Alli Romano is a freelance writer specializing in finance and media reporting. She is also a blogger, content manager and voices the occasional radio ad. Alli graduated from Northwestern University's Medill School of Journalism with a master's degree in journalism and The University of Michigan with a bachelor’s degree in political science.
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
You’ve heard it countless times: Build your assets and invest for the future. It’s sound advice, but if you needed money right now, how easily could you turn your assets and investments into cash?
All of your assets have value, but liquid assets are the ones you can quickly turn into cash without incurring any significant fees or penalties. Non-liquid assets either take time to sell or may lose value if you need to quickly turn them into cash.
The money you have in your checking and savings accounts, accessible on demand with a debit card? That’s a highly liquid asset. The RV parked in your driveway? It takes time and expense to sell, making it a non-liquid asset.
All of your assets and investments can be liquidated, if necessary. But before you sell anything, financial planners say you need to take stock of your asset portfolio and understand the liquidity of your holdings.
Simply put, liquidity is your ability to convert assets into cash. A liquid asset is often defined as cash or an investment with a maturity of 12 months or less, according to Marty Reid, president of Reid Financial Consulting and a certified financial planner. Holding liquid assets is important in case you need cash for emergencies, unexpected expenses or to make big purchases on short notice.
When explaining liquidity to clients, some financial advisors illustrate a pyramid of assets, with cash on hand or money in a savings or checking account at the top as the most liquid, and items or properties that take more time, effort and expense to sell, such as a house or a boat, towards the bottom.
Some assets that can fall into a gray area between liquid and non-liquid are stocks, mutual funds and longer term government securities. You can liquidate these investments for cash, but it could take up to a few days to get your money. You could also face penalties or costs, including brokerage fees, changes in market value, forfeiting interest gains or possible tax implications.
With stocks in particular, when you go to sell, you’re at the whim of the markets and it can take up to three or four days to get your funds. “What if the market is down the day you need money? If the market is down or volatile and you need money, you could be forced to sell and lose money,” said Kaya Ladejobi, a CFP and founder of New York-based Earn Into Wealth Strategies.
Examples of liquid assets:
Cash: Hard cash you physically have on hand to pay for expenses.
Checking or savings account: Money on deposit with a bank or credit union that you can access immediately.
Money market account: A money market, or MMA, is a high-interest savings account that can have check-writing privileges. MMAs may have more restrictions than a typical savings account, including higher minimum balances and limited number of withdrawals.
Certificate of deposit: Also known as a CD, this can have a duration that ranges from a few months to several years and offers higher interest rates than savings accounts. If you cash in your CD before the term expires, you could face a penalty on your accrued interest.
Treasury bills, notes and bonds: Government-issued securities with maturities ranging from a few weeks to 30 years. Shorter term securities are more liquid than long-term holdings. Interest rates are higher on longer securities. If you sell before maturity, you could lose value and possibly pay broker fees.
What to know about non-liquid assets
Non-liquid assets can be very valuable and marketable. These fixed assets should not be considered as a source of funds for your daily lifestyle or basic needs, but rather as tools to build long-term financial success, said Reid. If you try to sell a long-term asset on short notice, you might not receive the full benefit of their value and you could incur excessive fees associated with a hurried sale. Most of all, the sales process can be slow, which is the very reason they are not liquid assets.
That’s not to say there isn’t a market for these non-liquid assets. On the contrary, when you sell real estate or personal effects like jewelry or collectibles, you can realize considerable financial gains. Likewise, the long-term investment accounts, including IRAs and 401ks, can appreciate over time, but you’d lose value if you sold early, including potentially steep tax penalties.
“Any time you have to pay transaction costs, like using a broker, to sell something, it might be more costly. In addition to that, when you have to find a buyer and the pool of buyers is limited to turn an asset into cash, that makes it challenging,” Ladejobi said.
Examples of non-liquid assets
Real estate: Homes and land hold considerable value, but would take time and expense to sell, making real estate one of the most non-liquid assets.
Cars, RVs and boats: Recreational vehicles can also have strong monetary value, but take time and resources to sell.
Jewelry: Individual pieces and collections can fetch large sums, but you’ll need to find a buyer or possibly a broker to handle the transaction.
Furniture and collectibles: Like jewelry, these personal effects can appreciate strongly and may have enthusiastic buyers, but you’ll need to handle marketing and transactions, or work with a broker.
Retirement accounts (401ks, IRAs and investment accounts): These long-term investments will grow over time, eventually funding your retirement. If you cash out early (usually before you’re 59 1/2 years old), you could face steep penalties and tax implications. If you take money out of an IRA early, it could be included in your taxable income and incur a 10% additional tax penalty (there are some exceptions).
Why is asset liquidity important?
You never know what hardships or adventures life might throw your way. That’s why it’s important to have liquid assets at your disposal. Many investment advisors often urge clients to keep between three to six months of cash on-hand to pay living expenses, including housing, food and utilities.
Amit Chopra, a CFP and managing partner of Ramsey, N.J.-based Forefront Wealth Planning and Asset Management, often adjusts his advice based on a client’s age and expectations. Younger clients, he said, may want to keep six to 12 months of living expenses on hand in cash in case they decide to pursue a less stable job, such as at a startup, or a personal adventure. “Having a little more cash gives them the flexibility to do that,” he said. With older clients, who may be more established in their careers and personal lives, Chopra recommends setting aside enough cash for six to nine months of expenses.
As you prioritize how much liquidity you need in your financial portfolio, there are some additional considerations, including your tolerance for risk with investments and your long-term financial goals. To determine what’s right for you and how much liquidity you might need, the U.S. Securities and Exchange Commission (SEC) recommends investors take stock of their personal financial needs and determine the right mix of liquid and non-liquid assets. While cash and cash-equivalents are the safest investments — and the most liquid — they also yield the smallest returns.
Liquidity is a balancing act. Having cash on-hand is important for emergency car repairs or medical bills, and to fund lifestyle expenses, such as home improvements or a wedding, Reid noted. He encourages clients to mix liquidity with long-term investments.
“In real estate, they say, location, location, location. With investing, it’s diversification, diversification, diversification. How you diversify depends on your financial position, your risk tolerance level, and your long term and short term objectives,” said Reid.
The final word on liquid assets
When it comes to financial flexibility, cash is king. From there, your personal liquidity plan is a very personal choice, based on how much cash you think you need to be secure and comfortable. There’s no single right answer.
However, when it comes to realizing the value of your assets, not all investments are created equal. If you need funds quickly, with minimal headache and minor expense, cash and cash-equivalents are the easiest and fastest way. If you have more time to put into selling an asset or a longer timeline for needing money, non-liquid assets can be transformed into liquid ones, but it takes both planning and an active market to realize their fullest value. One thing is certain: The cash in your wallet and your checking and savings accounts are the ultimate liquid asset.
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Despite your best efforts, you sometimes fall behind on debt payments. While you work to steady your finances, there may be options available to forgive, reorganize or reduce your debt load.
Some creditors, such as a mortgage lender or student loan servicer, might work with you to revamp your loan or repayment schedule, or you could qualify for federal relief programs. But, in most cases, it may be difficult to have your entire outstanding debt forgiven, even if you file for bankruptcy.
Since each type of loan or debt has its own circumstances and prospects for debt relief, it is advisable to contact your creditor or lender as soon as possible to discuss options.
In this article, we will discuss the most common types of debt, as well as the possibilities for debt forgiveness.
If you find yourself with a growing credit card balance and interest charges, the stress can be overwhelming. Sometimes making the minimum payments is difficult or impossible. While credit card debt forgiveness can be rare, there are some options to manage or reduce your debt.
If you’ve fallen behind on your credit card payments, a good first step is to seek the advice of a reputable credit counselor. They can help you organize all your outstanding bills and finances. They can also help craft a manageable payment plan. The Federal Trade Commission (FTC) has tips to find a reputable credit counselor.
When your account is more than six months past due, a credit card company may refer the case to a collections agency. Collectors will make repeated attempts to obtain all, or some, repayment from cardholders. If that’s unsuccessful, they may file a lawsuit against the customer and could garnish wages to recoup some funds.
But you have some options if you discover you cannot repay your credit card debt.
A potential — but drastic — option to resolve credit card debt is to file for bankruptcy protection. Under federal law, there are two types of bankruptcy for individuals: Chapter 13 and Chapter 7. An individual could discharge some types of outstanding debt, including credit card balances, with either option, subject to court approval. Consumers considering this option should consult with an experienced bankruptcy attorney to review options and eligibility.
Chapter 13 bankruptcy is a court-approved plan to repay outstanding debt. If you complete a repayment program, which runs three to five years, some or all of your remaining debt can be discharged. To qualify, a debtor must follow an established process that includes petitioning the court and developing a plan with a court-appointed trustee and creditors. All debts are paid monthly by a trustee, who distributes funds to creditors.
One of the main benefits of Chapter 13 is that, once a petition is filed, it freezes all collections and foreclosure proceedings, allowing a debtor to retain their home and stop any other debt collections so long as they are included in the plan.
Alternatively, Chapter 7 involves liquidating an individual’s assets, often including a home, and using the proceeds to pay off creditors. Your outstanding debts are either settled by this liquidation or discharged. But since you are not paying your outstanding balances, your ability to secure future loans and re-establish your credit can be damaged, making this a less attractive option for individuals seeking future lending options.
You may be able to arrange a payment plan with your credit card companies, which would avoid sending your account into collections. Some credit card companies suggest that consumers contact them, outline their difficulties and suggest a plan for repayment.
If you fail to pay your debt for 180 days, a creditor may write that off as a loss. That action could damage your credit score, and you’ll still owe the debt. But debtors may still be willing to negotiate with you, the FTC states on its website.
Using a debt settlement company
Another option is working with a debt settlement company — typically a for-profit firm — that negotiates with the lender and agrees on a lump-sum payment. These services typically come with a fee and may require an individual to deposit a monthly amount into a special account that will be used to pay off debts. The FTC cautions that consumers make careful consideration before contracting a resettlement company. The agency advises that homeowners should make sure they can afford the monthly savings payments. If you fall behind, you’ll be further from your goal of repayment and may accumulate more late fees and interest, along with added damage to your credit. It also advises homeowners to research the settlement company by searching online for complaints or with your state attorney general’s office.
If you work with a debt settlement company, the FTC notes that money that is transferred into a savings or escrow account is your money, should be in your name and is to be used at your discretion, including any interest that accumulates. Also, the FTC says that settlement companies should only collect fees after the repayments are complete.
Pros and cons of credit card debt forgiveness
You could reduce outstanding debt, negotiate a more manageable repayment plan or agree on debt settlement. By mitigating your outstanding debt, you can decrease the outstanding balance and avoid incurring additional interest. Also, by keeping your accounts from going to collections proceedings, your credit score may take a lighter hit and you can avoid an escalation of collections proceedings.
In some cases, the collections agency and credit card company may agree to seek a settlement with the debtor and accept a portion of the debt, but there could be ramifications. If the rest of the debt is discharged, the IRS may consider the forgiven amount a gift and require you to pay income taxes on that amount. With both Chapter 13 and Chapter 7 bankruptcy, the filing will appear on your credit report, which could impact the terms and rates for future loans and credit.
Also, costs associated with discharging or settling debt can add up. Bankruptcy involves court and attorney’s fees. Settling debt will require you to pay a potentially large chunk of money. There are typically fees associated with using a settlement agency, too.
Student loan debt forgiveness
Depending on your circumstances and the loan you have, it may be possible to earn forgiveness or discharge on your student loans, but it is difficult. Student loans are typically subject to strict repayment terms, even if you don’t graduate or can’t find a job.
Student loans are available through the federal government and private financial institutions, including banks and credit unions. If you’re having difficulty making payments and are seeking some relief — whether you have public or private loans — you should start by contacting your loan servicer to discuss your circumstances and options.
If you have federal student loans, some circumstances could entitle you to forgiveness or discharge, but the requirements are usually stringent. These situations or programs, subject to eligibility, could include the following.
If a borrower dies or the student who the loan was taken out for dies, a federal student loan will be discharged.
Total and permanent disability (TPD) discharge
This must be documented by a physician, the Department of Veterans Affairs or the Social Security Administration. It must establish that you are “unable to engage in any substantial gainful activity due to a physical or mental impairment,” according to Federal Student Aid’s website. To qualify, individuals must submit a TPD application, which is subject to review and approval.
If an individual files for Chapter 7 or Chapter 13 bankruptcy and proves to the court that repayment would be an undue hardship on themselves and their family, they may be eligible to discharge the entire remaining loan balance, a portion or negotiate to a lower interest rate or revised repayment schedule.
If the school you attend or recently attended (usually within 120 days) closes, you may be able to discharge some or all of your federal student loans. In this instance, contact your loan servicer for help.
Public Service Loan Forgiveness
This highly anticipated federal loan relief program is tied to employment, but it has gotten off to a rocky start. The Department of Education set aside $350 million to provide tax-free debt relief to graduates who work in government or public service jobs, but the program has detailed eligibility requirements.
While the program holds promise, the review process has been slow. Only a handful of claims have been paid out. Since fall 2017, nearly 30,000 applications for forgiveness have been processed, but only 96 borrowers have had debt discharged. The program is so mired in problems that the federal government put in place a temporary initiative to try to correct it.
Another option for borrowers with outstanding federal or private loans could be modified repayment plans, which may allow for fixed or graduated payments over a period. Contact your loan servicer to discuss potential options.
Pros and cons of student loan forgiveness
If you qualify for some federal programs, including public service work, you could reduce or discharge your remaining student loans. If you face hardships, such as disability or bankruptcy, you may also be able to obtain forgiveness on some or all of your loans.
Similar to debt forgiveness on credit cards, some types of student loan discharge could impact your ability to obtain future loans. If you’ve missed payments and if your loan has gone into collections, that will impact your credit score. If you do have an outstanding balance discharged, you may have to pay income tax on the forgiven amount. There are a few exceptions to the canceled debt being taxable, including insolvency or bankruptcy. If debt is forgiven, some types of student loan discharges could be subject to taxation.
To keep your home and avoid foreclosure, you need to pay your mortgage on schedule. But personal hardships, such as job loss, illness or divorce, can sometimes make it difficult for a homeowner to make payments. If you get behind, it may be possible to negotiate a repayment plan with your lender or obtain some form of federal or state mortgage assistance.
Here’s a look at different ways to manage mortgage debt.
In some cases, it may be advisable for a homeowner to file for bankruptcy protection, either by declaring Chapter 13 or Chapter 7 bankruptcy. When you file for either Chapter 13 or Chapter 7, the petition halts collections against most of a debtor’s property, including foreclosure proceedings.
But there are important differences: Under a court-approved Chapter 13 plan, the homeowner is approved to pay back an agreed-upon amount of outstanding mortgage payments and resume a normal schedule. Under Chapter 7, the bank may still opt to foreclose on a home as a way to liquidate assets and repay creditors, including the mortgage lender.
One advantage of Chapter 13 is it gives homeowners an opportunity to avoid foreclosure by catching up on overdue payments with a payment plan, the U.S. Courts website notes.
Mortgage relief programs
Depending on where you live, state or federal programs may exist to provide mortgage assistance and relief. To assess the programs, homeowners should contact a Department of Housing and Urban Development-approved agency in your area. It can help you determine your eligibility for any programs that match your location and circumstances, as well as other foreclosure avoidance options. To assist homeowners, HUD provides a searchable database on its website to refer homeowners to nonprofit agencies by region qualified to provide services.
Some federal programs and options for homeowners include:
Home Affordable Refinance Program (HARP)
This program, set to expire at the end of 2018, allows qualified candidates to refinance with lower rates or more favorable terms. Homeowners must be up to date on their mortgages, have little or no equity in their property and have a loan from Freddie Mae or Fannie Mae that originated on or before May 31, 2009.
Hardest Hit Fund
In 2010, the federal government created the Hardest Hit Fund and allocated money to 18 states and the District of Columbia. The federal government has allocated billions to the program, which is set to expire at the end of 2020. Funds can be used for mortgage repayment assistance, to pay down second mortgages, relocation assistance or to reduce your mortgage balance.
Servicemembers Civil Relief Act
Under this law, the federal government offers some protections and programs for active-duty service members, as well as their dependents, who may experience difficulty paying their mortgages.
Homeowners with regular income to consistently service their loan may be able to work with their lenders to revise the terms of their loan. That could result in a modified payment schedule or new terms.
If you don’t qualify for a mortgage assistance program and you’re unable to negotiate a modification with your lender, you may be able to propose a forbearance period, which allows you to take a break from making your regular payments, such as a six-month respite. The difficulty with forbearance can be a homeowner’s ability to catch back up because, when the break is over, they’ll need to repay the outstanding mortgage payments and resume a normal payment schedule.
Pros and cons of mortgage debt forgiveness
If you modify your mortgage debt, you’ll likely be able to remain in your home. Also, if you qualify for a federal mortgage assistance program, you may receive funds to help pay your mortgage. If you negotiate a modification with your lender or even a reprieve in payments, you may be able to reorganize your finances and get back on solid footing.
To avoid foreclosure proceedings, you’ll need to stick to whatever terms of your federal relief plan or modification schedule you negotiate with your lender. If you fail to comply, including late or missed payments, you could be subject to foreclosure or financial penalties from your lender.
Individuals should contact the IRS or discuss their situation with a tax professional. They can also contact the Taxpayer Advocate Service, an independent service that works with the IRS to help taxpayers resolve problems. Another option is to contact a low-income taxpayer clinic in your area or consider the IRS’ Fresh Start Program.
Here are some things to consider for your tax debt.
Offer in compromise
The IRS has something called offer in compromise, which is an agreement between a taxpayer and the IRS to settle outstanding taxes for less than the full amount owed. To be considered, you need to submit an offer that the IRS finds realistic given your income and assets. Once you submit your offer, the IRS investigates and determines if it will accept it. Typically, individuals who qualify have very low or no income.
To be considered, taxpayers must have filed all their required tax returns. If you’re in bankruptcy proceedings, you can’t take part in the program. The program requires a $186 application fee.
As part of your offer, you need to propose a repayment schedule, which can be a lump sum or monthly installments. If you don’t have enough cash to make the payments, you’re still required to stick to the plan, and you may have to borrow money or sell assets to stay on schedule. The IRS’ website offers more details on the program and the application process.
For taxpayers who owe up to $50,000, the IRS offers monthly direct debit payments for up to six years to resolve outstanding debt. To qualify, the IRS will ask for some financial information, and taxpayers must sign up through the IRS’ online payment tool. If you need a longer period to pay off the debt, the IRS will likely ask for more detailed financial information.
If you owe less than $100,000, it may also be possible to arrange a short-term repayment plan. For both options, the IRS offers more information. The application is on its website.
Pros and cons of tax debt forgiveness
A revised tax payment plan can take pressure off you and help you stay current on your debts. If the IRS accepts your offer in compromise, you may be able to lower your outstanding tax debt. If you have a federal tax lien on your property, you may be able to have the lien discharged or withdrawn once you repay your debts. After the repayment is complete, the IRS removes all liens against you, which can improve your credit score.
An offer in compromise sounds like a great option, but there is a lot of fine print. The program has stringent eligibility standards, and investigators dig into your finances.
Also, the IRS can only collect taxes for the past 10 years. But if you start an offer in compromise application, the clock stops, possibly dragging out debt that might expire. Also, any collections that started before the application, such as wage garnishment, can continue. The process of investigation and approval can take a year or more. Finally, if you are approved, you must be compliant with all taxes and payments for five years.
If you’re facing mounting debt from any of these loans, it is important to get organized and understand your debts and evaluate your ability to make payments. You should also contact your lender or creditor and alert it to any change in circumstances or hardships. You should inquire about options to modify, reorganize or forgive your outstanding debts.
Financial counselors, including credit counselors, tax advisers and housing counselors, can often offer assistance at no or low costs to help manage debt and come up with management plans. If you’re able to hire a professional, a tax adviser, bankruptcy attorney or tax attorney may also be able to help you sort out your circumstances and options.
The bottom line is that while debt forgiveness may be rare, there are many resources available to consumers looking to manage and restructure their debts.
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