CAN YOU HELP ME PERSUADE MY BANK TO ACCEPT LESS THAN WHAT I OWE ON MY CONDO?
By LANI LUCIANO REPORTER ASSOCIATE: BARBARA SOLOMON

(MONEY Magazine) – Q. I bought a condominium several years ago for $92,000. When I needed more space, I decided to rent it out and buy another house. Unfortunately, the real estate market sank, and I now owe $85,000 on a condo that I can't sell for more than $55,000. I don't want to default on the mortgage because that would taint my credit record, so I want my bank, Norwest, to accept whatever amount I can get for the condo as full settlement of the mortgage. So far, the bankers there have refused. I don't see how their stubbornness helps either one of us. Is there anything you can do to help me? David Flynn ANAHEIM, CALIF.

A. Nothing besides gape in amazement. When I read your letter, I was astonished that you felt entitled to walk away from a legitimate debt just because your investment didn't work out. Then I was equally astonished to learn that banks are sometimes willing to settle for less than they're owed on a property that has dropped in value, simply to avoid the cost and bother of foreclosing. However, both the bank and the borrower suffer a bit. The bank must take a charge against its reserves, which could penalize stockholders, and the borrower's credit record will show that he defaulted on a loan, making it more difficult for him to borrow again from that bank or any other.

But even assuming you would accept the blemish on your credit rating, you are out of luck. You have a government-guaranteed mortgage, meaning it is insured by taxpayers through the U.S. Department of Housing and Urban Development (HUD). And HUD does not permit its mortgages to be settled for less than their balances unless the borrower is delinquent and can prove he is utterly unable to pay--a condition HUD calls incurable default. Since you've been making payments on your condo loan all along and can continue doing so, you don't meet either criterion. By the way, if you did manage to negotiate some kind of reduction on the loan balance, you would still owe income taxes on the amount forgiven. So all in all, I can't help you.

Q. I asked Merrill Lynch to sell a block of securities in my account. When I got my check, I found the brokerage had withheld 31% of my profits and sent the money to the IRS without knowing my tax situation. Merrill says I'll have to get the money back myself. Is this fair? In fact, is this even legal? William Smith POUGHKEEPSIE, N.Y.

A. Legal, fair--and easily avoided. The brokerage told my associate Barbara Solomon that it mailed you IRS Form W-9 and then tried to get in touch with you several times. Had you signed and returned the form, Merrill would not have withheld anything. Unfortunately, as you admitted to Barbara when she checked back with you, you mistook Merrill's letter for junk mail and tossed it out. Since Merrill never heard from you, it was required by law to forward a stiff 31% of your proceeds to Uncle Sam. It's always unpleasant to make Uncle an interest-free loan. But if you were overtaxed, you'll get a refund after you file your income tax return. Lesson: Check your mail more carefully.

Q. When my uncle died three years ago, my aunt inherited $250,000. That windfall helped her buy a new house and qualify for a $110,000 mortgage. But the monthly payments on her 30-year, 8.25% adjustable-rate loan are almost $1,100. That, plus her other expenses, add up to about $1,500 a month more than the $2,150 a month she earns as an elementary school secretary. She's been making up the shortfall by tapping her inheritance and now has only $160,000 left. She's 60 years old and hopes to retire in five years, but her pension will barely pay for her groceries. In short, she's going broke. I want her to use her cash to pay off the mortgage. She says if she does that, she'll be broke now instead of later. What should she do? Dana Eisenberg MANALAPAN, N.J.

A. Clearly, she should sell her house and move to a place she can afford. But assuming she has adamantly rejected that obvious solution, I think your idea is second best: She should pay off her mortgage. Retiring the loan is equivalent to getting a risk-free, tax-free return of 8.25% on her money. And with less of a cash cushion in the bank, she may recognize the need to cut down on her spending.

Even if she starts living within her means, she may not be able to retire as planned. With her meager pension, your aunt won't have enough money to last the 20 or even 30 years she may live past age 65. That means she has to consider working an extra five or so years. And she must use that extra time to boost her retirement savings. After paying off the mortgage, she'll have about $50,000 left. She should put aside $10,000 in a money-market fund for emergencies. To make the most of the remaining $40,000, says Glen Clemans, a planner with the Pearson Financial Group in Portland, Ore., your aunt will have to invest fairly aggressively. He suggests putting half her stake in U.S. stocks and the rest in real estate and foreign stocks to help soften any domestic equity downturns. She can achieve that mix by dividing her money equally among four no-load mutual funds: a large-company fund, such as Fidelity Equity-Income (up 19.1% annually for three years through March 31; 800-544-8888); a growth fund, such as Oakmark (up 20.5%; 800-625-6275); a real estate fund, such as Fidelity Real Estate (up 15.4%; 800-544-8888) and an international equities fund, such as Janus Worldwide (up 19.4%; 800-525-8983).

Q. I'd like to start an investment club with some friends who live in different parts of the country. We'll have virtual meetings on the Internet and pass around our research that way too. The main problem we foresee is taxes. Will the fact that we live in seven different states create an administrative nightmare for us? Matthew Olsen MIDDLETOWN, CONN.

A. Not at all. According to Kenneth Janke, head of the National Association of Investors Corp. ($39 annual membership fee; 810-583-6242), clubs are usually set up as partnerships that can pass along gains and losses to individual members. At tax time, the club's treasurer will fill out a Form 1065 and send it to the IRS to report the group's profits or losses; the treasurer will also send each member of the group a Form K-1 to indicate his or her individual share. Each then files the copy of the K-1 with the federal, state or local return.

Q. Last year, I sold my house and moved into my new wife's home, which we're upgrading with air conditioning and a finished basement. Since we now file our income taxes jointly, can I defer capital-gains taxes on the $18,000 profit I made on my old house by rolling the money over into improvements on my new house? Victor Swift PHOENIX

A. Nice try, but in a word: no. You can defer taxes only by purchasing a house costing as much as--or more than--the one you sold. The IRS regards your new home as a gift from your bride (you didn't know the tax folks were such romantics, did you?), so you don't qualify for the rollover. And your home improvements, as nice as they sound, have no bearing on the matter.

Q. When my company was bought out by another firm last year, the money in my 401(k) account was transferred to the acquirer's plan. My new plan has as many options as my old one and offers to kick in 50[cents] on every dollar I contribute up to 6% of my salary. Even so, I'm not impressed with the new plan, and I'd rather not participate. Instead, I'd like to withdraw my money and put it in an IRA. I'm only 27, so how can I roll over that money without paying a penalty? Isn't there some exemption if your company changes hands? Greg Marmol PITTSBURGH

A. Your new plan has as many options as your old one, and it even offers you 50[cents] on each dollar up to 6% of your salary--a guaranteed return of 50%--but still you are not impressed? Please think again. How do you plan to beat this performance on your own? And remember, it's illegal to invest in a printing press and print your own money. Still, if you insist on walking away from this good deal, you have a couple of options. You can 1) stop contributing to the new plan--you still won't get your money out, though--or 2) quit your job, in which case you'd be allowed to roll over your money into an IRA. Please don't do either. Instead, consult your company's benefits counselor to discuss the advantages of the new 401(k) plan. It could be the smartest financial move of your life.

Reporter associate: Barbara Solomon