercussions and unseen problems.

Before you do anything, find out the following:

  1. If you purchased your car through a private seller, does your state have a “lemon law”?
  2. If you purchased your car through a dealership, does the dealer have a return policy?

If you can answer “yes” to either of these questions, look into these options further to see if your circumstances apply and what you’re entitled to.

However, if you have no recourse under your state’s lemon law and your situation doesn’t qualify for a dealership’s return policy, returning the car is going to be a little tricky and could have credit implications—which you’ll want to consider, especially if you plan to lease or purchase another car once you give the other one back.

Returning the Car to the Dealer

Despite how liberating and freeing a car return may feel, giving the vehicle back to the dealer won’t erase your debt. In fact, the consequences could be just as frustrating as the junk car itself.

“Technically, if you give the car back, it is the same as a repossession,” Matt Briggs, co-founder and CEO of RentTrack, explains. “Keep in mind you have a legal obligation to pay the terms of the loan and the car dealer is typically not the finance company who holds the loan (unless they are ‘buy here pay here’). Either way you cannot simply ‘give back’ the vehicle to a dealer and walk away.”

So look at it this way: to simply give the car back is to consent to automobile repossession—meaning the car would be sold at auction, and you would be responsible for the difference in what the car brought at auction and the amount you still owe on the car.

Plus, you’d be on the hook for expenses involved in this process, such as repossession, towing, title and sale, and storage. So if you leave the car at the dealership, you still owe the debt—which could total to more than the dang clunker is worth—and you’re out a working vehicle.

Concerned about what could happen to your credit score? According to Experian, a car repossession stays on your credit report for seven years—even after the original account goes delinquent. You can see how your debt has affected you by getting a free credit report summary on Credit.com, which will explain what factors influence your credit score.

Car Debt and Bankruptcy

There is a way, however, to force a dealer to “eat steel,” says Eugene Melchionnne, a Connecticut bankruptcy attorney. To do so, you can surrender the car and discharge the debt in bankruptcy—but then you’d have to apply for bankruptcy. “There is also a process for ‘cramming down’ the debt to the value of the car in bankruptcy, and in a Chapter 13 case, you can spread the balance owed over an extended period of time,” he says.

“For example, if the car loan is for $20,000, but the car is worth $10,000, the loan can be reduced to $10,000, and if there are, say, four years left to pay at $500 per month, the payments can be spread out to a maximum of five years on the lowered balance, resulting in $330 or more a month savings,” Melchionne explains.

Selling or Trading the Car Instead

With all that said, it might be simpler and cheaper to sell the vehicle yourself or trade it in for something else, which is what Matt Briggs suggests you do.

“[At] most repossession auctions, the cars sell for a much lower price than the retail value, so you may end up owing more than you would if you sold it [as a] private party (using a website like AutoTrader, eBay, or Cars.com) or if you traded it in on a different vehicle.”

The Bottom Line

For most of us, simply driving the car back to the dealership and handing over the keys, however tempting, is not a workable strategy. So after you dig yourself out of this mess, do as much due diligence as possible before you buy next time.

“Bottom line,” Briggs said, “you have a legal obligation to pay the car loan in full, so make sure you are getting a good deal before you sign on the dotted line.”

 

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Will Debt Consolidation Help or Hurt Your Credit?

Debt isn't always a bad thing. In fact, it can help your small business thrive.

From student loans to a house mortgage, debt accumulation is stressful and overwhelming. As you make moves to get out of debt, you might want to consider consolidating credit cards or other loans to save you time and money. But that begs the question—does debt consolidation help or hurt your credit?

The answer depends on how you consolidat­e and what you do with your debt afterward.

1. Debt Consolidation Loans

Getting a new loan to pay off other debts is the most popular way to consolidate. It’s certainly what most people think of when they consider consolidation. But finding a loan that has decent terms and is designed specifically for the purpose of consolidation can be challenging—especially if your credit scores are a bit lower due to the balances you’re carrying.

It’s certainly not impossible, though. Look for reputable debt consolidation companies that will work for your specific situation.

Tip: Triple check lenders’ certifications to make sure you’re dealing with a legitimate site if you’re shopping for a loan online. Scams abound.

Effect on Your Credit: Consolidating credit cards with high balances using an installment loan (i.e. a loan with fixed monthly payments) may actually benefit your credit rating, especially if you use the loan to pay off credit cards that are near their limits. At the same time, any new loan can cause a short-term dip in your credit scores—so don’t be too surprised if you see your credit score change slightly when taking out a new loan.

2. Debt Management Plans

Debt management plans are often confused with debt consolidation—however, they’re very different programs. Debt management plans (DMPs) are offered through credit counseling agencies and, much to many people’s surprise, they don’t actually consolidate your debt.

Instead, you make a “consolidated” payment to the counseling agency, which then pays each of your creditors—usually at a reduced interest rate. Even though you’re making only one or two monthly payments, the counseling agency doesn’t actually pay off your creditors for you—it simply acts as a middle man to help you repay your debts and ensure that the creditors get the money they’re owed. These programs are available regardless of credit scores, so if you are having trouble consolidating, a DMP might be worth considering.

Tip: If you choose to move forward with a DMP, you should close or suspend your credit card accounts. Unfortunately, you’re not permitted to use credit cards while enrolled in a DMP.

Effect on Your Credit: If you have a good credit score and adhered to a creditor’s repayment terms in the past, a DMP could have a negative impact on your credit as it indicates that you are experiencing or have experienced difficulty with payments. Also, since a DMP directly impacts payment terms, credit reporting agencies might ping your DMP commitment because it designates a change in payment policies.

3. The Credit Card Shuffle

Transferring a high-rate credit card balance to a card with a lower rate is another way to consolidate. Carrie Rocha, author of Pocket Your Dollars: 5 Attitude Changes That Will Help You Pay Down Debt, and her husband paid off some $60,000 in debt, and taking advantage of low-rate balance transfers was one of the strategies they used to dig out. However, if you decide to go this route, you must be very disciplined in your approach. Otherwise, you may fall into traps such as getting stuck with a balance at a high interest rate after the introductory period ends.

Tip: Read the fine print. Keep your eyes peeled for any “but” or “until.”

Effect on Your Credit: It depends on how you use a transfer. You’ll often see a temporary dip in your credit score when opening any new card. If you use a substantial portion of the available credit (on the card) to consolidate balances from other cards with lower balance-to-available-credit ratios, your credit scores may drop from that as well. Finally, you may also lose points if you open a new card and use a majority of the credit line to consolidate.

However, if a 0% card allows you to save money and pay off your debt faster, you can come out ahead in the long run, both financially and credit score–wise.

The End Goal: Less Debt Equals Stronger Credit

Paying down debt can have a tremendous impact on your credit scores. According to FICO, the company behind most of the credit scores used by lenders, consumers with high credit scores (e.g. 785 and above), tend to keep their balances low. Specifically, two-thirds of consumers with good credit carry less than $8,500 in non-mortgage debt, and they use an average of 7% of their available credit on their credit cards.

That means that paying off debt—whether you use a consolidation loan or just put every penny you can toward your debt—will often improve your credit ratings in the long run. The biggest risk, though, is that it’s easy to run up new balances on the cards you paid off in the consolidation—and that’s definitely not a good move for your credit or your bottom line. As you make progress on paying off your loans, periodically check your free credit report to see where you stand.

Remember, moving debt is a means to your end. The goal is to pay off those balances and free up cash flow as well as to help build strong credit. So whether it’s a consolidation loan, credit card shuffle, or DMP, know your options so you get there just a little faster.

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Trapped in Payday Loan Debt? Here’s How You Can Escape.

Trapped in Payday Loan

Nobody likes being in debt, but it’s even worse when it seems like there’s no way out. That’s how the 12 million Americans who take out payday loans each year usually feel. That’s understandable, considering they pay out around nine billion dollars in loan fees. But there is hope—you don’t have to be stuck in the payday loan debt cycle forever.

Why It’s So Easy to Get Buried in Payday Loans

Payday loans are unsecured personal loans targeted at people who need money fast but don’t possess the type of credit or collateral required for a more traditional loan. Usually the only requirements to qualify for a payday loan are an active bank account and a job. Companies like MaxLend, RISE Credit, and CashMax have made an art out of providing high-interest loans to people who feel desperate and out of options.

The very structure of payday loans is set up to keep people on the hook. Here’s a breakdown of what payday loan debt looks like, according to the Pew Charitable Trusts:

  • It’s not short-term. Although payday loans are advertised as quick, short-term loans, the average payday loan borrower is in debt for a full five months each year.
  • Loan fees are huge. Average loan fees are $55 every other week, and the average borrower pays $520 per year for multiple loans of $375.
  • People borrow for the wrong reasons. Most payday loan borrowers—70%—spend the money on everyday expenses, like groceries, gas, and rent, rather than on emergencies.
  • It’s a vicious cycle. To totally pay off a loan, the average borrower would need to fork over $430 the next payday following the loan. Because that’s a big chunk of change, most people end up renewing and extending the loan. In fact, 80% of all payday loans are taken out two weeks after another one was paid in full.

What Happens If I Don’t Pay My Payday Loan?

As with any other loan, if you default on a payday loan, it can result in growing fees, penalties, and possible legal action. Because many payday loans use automatic debit payments to take funds directly out of a bank or prepaid account, you can also end up with overdraft fees on top of everything else. This can leave you without the funds you need to pay for necessities like food, childcare, and utilities. To top it all off, you may also experience a barrage of calls and threats from debt collectors.

This all sounds extremely unpleasant, but there are ways you can get help with payday loans.

How to Get Out of Payday Loan Debt

As we’ve established, it’s crucial to stop the vicious cycle of payday loan debt. There is payday loan help, but it can be hard to know where to start.

The best way out can depend on where you took out the loan. Laws governing payday loans vary from state to state. Some states, like Colorado, are currently working to change the way payday loans are administered in order to make it easier for customers to pay loans back and avoid the snowball effect of constant loan renewal. Other states require payday lenders to offer borrowers an  Extended Payment Plan (EPP), which stops the accrual of fees and interest.

Here’s a closer look at some of the options available to get rid of payday loan debt.

Extended Payment Plans (EPPs): If you borrowed from a lender who is a member of the Community Financial Services Association of America (CFSA), then you may be in luck. CFSA’s Best Practices allow a payday loan customer the option of entering into an EPP.  This means you’ll have more time to repay the loan (usually four extra pay periods) without any additional fees or interest added for that service. Best of all, you won’t be turned over to collections as long as you don’t default on the EPP. Here are the steps to follow if you want to apply for an EPP:

  • Apply on time. You must apply for the EPP no later than the last business day before the loan is due.
  • Sign a new agreement. If you took out your loan through a storefront location, you’ll have to go back to that location to turn in your application. If you took out a loan online, you’ll need to contact your lender for instructions about how to sign your new agreement.

Credit Counseling: If an EPP isn’t an option, you may want to talk with a credit counseling agency. While credit counseling agencies spend their time helping consumers get out of debt, these kinds of loans can present unique challenges. “It’s not a traditional loan with set guidelines in terms of how they work with us,” explains Fox. In spite of those challenges, there are things a credit counseling agency can do to help you get out of payday loan debt:

  • Restructure the payback. Fox says that payday lenders who are members of the CFSA “seem to be more lenient” and are “more apt to try to work with people.” Those lenders will often “restructure to pay back (the balance) over six to twelve months when coming through our program.” But he also adds that this applies in  only about 40–50% of the payday debt situations clients are dealing with.
  • Negotiate a settlement. If restructuring the payback terms isn’t an option, the credit counseling agency will try to work with the lender to determine a settlement amount that will resolve the debt altogether. If you can pay off the loan with a lump-sum payment (this is the time to ask Mom or Dad for help), the agency may be able to settle the debt for a percentage of the outstanding amount.
  • Adjust your budget. If no other options are viable, the agency can work with you to come up with a budget that will help you find the money to get the loan paid off. Sometimes that means reducing payments on other debts, consolidating debts, or reprioritizing other expenses.

Bankruptcy: Nobody wants to resort to this option, but sometimes it’s the only way to get out from under this kind of debt. There is a myth out there that you can’t include payday loans in a bankruptcy. However, that is not the case: “For the most part, payday loans aren’t treated any differently in bankruptcy than any other unsecured loan,” writes attorney Dana Wilkinson on the Bankruptcy Law Network blog.

Another unsubstantiated claim is that you may be charged with fraud or arrested if you can’t pay a payday loan back or if you try to discharge the loan. One of the reasons this fear is so widespread is that payday loan debt collection scammers often make these kinds of threats, despite the fact that these threats are illegal.

What to Do After You Get Rid of Payday Loans

After you get out of payday loan debt, you want to make sure you never go to a payday lender again. Some of the smartest things you can do to start cleaning up your credit include signing up for a free credit report. Regularly checking your credit is the best way to make sure you clear up any mistakes. Plus it’s rewarding to see your credit score improve.

You can also sign up for credit repair or search for a consolidation loan to help you pay off all of your debt. This allows you to start moving in the right direction financially.

Getting out of payday loan debt can seem daunting, but it’s worth the effort and hard work. Taking control of your finances—and actually being able to plan for the future—is a reward worth striving for.

Are you trapped in payday loan debt? Or have you found your way out? Share your story in the comments below.

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Why Do I Have to Pay My Real Estate Agent 6%?

buying-house-afford

When it’s time to sell your house, you may have visions of dollar signs dancing in your head, but the truth is, a lot of those dollars will never make it into your bank account. Instead, they end up in the pockets of real estate agents.

You’ve probably heard that agents, on average, take a 6% commission off of your home’s sale price. On a $300,000 home, that’s a whopping $18,000. Before handing over that chunk of change, it’s important to understand what it pays for—and if there’s anything you can do about it.

How Do Real Estate Agents Get Paid?

First, let’s take a look at the history of realtor fees. Realtor fees are usually paid as a commission, although flat fees apply in rare cases. This commission is taken right off the top of the selling price of the home, so many sellers don’t really feel the impact because they never had the money to begin with.

Since the 1950s, the National Association of Realtors has used a “suggested” commission rate for real estate agents. This rate landed at around 6% of a home’s selling price, which included commission for both the buyer’s and the seller’s agents. In 2016, that rate was closer to 5%, which provides a small amount of relief for home sellers looking to maximize their equity when they sell their home.

What Does a Real Estate Agent’s Commission Pay For?

Even at 5%, real estate agents would take home an average of about $15,000 on the sale of a $300,000 home. The total commission is split between both the listing and the buying agents, minus any fees the agents must pay to their brokerage. So let’s break down what you get for $15,000.

  • Help pricing your home. Expertise is at the top of the list of what a real estate agent brings to the party. This means they should be able to help you price your home competitively and in a manner that helps you reach your goals—whether you’re after a quick sale or a big sale price.
  • Effective marketing. One of an agent’s biggest jobs is to make your home look great and to stir up interest in the property. They may take photos, post online ads, use social media, host open houses, and anything else that puts your home in front of qualified buyers.
  • Screening for qualified buyers. It doesn’t do you any good if the people looking at your home aren’t able to buy it. A real estate agent should do all the footwork required to make sure anyone who’s interested in your house is preapproved for a home loan.
  • Closing expertise. Finally, a real estate agent should be well-versed in the art of closing a home sale. Their job is to get you the best price with the least hassle and walk you through all the steps you need to take to make sure your sale goes smoothly. This applies to showings, appraisals, inspections, and the final paperwork.

Can I Save Money on Real Estate Agent Commission?

The good news is you’re not stuck having to fork over 5% of your home’s selling price. If you don’t relish the idea of waving goodbye to that hefty sum, here are some alternatives.

1. Negotiate the commission rate. Just because 5–6% is common, it doesn’t mean that’s what you have to accept. Ask your real estate agent if they’re willing to take less.

“Offer 4%,” suggests Bob Nettleton, who successfully negotiated the commission when he used a real estate agent to sell his home. Or, he says, offer 2% if you find the buyer on your own and just need the agent to help with the standard process. Nettleton adds that other factors, such as home price and how many services you expect, can also affect how much you negotiate on the commission.

2. Sell your home by yourself. More people are opting to sell their home without a real estate agent. This saves on commission fees, but it means you have to do all the work to market your home and vet potential buyers. People who want to go the FSBO (For Sale by Owner) route can find help through services like Homie and Zillow.

Keep in mind that the buyer may have an agent who will expect a commission, so that’s another factor that will play into negotiation of the final sales price. If you opt for FSBO, you may also need to do additional homework like finding a mortgage lender who can help complete the sale.

Other Financial Considerations When Buying a Home

No matter what, you want to get the most out of selling your home. But real estate agent commission is just one part of the overall financial transaction of buying or selling a home.

Chances are if you’re selling a home, you’re probably also looking to buy another one. Negotiating how much you pay a real estate agent may pale in comparison to the extra money you’ll spend over the lifetime of a mortgage if you get locked into poor interest rates or your credit is less than perfect. Check the mortgage marketplace for interest rates and make sure your credit is in tip-top shape before you start looking for your next house. One factor many sellers overlook is the possible impact that selling their home could have on their credit.

If you’re concerned about your credit score, take advantage of a free credit report. This report lets you keep tabs on your credit, and it includes free updates every 30 days to help you proactively correct mistakes and improve your score. You also don’t need to let bad credit get in the way of refinancing your home.

Take Control of Your Home Sale

Managing big transactions like selling or buying a home can feel overwhelming, but there’s no need to panic. Just keep in mind that, ultimately, you are the one in control over the sale of your home. Weigh out the pros and cons of paying a full commission, and take the steps necessary to get a final profit out of your home that makes you happy.

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Help! My Tax Refund Was Taken to Pay My Student Loan Debt

Help! My Tax Refund Was Taken to Pay My Old Student Loan Debt

Every year, many people file their taxes expecting a refund … only to discover the money’s been taken to pay off their student loan debt. The bad news: The government can take that money if your federal student loans are in default. The better news: You can contest the seizure. And, if it was taken in error, you should be able to get your refund back. If it wasn’t an error, well, it can be very, very difficult to get those dollars released. However, we have heard anecdotally from readers who contacted the Education Department, demonstrated hardship and had at least part of their refund returned. The process appears to take awhile — and, again, there’s no guarantee Uncle Sam will comply — but it is an option someone can pursue if money is particularly tight.

Now, let’s delve a little deeper into why refunds get withheld — and what you can do if yours was one of them. (Psst: We’ll also provide some tips of what to do about those delinquent student loans.)

Why Was My Tax Refund Taken?

If you are in default on your federal student loans (which by definition means you are behind by 270 days or more), the Education Department can take your tax refund using the Treasury Offset Program. This program authorizes federal payments such as tax refunds or Social Security income to be intercepted in whole or in part to pay debts owed to other federal agencies. There are some limited consumer protections, but debtors aren’t always aware of them.

What Can You Do if Your Refund Was Seized?

We spoke with Jay Fleischman, a student loan and bankruptcy attorney, about what people can do. First, he said that by federal law, people who have student loans in default get a notice that they are at risk of having any potential tax refund seized for student loan repayment. That notice contains instructions for a review of your loan information and how to avoid the offset —so, in other words, if your student loans are in default and tax season is coming up, be sure to watch your mail.

If your refund is taken and you don’t believe it should have been, you can contest the offset by contacting the Education Department. If it was taken in error, the money will be refunded. However, be aware that an error does not generally include not getting a notice; it typically would require that you be able to prove your student loan was not in default.

As we mentioned earlier, if you were in default, you probably can’t get your refund back. The one case in which you are likely to be able to recover the money is if you filed jointly with a spouse, and it was his or her student loan that was in default.

“You may be able to make an injured spouse claim,” said Fleischman.

How Can I Keep a Tax Refund From Being Taken for Student Loan Debt?

Fleischman said it’s a good idea to adjust your withholdings whether you’re subject to a tax refund offset of not. A large tax refund means you overpaid your taxes during the year, he notes. If you are in default on your federal student loans you probably need that money. But at this point, there is nothing you can do to change the over-withholding from last year. Still, revisiting how much you’re having withheld for taxes is a smart move for anyone who got a large refund.

The bigger problem is how you are going to deal with the default on your student loans from now on. You’ll want to get out of default and stay that way. (Here’s an explainer on how to deal with student loan default.) In some cases, you may be able to get an income-based repayment plan in which your monthly payment can be set as low as $0. And “if your circumstances are dire and expected to remain so,” bankruptcy and the discharge of student loans might be options, Fleischman said. (Yes, that can be done.)

For most, what is done is done. The best thing you can do is to look ahead. And if you haven’t filed your tax return and expect a large refund, you may want to see what options you have to get out of default first. Being in default on a student loan can not only squeeze your budget, it can hurt your credit and cost you thousands of dollars in higher debt costs over a lifetime. You can get two of your credit scores for free on Credit.com to track your standing.

Got a question about your student loans? We want to help. Ask away in the comments section below and one of our experts will try to get back to you. In the meantime, visit our student loan learning center for more info.  

This article has been updated. It originally ran on March 9, 2015.

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The Wackiest Things Small Business Owners Try to Deduct

tax_deductions

As a small business owner, you want to take every legal tax deduction you can to lower your tax bill. But lingerie? A petting zoo? Daily breakfast eaten at your desk? As it turns out, one of those three items passed IRS scrutiny, proving that what’s crazy for one business to try to deduct could turn out to be fine for another.

Firearms was a popular response mentioned by several experts asked to share some of the unique items for which they’ve seen business owners try to get a tax break.

“A client tried to deduct the cost of a shotgun,” says Steven J. Weil, Ph.D., EA, president and partner of Fort Lauderdale firm RMS Accounting. “The reason given was, ‘I am a pharmacist and I need to protect myself in case someone wants to break into my house looking for drugs’.”

Another small business owner tried to deduct the cost of a concealed weapons permit class because they claimed it would allow them to “protect their office,” says Jeffrey Beebe, a CPA in Boise, Idaho. The problem? “They didn’t do anything that represented any kind of special risk,” he says.

And Thomas J. Williams, a tax accountant who operates Your Small Biz Accountant, LLC, said a client thought their “concealed weapon and permit would be deductible since it would be used for security purposes at the office.” He had to point out to the client that for an item to be deductible, it “must meet the necessary and ordinary test for the industry type. The client did not keep cash on site, nor were they located in an overly crime-ridden area; a general sense of feeling safer by owning a gun would not qualify as reasonable business expense.”

Off the Wall … But Deductible?

“A purchase from SexyHighHeels.com,” says Donna Merrill, business coach, tax expert and founder of Business Untangled, describing surprising items her clients have tried to write off. That purchase turned out to be a personal gift, purchased on a business credit card (another no-no). It didn’t fly. But two other unusual ones did:

  • A petting zoo for a direct sales home-based business. “Positioned strategically on the tax return with very visible notes to be seen upfront, this deduction continued to be accepted by the IRS for numerous years,” she says.
  • A Playboy subscription. “This expense was actually put through the scrutiny of an audit,” says Merrill. “It was a legitimate expense for the taxpayer, who was a photographer who did boudoir photography.”

“Clothing and shoes” are the ones that top the list of creative deductions Andrew G. Poulos, principal of Atlanta-based Poulos Accounting & Consulting, Inc., sees clients try to take. “Other crazy deductions I have seen include expensive gifts to their spouse, which include jewelry, lavish trips and even lingerie as a ‘gift.’ ”

Meals and entertainment deductions can trigger an audit if the business owner isn’t careful. “In my experience, the most abused expense is meals and entertainment,” according to Williams. “Clients are under the wrong impression that it’s a free for all. I once had a client try to deduct their daily breakfast because he happened to be speaking on the phone with a customer or sitting at his desk completing paperwork.”

Folasade Ayegbusi, founder of Accountingwithfolasade.com, says she’s seen a business owner try to deduct the occasional “alcohol run” under meals and entertainment. “Now, if the doctor prescribed you alcohol, then yes, we can deduct it,” she says.

Is Fido Deductible?

Pets can be expensive, and no doubt a tax deduction to lessen the burden would be nice. Some entrepreneurs do try. One of Weil’s clients, for example, tried to deduct the cost of their dog saying, “He is the company mascot, and we provide medical coverage for our employees.”

Joshua Zimmelman, owner of Westwood Tax & Consulting, says he’s had clients try to deduct vet bills and the cost of pet food by claiming their dogs were doing double duty as “guard dogs.” Beebe also had a client who tried to deduct the cost of their pet German Shepherd by claiming it was a guard dog.

Hobby or Business?

“People try to wrap their hobbies — from a kid’s soccer team to auto racing — into their business,” says Crystal Stranger, EA and president of 1st Tax. “It’s a thin line often between what does and does not fly when it comes to making something personal be business-related by calling it advertising or marketing,” she warns.

One test: Is it highly related to your business? She gives this example: “If you have a steer-roping team and run a business that builds saddles for steer roping, then the activities of competing your team and traveling to events are likely to be fully deductible. Whereas if your business is insurance, you will have a harder time connecting that to being a profit center.”

Vacations & Beach Homes

Personal vacations disguised as a business trip are another potential tax trap, warns Avo Asdourian, EA and founder of VirtualTaxAccountant.com. “If the deduction is for a convention and you are audited, the IRS will require the conference name and supporting registration documents, and proof that you attended the conference at least eight hours a day,” he explains. He adds, “If you call your vacation a business meeting, then you need to provide the people you met with and a synopsis of the business meeting and the outcome of the business meeting.”

One of Beebe’s clients tried to deduct a $600,000 catamaran used to entertain clients once or twice a year. Another hoped to get a tax break by claiming a deduction for a cabin deep in the woods, as well as the snowmobiles used to get there in the winter, because it was used occasionally to entertain clients.

Clients have tried to come up with “elaborate schemes” involving ”foreign companies owning nice houses on even nicer beaches,” says Austin Carlson, a CPA and associate at Gray Reed & McGraw. His answer is “not deductible,” he says.

Protect Yourself

For an expense to be deductible, the IRS says “it must be be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” But in many cases, business owners attempt to deduct a purely personal expense, says Williams.

As seen from the example of the Playboy subscription, some unconventional purchases may be deductible in the right circumstances. Make sure you keep good records and consider working with a qualified tax professional with experience helping small business owners.

But beware tax preparers who promise big deductions before reviewing your situation. “Don’t use anyone who suggests that you hide income or take write-offs you know you aren’t entitled to — this is a tip-off that the preparer is shady,” warns Asdourian. “If the IRS catches the preparer, all the preparer’s clients may come under audit.” Conversely, the wrong preparer could mean you miss out on deductions you are entitled to take.

Just remember the consequences if you come under the microscope of the IRS. The agency could put a lien on your business, which can have a major negative impact on your personal credit (if you’re a sole proprietor) and your business credit scores.

“There are always opportunities to plan legally within the law,” says Carlson, “but if it sounds too good to be true, it’s probably a one-way ticket to a massive IRS headache.”

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