If you haven’t heard about Teresa Guidice by now, where have you been?  She’s only the latest reality TV star to get caught up in trying to keep up with her rich friends by amassing 11 million in debt.

I generally like Teresa’s bad a$$ character from The Real Housewives of New Jersey.  She says what’s on her mind and she means it, albeit littered with expletives I wouldn’t say around children.  But, I have to wonder why this woman who plays such a “boss” bitch” character on a reality show didn’t play the same role in her marital finances?

Recently, she sat down with In Touch magazine to discuss her path to bankruptcy.  Yep, she and her husband declared bankruptcy to the tune of $11 million.

Essentially, she says they racked up the debt via fancy parties for the kids, 6 figure car ie their leased Maserati where they still owe $60,000, extravagant shopping trips with her friends and their over the top gold and marble home.

Their bankruptcy petition, filed in federal court in Newark, New Jersey, lists $11.8 million in debts. That includes $5.8 million on various business investments made by Joe, $2.6 million in mortgages on three homes, and $12,000 owed to a fertility clinic.

The couple also list $104, 000 in credit card bills, including $20,000 to top-tier department stores like Neiman Marcus and Nordstrom, and $2,300 to the phone company.- Radaronline

What can you learn from Teresa?

Communication: You need to be on the same page as your spouse about finances, even if he isnt.  She didn’t get the hint when he started telling her to ease up on the spending, but he should have sat her down and told her exactly how dire their financial situation was at the time.

Know Thy Self: If you’re buying on credit then you can’t afford it.  Doesn’t matter how long the credit line, at the end of the month you still have to pay it back to the bank.

You Home Isn’t An ATM:  My guess is that they used some of the equity from their homes to finance their lavish lifestyle.  Leveraging the equity during good times helped them live the life they love so much.  Again, living on borrowed money they would never be bale to pay back.

Teach Your Children The Value of Money:  Watching the show you would think this was the last day on earth for the kids.  She went overboard with spending on their parties, clothing and anything else they want.   As a result, sorry to say it but her children were like rabid brats who didn’t understand the word NO.  And rightfully so, she rarely said no even with their strained finances looming. Parents often say to me “well I want my children to have more than I did”.  Those are your wants, not your children’s.  Separate the two and understand that you children just want your unconditional love and a stable living environment.

I sincerely hope they learn lessons from this process but something tells me they won’t any time soon.  Keeping up with the Manzos seems to be top on their list of priorities.   By the way, I love Caroline!

What tips do you have for Teresa? If you watch the show, did you see this coming?

There’s been heavy talk recently around “walking away from foreclosures” and the devastating effect it’s having on banks and homeowners.  Jingle mail occurs when the borrower drops the keys in the mail and sends them back to the bank as final step in walking away from their home due to a rising mortgage and hard economic times all around.   But one thing we bet you hadn’t considered is that depending on the state, the lender may or may not have recourse or legal ability to seek the balance from you upon foreclosure in the form of a deficiency judgment.

Some states are non-recourse, which means they aren’t able to pursue a deficiency judgment against the borrower, most notable, the homes in California are non-recourse for purchase money mortgages.

Before walking away from your home consider ALL of your options:

• Short sale: Call your lender to find out whether or not this is an option for you.
• Loan modification: A loan modification can reduce your interest rate thereby changing your monthly payments to reflect one inline with your budget
• Loan extension This option allows the bank to place your payments on hold for a period of time and the balance that is unpaid is put towards the end of your loan to be paid in a balloon payment at the end of the term.  But this may not be available through all lenders.
• Principal write down The bank will refinance your loan down to the current market value, giving homeowners some equity back in their homes and more reason to stay put as most homeowners are disenchanted by the negative equity and perception of their largest investment being worth nothing or very little to them.

The above mentioned options can be pursued through your lender or better yet through housing non profit organizations like NACA and ACORN.

If the above options aren’t available to you for one reason or another you may be thinking about walking away from your home altogether.  Before you mail the keys, consider the following consequences:

Payment

You may be on the hook for the balance of what is owed after your home goes into foreclosure depending on your state and it’s laws around lender recourse.   The lender may seek a deficiency judgment where you either pay it off or let it charge off on your credit report which leads to severe damage to your credit standing.

Taxes

You may also be taxed on the amount forgiven or the balance owed in either situation.  The tax rate can range from 10-35% depending on your income.  The IRS treats the discharge of the debt as income or it is listed as “discharge of indebtedness income” on your tax bill.  So while losing your home is bad enough, just wait until you get the tax bill.

Now that you have more information, let’s take a look at how the situations are treated depending on whether or not you live in a recourse or non-recourse state.  Take note of your state’s laws, the bank’s ability to see a deficiency judgment and, if so, then consider your tax liabilities.  The IRS is far more tenacious in its collection of taxes owed so please consider the penalties and consequences of walking away from your home.

The following is a list linking to all the states and their respective laws and information around bank recourse:

If you live in a state that permits recourse then you are liable for the balance owed.  If the sale did not yield enough proceeds to cover the balance then you, the borrower must pay the difference which includes the interest that accrues during the process of foreclosure.

For example, if you have a home that is worth $600,000 and you have a $675,000 loan, in a recourse state, the bank has legal standing to go after the borrower for the balance and the IRS will send you a tax bill for the taxes owed on the $75,000 as this is treated as income.  The lender is required to send you a 1099 detailing the forgiveness of the debt of which a copy is also forwarded to the IRS.

If your loan is non-recourse then it is secured by the loan collateral.  If the sale of your home in foreclosure does not cover the balance on the loan then your lender has no legal standing on which to pursue the remaining or outstanding balance.  Therefore if you have a home that is worth $600,000 and you have a $675,000 loan, in a non-recourse state, the bank may not pursue the remaining $75,000.

Keep in mind that you could end up owing capital gains taxes if your loan is non-recourse.  You are reading correctly: the bank is selling the house, you are not, still the IRS treats this transaction as if you are selling the home.

Straight talk from the IRS:

Publication 544:

“If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. … You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized.”

There you have it.  Straight from the IRS.  Please consider all your options before walking away from a home you worked hard to obtain.  Foreclosure can have devastating consequences not only financially but psychologically as well.  Please be sure to talk to your lender, CPA and Realtor to gain an understanding of the options available to you.

*Whispers* But if you decide to walk away because it’s just a devalued money pit, that’s alright with me, but you didnt read that here.

Question:  Would you consider Jingle Mail if you lived in a non-recourse state?

This month’s group writing project is about Rich People Gone Broke! Being that Girls Just Wanna Have Funds is themed by the obvious, Cyndi Lauper’s Girls Just Wanna Have FUN hit of the 80s, I thought her profile appropriate for this project.

This 80s icon had it all: money, fame and a hit song which topped the charts, but Cyndi Lauper was actually forced into bankruptcy early in her career.  Her early years included a stint with a band called Blue Angels with bandmate John Turi.  The band released an album which soon flopped but to make matters worse, their manager sued the group for $80,000.  This subsequently led to the disbanding of Blue Angels but would be the turning point of Lauper’s music career.

Post bankruptcy, Lauper would sing in local NY clubs while her manager worked on getting her a record deal.  And that he did!  Lauper signed with Portrait and then went on to record She’s So Unuusal which released the first single Girls Just Wanna Have Fun.  The album True Colors would then follow which hit the number one spot on the charts back in the 80s.

Girls Just Wanna Have Fun embodied female self expression which became immensely popular amongst young girls at the time.  The album was a hit in the States and abroad in the UK.

Lessons From This Girl Gone Broke?

Bankruptcy doesn’t have to mean the end of the world.  Once Cyndi Lauper’s band broke up she went back to her passion, singing and making records.  This is what you do even when the odds are against  you, keep on trying until your goal.  Her perseverance landed her a record deal which resulted in a number one hit which no doubt rocketed her into 80′s icon status.

If you’re unfamiliar with Cyndu Lauper (shame on you!), check out the video here:

Do you know any Girls Gone Broke?  How did they turn things around?

Feel free to check out other posts by the PF Bloggers: