In 2010 the Illinois legislature passed the Employee Credit Privacy Act to protect employees from losing job opportunities based on negative credit reports. The law takes affect on January 1, 2011. The new law forbids an employer or a potential employer from discriminating against a person based on their credit history, and prohibits the use of a person's credit report or credit history as a basis for employment, discharge, or compensation.
The federal bankruptcy law has long forbidden an employer to discriminate against anyone in the job market who has filed bankruptcy, and it makes sense for the states to extend this coverage to credit problems, that are not severe enough to require bankruptcy.
The legislators have included a provision of the law which I believe will make it far more effective. Instead of merely telling employers that they cannot use the credit history in making their decisions; they have also included prohibitions against an employer or a potential employer inquiring about an individual’s credit history or obtaining a credit report on an employee or a potential employee.
As a bankruptcy lawyer I have encountered many individuals, who are worried about losing their jobs, when they file bankruptcy. I always point out that this conduct by their employer would be a violation of the bankruptcy law, but while this offers some comfort it does not totally eliminate the fear that an employer might just invent another official reason , when they are really firing someone for going bankrupt. Thus I believe making it illegal for the employer to even view the credit report adds a lot to the level of protection.
Unfortunately, the legislation blunted the protection in some other cases. Public employers, insurers, financial institutions and debt collectors are exempt from the provisions of the act. Also, an employer might be able to avoid the prohibition by claiming that credit history related to a bona fide job requirement.
Thursday, December 30, 2010
Sunday, December 26, 2010
Loans From Qualified Retirement Plans
Some individuals suffering financial problems attempt to avoid having to file a Chapter 7 bankruptcy or a Chapter 13 bankruptcy by withdrawing funds from a qualified retirement plan to pay their debts However, this strategy is seldom a good idea. In the first place qualified plans are designed to provide for a worker’s retirement, and withdrawing the funds to apply to current problems can lead to devastating long term consequences by leaving the workers with little means of support during the final years of their lives.
In addition qualified plans contain tax incentives to encourage people to use these plans and save for their retirement, and the flip side of these incentives is that withdrawing the funds early has a heavy tax cost that can add to a person’s financial problems.
Finally, creditors cannot levy against qualified plans to collect on judgements. Someone, who is struggling to pay his or her debts should not give up this protection, and it is never a happy situation when someone deletes their 401k trying to pay off debts and ends up filing bankruptcy anyway.
As an alternative to withdrawing from a retirement plan, some plans allow the participant to take out a loan. Qualified loans from 401k plans or other qualified retirement or profit sharing plans must be repaid in five years, and the employee must repay the loan in basically level payments made at least quarterly. The interest portion of these payments are not deductible for tax purposes. The loans cannot exceed the lesser of $50,000.00 or the employees nonforfeitable balance in the plan.
Borrowing from a qualified plan is not an ideal solution to a financial crisis, since these loans can often prove difficult to repay; and the law treats a failure to repay as a taxable distribution from the plan. However, borrowing is better than a total withdrawal, because you still have the possibility of being able to repay the loan, and even if you fail to repay the entire amount you will receive the benefits of a qualified plan on the portion you do manage to repay.
In addition qualified plans contain tax incentives to encourage people to use these plans and save for their retirement, and the flip side of these incentives is that withdrawing the funds early has a heavy tax cost that can add to a person’s financial problems.
Finally, creditors cannot levy against qualified plans to collect on judgements. Someone, who is struggling to pay his or her debts should not give up this protection, and it is never a happy situation when someone deletes their 401k trying to pay off debts and ends up filing bankruptcy anyway.
As an alternative to withdrawing from a retirement plan, some plans allow the participant to take out a loan. Qualified loans from 401k plans or other qualified retirement or profit sharing plans must be repaid in five years, and the employee must repay the loan in basically level payments made at least quarterly. The interest portion of these payments are not deductible for tax purposes. The loans cannot exceed the lesser of $50,000.00 or the employees nonforfeitable balance in the plan.
Borrowing from a qualified plan is not an ideal solution to a financial crisis, since these loans can often prove difficult to repay; and the law treats a failure to repay as a taxable distribution from the plan. However, borrowing is better than a total withdrawal, because you still have the possibility of being able to repay the loan, and even if you fail to repay the entire amount you will receive the benefits of a qualified plan on the portion you do manage to repay.
Monday, December 6, 2010
Tax Deduction for Student Loan Interest
Individuals who have incurred large debts in th process of acquiring an education do not always achieve the success they had hoped for with their degrees, and thus the bankrupty law can create quite a burden by denying a discharge of student loan debts in most cases.
This does seem fair in many ways, since these debtors incurred the student loans in an effort to improve themselves, which public policy should encourage. Yet unlike a person, who cannot keep track of his credit card debt, an individual, who studied hard in college or professional school and learned after he graduated that the opportunities for someone with the credentials he has worked so long to acquire just do not exist, can generally not receive relief in bankruptcy.
One break the law does give to people having student loans though comes when they file their tax returns. Individual taxpayers may deduct up to $2,500 of interest a year on student loans, and this is an above the line deduction, which means the former student will receive the benefit, even if he or she does not itemize deductions.
The deduction phases our for individuals having modified adjusted gross incomes of between $60,000 and $75,000 a year, or for couples filing joint returns who have between $120,000 and $150,000 of modified adjusted gross income. Modified adjusted gross income for this purpose means adjusted gross income with a couple of modifications that the law creates for purposes of figuring this deduction.
To qualify for the deduction for interest on student loans, the taxpayer must be paying interest on a loan for qualified higher education expenses incurred by himself or his spouse, when the recipient was at least a half time student. Qualified higher education expenses include, room and board and related expenses involved in attending an institution of higher education as well as tuition and fees.
This does seem fair in many ways, since these debtors incurred the student loans in an effort to improve themselves, which public policy should encourage. Yet unlike a person, who cannot keep track of his credit card debt, an individual, who studied hard in college or professional school and learned after he graduated that the opportunities for someone with the credentials he has worked so long to acquire just do not exist, can generally not receive relief in bankruptcy.
One break the law does give to people having student loans though comes when they file their tax returns. Individual taxpayers may deduct up to $2,500 of interest a year on student loans, and this is an above the line deduction, which means the former student will receive the benefit, even if he or she does not itemize deductions.
The deduction phases our for individuals having modified adjusted gross incomes of between $60,000 and $75,000 a year, or for couples filing joint returns who have between $120,000 and $150,000 of modified adjusted gross income. Modified adjusted gross income for this purpose means adjusted gross income with a couple of modifications that the law creates for purposes of figuring this deduction.
To qualify for the deduction for interest on student loans, the taxpayer must be paying interest on a loan for qualified higher education expenses incurred by himself or his spouse, when the recipient was at least a half time student. Qualified higher education expenses include, room and board and related expenses involved in attending an institution of higher education as well as tuition and fees.
Subscribe to:
Posts (Atom)