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A very dear friend came to me last night, almost in tears, and asked for my help. I don't know what to tell him.

About 2 years ago, he lost his job (company closed, not his fault) and he went completely broke. Had-to-move-out-of-his-apartment-into-a-friend's-basement, owed-money-to-everyone-he-ever-knew broke. The company he worked for had never actually put him on payroll (kept telling him they were working on it) and just paid him like a contractor. He wasn't, but they paid him like he was, so he was not able to get unemployment. Really broke.

He struggled and worked any job he could get and has nearly paid off all his debts. I'm actually very proud of him for that - he's really worked hard at it.

About 1 year ago, his POS car broke down. Repairs estimated at $1000, car worth maybe $800 and he still owed $1000 on it. He had no money at all and needed a car to work. So, he did what everyone told him not to do and bought a new car. Managed to finance more than 100% of the purchase price, because they had to roll his negative equity on the old into the loan. Because of his bad credit (really bad) his interest rate is something like 18.9%. It physically hurst me to think about it.

So, here we are now. He got a steady job, decent income, place of his own again, etc. This company is closing the local office and he will again be out of work in September. His only recurring bill right now is his car payment.

His payoff on the 2004 Kia Spectra he bought is right at $17K. The car is worth about $8K. I know the general advise is to get out of an upside down loan ASAP, but I don't see how. He can't sell it for anywhere near what is owed, and he does not have any money to make up the difference.

Everything else he can manage on unemployment, but he is very afraid he will lose the car to repossession. He's worked to hard to recover from the bad credit and lost job that this is killing him.

What can he do?

TIA
-a-
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Let me get this straight - he gets himself $9,000 upside-down on a new car to avoid a $1,000 repair bill....

He really only has two options if he wants to avoid repossession:

1. Sell the car for as much as he can and borrow the $9000 to make up the difference on the loan.

2. Continue making payments as agreed.

I'm a little bit confused by your statement - Everything else he can manage on unemployment - is he not looking for a new job NOW to replace the one going away in a couple of months? If he can find something comparable to his current job between now and September, then he should be able to keep making payments.
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He can offer to relocate to another town where the company has offices and look for a job with the company's competitors.

No spouse, I take it?

The company he worked for had never actually put him on payroll (kept telling him they were working on it) and just paid him like a contractor. He wasn't, but they paid him like he was,...

That doesn't compute. Did he get a W2 at the end of the year? Was tax withheld from his pay?
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Yes, he's already started looking for another job. He's just worried about the "worst case", i guess because last time it took him 14 months to get a full-time job.

He said he couldn't find $1000 for the repairs ("you can't finance repairs, but you can finance a new car"), so he bought the car.

No, he didn't get a W-2, he got a 1099 and had to pay all the taxes himself. He has appealed that with the IRS (not sure I'm using the right words) because he was clearly an employee under IRS rules/definitions/whatever. I'm not sure where that stands right now - his appeal, I mean - but I think he was smart to do it.
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Is your friend being straight with you because I'm finding a few things that don't make sense, but it could just be because you didn't post all the details.

He wasn't, but they paid him like he was, so he was not able to get unemployment.

If this were true, and it is defined by the IRS and not by what the company would like it to be, then he should have applied for unemployment under the rules that he really was an employee, and they should have been paying him as such. There have been court cases about this, and that's why the IRS has such rules. It is pretty cut and dry.

He got a steady job, decent income, place of his own again, etc. This company is closing the local office and he will again be out of work in September. His only recurring bill right now is his car payment.


His car cannot be his only recurring bill. What about his housing expenses like mortage, taxes and insurance? If he's renting, it would be more along the lines of rent. What about car insurance, groceries and the electric bill? All of these are recurring expenses and things he needs to be paying for. Why is he only worried about the car payment?

What can he do?


Has he really scrubbed his budget to the bone? Has he done things like elimate his cell phone or landline if he has both? Can he cut his cellphone minutes? Does he have cable that could be cancelled? Does he eat out at all because this is a pure discretionary expense and can be cut to nothing?

He really needs to look at his total budget and budget to the bone at this point while he continues to look for steady employment. He might also have to just take any job just so that he has some income coming in.

What he cannot do is sit around and wait for a solution to just happen. He needs to take control and start cutting expenses while increasing his means.
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He said he couldn't find $1000 for the repairs ("you can't finance repairs, but you can finance a new car"), so he bought the car.

Did it never occur to him that he can finance a used car? Heck, he could have even finance a cheaper new car.

Your friend seems to have a problem realizing that he is where he is at because of HIS choices. That's actually the root of his problem.

The only thing I can think to do aside from selling the car and borrowing the difference is to re-finance the loan with a credit union and try to get a better rate.

I'm not sure where that stands right now - his appeal, I mean - but I think he was smart to do it.

Oh yeah, picking fights with the IRS when you know that you had no taxes removed from your income is brilliant. To be honest, just from what you have posted, this guy has the financial attention span of a sparrow, and you should be ready for any help that you give him being negated by a some wild hair down the road.

Fred

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He can try to call the finance company and ask for a lower payment/longer repayment time. With 20% interest it will be expensive. Refinancing an upside down car loan essentially means that you have to qualify for the unsecured portion of the loan. I have my doubts that it would be possible with his current credit history.

No, he didn't get a W-2, he got a 1099 and had to pay all the taxes himself. He has appealed that with the IRS (not sure I'm using the right words) because he was clearly an employee under IRS rules/definitions/whatever. I'm not sure where that stands right now - his appeal, I mean - but I think he was smart to do it.

If he is deemed an employee, the employer would pay their half of social security. It does not make his previous employer liable for his income taxes or his half of social security. There is no tax fairy.

Does his budget for unemployment include income taxes? Given his recent history, is he aware that the payments are taxable?

I am not certain the appeal with the IRS it was the smart thing to do. Burning bridges with a previous employer can cause problems for future job searches and he is about to lose his current job.

Will the friend let him move back in? Car finance companies are brutal. They will reposses the car and the will seek payment of the difference. If they can't collect and they charge it off, he will have to declare the amount as income. It will destroy his credit for at least the next 7 years.



Debra
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If he is deemed an employee, the employer would pay their half of social security. It does not make his previous employer liable for his income taxes or his half of social security. There is no tax fairy.


No, but it does make his previous employer liable for unemployment, and that would mean he can collect, something he cannot do as a contract employee.
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1099 means he was a contractor, not an employee. That's why there was no withholding of taxes.
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1099 means he was a contractor, not an employee. That's why there was no withholding of taxes.


That is true, but some companies try to get around things like paying unemployment by having 1099 contractors when the people should be employees, and it is the IRS code that governs that decision. The point was that if should have been an employee, then regardless of how they paid him and whether or not they withheld taxes, they may still be on the hook for unemployment.

It would appear that he is not concerned about the tax withholding as much as the lack of unemployment benefits.
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That is true, but some companies try to get around things like paying unemployment by having 1099 contractors when the people should be employees, and it is the IRS code that governs that decision.

This thread has now made its way to the tax board, so let me address the tax issue, which feeds the unemployment issue. As I understand the situation, the person involved was treated as a contractor but believes he should have been treated as an employee. He has paid his income and employment taxes, although I'm not clear as to whether he's paid full self-employment tax or just employee FICA/Medicare. I'm also not clear as to whether he's made 2005 estimated tax payments. He has referred the employer/employee issue to the IRS.

If the ultimate determination is that he should have been treated as an employee, yes, the employer will be liable for unemployment tax, and yes, he will be entitled to unemployment benefits. Contrary to one post that said the issue is "cut and dried," the issue may be, but the process is far from. These things can take years to be resolve on the basic issue, and then the state, which administers the unemployment program, has to play catchup after that. Even if he's right, he should in no way be counting on unemployment benefits by September 2005.

Phil
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An addendum to what I just wrote. There is a "safe harbor" provision under which a determination would apply only to future payments. IIRC this requires that the employer's past actions were in good faith and in accordance with industry practices, not just employer whim.

Phil
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1099 means he was a contractor, not an employee. That's why there was no withholding of taxes.

Sometimes companies "switch" you to being a contractor despite your job not changing one iota. It happened to my DH. Your friend should go on the IRS web site, download the form to fill out to see if he qualifies as an employee or as a contractor, and then follow up on it.

My DH happened to fit more or less into the definition of "contractor." Paid based on hours worked, telecommuted, things like that. Your friend should check out this form, and see if he can be considered an employee, and if so, follow up with the IRS. If he ends up owing the IRS money, they're pretty good about working with people, about setting up payments plans and stuff. Good luck to your friend. I don't think he just has to accept the company reclassifying him, but it will probably take some time to sort it out, so the sooner he starts, the better. We probably would have made more of a stink about my DH getting classified as a contractor, but he was still working there, he wanted to still be working there, and he was sort of between the two definitions, so we kept quiet about it.

Oh, and I suggest your friend hedge his bets and make some kind of estimated tax payment on September 15 and January 15 of this tax year. He may or may not be able to get classified as an employee, but it's better to cover his bases. He can also look at I think it's Publication 560? 960? that talks about being self-employed, and some of the record-keeping you can do to take deductions for self-employment, if he ends up being officially a contractor. The more proactive he is, the better it will go for him either way, you know? If he can more or less estimate what he'd owe on the contractor income, the income that showed up on the 1099, and he can make some payments on that, that would help him.

But wait, if he got a 1099, he should have already filed the taxes on that tax year--you get your 1099 in January or February for the previous year's work--when did he get the 1099? What year was it for? Is he filing taxes late, in October, for 2004?


--Booa
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Debra,

The withholding and remittance of all payroll taxes is an employer burden. If the employer fails to withhold taxes, fails to remit withheld taxes or erroneously declares an employee a contractor, the employer and ONLY the employer is liable for the taxes; all of the taxes including what would normally be the employee portion of FICA and Medicare. And unlike any other corporate tax, if the IRS chooses to play hardball, the IRS can PERSONALLY hold the check signor liable for all the taxes. There is no corporate shield for payroll taxes.

Watch your local business pages for all the tax liens by the IRS. Almost inevitably those are payroll taxes. By all means if an employer classified an employee as a contractor, I'd be all over that. That will quickly add up to a chunk of money.

You're right Debra that there is no tax fairy, but there are IRS agents who don't play when it comes to payroll taxes.

Leighsah
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Warning - long post!

A very dear friend came to me last night, almost in tears, and asked for my help. I don't know what to tell him.

I understand your dilema. You care for this person, and you want to help, but you just don't know what to do. I am in similar place with one of my best friends.

What you shouldn't do, even if you can afford it, is pay off his debts.

What you should do is offer information and choices. You've learned a lot from this board and your own experiences, so a bit of good advice may save your friend a lot of heart ache.

Ask your friend what sort of help he wants, and list what you might be willing to do. If he is the sort to make his problems yours, don't get sucked in to taking over for him. He must learn to walk on his own. But do offer to help map out the path he should take.

Your friend is probably scared right now. Somehow, the second lay off is worse than the first - you know the financial pain ahead. He also might have had some loss of confidence in his ability. Perhaps even a cross roads of deciding if this profession is the right one for him.

You can offer to help him with his resume and job search. Be his career coach.

You can offer to help him organize his finances and create a post-job-loss budget. Work from real numbers - the way he spends now.

You can check in with him regularly to hear about his progress.

You can also do an analysis of the big picture, if he is willing to share, so you can see the total debt/asset situation. I wouldn't be surprised if the filing system was sketchy. Just getting organized can help a lot.

Together, make a plan for what he can afford. Hard choices might be called for. Tough love might be what is needed here. Point to the facts and figures and ask what sacrifices he needs to make. If he says I don't know and cries, be understanding but keep coming back to the facts and numbers. Being in denial will not help your friend.

Then the hardest part will be that you will need to let your friend make his own choices.

My friend who had the tearful heart to heart with me last February has made progress on his debt situation. He refinanced some student loans, he got caught up on his back rent, he applied for a higher paying job at work, he filed his taxes and got on a payment plan with the IRS, and he started paying his credit cards again after reaching a place where he was just frozen in fear and letting the bills pile up because he couldn't afford them. This friend has also, to my utter amazement, kept his POS car running well over 250,000 miles.

These are the accomplishments, and I am encouraging of the progress he has made. But he hasn't made himself a budget, he still is making late payments on some of his credit cards, he has continued spending entertainment money I don't think he can afford, contributes to his 401K while paying obscene finance charges because it makes him feel better to know he is putting something away towards his retirement, and hasn't saved a dime towards the next car. These are his choices. Do I want to slap him some times and say "WAKE UP! YOU HAVE TO MAKE AT LEAST MINIMUM CC PAYMENTS EVERY MONTH!" Of course I do! But it is his choice.

Denial is a place some people in deep debt live.

My friend will still be struggling with this debt problem 2, 4, 6 years from now. I hope some day he "gets it" and can live again debt free because it is a terrible burden.

TIA, I know you want to help your friend. There are ways to do it. But ultimately it is up to HIM to make the changes and change his attitudes.

Reading between the lines, I got that your friend might be angry with the former employer for keeping him as a consultant and thinking the whole debt problem is the result of not getting unemployment. As long as he is busy trying to blame others, he is not focused on doing what he can to fix this.

Yes, getting out of debt is HARD, HARD, HARD. I think a chorus of people here will agree that is true. But it is possible.

I wish your friend the best. It is a difficult, but no time should be lost. Action now, while still employed, is crucial.

JBeauty
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