Big purchases and big problems: common consumer issues when spending that tax return
The following information was discussed by Attorney Whitney Hughes on the May 3, 2011 edition of Legal Briefs on KDKA's Pittsburgh Today Live Show.
The tax returns have been filed, and if you’re lucky enough to have received a refund, many people are using it to either pay off debt (always a good choice) or as a stepping stone toward making a big purchase or investment. Below are some common expenditures for which people use their tax returns, and some potential pitfalls to avoid.
(1) Home improvements
Surveys have shown that a percentage of people will use at least some portion of their tax refund to pay for home improvements. Some helpful hints:
- Make sure you are dealing with a reputable contractor. Check for appropriate licenses, permits, and insurance.
- Ask for references and contact them. Many times a contractor will provide a list of references, but you should actually contact them to find out what their experiences were. Just looking at the list isn’t enough.
- Read through a contract carefully and don’t sign it if there’s a portion of it you don’t understand or don’t agree with. Make sure that it is also very specific with regard to materials to be used as well.
- If you are paying for materials and there are some left over, you can ask to retain the unused portion. Especially keep this in mind when having painting done; it’s always helpful to have extra paint around for touch-ups later.
- If you are having something replaced, especially in an older home, consider saving the items that are removed and if they are in decent condition, donate them to an architectural salvage business.
(2) Purchasing a new car
Warmer weather is here as well and we’re hearing from people who are ditching their car after getting through the winter or are buying a car for a young son or daughter who will be graduating and going off to school soon. Again, some helpful tips:
- NEVER, EVER BUY A CAR AS IS – So many people make this mistake and it never ends well. Legally, if you purchase a car “as-is” you are taking it with all faults, which means you cannot later go back and sue the seller when you find there is something wrong with it. Sometimes dealers will sell a car “as-is” and then attempt to sell you an additional “warranty.” This is essentially a service policy which may state that they will repair certain conditions over a given period of time at a certain cost. A service policy is different from a warranty.
- The Lemon Law does not apply to used cars. Period.
- If you finance a car and fail to make a payment, the bank can and often will repossess the car. It doesn’t matter that you were “only a little bit” late. Late is late, and it means at best you will be facing additional fees, and at worst you may lose the car. Keep this in mind especially when dealing with car dealers who are marketing their services to people who have questionable credit. Many times their financing agreements can have extremely high interest rates and clauses which permit them to repossess the car if even one payment is missed. Again, if there is something you don’t understand or that seems questionable, walk away.
- Use common sense. Generally speaking, a newer car, well taken care of should last longer. If you are buying an older car, one with many miles on it, or a car for an unusually low price, don’t expect it to be a long-lived investment. There are exceptions, but do your homework and really consider what you are buying.
- If you co-sign a loan for someone you are also promising to pay the entire debt. If the person taking out the loan fails to pay it, you will be responsible. Don’t assume that if they don’t pay and you are then on the hook, that you can successfully sue them later either. If they don’t pay that debt, chances are you won’t see your money either.
- If you put a car in your name (whether financed or titled) and then give the car to someone else and allow them to make payments to you, you own the car. It is completely your responsibility, and it does not matter whether or not the other person pays you back. You are the one who signed on the dotted line, so you’re on the hook. This is NEVER a wise move.
(3) Purchasing real estate
Often receiving a large chunk of money such as a tax refund will allow a person to put additional money toward a down payment on a home or can be just the push toward encouraging someone to invest in a sheriff sale property. Again, some helpful tips:
- Just because you have the money for a down payment doesn’t mean you can afford a home, and just because you are qualified for a mortgage doesn’t mean you should get one. Home ownership is expensive. It can be a very good investment, but we’ve all seen what can happen when you are in over your head with a property. You must consider your monthly payment, insurance, repairs to the property, utilities, and your daily living expenses. Chances are there will also be things you need when you move such as moving expenses and furniture, window treatments, etc. These all add up. Think carefully and make sure you have “more than enough” money set aside – “just enough” doesn’t cut it.
- When you purchase property at a sheriff’s sale you are taking it subject to all liens and encumbrances on the property. This means that if you purchase it for $2500, you may be accepting responsibility for a significant tax lien or an additional mortgage as well. You also will face having to remove people who are living there if they have not vacated the property. Bottom line is that the small chunk of money you get from a tax refund is usually not nearly enough to start “dabbling” in real estate by purchasing at a sheriff’s sale.
For a referral to an attorney practicing in a particular field, call the Allegheny County Bar Associatios Lawyer Referral Service at 412-261-5555 or visit their website at www.acbalrs.org.