Is the threat of retailer bankruptcy great enough to write off gift cards this holiday season? TODAY financial editor Jean Chatzky offers advice on this, plus wise words about investing, breaking a lease, mortgages and more.
Q: I'd like to buy some store gift certificates as Christmas gifts. I have received two e-mails recently from friends that tell me not to buy gift cards for Christmas this year because some of the stores will be going out of business. What is your advice on this? — Mary Ann
A: This has been one of those scare stories going around a lot lately. To be honest, there are just not quite as many bankruptcies as most people have been led to believe. There certainly have been some, but very few are outright going out of business. Others are reorganizing — in other words, they're going to come out of it. When a store goes into bankruptcy, the owner of a gift card is considered an unsecured creditor just like anyone else that the retailer owes money to.
In pure legal theory, that means you get in line with everyone else who is owed money — which would be trouble. But in practice, in most bankruptcies, if they file Chapter 11 and are looking to reorganize, the company obviously doesn't want to anger its customers. So when the company comes to the judge with legal orders on the first day of the court hearing, the company will give a list of the people they need to pay. This is usually the rent, utilities, employee salaries, and one of the things included is gift cards. They ask permission to be able to continue honoring those for the purpose of not angering customers. Circuit City, for example, is still honoring gift cards. Most are.
I think this worry started with the Sharper Image story a few months ago. They weren't honoring them, and it sort of blew up as the story of the season, but it's not nearly as widespread as people would lead you to believe. If the store does go out of business completely, which does happen in some cases, you would lose the card. But I mean the entire company is out of business, not just like the local store. You can still use the card online or at the next closest store if your local branch goes out of business.
Finally, there have been one or two cases where competitors have honored another store's card in this situation. Brookstone did that when Sharper Image was having its problems. They didn't honor the full value, but they gave something like 50 cents on the dollar as a way to draw customers into their stores.
Bottom line advice: If you get gift cards, use them as soon as possible. They weren't meant to sit around in a drawer — they were meant to be spent.
Q: I've heard a lot about some plan to help homeowners lower the amount of money they have to put toward their house payment based on how much they make. But is it true that you have to miss three payments and owe a certain percentage on your home in order to qualify for this? What are the criteria? Also, how badly does that hurt one's credit? Do I have to miss payments to get the help that I need? — Jennie, North Branch, Minn.
A: It all depends who is servicing your loan. In some cases, the lenders have laid out plans that allow them to deal with you if you are at risk of becoming delinquent. In other cases, you actually have to be 60 to 90 days delinquent before they will start dealing.
You should absolutely place a call to your service and see which camp you fall into. Be prepared to explain why you are having so much difficulty. Have you lost hours at work? Was someone laid off? Is someone ill? If you qualify, the loan will be modified in one of several ways:
- The term can be extended to 40 years, which will reduce your monthly payment but keep you paying longer.
- Your interest rate can be dropped to make monthly payments more palatable — although this change may be in effect temporarily (five years, typically) rather than permanently.
- Your monthly payment can be reduced so that the amount you're paying on housing is no more than 31 to 40 percent.
All of which probably sounds as if it would provide a lot of relief. So, let's answer the really hard question: What if you're not delinquent, but your servicer requires you to be delinquent to get help? Do you allow your credit to slide in order to get that help?
Essentially, you're choosing between the house and the credit score — and I think you choose the house in the vast majority of cases. When don't you? When you look at the numbers on a loan modification and realize they will not be enough to get you on the right footing. In that case, you have to make an even tougher decision to sell that house and find yourself a place to live you can really afford.
Q: I have $125,000 gaining 2 percent in a money market. I have two mortgages: one at $85,000 at 5.5 percent and one at $175,000 at 6.75 percent. Should I pay down those mortgages or would I be better off investing? — Stephen, New Rochelle, N.Y.
A: I would first make sure that you have at least six months of free cash in that money market account. In this economy, you may want to up that to 12. That's enough money to pay your living expenses and anything else you need (not want, but need) each month.
Also, if you are retired, then you need an even more substantial cash cushion — 24 months to 36 — so that you're not forced to sell retirement assets when the markets are hurting. Once you've satisfied those needs, you need to look at the return on your investment. The more expensive of those two mortgages is costing you about 5 percent after taxes. If you can invest the money and do better (after taxes) than that, you should invest it, particularly if you haven't exhausted your ability to invest in tax-advantaged accounts like IRAs and 401(k)s. If you don't think you can do better, use the money to pay down that higher interest rate mortgage.
Q: I was laid off and I'm renting an apartment I now won't be able to afford. I saw the layoff coming so I gave my landlord 60 days' notice that I would have to break my lease. I even offered to pay a third month. He refuses to look for a new tenant, says he will sue me and ruin my credit. What do I do with a landlord that refuses to negotiate? — Cecelia, Baltimore, Md.
A: First let me note that rules on this can vary by state. If you are in a similar situation, you'll want to check with the attorney general's office in your state as we did with the Maryland AG's office.
Here's the lowdown: If you break your lease before its end date, the landlord can hold you responsible for the rent due through the remainder of the lease. But, the landlord is also required to make a reasonable effort to re-rent the apartment as soon as possible. If he is able to re-rent the apartment, you are only responsible for the rent until the date the new tenant moves in. A landlord with multiple vacant units is not required to put a new tenant into the unit you have vacated first, and the landlord can hold you responsible for cost of re-renting, such as advertising.
What you should do is read over your lease carefully — some have a clause that allows tenants to cancel the lease with a certain amount of notice, others allow you to cancel and pay a fee. If your landlord still refuses to look for a new tenant, you should contact the Attorney General's Consumer Protection Division. They have a mediation unit that helps resolve disputes between landlords and tenants so the situation can avoid court. You can also try looking for a new tenant on your own by using sites like Craigslist. The person would have to be approved by the landlord before taking over the unit. But by putting someone in this landlord's hands you may be saving yourself a lot of time, energy and cost.
Q: I am looking to buy a car that's not too expensive. Should I buy or lease one? This would be my first car. — Catherine, N.J.
A: The answer depends on how long you're planning to keep the car and how you're going to use it. The major benefit of leasing is that you're getting a car that's under warranty, so you don't have to deal with routine maintenance costs. Leasing makes the most sense for people who insist on getting a new car every two to three years and don't drive more than 15,000 miles a year.
Since this is your first car and you're looking to keep your costs down I would advise you not only to buy, but to buy used. Look for a car that has come out of one of the certification programs that manufacturers offer these days. They tend to have terrific warranties, often for up to 100,000 miles. Then negotiate hard, using information about the value of a car that age with that many miles accessible on a Web site like edmunds.com or kbb.com.
Anyone buying a car is in the driver's (pun intended) seat because there are many more sellers than buyers these days, particularly if you decide what type of car you want (e.g., a four-door midsize sedan) but are willing to go for any brand in the category. It makes it much easier to play off one dealer against another.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .