Today’s Latest Scam: Homestead Protection

April 11, 2011

Don't drink the Kool-Aid. In particular, don't drink the Kool-Aid of incorrectly using the phrase "drinking the Kool-Aid". The stuff above is what those people drank in Guyana, yet for some reason the company managed to deflect all the bad PR to someone else.

Buy a house, rework your mortgage, or even apply for a loan and within days you’ll start receiving the kind of junk mail that usually warrants a second look – full of businesslike bold fonts, maybe even in red:

YOU COULD LOSE YOUR HOME IF YOU DON’T ACT IMMEDIATELY!

Sometimes the sender will go to the trouble of printing on the envelope the punishment prescribed in the United States Code for anyone but the addressee opening the letter. This lets you know that the sender means business. You open the letter and it tells you (in language much more ominous than our paraphrasing) that since you’re now a homeowner, or a potential homeowner, you could rejoin the unfortunate ranks of the renters once again with one simple legal slip-up. If someone sues you – too regular an occurrence in a society that’s now descended from litigious to ultralitigious – and should that plaintiff win a large enough amount, you could be forced to sell your house to pay the judgment. So what size barrel do you wear?

Therefore, you should immediately spend $95 or $150 with the homestead registration company that altruistically informed you of the precarious position that you’re now in.

It’s technically true that your home might be at risk, but this remains about the biggest scam this side of recommended rustproofing on a factory-new vehicle.

Simply put, here’s the extremely common situation that these companies try to exploit:

You buy a house. Regardless of how many houses or other pieces of real estate you own at a given time, one of them has the legal status of being your primary residence. Should you ever lose a court ruling and end up owing more than you can pay, whoever sued you could legally take your keys and march on in.

Except they can’t. There’s something called a homestead exemption that protects your house no matter what. Regardless of how much you owe, the legal principle that you’re entitled to quiet enjoyment of your home takes precedence over just about everything. Even Bernie Madoff got to keep his Park Avenue apartment, or would have if he hadn’t signed a 150-year lease to move to this idyllic setting in Granville County, North Carolina.

But if you own a house, you probably already have an automatic homestead that covers any danger. You don’t have to fill out any paperwork. If you can prove that the residence is indeed your primary one – which shouldn’t be too difficult – the most bellicose lawyer on the planet can’t touch it.

How come I didn’t know this?

Why would you? Who bothers to advertise it? Twisting up a Glad lawn & leaf bag over your fingers is the best way to safely remove a broken light bulb’s Edison screw from its socket, but that particular feature isn’t listed on the package.

So I can go around incurring debts, scamming people, spending money foolishly and daring people to sue me, knowing full well that my home is impervious to their lawyers’ petty threats?

Don’t go crazy. Somewhat obviously, if your house gets foreclosed on you don’t get to stay in it, even if you have nowhere else to go. The IRS will gladly take your house, too, maybe even just for sport. So pay your federal taxes.

If you declare bankruptcy, you also cede your homestead exemption in some instances, although there isn’t a bankruptcy judge in the nation who will kick you out on the street.

But pay your child support and alimony, you deadbeat. You also need to pay any mechanic’s lien, which is a legal term that refers to services rendered by a contractor that you never bothered paying for and that the contractor formally fought to recover. (That’s largely theoretical, mind you. It’s hard to imagine an unpaid driveway paving bill being large enough to force you to liquidate your house, or a homeowner being stubborn enough to refuse to pay and thus risk losing his house.)

It’s mostly general creditor claims that a homestead declaration protects you against. Unpaid medical bills, credit card debt, and other stuff you would never have incurred in the first place had you read Control Your Cash: Making Money Make Sense. However, there’s nothing in the book about how to fight off lawsuits, which you can’t control.

Also, vacation homes aren’t eligible for homestead exemptions – unless you want to start living in yours 183 days a year, and somehow do so retroactively, which would turn your primary residence into your secondary residence.

Is there any set of circumstances under which I should register my homestead?

Yes. For 6 months after you sell your house, if you can feel creditors breathing down your neck. If for whatever reason you’ve sold your house and haven’t yet bought a new one, your creditors can’t go after the cash proceeds from the sale.

It costs almost nothing to do this. Maybe a $15 filing fee, that’s it.

Of course, chances are pretty good that no one’s suing you for enough that you’d risk losing your house anyway. But because many people overestimate the risk of this happening, and therefore panic, that’s how homestead protection companies find their market of suckers.

One last thing: most states set a limit on the amount you can protect. $550,000 is standard.

But say you’ve reached the point in life where you’re sufficiently accomplished to have paid off your mortgage and have $551,000 in equity cooling in your house, even after the market falls. Yes, if anyone gets a judgment against you you’d conceivably have to sell your house.

Of course, if you’re this successful then you’ve already created an LLC or S corporation to anticipate this eventuality and protect yourself, right? (We could link to any one 20 guest posts we’ve written on this. Here’s a random one.)

**This article is featured in the Carnival of Wealth #34**

Filed Under: Bad Examples, Economics, Estate Planning, Real Estate Tagged With: , , ,

Your mutual fund is battling back

February 25, 2011

Do a Google image search for "rich woman", and for some reason this picture of Malcolm Gladwell comes up

Welcome to Recycle Friday, in which we dig up the carcass of a vintage guest post of ours and see how it stands up in the modern era. Today’s originally ran on 20sMoney last year. Annotations in CYC maroon:

Today’s happy headline (“Your mutual fund is hurting worse than you think”) necessitates a little look back. How does today’s Dow Jones Industrial Average compare to, say, the Dow of February 1997?

Answer: It doesn’t. Sure, the average is 10,192 today (12,069 this morning, baby! The proverbial gravy train with biscuit wheels! Start borrowing!) and was around 6900 twelve years and 3 months ago, but…the average of what?

The Dow is the sum of the prices of 30 of America’s largest stocks, multiplied by a constant. But the roster of stocks itself isn’t constant. Here are some of the blue chips that comprised the Dow in ‘97:

General Motors
Citigroup
AIG

(This is already reading like a list of notorious contemporary eradications. Despite where we appear to be heading, the next items on the list are not the Seattle SuperSonics, the French franc and Lindsay Lohan’s career.) (Those semi-pop culture references still hold up, kind of. Maybe we could trade out Charlie Sheen for Lindsay Lohan, but that’s it.)

Altria
Honeywell
Eastman Kodak
International Paper
AlliedSignal
3M
Goodyear
Sears Roebuck
Union Carbide
Bethlehem Steel
Westinghouse
Woolworth

That’s almost half the then-Dow, consisting of the infamous and the doddering. Today, these names sound as though they belong in some bygone epoch of American proto-commerce. (Woolworth, if you’re interested, took scarcely more than a generation to fall from five-and-dimes with lunch counters that wouldn’t serve black people to sneaker retail. The company shed all its fat and kept its one legitimate asset, which is now its successor company – Foot Locker.)

So yes, the Dow has “risen” 60% since the cloning of Dolly the sheep. But that’s comparing today’s Dow to something that no longer exists. A basket of 1997 Dow stocks wouldn’t have risen anywhere near 60%:  a lot would depend on whether you used your General Motors certificate to make a paper airplane out of or wipe up kitchen spills with.

(Since then, General Motors made a comeback of sorts. The old shares were indeed rendered worthless, thanks to a federal government that decided that GM’s bondholders and owners didn’t matter as much as its employees – or more importantly, its employees’ union bosses. The new shares began selling on November 18 at $34.19. Fortuitously, they just happened to have dropped a record 5% yesterday to close at $33.02. Did we mention that your tax dollars are responsible for this? We did.)

(No Dow stocks have changed out since Cisco and Travelers joined in 2009. In fact, none of the current 30 are even in trouble.)

Conversely, if you’d had the foresight to invest in stocks that were to become Dow components –Verizon, AT&T, Chevron, Cisco, Intel, Pfizer et al. – you’d have enjoyed a lot more than a 60% return over 12 years. But you’d have had to predict that cell phones would become ubiquitous, gas prices would rise, every new electronic component would need a router, and every man in America would convince himself that little blue pills were the only things standing between him and a happily exhausted wife.

What about companies that barely existed in 1997? Google didn’t trade publicly then, and wouldn’t for years. Yahoo! did, at around $1. Each company’s profound growth remains invisible to the Dow.

Because the Dow regularly replaces its weaker components with stronger ones, its levels can mislead. Only if you own a Dow index fund – a basket of stocks that consists of equal proportions of Dow components, and whose makeup changes as the Dow itself changes – can you truly track that investment consistently over the years.

But because the Dow is measured in dollars, or at least a mathematical manipulation thereof, you have to account for inflation. The Consumer Price Index has risen 37% since February of 1997. (And 1.4% annually since this post first ran. Are we ever going to see the hyperinflation we’ve been anticipating?) (The Consumer Price Index is subject to biases of its own, but explaining them would require a few thousand more words.) The Dow itself has risen 43% in that same period. (See above.) So in real dollars, a Dow index fund has appreciated .4% annually since then. Two-fifths of a stinking percent, and that’s ignoring broker fees. Should the Dow drop another 400 points – and it dropped half that much in the last 10 minutes of trading on May 23 – that’d wipe out every penny of those miniscule gains. That’s one term of Clinton, two terms of Bush, and a term-in-progress of Obama with no appreciable gain in the Dow.

(The changes since then amount to a rounding error. Seriously, it’s up to an annual increase of 1.8%. Maybe things really are looking up, if by “things” we mean “stocks” and by “up” we mean “harder to buy”.)

Your conservative neighbor whose entire portfolio is 3-year CDs doesn’t look so stupid now, does he? Yes, it’s easy to look back with perfect eyesight, but there is such a thing as overdiversification. And while that’s never as dangerous as riding the waves with only one or two stocks, it does lower your ceiling. When you put your eggs in one gigantic uber-basket, you’re not giving undervalued, bargain stocks a fair chance to boost your portfolio.

At Control Your Cash we shudder at the idea of frequent and indiscriminate turnover. A stock is an investment, not a blackjack hand. But we also hammer one primary mantra: Buy assets, sell liabilities. Do that often enough and you can’t help but get rich. Overpriced Dow components (and other big companies) with poor fundamentals are almost always liabilities.

(Fortunately, Dow Jones Inc., the folks who determine which stocks comprise its bellwether index, have gotten a little more pragmatic lately. A company’s history, or its influence of a couple generations ago, is no longer as important as what it’s done for us lately. Maybe those fancy semiconductors and software really are here to stay.)

**This post is featured at the Totally Money Carnival #9-Funny Baby Videos Edition**

Filed Under: Economics, Education, Finance, Investments Tagged With: , , ,

Nothing says “I love you” like the actual words

February 14, 2011

Come on in! We're having a special on 2002 Valentine's Day gifts!

So say it. By talking, not by impoverishing yourself.

It’s tough to determine whether Mothers Day or Valentine’s Day is the biggest crock of garbage on the retail liturgical calendar. After a few seconds of weighing this, we’ll go with Mothers Day. At least Valentine’s Day has been celebrated for centuries*.

This isn’t an anti-capitalistic jeremiad. Spend all the money you want, but at least spend it on something of value. Look, we’re not sociologists. Nor are we in that camp of reactionaries who think that consumerism and its sidekick, advertising, are the work of the devil. But come on. If you’ve seen the messages and feel even a hint of obligation toward spending money on something with minimal inherent value, we can come over there and slap you if that’s what it takes. There are plenty of Western customs you can honor (shaking hands, exhibiting good table manners, failing to torture cats) without throwing money away.

Just look at the slogans:

Helzberg Diamonds: “I am loved.”

Ergo, any woman who isn’t in a relationship with a Helzberg customer is being taken for granted and/or treated like garbage.

It’s the same as that “2 months’ salary” rule of thumb that jewelers came up with sometime in the mid-20th century and somehow got a grossly gullible public to swallow. Think about that for a second – an industry suggests that you should spend 1/6 of your annual income on its product, and people take it to heart.

Imagine if an industry that produces something far more useful – like groceries, or better yet, health insurance – tried to get away with that reasoning.

Seriously. Mental exercise time. What if an HMO used a similar tactic?

Hi. We’re your friends at CIGNA. Do you have enough protection against unforeseen accidents and illnesses? You never know when disaster might strike you or your loved ones, and possibly turn into tragedy. That’s why we recommend that you spend at least 10% of your pre-tax income on coverage. It’s a small price to pay to minimize the childhood leukemia deaths in your family.

The only question is which senator would chair the 2011 hearings on Unconscionable Advertising Messages Foisted By A Mercenary Industry On The Public. Our money’s on Chuck Schumer.

If you want to listen to a jeweler’s message, Zales’ slogan from the 1940s is particularly forthright, especially if you contemporize it for inflation – “A penny down and a dollar a week.”

The practice of buying jewelry, especially at this time of year, is the loudest and most imbecilic real-world rebuttal of Control Your Cash Mantra #1 – bolded, italicized and underlined here for your pleasure: Buy assets, sell liabilities.

Finance something if there’s a legitimate economic reason for it – the example we give repeatedly is homebuying. If you want a house, better to finance it than to pay rent for years and years when you could have been enjoying a home on credit. Even if your circumstances lead you to disagree with that sentiment – you live in an area with a chronically poor housing market, or your data indicates that it’ll become one before you plan to move out of any house you might buy – you have to agree that at least a house has utility. Financing a car is harder to justify than financing a house, but again, utility: we still haven’t developed a more efficient way to get from point A to point B at your leisure (assuming points A and B are on land) than by driving.

Where’s the utility in a non-industrial diamond? You’re not going to use it as a drill bit. No, it’s a totem of some emotion that you can only truly convey with actions, not expensive objects.

We’d include a chart showing how much what you spent on that tennis bracelet could grow to over the next x years, but you’ve seen similar charts before and the inevitable conclusion is so obvious that it doesn’t require mathematical reinforcement.

If you don’t care about your future together, act like you mean it: by dropping money on – or better yet, financing – a shiny trinket.

And ladies, if you need a bauble to validate your relationship, or your man, you’re one step above your colleagues whose husbands smoke cigars. (Why not just wear a button that says, “With all the tasty parts of me available to put in his mouth, he instead chooses the foulest-smelling thing this side of the public toilets in Calcutta. No, no hypermasculine phallic symbolism to see here”?)

Look, moments don’t sparkle. And if they do, it’s only a figure of speech. A Vermont Teddy Bear might not be imaginative, but it’s fun to hold. More importantly, the recipient isn’t going to wear it in public – making it a private token of a relationship that you shouldn’t be sharing with the rest of us anyway. And, the one we researched on their website costs only $80.

*If you care about this kind of arcana, the idea that the Hallmark Corporation created Mothers Day is an urban legend. Mothers Day is the brainchild of Anna Jarvis, a 19th century woman who wanted to honor her own mother. Jarvis mère spent the Civil War attending to wounded soldiers, both Blue and Gray. Jarvis fille, as women often do, kept pestering the authorities to make the holiday official. She died poor and childless.

**This post is featured in the Carnival of Wealth #27**

Filed Under: Capitalism, Economics, Finance, Investments, Making Smart Choices Tagged With: , , , , ,
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