Nolo's Encyclopedia Of Everyday Law

Nolo's Encyclopedia Of Everyday Law
Nolo’s Encyclopedia
of Everyday Law
Answers to Your Most Frequently
Asked Legal Questions
edited by Attorneys Shae Irving,
Kathleen Michon and Beth McKenna
4th edition
ix
Table of Contents
About This Book
1
ef
Houses
1.2 Buying a House
1.9 Selling Your House
1.15 Deeds
2
ef
Neighbors
2.2 Boundaries
2.3 Fences
2.4 Trees
2.6 Views
2.8 Noise
3
ef
Landlords and
Tenants
3.2 Leases and Rental
Agreements
3.4 Tenant Selection
3.4 Housing
Discrimination
3.6 Rent and Security
Deposits
3.8 Tenants’ Privacy Rights
3.9 Repairs and Maintenance
3.12 Landlord Liability for
Criminal Acts and
Activities
3.14 Landlord Liability for
Lead Poisoning
3.15 Landlord’s Liability for
Exposure to Asbestos
and Mold
3.16 Insurance
3.17 Resolving Disputes
4
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Workplace Rights
4.2 Fair Pay and Time Off
4.9 Workplace Health
and Safety
4.12 Workers’ Compensation
4.17 Age Discrimination
4.21 Sexual Harassment
4.25 Disability
Discrimination
4.29 Losing or Leaving
Your Job
5
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Small Businesses
5.2 Before You Start
5.8 Legal Structures
for Small Businesses
5.15 Nonprofit Corporations
5.18 Small Business Taxes
x
5.24 Home-Based Businesses
5.29 Employers’ Rights &
Responsibilities
6
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Patents
6.2 Qualifying for a Patent
6.7 Obtaining a Patent
6.9 Enforcing a Patent
6.12 Putting a Patent
to Work
6.14 How Patents Differ From
Copyrights and
Trademarks
7
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Copyrights
7.2 Copyright Basics
7.4 Copyright Ownership
7.6 Copyright Protection
7.10 Copyright Registration
and Enforcement
8
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Trademarks
8.2 Types of Trademarks
8.5 Trademark Protection
8.8 Using and Enforcing a
Trademark
8.11 Conducting a
Trademark Search
8.14 Registering a
Trademark
8.18 How Trademarks
Differ
From Patents and
Copyrights
9
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Your Money
9.2 Purchasing Goods and
Services
9.7 Using Credit and
Charge Cards
9.11 Using an ATM or Debit
Card
9.11 Strategies for Repaying
Debts
9.18 Dealing With the IRS
9.22 Debt Collections
9.25 Bankruptcy
9.28 Rebuilding Credit
10
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Cars and Driving
10.2 Buying a New Car
10.7 Leasing a Car
10.10 Buying a Used Car
10.12 Financing a Vehicle
Purchase
10.13 Insuring Your Car
10.16 Your Driver’s License
xi
10.19 If You’re Stopped by the
Police
10.21 Drunk Driving
10.23 Traffic Accidents
11
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Travel
11.2 Airlines
11.11 Rental Cars
11.16 Hotels and Other
Accommodations
11.21 Travel Agents
11.25 Travel Scams
12
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Wills and Estate
Planning
12.2 Wills
12.8 Probate
12.9 Executors
12.13 Avoiding Probate
12.15 Living Trusts
12.18 Estate and Gift Taxes
12.22 Funeral Planning and
Other Final Arrangements
12.25 Body and Organ
Donations
13
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Healthcare
Directives and
Powers of Attorney
13.2 Healthcare Directives
13.7 Durable Powers of
Attorney for Finances
13.11 Conservatorships
14
ef
Older Americans
14.2 Social Security
14.8 Medicare
14.12 Pensions
14.19 Retirement Plans
15
ef
Spouses and
Partners
15.2 Living Together—Gay
& Straight
15.6 Premarital Agreements
15.8 Marriage
15.16 Divorce
15.26 Domestic Violence
15.29 Changing Your Name
xii
16
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Parents and
Children
16.2 Adopting a Child
16.12 Stepparent Adoptions
16.14 Adoption Rights:
Birthparents,
Grandparents and
Children
16.18 Child Custody and
Visitation
16.25 Child Support
16.31 Guardianship of
Children
17
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Courts and
Mediation
17.2 Representing Yourself
in Court
17.13 Small Claims Court
17.21 Mediation
17.27 Dealing With Your
Lawyer
18
ef
Criminal Law
and Procedure
18.2 Criminal Law and
Procedure: An Overview
18.8 If You Are Questioned
by the Police
18.10 Searches and Seizures
18.14 Arrests and
Interrogations
18.17 Bail
18.20 Getting a Lawyer
Appendix:
Legal Research
Glossary
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1
Houses
1.2 Buying a House
1.9 Selling Your House
1.15 Deeds
Home is heaven for beginners.
—CHARLES H. PARKHURST
Buying or selling a house is a major undertaking. To do it
right, you need to understand how houses are priced, financed
and inspected; how to find and work with a real estate agent; how
to protect your interests when negotiating a contract; and how
legal transfer of ownership takes place. This chapter covers many
of the basic issues that buyers, sellers and owners need to know.
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Buying
a House
Before you look for a house, its essen-
tial to determine how much you can
afford to pay and what your financing
options are. Youll also need to decide
whether you want to work with a real
estate agent or broker, and finally,
even if you think youve found your
dream home, youll need to master the
ins and outs of house inspections. This
section will help you find your way
through the house-buying mazeand
to your new front door.
Im a first-time home buyer.
Is there any easy way to
determine how much house
I can afford?
As a broad generalization, most
people can afford to purchase a house
worth about three times their total
(gross) annual income, assuming a
20% down payment and a moderate
amount of other long-term debts,
such as car or student loan payments.
With no other debts, you can prob-
ably afford a house worth up to four
or even five times your annual in-
come.
The most accurate way to deter-
mine whether you can afford a par-
ticular house is to total up the esti-
mated monthly principal and interest
payments plus one-twelfth of the
yearly bill for property and home-
owners insurance. Now compare that
to your gross monthly income.
Lenders normally want you to make
all monthly housing payments with
28%-38% of your monthly income
the percentage depends on the amount
of your down payment, the interest
rate on the type of mortgage you
want, your credit history, the level of
your long-term debts and other fac-
tors. A bank or other lender can help
you determine how much house you
can afford.
Or you can run the numbers your-
self, using an online mortgage calcu-
lator such as those on the websites
listed at the end of this chapter.
Once youve done the basic calcula-
tions, you can ask a lender or loan
broker for a prequalification letter
saying that loan approval for a speci-
fied amount is likely based on your
income and credit history. Prequali-
fying lets you determine exactly how
much youll be able to borrow and
how much youll need for a down pay-
ment and closing costs.
Unless youre in a very slow mar-
ket, with lots more sellers than buy-
ers, you will want to do more than
prequalify for a loanyou will want
to be guaranteed for a specific loan
amount. This means that the lender
actually evaluates your financial situa-
tion, runs a credit check and preap-
proves you for a loanrather than
giving a general prequalification
based on your own statement about
your income and debts. Having lender
preapproval for a loan makes you more
attractive financially to sellers than
simple loan prequalification and is
crucial in competitive markets. With-
out it, you stand very little chance of
your offer being accepted.
H O U S E S
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How important is my credit
history in getting loan approval?
Your credit history has an important
effect on the type and amount of loan
lenders offer you. When reviewing
loan applications and making financ-
ing decisions, lenders typically re-
quest your credit risk score from the
credit bureaus. This score is a statisti-
cal summary of the information in
your credit report and includes:
your history of paying bills on time
the level of your outstanding debts
how long youve had credit
your credit limit
the number of inquiries for your
credit report (too many can lower
your score), and
the types of credit you have.
The higher your credit score, the
easier it will be to get a loan. If you
routinely pay your bills late, you can
expect a lower score, in which case a
lender may either reject your loan
application altogether or insist on a
very large down payment or high
interest rate to lower the lenders risk.
To avoid problems, always check
your credit report and clean up your
file if necessarybefore, not after, you
apply for a mortgage. For information
on how to order your credit report,
what to do if you find mistakes in
your report and how to rebuild good
credit, see Rebuilding Credit in Chapter
9, Your Money.
How can I find the best home
loan or mortgage?
Many entities, including banks, credit
unions, savings and loans, insurance
companies and mortgage bankers
make home loans. Lenders and terms
change frequently as new companies
appear, old ones merge and market
conditions fluctuate. To get the best
deal, compare loans and fees with at
least a half-dozen lenders. Fortu-
nately, mortgage rates and fees are
usually published in the real estate
sections of metropolitan newspapers
and are widely available on the
Internet.
Because many types of home loans
are standardized to comply with rules
established by the Federal National
Mortgage Association (Fannie Mae)
and other quasi-governmental corpo-
rations that purchase loans from lend-
ers, comparison shopping is not diffi-
cult, especially if you go online.
Mortgage rate websites come in
two basic flavors: those sites that
dont offer loans (called no-loan
sites) and those that do. No-loan sites
dont broker or lend mortgage money,
but are a great place to examine mort-
gage programs, learn mortgage lingo,
understand underwriting, get ques-
tions answered about the loan qualifi-
cation process, crunch numbers with
online mortgage calculators and check
your credit.
Many online mortgage sites also
offer direct access to loans from one or
more lenders. With multi-lender
shopping sites, you simply enter the
loan amount, property details and
other information and youll get cur-
rent rates, APR, points, even settle-
ment costs for each loan from dozens
of lenders. If you choose to complete
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an application, mortgage shopping
sites review your application, process
the required documentation and ship
your loan to the lender for further
review and underwriting.
See the list of recommended
websites at the end of this chapter for
more information on mortgage
websites.
If you dont want to shop for mort-
gages on your own, you can also work
with a loan broker, someone who spe-
cializes in matching house buyers
with an appropriate mortgage lender.
Loan brokers usually collect their fee
from the lender.
What are my other options for
home loans?
You may also be eligible for a gov-
ernment-guaranteed loan, offered by:
the Federal Housing Administration
(FHA), an agency of the Depart-
ment of Housing and Urban Devel-
opment (HUD) (see http://
www.hud.gov/mortprog.html)
the U.S. Department of Veterans
Affairs (see http://www.homeloans.
va.gov), or
a state or local housing agency.
Government loans usually have low
down payment requirements and
sometimes offer better-than-market
interest rates as well.
Also, ask banks and other private
lenders about any first-time buyer
programs that offer low down pay-
ment plans and flexible qualifying
guidelines to low and moderate in-
come buyers with good credit.
Finally, dont forget private sources
of mortgage moneyparents, other
relatives, friends or even the seller of
the house you want to buy. Borrowing
money privately is usually the most
cost-efficient mortgage of all.
Whats the difference between
a fixed and an adjustable rate
mortgage?
With a fixed rate mortgage, the inter-
est rate and the amount you pay each
month remain the same over the en-
tire mortgage term, traditionally 15,
20 or 30 years. A number of variables
are available, including five- and
seven-year fixed rate loans with bal-
loon payments at the end.
With an adjustable rate mortgage
(ARM), the interest rate fluctuates as
the interest rates in the economy fluc-
tuate. Initial interest rates of ARMs
are usually offered at a discounted
(teaser) rate which is lower than
those for fixed rate mortgages. Over
time, however, initial discounts are
filtered out and ARM rates fluctuate
as general interest rates go up or
down. To avoid constant and drastic
changes, ARMs typically regulate
(cap) how much and how often the
interest rate and/or payments can
change in a year and over the life of
the loan. A number of variations are
available for adjustable rate mort-
gages, including hybrids that change
from a fixed to an adjustable rate after
a period of years.
A good loan officer or loan broker
will walk you through all mortgage
options and tradeoffs such as higher
fees (or points) for a lower interest rate.
H O U S E S
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How do I decide whether to
choose a fixed or an adjustable
rate mortgage?
Because interest rates and mortgage
options change often, your choice of a
fixed or an adjustable rate mortgage
should depend on the interest rates
and mortgage options available when
youre buying, how much you can
afford in the short term, your view of
the future (generally, high inflation
will mean that ARM rates will go up
and lower inflation means that they
will fall), and how willing you are to
take a risk. Very risk-averse people
usually prefer the certainty of a fixed
rate mortgage, rather than take a
chance that an ARM might be cheaper
in the long run. However, some
people cant afford the relatively
higher interest rates at which fixed
rate mortgages usually begin.
Keep in mind that lenders not only
lend money to purchase homes; they
also lend money to refinance homes. If
you take out a loan now, and several
years from now interest rates have
dropped, refinancing may be an option.
Whats the best way to find and
work with a real estate agent or
broker?
Get recommendations from people
who have purchased a house in the
past few years and whose judgment
you trust. Dont work with an agent
you meet at an open house or find in
the Yellow Pages or on the Internet
unless and until you call references
and thoroughly check the person out.
The agent or broker you choose should
be in the full-time business of selling
real estate and should have the follow-
ing five traits: integrity, business so-
phistication, experience with the type
of services you need, knowledge of the
area where you want to live and sensi-
tivity to your tastes and needs.
All states regulate and license real
estate agents and brokers. You may
have different options as to the type of
legal relationship you have with an
agent or broker; typically, the seller
pays the commission of the real estate
salesperson who helps the buyer locate
the sellers house. The commission is a
percentage (usually 5% to 7%) of the
sales price of the house. What this
means is that your agent or broker has
a built-in conflict of interest: Unless
youve agreed to pay her separately,
she wont get paid until you buy a
home, and the more you pay for a
house, the bigger her cut.
In short, when you evaluate the
suitability of a house, its not wise to
rely principally on the advice of a per-
son with a significant financial stake in
your buying it. You need to be knowl-
edgeable about the house-buying pro-
cess, your ideal affordable house and
neighborhood, your financing needs
and options, your legal rights and how
to evaluate comparable prices.
Whats the best way to get
information on homes for sale
and details about the
neighborhood?
Thanks to the Internet, you no longer
have to rely solely on a real estate
agent for information about homes for
sale. You can scan online listings to
see which homes are worth a visit,
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how much they cost and what ameni-
ties they offer. Virtual visits to new
homes often include floor plans and
photographs.
Once you identify a house you like,
you can email the address or identifi-
cation number to your agent, the list-
ing agent or the owner (if its a listing
by a FSBOFor Sale By Owner) to
obtain additional information or to set
up an appointment to see the home in
person.
The list of websites at the end of
this chapter has some of the major
national real estate listing sites. Your
state or regional realty association or
multiple listing service (MLS) may
also have a website listing homes for
sale. Major real estate companies, in-
cluding ERA, RE/MAX, Coldwell
Banker, Prudential and others often
offer lists on their websites.
Finally, virtually all online editions
of newspapers offer a homes-for-sale
classifieds section that works much
like an online listing site. On most
newspaper sites, you can browse all
the listings, or customize your search
by typing in your criteria, such as
price range, location and number of
bedrooms and baths. Some of the best
sites also include useful information
on mortgage rates, schools and other
community resources, financial calcu-
lators, links to sales data on compa-
rable houses, home inspection ser-
vices, real estate agents and other in-
formation of interest to local buyers.
Check the Newspaper Association of
America (http://www.naa.org) for a
link to your newspaper. (Click on
Newspaper Links.)
Advice on relocation decisions and
details about your new community
and its services are also readily avail-
able online. For valuable information
about cities, communities and neigh-
borhoods, including schools, housing
costs, demographics, crime rates and
jobs, see the websites listed at the end
of this chapter. Finally, keep in mind
that the Internet is no substitute for
your own legwork. Ask your friends
and colleagues, walk and drive around
neighborhoods, talk to local residents,
read local newspapers, visit the local
library and planning department and
do whatever it takes to help you get a
better sense of a neighborhood or city.
My spouse and I want to buy a
$350,000 house. We have
good incomes and can make
high monthly payments, but we
dont have $70,000 to make a
20% down payment. Are there
other options?
Assuming you can afford (and qualify
for) high monthly mortgage payments
and have an excellent credit history,
you should be able to find a low (10%
to 15%) down payment loan for a
$350,000 house. However, you may
have to pay a higher interest rate and
loan fees (points) than someone mak-
ing a higher down payment. In addi-
tion, a buyer who puts less than 20%
down should be prepared to purchase
private mortgage insurance (PMI),
which is designed to reimburse a mort-
gage lender up to a certain amount if a
buyer defaults and the foreclosure sale
price is less than the amount owed the
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lender (the mortgage plus the costs of
the foreclosure sale).
PMI premiums are usually paid
monthly and typically cost less than
one-half of one percent of the mort-
gage loan. With the exception of
some government and older loans, you
can drop PMI once your equity in the
house reaches 22% and youve made
timely mortgage payments.
I want to buy a newly built
house. Is there anything special
I need to know?
The most important factor in buying
a newly built house is not what you
buy (that is, the particular model),
but rather from whom you buy. New
is not always better, especially if the
house is slapped together in a hurry.
Shop for an excellent buildersome-
one who builds quality houses, deliv-
ers on time and stands behind his or
her work. To check out a particular
builder, talk to existing owners in the
development youre considering, or ask
an experienced contractor to look at
other houses the developer is building.
Many developers of new housing
will help you arrange financing; some
will also pay a portion of your monthly
mortgage or subsidize your interest
payments for a short period of time
(called a buydown of the mortgage).
As with any loan, be sure you com-
parison shop before arranging financ-
ing through a builder.
Also, be sure to negotiate the prices
of any add-ons and upgrades, such as a
spa or higher quality carpet. These
can add substantially to the cost of a
new home.
Is there anything else I need to
know before buying a home in
a development run by a
homeowners association?
When you buy a home in a new sub-
division or planned unit development,
chances are good that you also auto-
matically become a member of an
exclusive clubthe homeowners
association, whose members are the
people who own homes in the same
development. The homeowners asso-
ciation will probably exercise a lot of
control over how you use and what
you do to your property.
Deeds to houses in new develop-
ments almost always include restric-
tionsfrom the colors you can paint
your house to the type of front yard
landscaping you can do to where (and
what types of vehicles) you can park
in your driveway. Usually, these re-
strictions, called covenants, conditions
and restrictions (CC&Rs), put deci-
sion-making rights in the hands of a
homeowners association. Before buy-
ing, study the CC&Rs carefully to see
if theyre compatible with your
lifestyle. If you dont understand
something, ask for more information
and seek legal advice if necessary.
Usually, getting relief from overly
restrictive CC&Rs after you move in
isnt easy. Youll likely have to submit
an application (with fee) for a vari-
ance, get your neighbors permission
and possibly go through a formal
hearing. And if you want to make a
structural change, such as building a
fence or adding a room, youll prob-
ably need formal permission from the
association in addition to complying
with city zoning rules.
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How can I make sure that the
house Im buying is in good
shape?
In some states, you may have the ad-
vantage of a law that requires sellers
to disclose considerable information
about the condition of the house. (See
Selling Your House, below.) Regardless
of whether the seller provides disclo-
sures, however, you should have the
property inspected for defects or mal-
functions in the buildings structure.
Start by conducting your own in-
spection. There are several useful do-
it-yourself inspection books available
to help you learn what to look for.
Ideally, you should inspect a house
before you make a formal written offer
to buy it so that you can save yourself
the trouble should you find serious
problems.
If a house passes your inspection,
hire a general contractor to check all
major house systems from top to bot-
tom, including the roof, plumbing,
electrical and heating systems and
drainage. This will take two or three
hours and cost you anywhere from
$200 to $500 depending on the loca-
tion, size, age and type of home. You
should accompany the inspector dur-
ing the examination so that you can
learn more about the maintenance and
preservation of the house and get an-
swers to any questions you may have,
including which problems are impor-
tant and which are relatively minor.
Depending on the property, you may
want to arrange specialized inspections
for pest damage, hazards from floods,
earthquakes and other natural disasters
and environmental health hazards such
as asbestos, mold and lead.
Professional inspections should be
done after your written purchase offer
has been accepted by the seller. (Your
offer should be contingent upon the
house passing one or more inspec-
tions.) To avoid confusion and dis-
putes, be sure you get a written report
of each inspection.
If the house is in good shape, you
can proceed, knowing that youre get-
ting what you paid for. If an inspector
discovers problemssuch as an anti-
quated plumbing system or a major
termite infestationyou can negotiate
with the seller to have him pay for
necessary repairs and provide a home
warranty (see Selling Your House, be-
low). Finally, you can back out of the
deal if an inspection turns up prob-
lems, assuming your contract is prop-
erly written to allow you to do so
.
Im making an offer to buy a
house, but I dont want to lock
myself into a deal that might not
work out. How can I protect
myself?
Real estate offers almost always contain
contingenciesevents that must hap-
pen within a certain amount of time
(such as 30 days) in order to finalize
the deal. For example, you may want to
make your offer contingent on your
ability to qualify for financing, the
house passing certain physical inspec-
tions or even your ability to sell your
existing house first. Be aware, however,
that the more contingencies you place
in an offer, the less likely the seller is
to accept it. See Selling Your House,
below, for more on real estate offers.
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Strategies for Buying
an Affordable House
To find a good house at a comparatively
reasonable price, you must learn about
the housing market and what you can
afford, make some sensible compromises
as to size and amenities and, above all,
be patient. Here are some proven
strategies to meet these goals:
1
Buy a fixer-upper cheap.
2
Buy a small house (with remodeling
potential) and add on later.
3
Buy a house at an estate or probate sale.
4
Buy a house subject to foreclosure (when
a homeowner defaults on his mortgage).
5
Buy a shared-equity house, pooling
resources with someone other than a
spouse or partner.
6
Rent out a room or two in the house.
7
Buy a duplex, triplex or house with an
in-law unit.
8
Lease a house you cant afford now with
an option to buy later.
9
Buy a limited-equity house built by a
nonprofit organization.
bk
Buy a house at an auction.
ef
More Information
About Buying a Home
100 Questions Every First-Time Home
Buyer Should Ask
, by Ilyce R. Glink
(Times Books), is a substantial book
designed to help first-time buyers through
the maze of buying a house.
Your New House: The Alert Consumers
Guide to Buying and Building a Quality
Home
, by Alan & Denise Fields (Windsor
Peak Press), offers valuable advice for
those who want to buy or build a new
home.
Inspecting a House
, by Rex Cauldwell
(Taunton Press), shows how to inspect a
house in order to discover major prob-
lems such as a bad foundation, leaky
roof or malfunctioning fireplace.
How to Buy a House in California
, by
Ralph Warner, Ira Serkes and George
Devine (Nolo), explains all the details of
the California house-buying process and
contains tear-out contracts and disclosure
forms.
Selling
Your House
If youre selling a home, you need to
time the sale properly, price the home
accurately and understand the laws,
such as disclosure requirements, that
cover house transactions. These ques-
tions and answers will get you started.
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I m trying to decide whether to
put my house on the market or
wait a while. What are the best
and worst times to sell?
Too many people rush to sell their
houses and lose money because of it.
Ideally, you should put your house on
the market when theres a large pool
of buyerscausing prices to go up.
This may occur in the following situa-
tions:
Your area is considered especially
attractivefor example, because of
the schools, low crime rate, employ-
ment opportunities, weather or
proximity to a major city.
Mortgage interest rates are low.
The economic climate of your
region is healthy and people feel
confident about the future.
Theres a jump in house buying
activity, as often occurs in spring.
Of course, if you have to sell imme-
diatelybecause of financial reasons,
a divorce, a job move or an imperative
health concernand you dont have
any of the advantages listed above,
you may have to settle for a lower
price, or help the buyer with financ-
ing, in order to make a quick sale.
I want to save on the real estate
commission. Can I sell my house
myself without a real estate
broker or agent?
Usually, yes. This is called a FSBO
(pronounced fizzbo)For Sale By
Owner. You must be aware, however,
of the legal rules that govern real
estate transfers in your state, such as
who must sign the papers, who can
conduct the actual transaction and
what to do if and when any problems
arise that slow down the transfer of
ownership. You also need to be aware
of any state-mandated disclosures as
to the physical condition of your
house. (See the discussion below.)
If you want to go it alone, be sure
you have the time, energy and ability
to handle all the detailsfrom setting
a realistic price to negotiating offers
and closing the deal. Also, be aware
that FSBOs are usually more feasible
in hot or sellers markets where theres
more competition for homes, or when
youre not in a hurry to sell. For more
advice on FSBOs, including the in-
volvement of attorneys and other pro-
fessionals in the house transaction,
contact your state department of real
estate. Also, check online at http://
www.owners.com for useful advice on
selling a home without an agent.
If youre in California, check out
For Sale by Owner by George Devine
(Nolo). This book provides step-by-
step advice on handling your own sale
in California, from putting the house
on the market to negotiating offers to
transferring title.
Is there some middle ground
where I can use a broker on a
more limited (and less
expensive) basis?
You might consider doing most of the
work yourselfsuch as showing the
houseand using a real estate brokers
help with such crucial tasks as:
setting the price of your house
advertising your home in the local
multiple listing service (MLS) of
H O U S E S
1. 11
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homes for sale in the area, published
by local boards of realtors, and
handling some of the more compli-
cated paperwork when the sale closes.
If you work with a broker in a lim-
ited way, you may be able to negoti-
ate a reduction of the typical 5%-7%
brokers commission, or you may be
able to find a real estate agent who
charges by the hour for specified ser-
vices such as reviewing the sales con-
tract.
How much should I ask for my
house?
The key is to determine how much
your property is actually worth on the
marketcalled appraising a houses
value. The most important factors
used to determine a houses value are
recent sales prices of similar properties
in the neighborhood (called comps).
Real estate agents have access to
sales data for the area (comp books)
and can give you a good estimate of
what your house should sell for. Many
real estate agents will offer this service
free, hoping that you will list your
house with them. You can also hire a
professional real estate appraiser to
give you a documented opinion as to
your houses value. Public record of-
fices, such as the county clerk or
recorders office, may also have infor-
mation on recent house sales. A few
private companies offer detailed com-
parable sales prices online for many
areas of the country, based on infor-
mation from County Recorders Of-
fices and property assessors. See the
list of recommended websites at the
end of this chapter.
Finally, asking prices of houses still
on the market can also provide guid-
ance (adjusting for the fact that ask-
ing prices are typically 10% or more
above the usual sales price). To find
out asking prices, go to open houses
and check newspaper real estate classi-
fied ads and online listings of homes
for sale.
Preparing Your House
for Sale
Making your house look as attractive as
possible may put several thousand dollars
in your pocket. Sweep the sidewalk; mow
the lawn; put some pots of blooming
flowers by the front door; clean the
windows; fix chipped or flaking paint.
Clean and tidy up all rooms; be sure the
house smells goodhide the kitty litter
box and bake some cookies. Check for
loose steps, slick areas or unsafe fixtures,
and deal with everything that might cause
injury to a prospective buyer. Take care
of real eyesores, such as a cracked
window or overgrown front yard. Dont
overlook small but obvious problems,
such as a leaking faucet or loose door-
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knob. Find ways to improve the look of
your house without spending much
moneya new shower curtain and towels
might really spruce up your bathroom.
Do I need to take the first offer
that comes in?
Offers, even very attractive ones, are
rarely accepted as written. More typi-
cally, you will respond with a written
counteroffer accepting some, maybe
even most, of the offer terms, but
proposing certain changes. Most
counteroffers correspond to these pro-
visions of an offer:
priceyou want more money
financingyou want a larger down
payment
occupancyyou need more time to
move out
buyers sale of current houseyou
dont want to wait for this to occur
inspectionsyou want the buyer to
schedule them more quickly.
A contract is formed when either
you or the buyer accept all of the terms
of the others offer or counteroffer in
writing within the time allowed.
What are my obligations to
disclose problems about my
house, such as a basement that
floods in heavy rains?
In most states, it is illegal to fraudu-
lently conceal major physical defects
in your property, such as your
troublesome basement. And states are
increasingly requiring sellers to take a
pro-active role by making written
disclosures on the condition of the
property. California, for example, has
stringent disclosure requirements.
California sellers must give buyers a
mandatory disclosure form listing
such defects as a leaky roof, faulty
plumbing, deaths that occurred
within the last three years on the
property, even the presence of neigh-
borhood nuisances, such as a dog that
barks every night. In addition, Cali-
fornia sellers must disclose potential
hazards from floods, earthquakes,
fires, environmental hazards and other
problems in a Natural Hazard Disclo-
sure Statement. California sellers must
also alert buyers to the availability of
a database maintained by law enforce-
ment authorities on the location of
registered sex offenders.
Generally, you are responsible for
disclosing only information within
your personal knowledge. While its
not usually required, many sellers hire
a general contractor to inspect the
property. The information will help
you determine which items need re-
pair or replacement and will assist you
in preparing any required disclosures.
An inspection report is also useful in
pricing your house and negotiating
with prospective buyers.
Full disclosure of any property de-
fects will also help protect you from
legal problems from a buyer who
seeks to rescind the sale or sues you
for damages suffered because you care-
lessly or intentionally withheld im-
portant information about your prop-
erty.
Check with your real estate broker
or attorney, or your state department
of real estate, for disclosures required
in your state and any special forms
you must use. Also, be aware that real
H O U S E S
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estate brokers are increasingly requir-
ing that sellers complete disclosure
forms, regardless of whether its
legally required.
Sellers Must Disclose
Lead-Based Paint and
Hazards
If you are selling a house built before
1978, you must comply with the federal
Residential Lead-Based Paint Hazard
Reduction Act of 1992 (42 U.S.Code §
4852d), also known as Title X (Ten). You
must:
disclose all known lead-based paint
and hazards in the house
give buyers a pamphlet prepared by
the U.S. Environmental Protection
Agency (EPA) called
Protect Your
Family From Lead in Your Home
include certain warning language in
the contract, as well as signed
statements from all parties verifying
that all disclosures (including giving
the pamphlet) were made
keep signed acknowledgments for three
years as proof of compliance, and
give buyers a ten-day opportunity to
test the housing for lead.
If you fail to comply with Title X, the
buyer can sue you for triple the amount
of damages sufferedfor example, three
times the cost of repainting a house previ-
ously painted with lead-based paint.
For more information, contact the
National Lead Information Center, 800-
424-LEAD (phone) or http://
www.epa.gov/lead/nlic.htm.
What are home warranties, and
should I buy one?
Home warranties are service contracts
that cover major housing systems
electrical wiring, built-in appliances,
heating, plumbing and the likefor
one year from the date the house is
sold. Most warranties cost $300-$500
and are renewable. If something goes
wrong with any of the covered sys-
tems after escrow closes, the repairs
are paid for (minus a modest service
fee)and the new buyer saves money.
Many sellers find that home warran-
ties make their house more attractive
and easier to sell.
Before buying a home warranty, be
sure you dont duplicate coverage.
You dont need a warranty for the
heating system, for example, if your
furnace is just six months old and still
covered by the manufacturers three-
year warranty.
Your real estate agent or broker can
provide more information on home
warranties.
What is the house closing?
The house closing is the final transfer
of the ownership of the house from
the seller to the buyer. It occurs after
both you and the buyer have met all
the terms of the contract and the deed
is recorded. (See Deeds, below). Clos-
ing also refers to the time when the
transfer will occur, such as The clos-
ing on my house will happen on Janu-
ary 27 at 10:00 a.m.
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Do I need an attorney for the
house closing?
This varies depending on state law and
local custom. In some states, attorneys
are not typically involved in residen-
tial property sales, and an escrow or
title company handles the entire clos-
ing process. In many other states, par-
ticularly in the eastern part of the
country, attorneys (for both buyer and
seller) have a more active role in all
parts of the house transaction; they
handle all the details of offer contracts
and house closings. Check with your
state department of real estate or your
real estate broker for advice.
Im selling my house and buying
another. What are some of the
most important tax
considerations?
The 1997 Taxpayer Relief Act con-
tained a big break for homeowners. If
you sell your home, you may exclude
up to $250,000 of your profit (capital
gain) from tax. For married couples
filing jointly, the exclusion is
$500,000.
The law applies to sales after May
6, 1997. To claim the whole exclu-
sion, you must have owned and lived
in your residence an aggregate of at
least two of five years before the sale.
You can claim the exclusion once
every two years.
Even if you havent lived in your
home a total of two years out of the
last five, you are still eligible for a
partial exclusion of capital gains if
you sold because of a change in em-
ployment, health or unforeseen cir-
cumstances. You get a portion of the
exclusion, based on the percentage of
the two-year period you lived in the
house. To calculate it, take the num-
ber of months you lived there before
the sale and divide it by 24.
For example, if youre an unmarried
taxpayer whos lived in your home for
12 months, and you sell it for a
$100,000 profit, the entire amount
would be excluded from capital gains.
Because you lived in the house for half
of the two-year period, you could
claim half the exclusion, or $125,000.
(12/24 x $250,000 = $125,000.)
Thats enough to exclude your entire
$100,000 gain.
For more information on current
tax laws involving real estate transac-
tions, contact the IRS at 800-829-
1040 or check their website at http://
www.irs.gov. Ask for Publication
523, Selling Your Home, and the gen-
eral instructions for Form 2119, Sale
of Your Home. If youre claiming the
exclusion, you must file Form 2119
with your tax return.
H O U S E S
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Deeds
Castles in the air are the only
property you can own without
the intervention of lawyers. Un-
fortunately, there are no title
deeds to them.
—J. FEIDOR REES
Remember playing Monopoly as a
kid, where amassing deeds to prop-
ertythose little color-coded cards
was all-important? Real-life deeds
arent nearly so colorful, but theyre
still very, very important. Here are
some questions commonly asked
about deeds.
What is a deed?
A deed is the document that transfers
ownership of real estate. It contains
the names of the old and new owners
and a legal description of the prop-
erty, and is signed by the person
transferring the property.
Do I need a deed to transfer
property?
Almost always. You cant transfer real
estate without having something in
writing. In some situations, a docu-
ment other than a deed is usedfor
example, in a divorce, a court order
may transfer real estate from the
couple to just one of them.
Im confused by all the different
kinds of deedsquitclaim deed,
grant deed, warranty deed.
Does it matter which kind of
deed I use?
Probably not. Usually, whats most
important is the substance of the
deed: the description of the property
being transferred and the names of the
old and new owners. Heres a brief
rundown of the most common types
of deeds:
A quitclaim deed transfers whatever
ownership interest you have in the
property. It makes no guarantees
about the extent of your interest.
Quitclaim deeds are commonly used
by divorcing couples; one spouse signs
over all his rights in the couples real
estate to the other. This can be espe-
cially useful if it isnt clear how much
of an interest, if any, one spouse has in
property thats held in another
spouses name.
A grant deed transfers your owner-
ship and implies certain promises
that the title hasnt already been
transferred to someone else or been
encumbered, except as set out in the
deed. This is the most commonly used
kind of deed, in most states.
A warranty deed transfers your own-
ership and explicitly promises the
buyer that you have good title to the
property. It may make other promises
as well, to address particular problems
with the transaction.
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Does a deed have to be
notarized?
Yes. The person who signs the deed
(the person who is transferring the
property) should take the deed to a
notary public, who will sign and
stamp it. The notarization means that
a notary public has verified that the
signature on the deed is genuine. The
signature must be notarized before the
deed will be accepted for recording
(see the next question).
After a deed is signed and
notarized, do I have to put it on
file anywhere?
Yes. You should record (file) the
deed in the land records office in the
county where the property is located.
This office goes by different names in
different states; its usually called the
County Recorders Office, Land Reg-
istry Office or Register of Deeds. In
most counties, youll find it in the
courthouse.
Recording a deed is simple. Just
take the signed, original deed to the
land records office. The clerk will take
the deed, stamp it with the date and
some numbers, make a copy and give
the original back to you. The numbers
are usually book and page numbers,
which show where the deed will be
found in the countys filing system.
There will be a small fee, probably
about $5 a page, for recording.
Whats a trust deed?
A trust deed (also called a deed of
trust) isnt like the other types of
deeds; its not used to transfer prop-
erty. Its really just a version of a mort-
gage, commonly used in some states.
A trust deed transfers title to land
to a trustee, usually a trust or title
company, which holds the land as
security for a loan. When the loan is
paid off, title is transferred to the bor-
rower. The trustee has no powers un-
less the borrower defaults on the loan;
then the trustee can sell the property
and pay the lender back from the pro-
ceeds, without first going to court.
More
Information
About Deeds
Deeds for California Real Estate
,
by Mary Randolph (Nolo),
contains tear-out deed forms and
instructions for transferring
California real estate.
For information about deeds
in other states, check your
local law library.
H O U S E S
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p
http://www.nolo.com
Nolo offers self-help information on a wide
variety of legal topics, including real estate
matters. The website also has several real
estate calculators, including a Home
Affordability calculator.
http://www.homefair.com/
home
Homefair offers lots of information and
calculators that will help you move and
make relocation decisions. Its especially
useful if youre deciding where to live
based on home prices, schools, crime, sala-
ries and other factors.
http://www.homeadvisor.com
Microsofts Home Advisor helps with all
aspects of buying or selling a homefrom
listings and financing to home improve-
ments.
http://www.ashi.com
The American Society of Home Inspectors
offers information on buying a home in
good shape, including referrals to local
home inspectors.
http://www.inman.com
Real estate columnist Brad Inman provides
the latest real estate news. Also, see http://
deadlinenews.com by real estate writer
Brouderick Perkins.
http://www.realtylocator.com
Realty Locator provides over 100,000 real
estate links nationwide, including property
listings, agents, lenders, neighborhood
data, real estate news and resources on
everything from home improvement to mort-
gage calculators.
http://www.homepath.com
Fannie Mae, the nations largest source of
home mortgage loans, offers several useful
home affordability mortgage calculators. It
also provides a wide range of consumer
information.
http://www.iOwn.com
iOwn allows you to compare rates from
various lenders, prequalify and apply for a
home loan. It includes detailed advice on
choosing the best type of mortgage, deter-
mining how much house you can afford,
selecting a real estate broker and evaluat-
ing the value of a house. Similar online
mortgage sites are available at http://
www.e-loan.com and http://www.
homeadvisor.com.
http://www.hsh.com
HSH Associates publishes detailed infor-
mation on mortgage loans available from
lenders across the U.S.
http://www.realtor.com
The official website of the National Asso-
ciation of Realtors lists over one and a half
million homes for sale throughout the
United States and provides links to real
estate broker websites and a host of related
realty services.
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http://www.homebuilder.com
The National Association of
Homebuilders website lists new homes and
developments in major metropolitan areas.
http://www.owners.com
This site lists homes sold without a broker,
also known as FSBOs (for sale by owner).
It also provides useful information for
anyone considering selling their home
without a real estate agent.
http://www.homegain.com
HomeGain is geared toward home sellers.
It provides an Agent Evaluator service to
help you find a real estate agent, a Home
Valuation tool to help price your home,
calculators for a wide variety of tasks and
other resources.
http://www.dataquick.com/
consumer
For a modest fee, Dataquick.com (click on
the Neighborhood Report Center) pro-
vides details on housesincluding pur-
chase price, sales date, address, number of
bedrooms and baths, square footage and
property tax information.
i
i
abb
2
Neighbors
2.2 Boundaries
2.3 Fences
2.4 Trees
2.6 Views
2.8 Noise
People have discovered that they can fool
the devil, but they can’t fool the neighbors.
EDGAR WATSON HOWE
Years ago, problems between neighbors were resolved infor-
mally, perhaps with the help of a third person respected by both
sides. These days, neighborswho may not know each other well,
if at allare quicker to head for court. Usually, of course, law-
suits only exacerbate bad feelings and cost everyone money, and
the courthouse should be the place of last, not first, resort. But
knowing the legal ground rules is important; you may prevent
small disputes from turning into big ones.
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Boundaries
Most of us dont know, or care, ex-
actly where our property boundaries
are located. But if you or your neigh-
bor wants to fence the property, build
a structure or cut down a tree close to
the line, you need to know where it
actually runs.
How can I find the exact
boundaries of my property?
You can hire a licensed land surveyor
to survey the property and place offi-
cial markers on the boundary lines. A
simple survey usually costs about
$500; if no survey has been done for a
long time, or if the maps are unreli-
able and conflicting, be prepared to
spend up to $1,000.
My neighbor and I dont want
to pay a surveyor. Cant we just
make an agreement about
where we want the boundary to
be?
You and the neighbor can decide
where you want the line to be, and
then make it so by signing deeds that
describe the boundary. If you have a
mortgage on the property, consult an
attorney for help in drawing up the
deeds. You may need to get the per-
mission of the mortgage holder before
you give your neighbor even a tiny
piece of the land.
Once you have signed a deed, you
should record (file) it at the county
land records office, usually called the
County Recorders Office, Land Reg-
istry Office or something similar.
Deeds are discussed in more detail in
Chapter 1.
What can I do if a neighbor
starts using my property?
If a neighbor starts to build on what
you think is your property, do some-
thing immediately. If the encroach-
ment is minorfor instance, a small
fence in the wrong placeyou may
think you shouldnt worry. But youre
wrong. When you try to sell your
house, a title company might refuse to
issue insurance because the neighbor
is on your land.
Also, if you dont act promptly,
you could lose part of your property.
When one person uses anothers land
for a long enough time, he can gain a
legal right to continue to do so and,
in some circumstances, gain owner-
ship of the property.
Talk to your neighbor right away.
Most likely, a mistake has been made
because of a conflicting description in
the neighbors deed or just a mistaken
assumption about the boundary line.
If your neighbor is hostile and insists
on proceeding, state that you will sue
if necessary. Then send a firm letter
or have a lawyer send one on his or her
letterhead. If the building doesnt
stop, waste no time in having a lawyer
get a judges order to temporarily stop
the neighbor until you can bring a
civil lawsuit for trespass before the
judge.
N E I G H B O R S
2.3
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A Little Common Sense
If you are having no trouble with your
property and your neighbors, yet you feel
inclined to rush out to determine your
exact boundaries just to know where they
are, please ask yourself a question. Have
you been satisfied with the amount of
space that you occupy? If the answer is
yes, then consider the time, money and
hostility that might be involved if you
pursue the subject.
If a problem exists on your border,
keep the lines of communication open
with the neighbor, if possible. Learn the
law and try to work out an agreement.
Boundary lines simply dont matter that
much to us most of the time; relationships
with our neighbors matter a great deal.
Fences
Local fence ordinances are usually
strict and detailed. Most regulate
height and location, and some control
the material used and even appear-
ance. Residents of planned unit devel-
opments and subdivisions are often
subject to even pickier rules. On top
of all this, many cities require you to
obtain a building permit before you
begin construction.
Fence regulations apply to any
structure used as an enclosure or a
partition. Usually, they include
hedges and trees.
How high can I build a fence on
my property?
In residential areas, local rules com-
monly restrict artificial (constructed)
backyard fences to a height of six feet.
In front yards, the limit is often four
feet.
Height restrictions may also apply
to natural fencesfences of bushes or
treesif they meet the ordinances
general definition of fences. Trees that
are planted in a row and grow to-
gether to form a barrier are usually
considered a fence. When natural
fences are specifically mentioned in
the laws, the height restrictions com-
monly range from five to eight feet.
If, however, you have a good reason
(for example, you need to screen your
house from a noisy or unsightly neigh-
boring use, such as a gas station), you
can ask the city for a one-time excep-
tion to the fence law, called a variance.
Talk to the neighbors before you make
your request, to explain your problem
and get them on your side.
My neighbor is building a fence
that violates the local fence law,
but nothings happening. How
can I get the law enforced?
Cities are not in the business of send-
ing around fence inspection teams,
and as long as no one complains, a non-
conforming fence may stand forever.
Tell the neighbor about the law as
soon as possible. She probably doesnt
know what the law is, and if the fence
is still being built, may be able to
modify it at a low cost. If she suggests
that you mind your own business,
alert the city. All it takes in most cir-
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cumstances is a phone call to the plan-
ning or zoning department or the city
attorneys office. The neighbor will be
ordered to conform; if she doesnt, the
city can fine her and even sue.
My neighbors fence is hideous.
Can I do anything about it?
As long as a fence doesnt pose a threat
of harm to neighbors or those passing
by, it probably doesnt violate any law
just because its ugly. Occasionally,
however, a town or subdivision allows
only certain types of new fencessuch
as board fencesin an attempt to
create a harmonious architectural
look. Some towns also prohibit certain
materialsfor example, electrically
charged or barbed wire fences.
Even without such a specific law, if
a fence is so poorly constructed that it
is an eyesore or a danger, it may be
prohibited by another law, such as a
blighted property ordinance. And if
the fence was erected just for mean-
nessits high, ugly and has no rea-
sonable use to the ownerit may be a
spite fence, and you can sue the
neighbor to get it torn down.
The fence on the line between
my land and my neighbors is in
bad shape. Can I fix it or tear it
down?
Unless the property owners agree oth-
erwise, fences on a boundary line be-
long to both owners when both are
using the fence. Both owners are re-
sponsible for keeping the fence in
good repair, and neither may remove
it without the others permission.
A few states have harsh penalties
for refusing to chip in for mainte-
nance after a reasonable request from
the other owner. Connecticut, for ex-
ample, allows one neighbor to go
ahead and repair, and then sue the
other owner for double the cost.
Of course, its rare that a land-
owner needs to resort to a lawsuit.
Your first step should be to talk to
the neighbor about how to tackle the
problem. Your neighbor will prob-
ably be delighted that youre taking
the initiative to fix a fence thats al-
ready an eyesore and might deterio-
rate into a real danger.
Trees
WOODMAN, SPARE THAT TREE.
T
OUCH NOT A SINGLE BOUGH:
IN YOUTH IT SHELTERED ME,
A
ND ILL PROTECT IT NOW.
GEORGE POPE MORRIS
N E I G H B O R S
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We human beings exhibit some com-
plicated, often conflicting, emotions
over our trees. This is especially true
when it comes to the trees in our own
yards. We take ownership of our trees
and their protection very seriously in
this country, and this is reflected in
the law.
Can I trim the branches of the
neighbors tree that hang over
my yard?
You have the legal right to trim tree
branches up to the property line. But
you may not go onto the neighbors
property or destroy the tree itself.
Deliberately Harming
a Tree
In almost every state, a person who
intentionally injures someone elses tree is
liable to the owner for two or three times
the amount of actual monetary loss.
These penalties protect tree owners by
providing harsh deterrents to would-be
loggers.
Most of a big oak tree hangs
over my yard, but the trunk is on
the neighbors property. Who
owns the tree?
Your neighbor. It is accepted law in
all states that a tree whose trunk
stands wholly on the land of one per-
son belongs to that person.
If the trunk stands partly on the
land of two or more people, it is called
a boundary tree, and in most cases it
belongs to all the property owners.
All the owners are responsible for car-
ing for the tree, and one co-owner
may not remove a healthy tree with-
out the other owners permission.
My neighbor dug up his yard,
and in the process killed a tree
thats just on my side of the
property line. Am I entitled to
compensation for the tree?
Yes. The basic rule is that someone
who cuts down, removes or hurts a
tree without permission owes the
trees owner money to compensate for
the harm done. You can sue to enforce
that rightbut you probably wont
have to, once you tell your neighbor
what the law is.
My neighbors tree looks like its
going to fall on my house any
day now. What should I do?
You can trim back branches to your
property line, but that may not solve
the problem if youre worried about
the whole tree coming down.
City governments often step in to
take care of, or make the owner take
care of, dangerous trees. Some cities
have ordinances that prohibit main-
taining any dangerous condition
including a hazardous treeon pri-
vate property. To enforce such an or-
dinance, the city can demand that the
owner remove the tree or pay a fine.
Some cities will even remove such a
tree for the owner. To check on your
citys laws and policies, call the city
attorneys office.
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You might also get help from a
utility company, if the tree threatens
its equipment. For example, a phone
company will trim a tree that hangs
menacingly over its lines.
If you dont get help from these
sources, and the neighbor refuses to
take action, you can sue. The legal
theory is that the dangerous tree is a
nuisance because it is unreasonable
for the owner to keep it and it inter-
feres with your use and enjoyment of
your property. You can ask the court
to order the owner to prune or remove
the tree. Youll have to sue in regular
court (not small claims court) and
have proof that the tree really does
pose a danger to you.
Views
The privilege of sitting in ones home
and gazing at the scenery is a highly
prized commodity. And it can be a
very expensive one. Potential buyers,
sometimes overwhelmed by a stun-
ning landscape, commit their life
savings to properties, assuming that
the view is permanent. Sometimes it
is not.
If a neighbors addition or
growing tree blocks my view,
what rights do I have?
Unfortunately, you have no right to
light, air or view, unless it has been
granted in writing by a law or subdi-
vision rule. The exception to this
general rule is that someone may not
deliberately and maliciously block
anothers view with a structure that
has no reasonable use to the owner.
This rule encourages building and
expansion, but the consequences can
be harsh. If a view becomes blocked,
the law will help only if:
a local law protects views
the obstruction violates private
subdivision rules, or
the obstruction violates some other
specific law.
How can a view ordinance help?
A few cities that overlook the ocean
or other desirable vistas have adopted
view ordinances. These laws protect a
property owner from having his view
(usually, the view that he had when
he bought the property) obstructed
by growing trees. They dont cover
buildings or other structures that
block views.
The ordinances allow someone who
has lost a view to sue the tree owner
for a court order requiring him to
restore the view. A neighbor who
wants to sue must first approach the
tree owner and request that the tree
be cut back. The complaining person
usually bears the cost of trimming or
topping, unless the tree was planted
N E I G H B O R S
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after the law became effective, or the
owner refuses to cooperate.
Some view ordinances contain ex-
tensive limitations that take most of
the teeth out of them. Some ex-
amples:
Certain species of trees may be
exempt, especially if they grew
naturally.
A neighbor may be allowed to
complain only if the tree is within a
certain distance from his or her
property.
Trees on city property may be
exempt.
Cities Without
View Ordinances
If, like most cities, your city doesnt have
a view ordinance, you might find help
from other local laws. Here are some
laws that may help restore your view:
Fence Height Limits. If a fence is block-
ing your view, it may be in violation of a
local law. Commonly, local laws limit
artificial (constructed) fences in back
yards to six feet high and in front yards
to three or four feet. Height restrictions
may also apply to natural fences, such
as hedges.
Tree Laws. Certain species of trees
may be prohibitedfor example, trees
that cause allergies or tend to harm other
plants. Laws may also forbid trees that
are too close to a street (especially an
intersection), to power lines or even to
an airport.
Zoning Laws. Local zoning regulations
control the size, location and uses of
buildings. In a single-family area, build-
ings are usually limited to 30 or 35 feet.
Zoning laws also usually require a cer-
tain setback, or distance between a struc-
ture and the boundary lines. They also
limit how much of a lot can be occupied
by a structure. For instance, many subur-
ban cities limit a dwelling to 40% to
60% of the property.
I live in a subdivision with a
homeowners association. Will
that help me in a view dispute?
Often, residents of subdivisions and
planned unit developments are sub-
ject to a detailed set of rules called
Covenants, Conditions and Restric-
tions (CC&Rs). They regulate most
matters that could concern a neigh-
bor, including views. For example, a
rule may state that trees cant ob-
struct the view from another lot, or
simply limit tree height to 15 feet.
If someone violates the restrictions,
the homeowners association may ap-
ply pressure (for example, removing
the privilege of using a swimming
pool) or even sue. A lawsuit is costly
and time-consuming, however, and
the association may not want to sue
except for serious violations of the
rules.
If the association wont help, you
can take the neighbor to court your-
self, but be prepared for a lengthy and
expensive experience.
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I want to buy a house with a
great view. Is there anything I
can do to make sure I wont ever
lose the viewand much of my
investment?
First, ask the property owner or the
city planning and zoning office if the
property is protected by a view ordi-
nance. Then check with the real estate
agent to see if neighbors are subject to
restrictions that would protect your
view. Also, if the property is in a
planned unit development, find out
whether a homeowners association
actively enforces the restrictions.
Check local zoning laws for any
property that might affect you. Could
the neighbor down the hill add a sec-
ond-story addition?
Finally, look very closely from the
property to see which trees might
later obstruct your view. Then go in-
troduce yourself to their owners and
explain your concerns. A neighbor
who also has a view will probably un-
derstand your concern. If someone is
unfriendly and uncooperative, you
stand warned.
How to Approach
a View Problem
Before you approach the owner of a tree
that has grown to block your view,
answer these questions:
Does the tree affect the view of other
neighbors? If it does, get them to
approach the tree owner with you.
Trimming costs may be divided among
you.
Which part of the tree is causing view
problems for youone limb, the top,
one side of it?
What is the least destructive action that
could be taken to restore your view?
Maybe the owner will agree to a
limited and careful pruning.
How much will the trimming cost? Be
ready to pay for it. Remember that
every day you wait and grumble is a
day for the trees to grow and for the
job to become more expensive. The
loss of your personal enjoyment is
probably worth more than the trimming
cost, not to mention the devaluation of
your property (which can be thousands
of dollars).
Noise
Nothing so needs re-
forming as other
people’s habits.
MARK TWAIN
If you are a reasonable person and
your neighbor is driving you wiggy
N E I G H B O R S
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with noise, the neighbor is probably
violating a noise law.
Do I have any legal recourse
against a noisy neighbor?
You bet. The most effective weapon
you have to maintain your peace and
quiet is your local noise ordinance.
Almost every community prohibits
excessive, unnecessary and unreason-
able noise, and police enforce these
laws.
Most laws designate certain quiet
hours”—for example, from 10 p.m. to
7 a.m. on weekdays, and until 8 or
9 a.m. on weekends. So running a
power mower may be perfectly accept-
able at 10 a.m. on Saturday, but not
at 7 a.m. Many towns also have deci-
bel level noise limits. When a neigh-
bor complains, they measure the noise
with electronic equipment. To find
out what your towns noise ordinance
says, ask at the public library or the
city attorneys office.
If your neighbor keeps disturbing
you, you can also sue, and ask the court
for money damages or to order the
neighbor to stop the noise (abate the
nuisance, in legal terms). For money
damages alone, you can use small
claims court. For a court order telling
somebody to stop doing something,
youll have to sue in regular court.
Of course, what you really want is
for the nuisance to stop. But getting a
small claims court to order your
neighbor to pay you money can be
amazingly effective. And suing in
small claims court is easy and inex-
pensive, and it doesnt require a law-
yer.
Noise that is excessive and deliber-
ate may also be in violation of state
criminal laws against disturbing the
peace or disorderly conduct. This
means that, in very extreme circum-
stances, the police can arrest your
neighbor. Usually, these offenses are
punishable by fines or short jail sen-
tences.
The neighbor in the apartment
next to mine is very noisy. Isnt
the landlord supposed to keep
tenants quiet?
In addition to the other remedies all
neighbors have, you have another
arrow in your quiver: You can lean on
the landlord to quiet the neighbor.
Standard rental and lease agreements
contain a clause entitled Quiet
Enjoyment. This clause gives tenants
the right to occupy their apartments
in peace, and also imposes upon them
the responsibility not to disturb their
neighbors. Its the landlords job to
enforce both sides of this bargain.
If the neighbors stereo is keeping
you up every night, the tenants are
probably violating the rental agree-
ment, and could be evicted. Especially
if several neighbors complain, the
landlord will probably order the ten-
ant to comply with the lease or face
eviction. For more information about
your rights as a tenant, see Chapter 3.
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Tips for Handling
a Noise Problem
Know the law and stay within it.
Be reasonably tolerant of your
neighbors.
Assert your rights.
Communicate with your neighbors
both the one causing the problem and
others affected by it.
Ask the police for help when it is
appropriate.
Use the courts when necessary.
My neighbors dog barks all the
time, and its driving me crazy.
What can I do?
Usually, problems with barking dogs
can be resolved without resorting to
police or courts. If you do eventually
wind up in court, however, a judge
will be more sympathetic if you made
at least some effort to work things out
first. Here are the steps to take when
youre losing patience (or sleep) over a
neighbors noisy dog:
1. Ask your neighbor to keep the dog
quiet. Sometimes owners are blissfully
unaware that theres a problem. If the
dog barks for hours every daybut
only when its left alonethe owner
may not know that youre being
driven crazy.
If you can establish some rapport
with the neighbor, try to agree on
specific actions to alleviate the prob-
lem: for example, that your neighbor
will take the dog to obedience school
or consult with an animal behavior
specialist, or that the dog will be kept
inside after 10 p.m. After you agree
on a plan, set a date to talk again in a
couple of weeks.
2. Try mediation. Mediators, both
professional and volunteers, are
trained to listen to both sides, iden-
tify problems, keep everyone focused
on the real issues and suggest com-
promises. A mediator wont make a
decision for you, but will help you
and your neighbor agree on a resolu-
tion.
Many cities have community me-
diation groups which train volunteers
to mediate disputes in their own
neighborhoods. Or ask for a referral
from:
the small claims court clerks office
the local district attorneys office
the consumer complaint division, if
there is one
radio or television stations that offer
help with consumer problems, or
a state or local bar association.
For more information on media-
tion, see Chapter 17, Courts and Me-
diation.
3. Look up the law. In some places,
barking dogs are covered by a specific
state or local ordinance. If theres no
law aimed specifically at dogs, a gen-
eral nuisance or noise ordinance
makes the owner responsible. Local
law may forbid loud noise after 10
p.m., for example, or prohibit any
unreasonable noise. And someone
who allows a dog to bark after numer-
ous warnings from police may be ar-
rested for disturbing the peace.
To find out what the law is where
you live, go to a law library and check
N E I G H B O R S
2.11
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the state statutes and city or county
ordinances yourself. Look in the index
under noise, dogs, animals or
nuisance. For more information on
how to do this, see the Legal Research
Appendix. Or call the local animal
control agency or city attorney.
4. Ask animal control authorities to
enforce local noise laws. Be persistent.
Some cities have special programs to
handle dog complaints.
5. Call the police, if you think a crimi-
nal law is being violated. Generally, po-
lice arent too interested in barking
dog problems. And summoning a
police cruiser to a neighbors house
obviously will not improve your al-
ready-strained relations. But if noth-
ing else works, and the relationship
with your neighbor is shot anyway,
give the police a try.
ef
More Information
About Neighbor Law
Neighbor Law: Fences, Trees, Bound-
aries & Noise
, by Cora Jordan (Nolo),
explains laws that affect neighbors and
shows how to resolve common disputes
without lawsuits.
Dog Law
, by Mary Randolph (Nolo), is a
guide to the laws that affect dog owners
and their neighbors.
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http://www.nolo.com
Nolo offers self-help information about a
wide variety of legal topics, including
neighbor law.
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3
Landlords and Tenants
3.2 Leases and Rental
Agreements
3.4 Tenant Selection
3.4 Housing
Discrimination
3.6 Rent and Security
Deposits
3.8 Tenants’ Privacy
Rights
3.9 Repairs and
Maintenance
3.12 Landlord Liability
for Criminal Acts
and Activities
3.14 Landlord Liability
for Lead Poisoning
3.15 Landlord’s Liability
for Exposure to
Asbestos and Mold
3.16 Insurance
3.17 Resolving Disputes
Property has its duties as well
as its rights.
THOMAS DRUMMOND
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Thirty years ago, custom, not law,
controlled how most landlords and
tenants interacted with each other.
This is no longer true. Today,
whether you focus on leases and rental
agreements; habitability; discrimina-
tion; the amount, use and return of
security deposits; how and when a
landlord may enter a rental unit or a
dozen other issues, both landlord and
tenant must understand their legal
rights and responsibilities.
Because landlord-tenant laws vary
significantly depending on where you
live, remember to check your state
and local laws for specifics. A list of
state landlord-tenant statutes is in-
cluded at the end of this chapter. You
can find and read the state statutes
online. (See Finding Statutes and
Regulations Online in the Legal Re-
search Appendix.)
Leases and
Rental
Agreements
Its important to carefully readand
fully understandthe terms of your
lease or rental agreement. This piece
of paper is the contract that forms the
legal basis for the landlord-tenant
relationship.
Why is it important to sign a
lease or rental agreement?
The lease or rental agreement is the
key document of the tenancy. A thor-
ough lease or rental agreement will
set out important issues such as:
the length of the tenancy
the amount of rent and deposits the
tenant must pay
the number of people who can live
on the rental property
who pays for utilities
whether the tenant may have pets
whether the tenant may sublet the
property
the landlords access to the rental
property, and
who pays attorney fees if there is a
lawsuit.
Leases and rental agreements
should always be in writing, even
though oral agreements for less than a
year are enforceable in most states.
While oral agreements may seem easy
and informal, they often lead to dis-
putes. If a tenant and landlord later
disagree about key agreements, such
as whether the tenant can sublet, the
result is all too likely to be a court
argument over who said what to
whom, when and in what context.
Whats the difference between
a rental agreement and a lease?
The biggest difference is the length of
occupancy. A written rental agree-
ment provides for a tenancy of a short
period (often 30 days). The tenancy is
automatically renewed at the end of
this period unless the tenant or land-
lord ends it by giving written notice,
typically 30 days. For these month-to-
month rentals, the landlord can
change the terms of the agreement
with proper written notice, subject to
L A N D L O R D S A N D T E N A N T S
3.3
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any rent control laws. This notice is
usually 30 days, but can be shorter in
some states if the rent is paid weekly
or bi-weekly or if the landlord and
tenant agree. In some states, the no-
tice period is longer.
A written lease, on the other hand,
gives a tenant the right to occupy a
rental unit for a set termmost often
for six months or a year, but some-
times longeras long as the tenant
pays the rent and complies with other
lease provisions. Unlike a rental
agreement, when a lease expires it
does not usually automatically renew
itself. A tenant who stays on with the
landlords consent will generally be
considered a month-to-month tenant
(with the same terms and conditions
that were present in the lease).
In addition, with a fixed-term
lease, the landlord cannot raise the
rent or change other terms of the ten-
ancy during the lease, unless the
changes are specifically provided for
in the lease or the tenant agrees.
What happens if a tenant
breaks a long-term lease?
As a general rule, a tenant may not
legally break a lease unless the land-
lord significantly violates its terms
for example, by failing to make neces-
sary repairs, or by failing to comply
with an important law concerning
health or safety. A few states have
laws that allow tenants to break a
lease because health problems or a job
relocation require a permanent move.
A tenant who begins active military
service may break a lease after giving
30 days notice.
A tenant who breaks a lease with-
out a legally recognized cause will be
responsible for the remainder of the
rent due under the lease term. In most
states, however, a landlord has a legal
duty to try to find a new tenant as
soon as possibleno matter what the
tenants reason for leavingrather
than charge the tenant for the total
remaining rent due under the lease.
At that point, the old tenants respon-
sibility for the rent will stop.
When can a landlord legally
break a lease and end a
tenancy?
Usually, a landlord may legally break
a lease if a tenant significantly violates
its terms or the lawfor example, by
paying the rent late, keeping a dog in
violation of a no-pets clause in the
lease, substantially damaging the
property or participating in illegal
activities on or near the premises,
such as selling drugs.
Usually a landlord must first send
the tenant a notice stating that the
tenancy has been terminated. State
laws set out very detailed require-
ments as to how a landlord must write
and deliver (serve) a termination no-
tice, depending on what the tenant has
done wrong. The termination notice
may state that the tenancy is over and
warn the tenant that he or she must
vacate the premises or face an eviction
lawsuit. Or, the notice may give the
tenant a few days to clean up his or
her actfor example, pay the rent or
find a new home for the dog. (If the
tenant fixes the problem or leaves as
directed, no one goes to court.) If a
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tenant doesnt comply with the termi-
nation notice, the landlord can file a
lawsuit to evict the tenant.
Tenant
Selection
Choosing tenants is the most impor-
tant decision any landlord makes. To
do it well, landlords need a reliable
system that helps weed out tenants
who will pay their rent late, damage
the rental unit or cause legal or practi-
cal problems later.
Whats the best way for
landlords to screen tenants?
Savvy landlords should ask all pro-
spective tenants to fill out a written
rental application that asks for the
following information:
employment, income and credit
history
Social Security and drivers license
numbers
details on past evictions or bank-
ruptcies, and
references.
Before choosing tenants, landlords
should check with previous landlords
and other references; verify income,
employment and bank account infor-
mation; and obtain a credit report.
The credit report is especially impor-
tant because it will indicate whether a
particular person has a history of pay-
ing rent or bills late, has gone through
bankruptcy, has been convicted of a
crime or has ever been evicted.
How can a landlord avoid
discrimination lawsuits when
choosing a tenant?
Fair housing laws specify clearly illegal
reasons to refuse to rent to a tenant.
(For details, see Housing Discrimination,
below.) Landlords are legally free to
choose among prospective tenants as
long as their decisions comply with
these laws and are based on legitimate
business criteria. For example, a land-
lord is entitled to reject someone with
a poor credit history, insufficient in-
come to pay the rent or past behav-
iorsuch as damaging propertythat
makes the person a bad risk. A legally
recognized occupancy policy limiting
the number of people per rental unit
one that is clearly tied to health and
safetycan also be a legal basis for
refusing tenants.
Housing
Discrimination
Not so long ago, a landlord could
refuse to rent to an applicant, or could
evict a tenant, for almost any reason.
If a landlord didnt like your race or
religion, or the fact that you had chil-
dren, you might find yourself out on
the street. But times have changed.
To protect every Americans right to
be treated fairly and to help people
find adequate housing, Congress and
state legislatures passed laws prohibit-
ing discrimination, most notably the
federal Fair Housing Acts.
L A N D L O R D S A N D T E N A N T S
3.5
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What types of housing
discrimination are illegal?
The federal Fair Housing Act and Fair
Housing Amendments Act prohibit
landlords from choosing tenants on the
basis of a group characteristic such as:
race
religion
ethnic background or national
origin
sex
age
the fact that the prospective tenant
has children (except in certain
designated senior housing), or
a mental or physical disability.
In addition, some state and local
laws prohibit discrimination based on
a persons marital status or sexual
orientation. And some cities and
counties have added other criteria,
such as ones personal appearance.
On the other hand, landlords are
allowed to select tenants using criteria
that are based on valid business rea-
sons, such as requiring a minimum
income or positive references from
previous landlords, as long as these
standards are applied equally to all
tenants.
Examples of Housing
Discrimination
The Fair Housing Act and Amendments
prohibit landlords from taking any of the
following actions based on race, religion
or any other protected category:
advertising or making any statement
that indicates a preference based on
group characteristic, such as skin color
falsely denying that a rental unit is
available
setting more restrictive standards, such
as higher income, for certain tenants
refusing to rent to members of certain
groups
refusing to accommodate the needs of
disabled tenants, such as allowing a
guide dog, hearing dog or service dog
setting different terms for some tenants,
such as adopting an inconsistent policy
of responding to late rent payments, or
terminating a tenancy for a
discriminatory reason.
How does a tenant file a
discrimination complaint?
A tenant who thinks that a landlord
has broken a federal fair housing law
should contact the U.S. Department
of Housing and Urban Development
(HUD), the agency which enforces the
Fair Housing Act. To find the nearest
office, call HUDs Fair Housing Infor-
mation Clearinghouse at 800-343-
3442, or check the HUD Website at
http://www.hud.gov. HUD will pro-
vide a complaint form and will inves-
tigate and decide the merits of the
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claim. A tenant must file his or her
complaint within one year of the al-
leged discriminatory act. HUD will
typically appoint a mediator to nego-
tiate with the landlord and reach a
settlement (called a conciliation). If
a settlement cant be reached, the fair
housing agency will hold an adminis-
trative hearing to determine whether
discrimination has occurred.
If the discrimination is a violation
of a state fair housing law, the tenant
may file a complaint with the state
agency in charge of enforcing the law.
In California, the Department of Fair
Employment and Housing enforces
the states two fair housing laws.
Also, instead of filing a complaint
with HUD or a state agency, tenants
may file lawsuits directly in federal or
state court. If a state or federal court
or housing agency finds that discrimi-
nation has taken place, a tenant may
be awarded damages, including any
higher rent he or she had to pay as a
result of being turned down, and
damages for humiliation or emotional
distress.
Rent and
Security
Deposits
Landlords may charge any dollar
amount for rent, except in certain
areas covered by rent control. Many
states do, however, have rules as to
when and how rent must be paid and
how it may be increased.
Security deposits are more strictly
regulated by state law. Most states
dictate how much money a landlord
can require, how the funds can be
usedfor example, to cover unpaid
rentand when and how the deposit
must be returned.
What laws cover rent due dates,
late rent and rent increases?
By custom, leases and rental agree-
ments usually require rent to be paid
monthly, in advance. Often rent is
due on the first day of the month.
However, it is legal for a landlord to
require rent to be paid at different
intervals or on a different day of the
month. Unless the lease or rental
agreement specifies otherwise, there is
no legally recognized grace period
in other words, if a tenant hasnt paid
the rent on time, the landlord can
usually terminate the tenancy the day
after it is due. Some landlords charge
fees for late payment of rent or for
bounced checks; these fees are usually
legal if they are reasonable. The laws
on late fees can be found in your
states landlord-tenant statutes, listed
at the end of this chapter.
For month-to-month rentals, the
landlord can raise the rent (subject to
any rent control laws) with proper
written notice, typically 30 days.
With a fixed-term lease, the landlord
may not raise the rent during the
lease, unless the increase is specifically
called for in the lease or the tenant
agrees.
L A N D L O R D S A N D T E N A N T S
3.7
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How Rent Control Works
Communities in only five states
California, the District of Columbia,
Maryland, New Jersey and New York
have laws that limit the amount of rent
landlords may charge. Rent control
ordinances (also called rent stabilization,
maximum rent regulation or a similar
term) limit the circumstances and times
rent may be increased. Many rent control
laws require landlords to have a legal or
just cause (that is, a good reason) to
terminate a tenancyfor example, if the
tenant doesnt pay rent or if the landlord
wants to move a family member into the
rental unit. Landlords and tenants in New
York City, Newark, San Francisco and
other cities with rent control should get a
current copy of the ordinance and any
regulations interpreting it. Check the
phone book for the address and phone
number of the local rent control board, or
contact the mayor or city managers
office.
How much security deposit can
a landlord charge?
All states allow landlords to collect a
security deposit when the tenant
moves in; the general purpose is to
assure that the tenant pays rent when
due and keeps the rental unit in good
condition. Half the states limit the
amount landlords can charge, usually
not more than a month or two worth
of rentthe exact amount depends on
the state.
Many states require landlords to
put deposits in a separate account, and
some require landlords to pay tenants
the interest on deposits.
What are the rules for returning
security deposits?
The rules vary from state to state, but
landlords usually have a set amount of
time in which to return deposits, usu-
ally 14 to 30 days after the tenant
moves outeither voluntarily or by
eviction.
Landlords may normally make cer-
tain deductions from a tenants secu-
rity deposit, provided they do it cor-
rectly and for an allowable reason.
Many states require landlords to pro-
vide a written itemized accounting of
deductions for unpaid rent and for
repairs for damages that go beyond
normal wear and tear, together with
payment for any deposit balance.
A tenant may sue a landlord who
fails to return his or her deposit when
and how required, or who violates
other provisions of security deposit
laws such as interest requirements.
Often these lawsuits are brought in
small claims court. If the landlord has
intentionally and flagrantly violated
the ordinance, in some states a tenant
may recover the entire deposit
sometimes even two or three times
this amountplus attorney fees and
other damages.
The rules for the keeping and re-
turn of security deposits can be found
in state landlord-tenant statutes,
listed at the end of this chapter.
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Tenants
Privacy Rights
In most states, the tenants duty to
pay rent is conditioned on the
landlords proper repair and mainte-
nance of the premises. This means
that landlords have a legal responsi-
bility to keep fairly close tabs on the
condition of the property. To balance
landlords responsibilities with ten-
ants rights to privacy in their homes,
laws in many states set rules about
when and how landlords may legally
enter rented premises.
Under what circumstances may
a landlord enter rental property?
Typically, a landlord has the right to
legally enter rented premises in cases
of emergency, in order to make
needed repairs (in some states, just to
determine whether repairs are neces-
sary) or to show the property to pro-
spective new tenants or purchasers.
Several states allow landlords the
right of entry during a tenants ex-
tended absence (often defined as seven
days or more) to maintain the prop-
erty as necessary and to inspect for
damage and needed repairs. In most
cases, a landlord may not enter just to
check up on the tenant and the rental
property.
Must landlords provide notice of
entry?
States typically require landlords to
provide advance notice (usually 24
hours) before entering a rental unit.
Without advance notice, a landlord or
manager may enter rented premises
while a tenant is living there only in
an emergency, such as a fire or serious
water leak, or when the tenant gives
permission.
To find out how much notice a
landlord must give a tenant before
entering, check your states landlord-
tenant statutes, listed at the end of
this chapter.
Is it legal for a landlord to
answer questions about a
tenants credit?
Creditors, banks and prospective land-
lords may ask a landlord to provide
credit or other information about a
current or former tenant. A landlord
who sticks to the facts that are rel-
evant to the tenants creditworthiness
(such as whether the tenant paid rent
on time) may respond to these inquir-
ies without fear of legal difficulties
initiated bt the tenant. To be extra
careful, some landlords insist that
tenants sign a release giving the land-
lord permission to respond to such
requests.
L A N D L O R D S A N D T E N A N T S
3.9
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Repairs and
Maintenance
In 1863, an English judge wrote that
Fraud apart, there is no law against
letting [leasing] a tumble-down
house. But in 20th century America,
its no longer legal to be a slumlord.
Landlords must repair and maintain
their rental property or face financial
losses and legal problems from ten-
antswho may withhold rent and
pursue other legal remediesand
from government agencies that en-
force housing codes.
What are the landlords repair
and maintenance
responsibilities?
Under most state and local laws,
rental property owners must offer and
maintain housing that satisfies basic
habitability requirements, such as
adequate weatherproofing; available
heat, water and electricity; and clean,
sanitary and structurally safe pre-
mises. Local building or housing
codes typically set specific standards,
such as the minimum requirements
for light, ventilation and electrical
wiring. Many cities require the instal-
lation of smoke detectors in residen-
tial units and specify security mea-
sures involving locks and keys.
To find out more about state laws
on repair and maintenance responsi-
bilities, check your states landlord-
tenant statutes listed at the end of this
chapter. Your local building or hous-
ing authority and health or fire de-
partment can provide information on
local housing codes and penalties for
violations.
What are a tenants rights if the
landlord refuses to maintain the
property?
If a landlord doesnt meet his or her
legal responsibilities, a tenant usually
has several options, depending on the
state. These options include:
paying less rent
withholding the entire rent until
the problem is fixed
making necessary repairs or hiring
someone to make them and deduct-
ing the cost from the next months
rent
calling the local building inspector,
who can usually order the landlord
to make repairs, or
moving out, even in the middle of a
lease.
A tenant who has lived under sub-
standard conditions can also sue the
landlord for a partial refund of rent
paid during that time, and in some
circumstances can sue for the discom-
fort, annoyance and emotional distress
caused by the substandard conditions.
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Tenants should check state and
local laws and understand remedies
available before taking any action,
especially withholding rent.
What must tenants do to keep
the rental property in good
shape?
All tenants have the responsibility to
keep their own living quarters clean
and sanitary. A landlord can usually
delegate his repair and maintenance
tasks to the tenant in exchange for a
reduction in rent. If the tenant fails to
do the job well, however, the landlord
is not excused from his responsibility
to maintain habitability. In addition,
tenants must carefully use common
areas and facilities, such as lobbies,
garages and pools.
Is a landlord liable if a tenant or
visitor is injured on the rental
property?
A landlord may be liable to the ten-
antor othersfor injuries caused by
dangerous or defective conditions on
the rental property. In order to hold
the landlord responsible, the tenant
must prove that the landlord was neg-
ligent and that the landlords negli-
gence caused an injury. To do this,
the tenant must show that:
the landlord had control over the
problem that caused the injury
the accident was foreseeable
fixing the problem (or at least
giving adequate warnings) would
not have been unreasonably expen-
sive or difficult
a serious injury was the probable
consequence of not fixing the
problem
the landlord failed to take reason-
able steps to avert the accident
the landlords failurehis negli-
gencecaused the tenants accident,
and
the tenant was genuinely hurt.
For example, if a tenant falls and
breaks his ankle on a broken front
door step, the landlord will be liable
if the tenant can show that:
It was the landlords responsibility
to maintain the steps (this would
usually be the case, because the
steps are part of the common area,
which is the landlords responsibil-
ity).
An accident of this type was foresee-
able (falling on a broken step is
highly likely).
A repair would have been easy or
inexpensive (fixing a broken step is
a minor job).
The probable result of a broken step
is a serious injury (a fall certainly
qualifies).
The landlord failed to take reason-
able measures to maintain the steps
(this will be easy to prove if the step
was broken for weeks, or even days,
but less so if the step broke five
minutes earlier and showed no
previous signs of weakening).
The broken step caused the injury
(this is easy to prove if the tenant
has a witness to the fall, but might
be hard if there are no witnesses and
the landlord claims that the tenant
really injured himself somewhere
else and is attempting to pin the
blame on the landlord), and
He is really hurt (in the case of a
broken bone, this is easy to establish).
L A N D L O R D S A N D T E N A N T S
3.11
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A tenant can file a personal injury
lawsuit for medical bills, lost earn-
ings, pain and other physical suffer-
ing, permanent physical disability and
disfigurement and emotional distress.
A tenant can also sue for property
damage that results from faulty main-
tenance or unsafe conditions.
ef
More Information on Personal
Injury Lawsuits
How to Win Your Personal Injury Claim,
by Joseph L. Matthews (Nolo), provides
step-by-step details on how to understand
what a claim is worth, prepare a claim
for compensation, negotiate a fair
settlement and manage a case even if a
lawyer is not involved.
How can property owners
minimize financial losses and
legal problems related to repairs
and maintenance?
Landlords who offer and maintain
housing in excellent condition can
avoid many problems. Heres how:
Clearly set out responsibilities for
repair and maintenance in the lease
or rental agreement.
Use a written checklist to inspect
the premises and fix any problems
before new tenants move in.
Encourage tenants to immediately
report plumbing, heating, weather-
proofing or other defects or safety or
security problemswhether in the
tenants unit or in common areas
such as hallways and parking garages.
Keep a written log of all tenant
complaints and repair requests with
details as to how and when prob-
lems were addressed.
Handle urgent repairs as soon as
possible. Take care of major incon-
veniences, such as a plumbing or
heating problem, within 24 hours.
For minor problems, respond in 48
hours. Always keep tenants in-
formed as to when and how the
repairs will be made and the reasons
for any delays.
Twice a year, give tenants a checklist
on which to report potential safety
hazards or maintenance problems
that might have been overlooked.
Use the same checklist to inspect all
rental units once a year.
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Landlord
Liability for
Criminal Acts
and Activities
Can a law-abiding citizen end up fi-
nancially responsible for the criminal
acts of a total stranger? Yesif its a
landlord who owns rental property
where an assault or other crime oc-
curred. Rental property owners are
being sued with increasing frequency
by tenants injured by criminals, with
settlements and jury awards typically
ranging from $100,000 to $1 million.
What are the landlords responsibili-
ties for tenant safety and security?
Property owners are responsible for
keeping their premises reasonably safe
for tenants and guests. Landlords in
most states now have at least some
degree of legal responsibility to pro-
tect their tenants from would-be as-
sailants and thieves and from the
criminal acts of fellow tenants. Land-
lords must also protect the neighbor-
hood from their tenants illegal activi-
ties, such as drug dealing. These legal
duties stem from building codes, or-
dinances, statutes and, most fre-
quently, court decisions.
How can a landlord limit
responsibility for crime
committed by strangers on the
rental property?
Effective preventive measures are the
best response to possible liabilities
from criminal acts and activities. The
following steps will not only limit the
likelihood of crime, but also reduce
the risk that the property owner will
be found responsible if a criminal
assault or robbery does occur. A land-
lord should:
Meet or exceed all state and local
security laws that apply to the rental
property, such as requirements for
deadbolt locks on doors, good
lighting and window locks.
Realistically assess the crime situa-
tion in and around the rental
property and neighborhood and
design a security system that
provides reasonable protection for
the tenantsboth in individual
rental units and common areas such
as parking garages and elevators.
Local police departments, the
landlords insurance company and
private security professionals can all
provide useful advice on security
measures. If additional security
requires a rent hike, the landlord
should discuss the situation with his
or her tenants. Many tenants will
pay more for a safer place to live.
Educate tenants about crime prob-
lems in the neighborhood and
describe the security measures
provided and their limitations.
Maintain the rental property and
conduct regular inspections to spot
and fix any security problems, such
as broken locks or burned out
exterior flood lights. Asking tenants
for their suggestions as part of an
ongoing repair and maintenance
system is also a good idea.
L A N D L O R D S A N D T E N A N T S
3.13
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Handle tenant complaints about
dangerous situations, suspicious
activities or broken security items
immediately. Failing to do this may
saddle a landlord with a higher level
of legal liability should a tenant be
injured by a criminal act after a
complaint is made.
The Costs of Crime
The money a landlord spends today on
effective crime-prevention measures will
pale in comparison to the costs that may
result from crime on the premises. The
average settlement paid by landlords
insurance companies for horrific crimes
such as rape and assault is $600,000,
and the average jury award (when cases
go to trial) is $1.2 million.
What kind of legal trouble do
landlords face from tenants who
deal drugs on the property?
Drug-dealing tenants can cause land-
lords all kinds of practical and legal
problems:
It will be difficult to find and keep
good tenants and the value of the
rental property will plummet.
Anyone who is injured or annoyed
by drug dealersbe it other tenants
or people in the neighborhood
may sue the landlord on the grounds
that the property is a public nui-
sance that seriously threatens public
safety or morals.
Local, state or federal authorities
may levy stiff fines against the
landlord for allowing the illegal
activity to continue.
Law enforcement authorities may
seek criminal penalties against the
landlord for knowingly allowing
drug dealing on the rental property.
In extreme cases, the presence of
drug dealers may result in the
government confiscating the rental
property.
How can a property owner
avoid legal problems from
tenants who deal drugs or
otherwise break the law?
There are several practical steps land-
lords can take to avoid trouble from
tenants and limit their exposure to
any lawsuits that are filed:
Screen tenants carefully and choose
tenants who are likely to be law-
abiding and peaceful citizens. Weed
out violent or dangerous individuals
to the extent allowable under
privacy and anti-discrimination laws
that may limit questions about a
tenants past criminal activity, drug
use or mental illness.
Keep the results of background
checks that show that the tenants
rent appeared to come from legiti-
mate sources (jobs and bank ac-
counts).
Dont accept a cash deposit or rental
payments.
Do not tolerate tenants disruptive
behavior. Include an explicit provi-
sion in the lease or rental agreement
prohibiting drug dealing and other
illegal activity by tenants or guests
and promptly evict tenants who
violate the clause.
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Be aware of suspicious activity, such
as heavy traffic in and out of the
rental premises.
Respond to tenant and neighbor
complaints about drug dealing on
the rental property. Get advice from
police immediately upon learning of
a problem.
Consult with security experts to do
everything reasonable to discover
and prevent illegal activity on the
rental property.
Protecting Tenants From
the Manager
Rental property owners should be
particularly careful when hiring a
property managerthe person who
interacts with all tenants and has access
to master keys. Landlords should
scrupulously check a managers
background to the fullest extent allowed
by law, and closely supervise his or her
job performance. A tenant who gets hurt
or has property stolen or damaged by a
manager could sue the property owner
for failing to screen the manager
properly. If tenants complain about
illegal acts by a manager, landlords
should pay attention. Finally, property
owners should make sure their insurance
covers illegal acts of their employees.
Landlord
Liability for
Lead
Poisoning
Landlords are increasingly likely to be
held liable for tenant health problems
resulting from exposure to lead and
other environmental toxins, even if
the landlord didnt causeor even
know aboutthe danger.
What are a landlords legal
responsibilities regarding lead
in rental property?
Because of the health problems caused
by lead poisoning, the Residential
Lead-Based Paint Hazard Reduction
Act was enacted in 1992. This law is
commonly known as Title X (ten).
Environmental Protection Agency
(EPA) regulations implementing Title
X apply to rental property built be-
fore 1978.
Under Title X, before signing or
renewing a lease or rental agreement,
and before undertaking any renova-
tion, a landlord must give every ten-
ant the EPA pamphlet, Protect Your
Family From Lead in Your Home, or a
state-approved version of this pam-
phlet. At the start of the tenancy,
both the landlord and tenant must
sign an EPA-approved disclosure form
L A N D L O R D S A N D T E N A N T S
3.15
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to prove that the landlord told the
tenants about any known lead-based
paint or hazards on the premises.
Property owners must keep this dis-
closure form as part of their records
for three years from the date that the
tenancy begins.
A landlord who fails to comply
with EPA regulations faces penalties
of up to $10,000 for each violation.
And a landlord who is found liable for
tenant injuries from lead may have to
pay three times what the tenant suf-
fered in damages.
ef
More Information on Lead
Hazard Resources
Information on the evaluation and control
of lead dust, and copies of
Protect Your
Family From Lead in Your Home
may be
obtained by calling the National Lead
Information Center at 800-424-LEAD, or
checking its website at http://
www.epa.gov/opptintr/lead/nlic.htm. In
addition, state housing departments have
information on state laws and regulations
governing the evaluation and control of
lead hazards.
Are there any rental properties
exempt from Title X regulations?
These properties are not covered by
Title X:
housing for which a construction
permit was obtained, or on which
construction was started, after
January 1, 1978
housing certified as lead-free by a
state-accredited lead inspector
lofts, efficiencies and studio apart-
ments
short-term vacation rentals of 100
days or less
a single room rented in a residential
dwelling
housing designed for persons with
disabilities, unless any child less
than six years old lives there or is
expected to live there
retirement communities (housing
designed for seniors, where one or
more tenants is at least 62 years
old), unless children under the age
of six are present or expected to live
there.
Landlords
Liability for
Exposure to
Asbestos and
Mold
In addition to lead, property owners
may be liable for tenant health prob-
lems caused by exposure to other en-
vironmental hazards, such as asbestos
and mold.
Regulations concerning asbestos are
issued by the Occupational Safety and
Health Administration (OSHA). They
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set strict standards for the testing,
maintenance and disclosure of asbes-
tos in buildings constructed before
1981. For information call the nearest
OSHA office or check OSHAs
website at http://www.osha.gov.
Mold is the newest environmental
hazard fueling lawsuits against rental
property owners. Across the country,
tenants have won multi-million-dollar
cases against landlords for significant
health problemssuch as rashes,
chronic fatigue, nausea, cognitive
losses, hemorrhaging and asthma
allegedly caused by exposure to toxic
molds in their building. In a typical
case, the Delaware Supreme Court in
May 2001 upheld a $1.4 million
award to two tenants who suffered
asthma and other health problems
caused by mold that grew when the
landlord refused to fix leaks in their
apartment.
There are no federal or state laws or
regulations covering permissible ex-
posure to mold, though California has
directed its Department of Health
Services to study the issue. New York
Citys Department of Health has de-
veloped guidelines for indoor air qual-
ity, which landlords in New York
City should follow. In fact, any land-
lord would be wise to consult them.
You can read them online at http://
www.ci.nyc.ny.us. San Francisco has
added mold to its list of nuisances,
thereby allowing tenants to sue land-
lords under private and public nui-
sance laws if they fail to clean up seri-
ous outbreaks (San Francisco Health
Code §581).
Insurance
Both tenants and landlords need in-
surance to protect their property and
bank accounts. Without adequate
insurance, landlords risk losing hun-
dreds of thousands of dollars of prop-
erty from fire or other hazards. While
tenants may not have as much at stake
financially, they also need insurance
especially tenants with expensive per-
sonal belongings. Tenant losses from
fire or theft are not covered by the
landlords insurance.
How can insurance help protect
a rental property business?
A well-designed insurance policy can
protect rental property from losses
caused by many perils, including fire,
storms, burglary and vandalism.
(Earthquake and flood insurance are
typically separate and, in some areas,
mold may soon join the list.) A com-
prehensive policy will also include
liability insurance, covering injuries
or losses suffered by others as the re-
sult of defective conditions on the
property.
Equally important, liability insur-
ance covers the cost (mostly lawyers
bills) of defending personal injury
lawsuits.
Here are some tips on choosing
insurance:
Purchase enough coverage to protect
the value of the property and assets.
Be sure the policy covers not only
physical injury but also libel, slander,
discrimination, unlawful and retalia-
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tory eviction and invasion of privacy
suffered by tenants and guests.
Carry liability insurance on all
vehicles used for business purposes,
including the managers car or truck
if he or she will use it on the job.
Make sure your policy is occurence
based, not claims based. Heres
the difference: under a claims-based
policy, your policy must be in effect
on the date you make the claim
even if it was in place when the
incident leading to the claim oc-
curred. Under an occurance-based
arrangement, you can make the claim
after the policy has endedwhich is
obviously to your advantage.
If you need more information, The
Legal Guide for Starting & Running a
Small Business, by Fred S. Steingold
(Nolo), contains a detailed discussion
of small business law, including how
to insure your rental property.
What does renters insurance
cover?
The average renters policy covers
tenants against losses to their belong-
ings occurring as a result of fire and
theft, up to the amount stated on the
face of the policy, such as $25,000 or
$50,000.
Most renter policies include de-
ductible amounts of $250 or $500.
This means that if a tenants apart-
ment is burglarized, the insurance
company will pay only for the amount
of the loss over and above the deduct-
ible amount.
In addition to fire and theft, most
renters policies include personal li-
ability coverage ($100,000 is a typical
amount) for injuries or damage caused
by the tenantfor example, if a
tenants garden hose floods the
neighbors cactus garden, or a tenants
guest is injured on the rental property
due to the tenants negligence.
Renters insurance is a package of
several types of insurance designed to
cover tenants for more than one risk.
Each insurance companys package
will be slightly differenttypes of
coverage offered, exclusions, the dollar
amounts specified and the deductible
will vary. Tenants who live in a flood
or earthquake-prone area will need to
pay extra for coverage. Policies cover-
ing flood and earthquake damage can
be hard to find; tenants should shop
around until they find the type of
coverage that they need. Theres lots
of information on the Webtype
renters insurance into your favorite
search engine to learn more.
Resolving
Disputes
Legal disputesactual and poten-
tialcome in all shapes and sizes for
landlords and tenants. Whether its a
disagreement over a rent increase,
responsibility for repairs or return of a
security deposit, rarely should lawyers
and litigation be the first choice for
resolving a landlord-tenant dispute.
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How can landlords and tenants
avoid disputes?
Both landlords and tenants should
follow these tips to avoid legal prob-
lems:
Know your rights and responsibili-
ties under federal, state and local
law.
Make sure the terms of your lease or
rental agreement are clear and
unambiguous.
Keep communication open. If
theres a problemfor example, a
disagreement about the landlords
right to enter a tenants apart-
mentsee if you can resolve the
issue by talking it over, without
running to a lawyer.
Keep copies of any correspondence
and make notes of conversations
about any problems. For example, a
tenant should ask for repairs in
writing and keep a copy of the letter.
The landlord should keep a copy of
the repair request and note when and
how the problem was repaired.
Weve talked about the problem
and still dont agree. What
should we do next?
If you cant work out an agreement on
your own, but want to continue the
rental relationship, consider media-
tion by a neutral, third party. Unlike
a judge, the mediator has no power to
impose a decision but will simply
work to help find a mutually accept-
able solution to the dispute. Media-
tion is often available at little or no
cost from a publicly funded program.
ef
More Information About
Mediation
For information on local mediation
programs, call your mayors or city
managers office, and ask for the staff
member who handles landlord-tenant
mediation matters or housing disputes.
That person should refer you to the public
office, business or community group that
handles landlord-tenant mediations.
You can learn more about mediation by
reading Chapter 17 of this book,
Courts
and Mediation
.
If mediation doesnt work, is
there a last step before going to
a lawyer?
If you decide not to mediate your
dispute, or mediation fails, its time
to pursue other legal remedies. If the
disagreement involves money, such as
return of the security deposit, you can
take the case to small claims court. A
few states use different names for this
type of court (such as Landlord-Ten-
ant Court), but traditionally the pur-
pose has been the same: to provide a
speedy, inexpensive resolution of dis-
putes that involve relatively small
amounts of money.
Keep in mind that your remedy in
small claims court may be limited to
an award of money damages. The
maximum amount you can sue for
varies from $3,000 to $7,500, de-
pending on your state.
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You can find more information
about small claims court in Chapter
17, Courts and Mediation.
Landlord-Tenant
Statutory Codes
Here are some of the key statutes pertaining
to landlord-tenant law in each state.
ALABAMA
Ala. Code §§ 35-9-1 to 35-9-100
ALASKA
Alaska Stat. §§ 34.03.010 to 34.03.380
ARIZONA
Ariz. Rev. Stat. Ann. §§ 12-1171 to
12-1183, §§ 33-1301 to 33-1381
ARKANSAS
Ark. Code Ann. §§ 18-16-101 to 18-16-306
CALIFORNIA
Cal. Civ. Code §§ 1925 to 1954, 1961 to
1962.7, 1995.010 to 1997.270
COLORADO
Colo. Rev. Stat. §§ 38-12-101 to 38-12-
104, 38-12-301 to 38-12-302
CONNECTICUT
Conn. Gen. Stat. Ann. §§ 47a-1 to 47a-51
DELAWARE
Del. Code Ann. tit. 25, §§ 5101 to 7013
DIST. OF COLUMBIA
D.C. Code Ann. §§ 45-1401 to 45-1597,
45-2501 to 45-2593
FLORIDA
Fla. Stat. Ann. §§ 83.40 to 83.66
GEORGIA
Ga. Code Ann. §§ 44-7-1 to 44-7-81
HAWAII
Haw. Rev. Stat. §§ 521-1 to 521-78
IDAHO
Idaho Code §§ 6-301 to 6-324, §§ 55-201
to 55-313
ILLINOIS
765 Ill. Comp. Stat. §§ 705/0.01 to 740/5
INDIANA
Ind. Code Ann. §§ 32-7-1-1 to 37-7-9-10
IOWA
Iowa Code Ann. §§ 562A.1 to 562A.36
KANSAS
Kan. Stat. Ann. §§ 58-2501 to 58-2573
KENTUCKY
Ky. Rev. Stat. Ann. §§ 383.010 to 383.715
LOUISIANA
La. Rev. Stat. Ann. §§ 9:3201 to 9:3259;
La. Civ. Code Ann. art. 2669 to 2742
MAINE
Me. Rev. Stat. Ann. tit. 14, §§ 6001 to
6046
MARYLAND
Md. Code Ann. [Real Prop.] §§ 8-101 to
8-604
MASSACHUSETTS
Mass. Gen. Laws Ann. ch. 186, §§ 1 to 21
MICHIGAN
Mich. Comp. Laws §§ 554.601 to 554.640
MINNESOTA
Minn. Stat. Ann. §§ 504B.001 to
504B.471
MISSISSIPPI
Miss. Code Ann. §§ 89-8-1 to 89-8-27
MISSOURI
Mo. Rev. Stat. §§ 441.005 to 441.880,
§§ 535.150 to 535.300
MONTANA
Mont. Code Ann. §§ 70-24-101 to 70-25-
206
NEBRASKA
Neb. Rev. Stat. §§ 76-1401 to 76-1449
NEVADA
Nev. Rev. Stat. Ann. §§ 118A.010 to
118A.520
NEW HAMPSHIRE
N.H. Rev. Stat. Ann. §§ 540:1 to 540:29,
540-A:1 to 540-A:8
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NEW JERSEY
N.J. Stat. Ann. §§ 46:8-1 to 46:8-49
NEW MEXICO
N.M. Stat. Ann. §§ 47-8-1 to 47-8-51
NEW YORK
N.Y. Real Prop. Law §§ 220 to 238, Real
Prop. Acts. §§ 701 to 853, Mult. Dwell.
Law (all), Mult. Res. Law (all), Gen. Oblig.
Law §§ 7-103 to 7-108
NORTH CAROLINA
N.C. Gen. Stat. §§ 42-1 to 42-14.2, 42-
25.6 to 42-76
NORTH DAKOTA
N.D. Cent. Code §§ 47-16-01 to 47-16-41
OHIO
Ohio Rev. Code Ann. §§ 5321.01 to
5321.19
OKLAHOMA
Okla. Stat. Ann. tit. 41, §§ 1 to 136
OREGON
Or. Rev. Stat. §§ 90.100 to 90.450
PENNSYLVANIA
68 Pa. Cons. Stat. Ann. §§ 250.101 to
250.510-B
RHODE ISLAND
R.I. Gen. Laws §§ 34-18-1 to 34-18-57
SOUTH CAROLINA
S.C. Code Ann. §§ 27-40-10 to 27-40-910
SOUTH DAKOTA
S.D. Codified Laws Ann. §§ 43-32-1 to
43-32-29
TENNESSEE
Tenn. Code Ann. §§ 66-28-101 to 66-28-
520
TEXAS
Tex. Prop. Code Ann. §§ 91.001 to
92.354
UTAH
Utah Code Ann. §§ 57-17-1 to 57-17-5,
57-22-1 to 57-22-6
VERMONT
Vt. Stat. Ann. tit. 9, §§ 4451 to 4468
VIRGINIA
Va. Code Ann. §§ 55-218.1 to 55-248.40
WASHINGTON
Wash. Rev. Code Ann. §§ 59.04.010 to
59.04.900, 59.18.010 to 59.18.911
WEST VIRGINIA
W. Va. Code §§ 37-6-1 to 37-6-30
WISCONSIN
Wis. Stat. Ann. §§ 704.01 to 704.45
WYOMING
Wyo. Stat. §§ 1-21-1201 to 1-21-1211,
§§ 34-2-128 to 34-2-129
L A N D L O R D S A N D T E N A N T S
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ef
More Information About
Landlord-Tenant Law
From the landlords point of view:
Every Landlords Legal Guide
, by Marcia
Stewart, Ralph Warner and Janet Portman
(Nolo). This 50-state book provides
extensive legal and practical information
on leases, tenant screening, rent, security
deposits, privacy, repairs, property
managers, discrimination, roommates,
liability, tenancy termination and much
more. It includes more than 25 legal forms
and agreements as tear-outs and on disk.
LeaseWriter
(Nolo)(CD-ROM for
Windows/Macintosh). This software
program generates a customized legal
residential lease or rental agreement,
plus more than a dozen key documents
and forms every landlord and property
manager needs. It includes a database to
track tenants and rental properties, and a
log for rental payments, repairs and
problems. The program gives you instant
access to state-specific landlord-tenant
information, and extensive online legal
help.
From the tenants point of view:
Every Tenants Legal Guide
, by Janet
Portman and Marcia Stewart
(Nolo)
. This
book gives tenants in all 50 states the
legal and practical information they need
to deal with their landlords and protect
their rights when things go wrong. It
covers all important issues of renting,
including signing a lease, getting a
landlord to make needed repairs,
fighting illegal discrimination, protecting
privacy rights, dealing with roommates,
getting the security deposit returned
fairly, moving out and much more.
Renters Rights
, by Janet Portman and
Marcia Stewart (Nolo). A concise, highly
accessible guide for tenants in every
state, loaded with tips and strategies.
For both landlords and tenants:
Everybodys Guide to Small Claims
Court
, by Attorney Ralph Warner
(National and California Editions)
(Nolo)
.
The book explains how to evaluate your
case, prepare for court and convince a
judge youre right. It also tells you what
remedies (money only, or enforcement of
the lease) are available in your state.
How to Mediate Your Dispute
, by Peter
Lovenheim
(Nolo)
, explains how to
choose a mediator, prepare a case and
navigate the mediation process.
Additionally, tenants unions and rental
property owners associations are good
sources of advice. Look in your telephone
books white pages for names of these
organizations.
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For tenants renting commercial
property:
Leasing Space for Your Small Business
,
by Janet Portman and Fred. S. Steingold
(Nolo). Gives commercial tenants the
information they need to understand and
negotiate a commercial lease, plus tips
on finding suitable space, choosing and
working with brokers and lawyers and
bargaining effectively for the best terms
and conditions.
http://www.nolo.com
Nolo offers self-help information about a
wide variety of legal topics, including
landlord-tenant law and provides links to
federal and state statutes.
http://tenant.net
TenantNet provides information about
landlord-tenant law, with a focus on ten-
ants rights. TenantNet is designed prima-
rily for tenants in New York City, but the
site offers information about the law in
many other states. The site also provides the
text of the federal fair housing law.
http://www.spl.org
The Seattle Public Library has links to
many cities that have posted their ordi-
nances (and often their rent control laws)
online.
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4
Workplace Rights
4.2 Fair Pay and
Time Off
4.9 Workplace Health
and Safety
4.12 Workers’ Compensation
4.17 Age Discrimination
4.21 Sexual Harassment
4.25 Disability
Discrimination
4.29 Losing or Leaving
Your Job
I LIKE WORK; IT FASCINATES ME.
I CAN SIT AND LOOK AT IT FOR HOURS.
JEROME K. JEROME
If youre like most workers, you have experienced occasional
job-related problems or have questions about whether you are
being fairly and legally treated on the job. Here are several
common problems:
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You were not hired for a job and
you have good reason to suspect it
was because of your race, age, sex,
sexual orientation or because you are
disabled.
Your employer promoted a less-
qualified personperhaps someone
who is younger than you areto fill
a position you were promised.
You are regularly forced to work
overtime but are not given extra
pay. Or, you are paid for working
extra hours, but you do not receive a
premium rate, such as time-and-a-
half.
You need to take a leave of absence
from your job to care for a sick
parent, but you are concerned that
this will jeopardize your job or your
eligibility for a promotion.
You have been called to serve on a
jury and wonder if your employer
must pay you for this time.
You have just been laid off and you
want to know whether, if business
at your company picks up in the
future, you have any right to get
your job back. You also want to
know whether youre entitled to
unemployment payments, or
whether your employer owes you
severance pay.
It is reassuring for many workers to
learn that they do not face these issues
alone. In recent years, a number of
laws have been passed to protect your
rights in the workplace. Federal laws
now establish some basic guarantees
for most workerssuch as the right
to be paid fairly and on time and to
work free from discrimination. And
state laws may place their own twists
on your workplace rightsgiving
more protection than federal law, for
example, or regulating whether or not
you are entitled to time off work to
vote.
Fair Pay and
Time Off
I do not like work
even when someone else does it.
MARK TWAIN
These days, most of us spend at least
half of our waking hours working.
Ideally, this time will be spent on
jobs that are fulfilling. But whether or
not we enjoy our work, the bottom
line for almost all of us is to be paid
fairly and on time. Fortunately, both
state and federal laws protect this
right.
I suspect my employer is bending
some of the rules on paying
employees. What are the legal
controls on pay for work?
The most important and far-reaching
law guaranteeing a workers right to
be paid fairly is the federal Fair Labor
Standards Act or FLSA. The FLSA:
defines the 40-hour workweek
covers the federal minimum wage
(currently $5.15 per hour)
sets requirements for overtime, and
places restrictions on child labor.
The FLSA is the single law most
often violated by employers. But em-
W O R K P L A C E R I G H T S
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ployers must also comply with other
local, state or federal workplace laws
that sometimes set higher standards
on wages and hours. If a state law sets
a higheror more worker-friendly
standard, then your employer must
follow it. So in addition to determin-
ing whether you are being paid prop-
erly under the FLSA, you may need to
check other laws that apply to your
situation. For example, many states
have a higher minimum wage than
mandated by federal law. Your em-
ployer must comply with whichever
minimum wage is higher.
To learn about state and local labor
laws that might apply to you, contact
the local office of your state depart-
ment of labor, which should be able
to supply you with written materials
setting forth your legal rights.
What is the current minimum
wage?
The federal minimum wage is cur-
rently $5.15 per hour. But many
states have their own minimum wage
laws that require a higher rate of pay.
For example, Rhode Islands mini-
mum wage is $6.15 per hour. Em-
ployers must pay whichever minimum
wage ratefederal or stateis higher.
To find out the minimum wage rates
in the 50 states, the District of Co-
lumbia, Puerto Rico and Guam, visit
the U.S. Department of Labors
website at http://www.dol.gov/dol/esa/
public/minwage/america.htm. You
can also contact your state labor de-
partment for information.
In addition, some cities and coun-
ties have enacted so-called living
wage ordinances. These can set the
minimum wage that your employer
must pay even higher. To find out if
your area has a living wage ordinance,
contact your local government offices.
My boss says that because Im a
supervisor, I am not legally
entitled to overtime pay. Is this
true?
It may be. Some employees are ex-
empt from the overtime requirements
of the FLSAand the biggest and
most abused exemption is for execu-
tive, administrative and professional
workers. To qualify as an exempt ex-
ecutive, the employee must, among
other things, supervise two full-time
employees (or the equivalent). The
definitions of administrative and pro-
fessional employees have their own
quirks. For example, employees cat-
egorized as professionals must per-
form work that is primarily intellec-
tual. The definitions also change with
the employees salary level. For ex-
ample, if the weekly salary of the ex-
ecutive, administrative or professional
employee exceeds a certain minimum,
fewer factors are required to qualify
for the exemption.
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Determining whether you truly are
exempt from overtime requirements
becomes even more complex when
you factor in state law requirements.
If you have a question about whether
your particular job is exempt, it may
be worth your while to go to the near-
est law library and carefully read the
Fair Labor Standards Act, 29 U.S.C.
§§ 201 and following. You can also
read this law online by visiting the
U.S. Department of Labor site at
http://www.dol.gov.
To learn about overtime laws in
your state, contract your state depart-
ment of labor.
I put in more than forty hours on
the job each week, without
overtime pay. Am I entitled
to time off to compensate for
this?
Most workers are familiar with com-
pensatory or comp timethe practice
of offering employees time off from
work in place of cash payments for
overtime. What comes as a shock to
many is that the practice is illegal in
most situations. Under the FLSA,
only state or government agencies
may legally allow their employees
time off in place of wages (29 U.S.C.
§ 207(o)). Even then, comp time may
be awarded only:
according to the terms of an agree-
ment arranged by union representa-
tives, or
if the employer and employee agree
to the arrangement before work
begins.
When compensatory time is al-
lowed, it must be awarded at the rate
of one and one-half times the overtime
hours workedand comp time must
be taken during the same pay period
that the overtime hours were worked.
Some states do allow private em-
ployers to give employees comp time
instead of cash. But there are com-
plex, often conflicting laws control-
ling how and when it may be given. A
common control, for example, is that
employees must voluntarily request in
writing that comp time be given in-
stead of overtime paybefore the
extra hours are worked. Check with
your states labor department for spe-
cial laws on comp time in your area.
Many employers and employees
routinely violate the rules governing
the use of compensatory time in place
of cash overtime wages. However,
such violations are risky. Employees
can find themselves unable to collect
money due them if a company goes
out of business or they are fired. And
employers can end up owing large
amounts of overtime pay to employees
as the result of a labor department
prosecution of compensatory time
violations.
Can my boss force me to work
overtime?
Under the FLSA (which, youll recall,
is a federal law) your employer can
force you to work overtime and can
even fire you if you refuse to do so.
The FLSA does not limit the num-
ber of hours in a day or days in a week
that an employer can schedule an em-
ployee to work. It only requires em-
W O R K P L A C E R I G H T S
4.5
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ployers to pay non-exempt employees
overtime (time and a half the workers
regular rate of pay) for any hours over
40 that the employee works in a week.
However, your state law may pro-
vide additional rights. Contact your
state labor department to learn more.
Does my employer have to pay
me overtime if I work more than
eight hours in a day?
Under the FLSA, your employer does
not have to pay you overtime if you
work more than eight hours in any
given day. The federal law is inter-
ested only in weeks, not days, so as
long as you work less than 40 hours in
a week, you arent entitled to over-
time.
In this area, however, its definitely
worth checking to see what your state
law has to say on the subject. Some
states, such as California, do require
employers to pay overtime to employ-
ees who work more than eight hours
in a day. Your employer must comply
with whichever lawfederal or
stateis most beneficial to you.
I work as a waitress and make
good tips. My boss says that
because I get this extra money
at work, he can pay me a wage
that is lower than the hourly
minimum wage. Is this true?
It depends on how much money you
make in tips. Employers must pay all
employees not less than the minimum
wage.
But the matter of minimum wage
becomes tricky when an employee
routinely receives at least $30 per
month in tips. Under federal law,
employers are allowed to credit half of
those tips against the minimum wage
requirement, which, under federal
law, is currently $5.15 per hour. So,
they can credit up to $2.12 an hour of
the tips received toward their wage
obligation and actually pay you only
$2.13 an hour. However, the
employers offset must not exceed the
tips the employee actually receives.
EXAMPLE
Alphonse is employed as a waiter and
earns more than $10 per hour in tips.
Denis, the restaurants owner, is required
to pay Alphonse at least $2.13 per hour
on top of his tips for the first 40 hours
worked in each week.
If business slows and Alphonses tips dip
to, say, $1 an hour, Denis may credit the
tip amount toward Alphonses hourly
minimum wage. Denis must pay the addi-
tional salary required to make up the full
amount of minimum wage Alphonse is
owed: $5.15 an hour.
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I am required to carry a beeper
24 hours a day, every day of
the week for my job. I am
occasionally called on my
vacation, holidays and other
days off. Am I entitled to be
paid anything for on-call time?
Under federal law, vacation days, holi-
days and other paid days off work
should be just thatdays off work
and you are entitled to enjoy them
free from the reins of your beeper.
When your employer requires you to
be on-call but does not require you to
stay on the companys premises, the
following two rules generally apply:
On-call time that you control and
use for your own enjoyment or
benefit is not counted as payable
time.
On-call time over which you have
little or no control and which you
cannot use for your own enjoyment
or benefit is payable time.
Disputes usually boil down to the
slipperiness in the definition of con-
trol and use of time. If the occasional
beep beckons you only to call in to
give advice, but you are otherwise free
to spend your time any way you want,
your employer need only pay for the
time you spend answering the beeper.
However, if your employer insists that
you be available to return to work on
demand and puts constraints on your
behavior between beeper callsyou
cannot consume alcohol, or you must
stay within a certain radius of work,
for exampleyou may be entitled to
compensation for your on-call time.
Similarly, if you receive five or six
beeper calls on every day off, and if
each of those beeps require you to
come into the office or be in a specific
place, then a court will likely see that
your time isnt your own and will
require that your employer compen-
sate you.
Andas alwaysbe sure to check
with your state labor department to
see if your state has different rules.
Independent Contractors
Are Exempt
The Fair Labor Standards Act covers only
employees, not independent contractors,
who are considered independent
business people. Whether a person is an
employee for purposes of the FLSA,
however, generally turns on whether that
worker is employed by a single
employer, and not on the sometimes
more lax Internal Revenue Service
definition of an independent contractor.
If nearly all of your income comes from
one company, a court would probably
rule that you are an employee of that
company for purposes of the FLSA, re-
gardless of whether other details of your
worklife would appear to make you an
independent contractor.
The FLSA was passed to clamp down
on employers who cheated workers of
their fair wages. As a result, employee
status is broadly interpreted so that as
many workers as possible come within
the protections of the law. In recent cases
determining close questions of employ-
ment status, growing numbers of courts
W O R K P L A C E R I G H T S
4.7
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have found workers to be employees
rather than independent contractors.
Courts are more likely to find that work-
ers are employees when:
the relationship appears to be
permanent
the worker lacks bargaining power
with regard to the terms of his or her
employment, and
the individual worker is economically
dependent upon the business to which
he or she gives service.
o
What laws ensure my right to
take vacations?
Heres a surprising legal truth that
most workers would rather not learn:
No law requires employers to pay you
for time off, such as vacation or holi-
days. This means that if you receive a
paid vacation, its because of custom,
not law.
And just as vacation benefits are
discretionary with each employer, so
is the policy of how and when they
accrue. For example, it is perfectly
legal for an employer to require a cer-
tain length of employmentsix
months or a year are commonbefore
an employee is entitled to any vaca-
tion time. It is also legal for employ-
ers to prorate vacations for part-time
employees, or to deny them the ben-
efit completely. Employers are also
free to set limits on how much paid
time off employees may store up be-
fore it must be taken or is lost.
If your employer does have a policy
of offering employees paid time off,
however, it cannot discriminate in
offering itall employees must be
subject to the same rules.
If I lose or leave my job,
when will I receive my final
paycheck?
Unfortunately, there is no easy answer
to this question. Many state laws, but
not all, mandate that a worker who is
fired must be paid all accrued wages
and promised vacation pay immedi-
ately. Furthermore, state laws often
set short limitsgenerally 72
hoursas the time in which this pay-
ment must be made if an employee
quits. But youll need to check with
your states deparment of labor to
learn the details of the law that ap-
plies to you.
Am I entitled to take time off
from work if I get sick?
No law requires an employer to offer
paid time off for illness. As with paid
vacation time, however, an employer
who offers paid sick time to some
workers cannot discriminate by deny-
ing it to others.
Though you may not be entitled to
paid time off, the Family and Medical
Leave Act (FMLA), a federal law
passed in 1993, gives workers some
rights to unpaid leave for medical
reasons. Under the FMLA, you may be
eligible for up to 12 weeks of unpaid
sick leave during any 12-month pe-
riod. Your employer can count your
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accrued paid benefitsvacation, sick
leave and personal leave daystoward
the 12 weeks of leave allowed under
the law. But many employers give
employees the option of deciding
whether or not to include paid leave
time as part of their 12 weeks of sick
leave.
The FMLA applies to all private
and public employers with 50 or more
employeesan estimated one-half of
the workforce. To be covered under
the law, you must have:
been employed at the same work-
place for a year or more, and
worked at least 1,250 hours (about
24 hours a week) during the year
preceding the leave.
There are a number of loopholes in
the FMLA. Companies with fewer
than 50 employees working at offices
within a 75-mile radius are exempt
from the FMLAthis means that
small regional companies of even the
largest corporations may not need to
comply with the Act. The law also
allows companies to exempt the high-
est paid 10% of employees. And
finally, schoolteachers and instructors
who work for educational agencies
and private elementary or secondary
schools may have restrictions on their
FMLA leave.
Note, however, that a number of
states have passed their own versions
of family leave lawsand most of
them give workers more liberal leave
rights. A number of laws apply, for
example, to smaller workplaces and
extend to workers who have been on
the job only a short time. Check with
your states department of labor for
more information.
What if a member of my family
gets sickcan I take time off to
care for him or her?
Possibly. Workers rights under the
Family and Medical Leave Act
(FMLA)or under your states ver-
sion of italso apply if a member of
your close family gets sick, or if you
give birth to or adopt a child. The
rights for new parents apply to both
mothers and fathers in all situations
birth or adoption.
My employer refused to grant
me the time off for sick leave
guaranteed by the FMLA. What
can I do?
The FMLA is enforced by the U.S.
Department of Labor. If you have
specific questions about this law, in-
cluding how to file a claim against
your employer for failing to comply,
contact your local Department of La-
bor office. You should be able to find a
listing under U.S. Government, Depart-
ment of Labor, in the phone book. You
can also find a list of local offices of the
U.S. Department of Labor by visiting
the agencys website at http://
www.dol.gov.
You generally must file a claim
under the FMLA within two years of
an employers violation. If the viola-
tion was willful (intentional), youll
have up to three years to file.
W O R K P L A C E R I G H T S
4.9
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Workplace
Health and
Safety
Over the past 20 years, workers have
pushed strongly for laws to protect
their health and safety on the job.
And they have been somewhat suc-
cessful. Several laws now establish
basic safety standards aimed at reduc-
ing the number of illnesses, injuries
and deaths in workplaces. Because
most workplace safety laws rely for
their effectiveness on employees who
are willing to report job hazards, most
laws also prevent employers from fir-
ing or discriminating against employ-
ees who report unsafe conditions to
proper authorities.
Do I have any legal rights if I
feel that my workplace is unsafe
or unhealthy?
The main federal law covering threats
to workplace safety is the Occupational
Safety and Health Act of 1970 (OSHA).
OSHA requires employers to provide
a workplace that is free of dangers
that could physically harm employees.
The law quite simply requires that
your employer protect you from rec-
ognized hazards in the workplace. It
does not specify or limit the types of
dangers covered. Instead, it includes
everything from equipment that
might cause a serious cut or bruise to
the unhealthy effects of long-term
exposure to radiation, chemicals or
airborne pollutants.
ef
More Information About
Wages, Hours and Time Off
You can check into your employers
wage and payment policies by calling
the local U.S. Labor Department, Wage
and Hour Division office, listed in the
federal government section of your
telephone directory.
Most of the exemptions to FLSA cover-
age are listed in federal statute, 29
U.S.C. §213. The most direct way to
become familiar with these exemptions is
to read about them in an annotated edi-
tion of the U.S. Code, which is what your
local law library (or even a large public
library) is most likely to have. You can
also find this law through Nolos Legal
Research Center at http://
www.nolo.com/research/index.html.
Also, the United States Department of
Labor, 200 Constitution Avenue, NW,
Washington, DC 20210, 202-219-
7316, offers pamphlets describing
federal wage and hours laws and the
Family Medical Leave Act. Or, visit the
agencys website at http://www.dol.gov.
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Most states now have their own
OSHA laws, most of which offer pro-
tections similar to the federal law. A
few states, including California, re-
quire all employers to fashion work-
place safety plans. And Texas, big in
its approach to most everything, has
instituted a 24-hour hotline to receive
complaints; the state prohibits em-
ployers from discriminating against
those who call in.
How do I assert my rights to a
safe workplace?
If you feel that your workplace is un-
safe, your first action should be to
make your supervisor aware of the
danger. If your employer doesnt take
prompt action, follow up in writing.
Then, if you are still unsuccessful in
getting your company to correct the
safety hazard, you can file a complaint
at the nearest OSHA office. Look
under the U.S. Labor Department in
the federal government section of your
local telephone directory. You can
also file a complaint online at http://
www.osha.gov/as/opa/worker/
index.html.
If you feel that a workplace hazard
poses an imminent danger (which is a
danger that could immediately cause
death or serious physical harm), you
should act immediately and call the
agencys hotline at 800-321-OSHA.
Preventing Additional
Injuries
Workplace hazards often become obvi-
ous only after they cause an injury. For
example, an unguarded machine part
that spins at high speed may not seem
dangerous until someones clothing or
hair becomes caught in it. But even after
a worker has been injured, employers
sometimes failor even refuseto recog-
nize that something that hurt one person
is likely to hurt another.
If you have been injured at work by a
hazard that should be eliminated before
it injures someone else, take the follow-
ing steps as quickly as possible after
obtaining the proper medical treatment:
Immediately file a claim for workers
compensation benefits so that your
medical bills will be paid and you will
be compensated for your lost wages
and injury. In some states, the amount
you receive from a workers comp
claim will be larger if a violation of a
state workplace safety law contributed
to your injury. (For more information
about workers compensation, see the
next series of questions in this chapter.)
Point out to your employer that a con-
tinuing hazard or dangerous condition
exists. As with most workplace safety
complaints, the odds of getting action
will be greater if other employees join
in your complaint.
If your employer does not eliminate the
hazard promptly, file a complaint with
OSHA and any state or local agency
that you think may be able to help.
W O R K P L A C E R I G H T S
4.11
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You can obtain a list of state health
and safety agencies on the OSHA
website at http://www.osha.gov. For
example, if your complaint is about
hazardous waste disposal, you may be
able to track down a specific local
group that has been successful in inves-
tigating similar complaints in the past.
Does OSHA protect against the
harmful effects of tobacco
smoke in the workplace?
OSHA rules apply to tobacco smoke
only in rare and extreme circumstances,
such as when contaminants created by
a manufacturing process combine with
tobacco smoke to create a dangerous
workplace air supply that fails OSHA
standards. Workplace air quality stan-
dards and measurement techniques are
so technical that typically only OSHA
agents or consultants who specialize in
environmental testing are able to de-
termine when the air quality falls be-
low allowable limits.
If OSHA wont protect me from
secondhand tobacco smoke at
work, is there anything I can do
to limit or avoid exposure?
If your health problems are severely
aggravated by co-workers smoking,
there are a number of steps you can
take.
Check local and state laws. A grow-
ing number of local and state laws
prohibit smoking in the workplace.
Most of them also set out specific pro-
cedures for pursuing complaints. Your
states labor department should have
up-to-date information about these. If
you cant find local laws that prohibit
smoking in workplaces, check with a
national nonsmokers rights group,
such as Americans for Nonsmokers
Rights, 2530 San Pablo Avenue, Suite
J, Berkeley, CA 94702, 510-841-3032,
http://www.no-smoke.org.
Ask your employer for an accommoda-
tion. Successful accommodations to
smoke-sensitive workers have in-
cluded installing additional ventila-
tion systems, restricting smoking ar-
eas to outside or special rooms and
segregating smokers and nonsmokers.
Consider income replacement programs.
If you are unable to work out a plan to
resolve a serious problem with work-
place smoke, you may be forced to
leave the workplace. But you may
qualify for workers compensation or
unemployment insurance benefits. See
Losing or Leaving Your Job, below.
ef
More Information About
Workplace Health and Safety
The Occupational Safety and Health
Administration, 200 Constitution Avenue,
NW, Washington, DC 20210,
202-693-1999, publishes pamphlets
about workplace safety laws. You can
also visit OSHA online at http://
www.osha.gov.
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Workers
Compensation
If you are injured on the jobor suf-
fer a work-related illness or disease
that prevents you from workingyou
may be eligible to receive benefits
from your state workers compensa-
tion program. You also may be en-
titled to free medical care. If your
disability is classified as permanent or
results in death, additional benefits
may be available to you and your fam-
ily. If you receive workers compensa-
tion benefits, you lose your right to
sue your employer for the injury.
Who pays workers
compensation benefits?
In most states, employers are required
to purchase insurance for their employ-
ees from a workers compensation in-
surance companyalso called an insur-
ance carrier. In some states, larger em-
ployers who are clearly solvent are al-
lowed to self-insure or act as their own
insurance companies, while smaller
companies (with fewer than three or
four employees) are not required to
carry workers compensation insurance
at all. When a worker is injured, her
claim is filed with the insurance com-
panyor self-insuring employerwho
pays medical and disability benefits
according to a state-approved formula.
Are all on-the-job injuries
covered by workers
compensation?
Most are. The workers compensation
system is designed to provide benefits
to injured workers no matter whether
an injury is caused by the employers
or employees negligence. But there
are some limits. Generally, injuries
caused because an employee is intoxi-
cated or using illegal drugs are not
covered by workers compensation.
Coverage may also be denied in situa-
tions involving:
self-inflicted injuries (including
those caused by a person who starts
a fight)
injuries suffered while a worker was
committing a serious crime
injuries suffered while an employee
was not on the job, and
injuries suffered when an employees
conduct violated company policy.
If your employers conduct is espe-
cially egregious (for example, your
employer did something intentional
or reckless that injured you), you
may be allowed to bypass the work-
ers compensation system and sue
your employer in courtfor much
larger amounts of money than you
could cover through workers com-
pensation.
Does an injury have to have a
definite date of onset in order to
be covered?
Not necessarily.Your injury does not
need to be caused by an accident
such as a fall from a ladder. Many
workers, for example, receive compen-
sation for repetitive stress injuries,
including carpal tunnel syndrome and
back problems, that are caused by
W O R K P L A C E R I G H T S
4.13
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overuse or misuse over a long period
of time. You may also be compensated
for some illnesses and diseases that are
the gradual result of work condi-
tionsfor example, heart conditions,
lung disease and stress-related diges-
tive problems.
Are You Covered by
Workers Compensation?
Most workers are eligible for workers
compensation coverage, but every state
excludes some workers. Exclusions often
include:
business owners
independent contractors
casual workers
domestic employees in private homes
farm workers
maritime workers
railroad employees, and
unpaid volunteers.
Check the workers compensation law
of your state to see whether these exclu-
sions affect you.
Federal government employees are
also excluded from state workers com-
pensation coverage, but they receive
workers compensation benefits under a
separate federal law.
Employees who arent covered by
workers compensation usually must sue
the employer for damages or, in some
cases, they can sue the maker of a faulty
piece of equipment.
Do I have to be injured at my
workplace to be covered by
workers compensation?
No. As long as your injury is job-
related, its covered. For example,
youll be covered if you are injured
while traveling on business, doing a
work-related errand or even attending
a required, business-related social
function.
How do I claim workers
compensation benefits?
First, promptly report the work-
related injury or sickness to your
employer. Most states require that this
be done within two to 30 days
following an injury. If an injury occurs
over time (for example, a breathing
problem or carpal tunnel syndrome),
you must report your condition soon
after you discover it and realize that it
is caused by your work.
Next, get the medical treatment
you need and follow the doctors
instructions exactly. (This may
include an off-work order or a lim-
ited-duties work order.) Finally, file a
claim with your workers compensa-
tion carrier. Necessary forms must be
provided by your employer. Ask
someone in the personnel or benefits
department.
Finally, make sure you save copies of
all correspondence with your employer,
its insurance carrier and your doctor
concerning your workers compensation
claim.
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What kind of benefits will I
receive?
The workers compensation system
provides replacement income, medical
expenses and sometimes vocational
rehabilitation benefitsthat is, on
the job training, schooling or job
placement assistance. The benefits
paid through workers compensation,
however, are almost always limited to
relatively modest amounts.
If you become temporarily unable
to work, youll usually receive two-
thirds of your average wage up to a
fixed ceiling. But because these pay-
ments are tax-free, if you received
decent wages prior to your injury,
youll fare reasonably well in most
states. You will be eligible for these
wage-loss replacement benefits as soon
as youve lost a few days of work be-
cause of an injury or illness that is
covered by workers compensation.
If you become permanently unable
to do the work you were doing prior
to the injury, or unable to do any work
at all, you may be eligible to receive
long-term or lump-sum benefits. The
amount of the payment you may be
entitled to receive varies greatly with
the nature and extent of your injuries.
If you anticipate a permanent work
disability, contact your local workers
compensation office as soon as pos-
sible; these benefits are rather complex
and may take a while to process.
Social Security Benefits
for the Permanently
Disabled
If youre permanently unable to return to
work, you may qualify for Social Security
Disability benefits. Social Security will,
over the long run, provide more benefits
than workers compensationbut be
forewarned that these benefits are hard to
get. They are reserved for seriously injured
workers. To qualify, your injury or illness:
must prevent you from doing any
substantial gainful work, and
must be expected to last at least twelve
months, or to result in death.
If you think you may meet the above
requirements, contact your local Social
Security office. For more information about
Social Security benefits, see Chapter 14.
Can I be treated by my own
doctor and, if not, can I trust a
doctor provided by my
employer?
In some states, you have a right to see
your own doctor if you make this re-
quest in writing before the injury
occurs. More typically, however,
injured workers are referred to a doc-
tor or health plan recruited and paid
for by their employer.
W O R K P L A C E R I G H T S
4.15
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Your doctors report will have a big
impact upon the benefits you receive.
While its crucial that you tell the
doctor the truth about both your in-
jury and your medical history (your
benefits may be denied based on fraud
if you dont), be sure to clearly iden-
tify all possible job-related medical
problems and sources of pain. In
short, this is no time to downplay or
gloss over the presence of a pain.
Keep in mind that a doctor paid for
by your employers insurance com-
pany is not your friend. The desire to
get future business may motivate a
doctor to minimize the seriousness of
your injury or to identify it as a pre-
existing condition.
If I am initially treated by an
insurance company doctor, do I
have a right to see my own
doctor at some point?
State workers compensation systems
establish technical and often tricky
rules in this area. Often, you have the
right to ask for another doctor at the
insurance companys expense if you
clearly state you dont like the one the
insurance company provides, although
there is sometimes a waiting period
before you can get a second doctor.
Also, if your injury is serious, you
usually have the right to a second
opinion. And in some states, after you
are treated by an insurance companys
doctor for a certain period (90 days is
typical), you may have the automatic
right to transfer your treatment to
your own doctor or health planwith
the cost being paid for by the workers
comp insurance company.
To understand your rights, contact
your state workers compensation
office (also called industrial relations
office). You can also get copy of your
states rulesor, if necessary, research
your state workers compensation laws
and regulations in the law library.
The Appendix contains information
about how to do your own legal re-
search.
Suppose I suffer an injury to a
part of my body that had been
injured previouslywill I still be
covered?
If the previous injury was also work-
related, workers compensation should
provide full coverage. If it wasnt, you
may receive lower-level benefits.
If your earlier injury occurred at a
former job, its generally up to your
current employers insurance company
and your former employer to sort out
whos responsible for paying your
benefitssometimes they will split
the costs between them.
How do I find a good workers
compensation lawyerand how
much will it cost?
You usually dont need a lawyer unless
you suffer a permanent disability, or all
or part of your workers compensation
claim is denied. If one of these situa-
tions occurs, youll probably want to
do some research to familiarize yourself
with your rights and duties. For ex-
ample, many claims are denied based
on a doctors report claiming that you
are not injured. If you dispute this, you
may have a right to obtain a second
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doctors opinion paid for by the work-
ers compensation insurer.
If your claim is denied, consider
hiring an experienced workers com-
pensation lawyer to help you navigate
the appeals process. The best way to
find a good lawyer is often through
word of mouthtalk to other injured
workers or check with a local union or
other workers organization.
In most states, fees for legal repre-
sentation in workers compensation
cases are limited to between 10% and
15% of any eventual award. Because
these fees are relatively modest, work-
ers compensation lawyers customarily
take on many clients and, as a result,
do not have time to provide much
individual attention. Most of your
contacts with your attorneys office
will be with paralegals and other sup-
port personnel. This is not a bad thing
in itself, if the office is well run by
support staff. Be sure that the office is
able to stay on top of paperwork and
filing deadlines, and that a knowl-
edgeable person is available to answer
your questions clearly and promptly.
What to Do When the
Insurance Company Wont Pay
Some workers compensation carriers
take an aggressive stance and deny
legitimate claims for workers compensa-
tion. When this happens, its often
because the insurer claims you havent
been injured or, if you have, that its not
serious enough to qualify you for
temporary or total disability. Commonly,
this is done after a private investigator
hired by the insurance company follows
you and obtains photographs showing
you engaging in fairly strenuous physical
activity, such as lifting a box or mowing
the lawn, despite claiming a back injury.
If your legitimate benefits are denied,
you should immediately file an appeal
with your state appeals agencycalled
the industrial accidents board, the
workers compensation appeals board or
something similar. You may also want to
hire an attorney to help you press your
claim.
If I receive workers
compensation, can I also sue my
employer in court?
Generally, no. The workers compen-
sation system was established as part
of a legal trade-off. In exchange for
giving up the right to sue an
employer in court, you get workers
compensation benefits no matter who
was at fault. Before the workers com-
pensation system was passed, if you
went to court, you stood to recover a
large amount of money, but only if
you could prove the injury was caused
by your employer.
Today, you may be able to sue in
court if your injury was caused by
someone other than your employer
(a visitor or outside contractor, for
example) or if it was caused by a
defective product (such as a flaw in
the construction of the equipment you
were working with).
You might even be able to sue your
employer in court if your injury was
caused by intentional, reckless or ille-
gal conduct on your employers part.
W O R K P L A C E R I G H T S
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What if my employer tells me
not to file a workers
compensation claim or threatens
to fire me if I do?
In most states, it is a violation of the
workers compensation laws to retali-
ate against an employee for filing a
workers compensation claim. If this
happens, immediately report it to your
local workers compensation office.
ef
More Information About
Workers’ Compensation
How to Handle Your Workers Compen-
sation Claim
, by Christopher Ball (Nolo),
includes all forms and instructions for
filing a workers compensation claim in
California. The book is also useful for
people who live elsewhere, given the
absence of self-help resources for other
states; it provides a good overview of
how the system works.
Age
Discrimination
Young men think old men are
fools, but old men know young
men are fools.
GEORGE CHAPMAN
Unfortunately, rather than value older
workers intelligence, experience and
work ethic, some employers assume
that older workers are out of touch
or set in their ways. And, because
older workers often earn higher sala-
ries and have higher healthcare premi-
ums than younger workers, some em-
ployers think they are too expen-
sive. For these reasons, some employ-
ers try to get rid of their more sea-
soned workers and are reluctant to
hire older workers.
Fortunately, federal and state laws
afford some protection to older work-
ers who face discrimination in the
workplaceand also help protect
their pension rights when they leave.
My employer has just cut the
workforce in half, singling out
older workers. Is there any legal
protection for us?
Possibly. The federal Age Discrimina-
tion in Employment Act (ADEA)
provides that workers over the age of
40 cannot be arbitrarily discriminated
against because of age in any employ-
ment decision. Perhaps the single
most important rule under the ADEA
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is that no worker can be forced to
retire.
Under the ADEA, there has to be a
valid reasonnot related to agefor
all employment decisions, especially
lay-offs. Examples of valid reasons
would be poor job performance by the
employee or an employers economic
trouble. If lay-offs have been an-
nounced or are in the wind, talk with
other affected workers. If most people
who are laid off are 40 or older, and
the majority of workers kept on are
younger, you may have the basis for
an ADEA complaint or lawsuit. This
is especially likely if the employer has
hired younger workers to take the
places of workers over 40.
Many states also have laws that
prohibit age discrimination. To find
out if your state has such a law, con-
tact your state labor department or
fair employment office.
Does the ADEA protect all
workers from age
discrimination?
Unfortunately not; there are limits on
both the employees and the employers
who are covered. The ADEA applies
only to employees age 40 and older
and only to workplaces with 20 or
more employees. The ADEA applies
to federal employees, private sector
employees and labor union employees.
It does not, however, cover state em-
ployees.
There are several other exceptions
to the broad protection of the ADEA:
Executives or people in high
policy-making positions can be
forced to retire at age 65 if they
would receive annual retirement
pension benefits worth $44,000 or
more.
There are special exceptions for
police and fire personnel, tenured
university faculty and certain federal
employees having to do with law
enforcement and air traffic control.
If you are in one of these categories,
check with your personnel office or
benefits plan office for details.
An additional exception to the
federal age discrimination law is
made when age is an essential part
of a particular jobreferred to by
the legal jargon of a bona fide
occupational qualification (BFOQ).
For example, if an employer who
sets age limits on a particular job
can prove that the limit is necessary
because a workers ability to ad-
equately perform the particular job
does, in fact, diminish after the age
limit is reached, its okay to dis-
criminate. However, it has become
more difficult for employers to
prove a BFOQ because the law
protects workers as young as age 40.
If Im not protected by the
ADEA, is an employer free to
discriminate against me
because of my age?
That depends on where you live. All
states except Alabama and South Da-
kota have laws against age discrimina-
tion in employment, and those state
laws often provide greater protection
than the federal law. For example,
several states provide age discrimina-
tion protection to workers before they
reach age 40, and other states protect
W O R K P L A C E R I G H T S
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Can my employer force me to
take early retirement?
No employer can require you to retire
because of your age. An early retire-
ment plan is legal only if it gives you
a choice between two options: keep-
ing things as they are or choosing to
retire under a plan that leaves you
better off than you previously were.
This choice must be a genuine one;
you must be free to reject the offer. In
addition, if either choice leaves you
worse off, the offer violates the Older
Workers Benefit Protection Act.
How can I enforce my rights
under the laws that protect
against age discrimination?
If you believe that an employer has
discriminated against you because of
your age, you can file a complaint
with the federal Equal Employment
Opportunity Commission (EEOC)
just as you would against any other
workplace discrimination. Call 800-
669-4000 to find the EEOC office
nearest you. You can also find a list of
EEOC regional offices on the agencys
website at http://www.eeoc.gov. If the
EEOC does not resolve your com-
plaint to your satisfaction, you can
consult an attorney for advice about
filing a lawsuit.
In addition, you can file a com-
plaint under your state age discrimi-
nation law, if your state has one. Con-
tact your state labor department or
fair employment office for details.
Like all fair employment laws, age
discrimination laws require you to file
a complaint within a specified amount
against the actions of employers with
fewer than 20 employees. In addition,
state laws against age discrimination
do protect state employees, unlike the
federal ADEA.
To find out more about the laws of
your own state, contact your state
labor department.
Ive noticed a pattern where I
work: Older workers tend to be
laid off just before their pension
rights lock in or vest. Is that
legal?
Using various ploys like this one to
cheat workers out of their promised
pensions is a technique some employ-
ers use to save money. But its not
legal. The federal Older Workers
Benefit Protection Act forbids
using an employees age as the basis
for discrimination in benefits, and
targeting older workers for their
staff cutting programs.
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of time, usually 180 days. Therefore,
it is important for you to act as soon
as you realize that you might be the
victim of age discrimination. If you
wait too long, you might lose your
rights.
Out From Under the
Golden Parachute
A growing number of employers ask
older workers to sign waiversalso
called releases or agreements not to sue.
In return for signing the waivers, the
employer offers the employee an incen-
tive to leave the job voluntarily, such as a
significant amount of severance pay. The
Older Workers Benefit Protection Act
places a number of restrictions on such
waivers:
Your employer must make the waiver
understandable to the people who are
likely to use it.
The waiver may not cover any rights or
claims that you discover are available
after you sign it, and it must specify
that it covers your rights under the
ADEA.
Your employer must offer you some-
thing of value (such as severance
pay)over and above what is already
owed to youin exchange for your
signature on the waiver.
Your employer must advise you, in
writing, that you have the right to con-
sult an attorney before you sign the
waiver.
If the offer is being made to a group or
class of employees, your employer
must inform you in writing how the class
of employees is defined; the job titles
and ages of all the individuals to
whom the offer is being made; and the
ages of all the employees in the same
job classification or unit of the company
to whom the offer is not being made.
You must be given a fixed time in
which to make a decision on whether
or not to sign the waiver.
More Information About
Age Discrimination
Several organizations offer help and
information on age discrimination in
employment. Among the most helpful are:
American Association of Retired Persons
601 E Street, NW
Washington, DC 20049
800-424-3410
http://www.aarp.org
AARP is a nonprofit membership orga-
nization of older Americans open to
anyone age 50 or older. It offers a wide
range of publications on retirement plan-
ning, age discrimination and employ-
ment-related topics. Networking and
direct services are available through
local chapters.
Older Womens League
666 Eleventh Street, NW, Suite 700
Washington, DC 20001
202-783-6686
The Older Womens League provides
advice on discrimination and other issues
facing elderly men and women.
W O R K P L A C E R I G H T S
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Sexual
Harassment
Sexual harassment on the job took a
dramatic leap into public awareness in
October 1991, when Professor Anita
Hill made known her charges against
Judge Clarence Thomas after his
nomination to the U.S. Supreme
Court. Many other incidents have
erupted since then, including
investigations into the Navy after the
Tailhook incident and into govern-
ment officials after Senator Bob
Packwood was accused of harassing
several female staffers. Paula Jones
dominated headlines for months with
her claim that President Clinton ha-
rassed her while a conventioneering
governor. And more recently,
Mitsubishi Motors agreed to pay a
record $34 million settlement to hun-
dreds of women harassed at its auto
assembly plant.
Enforcement of the laws prohibit-
ing sexual harassment has been
stepped up in the last few years. But
in workplaces across America, the
issue is far from settled. Sexual harass-
ment is still a daily problem for many
workers, especially women.
What is sexual harassment?
In legal terms, sexual harassment is
any unwelcome sexual advance or
conduct on the job that creates an
intimidating, hostile or offensive
working environment. In real life,
sexually harassing behavior ranges
from repeated offensive or belittling
jokes to a workplace full of offensive
pornography to an outright sexual
assault.
Are there laws that protect
against sexual harassment on
the job?
Yes. But surprisingly, those laws are
fairly new. In 1980, the Equal Em-
ployment Opportunity Commission
(EEOC) issued regulations defining
sexual harassment and stating it was a
form of sex discrimination prohibited
by the Civil Rights Act, which had
been originally passed in 1964. In
1986, the U.S. Supreme Court first
ruled that sexual harassment was a
form of job discriminationand held
it to be illegal.
Today, there is greater understand-
ing that the Civil Rights Act prohib-
its sexual harassment at work. In ad-
dition, most states have their own fair
employment practices laws that pro-
hibit sexual harassmentmany of
them more strict than the federal law.
To find out more about the federal
prohibition against sexual harassment,
contact the EEOC office nearest you.
For a list of EEOC regional offices,
call the main EEOC office at 800-
669-4000 or refer to the agencys
website at http://www.eeoc.gov.
To learn more about state laws
prohibiting sexual harassment, con-
tact your state labor department or
state fair employment office. In addi-
tion, your local EEOC office should be
able to give you information about
the laws in your state.
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Can a man be sexually
harassed?
Yes, a man can be sexually harassed.
The laws prohibiting sexual harass-
ment on the job protect all workers,
male and female, from being harassed
on the basis of their gender.
But in the overwhelming majority
of cases of sexual harassment, its a
male co-worker or supervisor who is
harassing a female worker. No one is
sure why this is so. Socialization prob-
ably plays a part: Men are more likely
than women to find sexual advances
flattering, women more likely to be
perceived as the gatekeepers of sexual
conduct. Economics probably enter,
too. There are simply more women in
the workforce than ever beforeand
at least some male workers feel the
influx as a threat to their own liveli-
hoods. Finally, sexual harassment is
usually a power ploy, a way to keep
some workers in lower-paid, less re-
spected positionsor force them out
of the workplace altogether.
Are gays and lesbians protected
by the laws against sexual
harassment?
Whether federal civil rights laws pro-
tect gays and lesbians is a hot ques-
tion these days. The U.S. Supreme
Court has not addressed the issue, so
there is no definitive word on whether
gays and lesbians can find shelter un-
der the federal prohibition against
sexual harassment in the workplace. A
number of lower federal courts have
considered the issue, however, and
they have proven to be quite hostile to
the protection of gays and lesbians.
If you are gay or lesbian, you might
find protection under a state law or a
local ordinance. In addition, you
might live in an area where the federal
courts are more receptive to granting
protection. To find out about what
laws might protect you in your geo-
graphical area, contact the Lambda
Legal Defense and Education Fund at
202-809-8585 or http://
www.lambdalegal.org.
Im being sexually harassed at
work. What is the first thing I
should do?
Tell the harasser to stop. Surprisingly
oftensome experts say up to 90% of
the timethis works.
When confronted directly, harass-
ment is especially likely to end if it is
at a fairly low level: off-color jokes,
inappropriate comments about your
appearance, tacky cartoons tacked onto
the office refrigerator or repeated re-
quests for dates after you have said no.
But clearly saying you want the
offensive behavior to stop does more
than let the harasser know that the
behavior is unwelcome. It is also a
crucial first step if you later decide to
take more formal action against the
harasser, whether through your
companys complaint procedure or
through the legal system. And be sure
to document whats going on by keep-
ing a diary or journal; your case will
be stronger if you can later prove that
the harassment continued after you
confronted the harasser.
W O R K P L A C E R I G H T S
4.23
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What if the harassment doesnt
stop even after Ive confronted
the harasser?
If confronting the harasser doesnt
work, complain, complain, complain.
Talk to your supervisor. Talk to the
harassers supervisor. If that doesnt
work, talk to their supervisors, and so
on. If your company has a complaint
procedure in place, follow it. If your
company has a human resources de-
partment, talk to someone there. And
every step of the way, document your
complaints. Save copies of all letters
and e-mails. Take notes of all conver-
sations. You have a right to a work
environment free of sexual harass-
ment, and you must be assertive about
making that right work for you.
Of course, there will be times when
you are afraid to complain about ha-
rassment, perhaps because the harasser
is your supervisor or because the ha-
rasser has made threats against you.
The laws against sexual harassment
prohibit your employer from retaliat-
ing against you for complaining about
sexual harassment. Although this fact
might be cold comfort if you fear for
your job or your safety, the fact is that
the law can protect you only if you let
someone with power at your work-
place know about your problem. Be
creative. If your supervisor is the one
harassing you, go to his supervisor or
go to a supervisor in another depart-
ment.
Collect as much detailed evidence
as possible about the harassment. Be
sure to save any offensive letters, pho-
tographs, cards or notes you receive.
And if you were made to feel uncom-
fortable because of jokes, pin-ups or
cartoons posted at work, confiscate
themor at least make copies. An
anonymous, obnoxious photo or joke
posted on a bulletin board is not any-
one elses personal property, so you are
free to take it down and keep it as
evidence. If thats not possible, photo-
graph the workplace walls. Note the
dates the offensive material was
postedand whether there were hos-
tile reactions when you took it down
or asked another person to do so.
Also, keep a detailed journal. Write
down the specifics of everything that
feels like harassment. Include the
names of everyone involved, what hap-
pened, and where and when it took
place. If anyone else saw or heard the
harassment, note that as well. Be as
specific as possible about what was said
and doneand how it affected you,
your health or your job performance.
If your employer has conducted
periodic evaluations of your work,
make sure you have copies. In fact,
you may want to ask for a copy of
your entire personnel filebefore you
tip your hand that you are considering
taking action against a harassing co-
worker. Your records will be particu-
larly persuasive evidence if your evalu-
ations have been good but after you
complain, your employer retaliates by
trying to transfer or fire you, claiming
poor job performance.
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If Youre Afraid of
Offending
The super-cautious advicedont talk
with co-workers about anything but
businessis surely overkill. The better
approach is to use common sense. There
is plenty of room to be friendly and
personable without behaving in a way
that is likely to offend workers of either
gender.
Some rough guides for evaluating your
own workplace behavior:
If you wouldnt say or do something in
front of your spouse or parents, its
probably a poor idea to say or do it at
work.
Would you say or do it in front of a
colleague of the same gender?
How would you feel if your mother,
wife, sister or daughter were subjected
to the same words or behavior?
How would you feel if a co-worker
said or did the same things to you?
Does it need to be said or done at all?
If you are truly concerned that your
words or conduct may be offensive to a
co-worker, there is one surefire way to
find out: ask.
If the harassment still doesnt
stop, what are my options short
of filing a lawsuit or a complaint
with a government agency?
If the harasser has ignored your oral
requests to stop, or you are uncom-
fortable making the request, write a
succint letter demanding an end to
the behavior. If that doesnt end the
harassment, you may want to take
more forceful action. Consider giving
a copy of your letter to the harassers
supervisoralong with a memo ex-
plaining that the behavior has become
more outrageous.
If the harassment still does not
abateor if you believe the supervisor
is sympathetic to the harassment or
the harassersend the letter to the
next-ranked worker or official at your
workplace. Include a cover letter in
which you offer your own remedy for
the situationsomething realistic
that might help end the discomfort,
such as transferring the harasser to a
more distant worksite. If its your own
supervisor who has been harassing
you, consider asking to be assigned a
different supervisor.
These days, most workplaces have
specific written policies prohibiting
sexual harassment. If you have fol-
lowed the steps that seem reasonable
to you but the harassment continues,
your next option is to pursue any pro-
cedure your company has established
for handling harassment.
What legal steps can I take to
end the harassment?
If all investigation and settlement at-
tempts fail to produce satisfactory re-
sults, one option is to file a civil law-
suit for damages either under the fed-
eral Civil Rights Act or under a state
fair employment practices statute.
Even if you intend right from the
beginning to file such a lawsuit, you
sometimes must first file a claim with
a government agency. For example, an
employee pursuing a claim under the
Civil Rights Act must first file a
claim with the federal EEOC, and a
W O R K P L A C E R I G H T S
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similar complaint procedure is re-
quired under some state laws. The
EEOC or state agency may decide to
prosecute your case on its own, but
that happens only occasionally.
More commonly, at some point, the
agency will issue you a document
referred to as a right-to-sue letter
that allows you to take your case to
court. When filing an action for
sexual harassment, you will almost
always need to hire a lawyer for help.
ef
More Information
About Sexual Harassment
Sexual Harassment on the Job
, by
William Petrocelli and Barbara Kate
Repa (Nolo), explains what sexual
harassment is and how to stop it.
9to5, National Association
of Working Women
614 Superior Avenue, NW
Cleveland, OH 44113
216-566-9308 (general information)
800-522-0925 (hotline)
http://www.9to5.org
9to5 is a national nonprofit member-
ship organization for working women. It
provides counseling, information and
referrals for problems on the job, includ-
ing family leave, pregnancy disability,
termination, compensation and sexual
harassment. 9to5 also offers a newsletter
and publications. There are local chap-
ters throughout the country.
Disability
Discrimination
Many individuals fortunate enough to
be healthy in mind and bodyand to
be employedlament the difficulties
a workplace can impose. But for those
with physical or mental disabilities,
many workplaces can be truly daunt-
ing. Fortunately, the federal Ameri-
cans with Disabilities Act (ADA), has
helped to level the playing field a bit.
What laws protect disabled
workers from workplace
discrimination?
The Americans with Disabilities Act
(ADA) prohibits employment dis-
crimination on the basis of workers
disabilities. Generally, the ADA pro-
hibits employers from:
discriminating on the basis of
virtually any physical or mental
disability
asking job applicants questions
about their past or current medical
conditions
requiring job applicants to take
medical exams, and
creating or maintaining worksites
that include substantial physical
barriers to the movement of people
with physical disabilities.
The ADA covers companies with
15 or more employees. Its coverage
broadly extends to private employers,
employment agencies and labor orga-
nizations. A precursor of the ADA,
the Vocational Rehabilitation Act,
prohibits discrimination against dis-
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abled workers in state and federal
government.
In addition, many state laws pro-
tect against discrimination based on
physical or mental disability.
Exactly whom does the
ADA protect?
The ADAs protections extend to dis-
abled workersdefined as people who:
have a physical or mental impair-
ment that substantially limits a
major life activity
have a record of impairment, or
are regarded as having an impair-
ment.
An impairment includes physical
disorders, such as cosmetic disfigure-
ment or loss of a limb, as well as men-
tal and psychological disorders.
The ADA protects job applicants
and employees who, although dis-
abled as defined above, are still quali-
fied for a particular job. In other
words, they would be able to perform
the essential functions of a job with
some form of accommodation, such as
wheelchair access, a voice-activated
computer or a customized workspace.
As with other workers, whether a
disabled worker is deemed qualified
for a given job depends on whether he
or she has appropriate skill, experi-
ence, training or education for the
position.
If I am disabled, how do I get
my employer to accommodate
my disability?
The first step is simple, but often
skipped: Ask. The ADA places the
burden on you, the employee, to in-
form the employer that you have a
disability and that you need an accom-
modation for it. Indeed, the ADA
forbids employers from asking em-
ployees whether they have a disability.
When you ask for an accommoda-
tion, you do not need to use formal
legal language or even do it in writing
(though its always a good idea to
document your request). Just tell your
employer what your disability is and
why you need an accommodation. If
you arent comfortable going to your
employer and making this request
yourself, you can ask a friend, family
member, or representative to do it for
you.
Once you request the accommoda-
tion, your employer should engage in
an informal process of determining
whether it can accommodate you and,
if so, how. Remember that your em-
ployer may be concerned about cost or
worried that other employees may
incorrectly view you as getting spe-
cial treatment. The more helpful and
understanding you can be during this
process, the more likely it is that your
employer will find a way to accommo-
date you.
As part of this process, your em-
ployer is allowed to ask you for docu-
mentation, or proof, of your disabil-
ity. It is important that you comply
with this request to the best of your
ability; if you dont, then you will lose
your right to an accommodation.
If an accommodation is not rea-
sonable (see below for more explana-
tion), your employer does not have to
provide it. Nor does your employer
have to provide you with the accom-
W O R K P L A C E R I G H T S
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modation that you want, as long as it
provides another one that is effective.
You dont have to accept a particu-
lar accommodation, but be prepared to
defend your choice on the grounds
that the accommodation isnt effective.
If a court decides that the offered ac-
commodation was reasonable, you may
no longer be qualified for the job, and
your employer can terminate you.
Accommodations Dont
Need to Cost a Bundle
According to ergonomic and job
accommodation experts, the cost of
accommodating a particular workers
disability is often surprisingly low.
31% of accommodations cost nothing.
50% cost less than $50.
69% cost less than $500.
88% cost less than $1,000.
The Job Accommodation Network
(JAN), which provides information about
how to accommodate people with dis-
abilities, gives the following examples of
inexpensive accommodations:
Glare on a computer screen caused an
employee with an eye disorder to get
eye fatigue. The problem was solved
with a $39 antiglare screen.
A deaf medical technician couldnt
hear the buzz of a timer, which was
necessary for laboratory tests. The
problem was solved with an indicator
light at a cost of $26.95.
To contact JAN, call 1-800-526-7234
or visit its website at http://janweb.icdi.
wvu.edu.
How can I tell if a particular
accommodation offered by my
employer is reasonable?
The ADA points to several specific
accommodations that are likely to be
deemed reasonablesome of them
changes to the physical set-up of the
workplace, some of them changes to
how or when work is done. They in-
clude:
making existing facilities usable by
disabled employeesfor example,
by modifying the height of desks
and equipment, installing computer
screen magnifiers or installing
telecommunications devices for the
deaf
restructuring jobsfor example,
allowing a ten-hour/four-day
workweek so that a worker can
receive weekly medical treatments
modifying exams and training
materialsfor example, allowing
more time for taking an exam, or
allowing it to be taken orally
instead of in writing
providing a reasonable amount of
additional unpaid leave for medical
treatment
hiring readers or interpreters to
assist an employee, and
providing temporary workplace
specialists to assist in training.
These are just a few possible ac-
commodations. The possibilities are
limited only by an employees and
employers imaginationsand the
reality that might make one or more
of these accommodations financially
impossible in a particular workplace.
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When can an employer legally
claim that a particular
accommodation is simply not
feasible?
The ADA does not require employers
to make accommodations that would
cause them an undue hardshipa
weighty concept defined in the ADA
only as an action requiring signifi-
cant difficulty or expense.
The Equal Employment Opportu-
nity Commission (EEOC), the federal
agency responsible for enforcing the
ADA, has set out some of the factors
that will determine whether a particu-
lar accommodation presents an undue
hardship on a particular employer:
the nature and cost of the accommo-
dation
the financial resources of the em-
ployer (a large employer may be
expected to foot a larger bill than a
mom-and-pop business)
the nature of the business (including
size, composition and structure of
the workforce), and
accommodation costs already
incurred in the workplace.
It is not easy for employers to prove
that an accommodation is an undue
hardship, as financial difficulty alone
is not usually sufficient. Courts will
look at other sources of money, in-
cluding tax credits and deductions
available for making some accommo-
dations, as well as the disabled
employees willingness to pay for all
or part of the costs.
Taking Action Under
the ADA
The ADA is enforced by the Equal
Employment Opportunity Commission
(EEOC). To start an investigation of your
claim, file a complaint at the local EEOC
office. Call 800-669-4000 to find the
office nearest you. Or refer to the agencys
website at http://www.eeoc.gov.
If you live in a state with laws that protect
workers against discrimination based on
physical or mental disability, you can
choose to file a complaint under your
states law, the ADA or both. To find out
about state laws, contact your state labor
department or fair employment office.
For additional information on the ADA,
contact:
Office of the Americans
with Disabilities Act
Civil Rights Division
U.S. Department of Justice
P.O. Box 66118
Washington, DC 20035-6118
Hotline:
800-514-0301 (voice)
800-514-0383 (TTY)
http://www.usdoj.gov/
crt/ada/adahom1.htm
W O R K P L A C E R I G H T S
4.29
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Losing
or Leaving
Your Job
Nothing is really work
unless you would rather be
doing something else.
SIR JAMES A. BARRIE
The possibility of being laid off or
fired looms large in the list of fears of
most workers. Employers have tradi-
tionally had a free hand to hire and
fire, but a number of recent laws and
legal rulings restrict these rights.
For what reasons can I be fired?
Unfortunately, the answer to this
question is: It depends. Generally,
the reasons for which you can be fired
depend in large part on whether you
have a contract for employment.
Determining whether you have an
employment contract can be tricky. A
contract can be oral or written, ex-
press or implied. Sometimes, a con-
tract is a document labeled Contract
for Employment that has a number
of provisions and that is signed by you
and your employer. Other times, it is
an oral promise that your employer
makes to you when you are hired that
you will only be fired if you perform
your job incompetently. Still other
times, it is something that is implied
from the peculiar circumstances of
your employment, such as the amount
of time you have worked for your em-
ployer, the way that your employer
has treated other employees and pro-
visions in your employee handbook.
If you do have a contract for em-
ployment, that generally (but not
always) means that you can be fired
only for good cause, a legal concept
that includes such things as incompe-
tence, excessive absences and violation
of work rules.
If you dont have a contract for
employment (which is likely since the
majority of employees in this country
do not have employment contracts),
then your employer can terminate you
for any reason that isnt illegal (see
below). For example, your employer
can terminate you simply because she
doesnt like you or because your work
style does not fit in with the company
or because you and your supervisor
disagree too much on how your job
should be done. Be aware, however,
that sometimes these sorts of superfi-
cial reasons, such as I just didnt like
her or She didnt fit in with the rest
of the office, can mask the real reason
behind the termination, which is an
illegal one.
Whether or not you have an em-
ployment contract, the law does place
limits on your employers ability to
fire you. For example, employers do
not have the right to discriminate
against you illegally or to violate state
or federal laws, such as those control-
ling wages and hours. Most state dis-
crimination laws are quite broad. In
addition to protecting against the
traditional forms of discrimination
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based on race, color, religion, national
origin and age, many also protect
against discrimination based on sexual
orientation, physical and mental dis-
ability, marital status and receiving
public funds.
Separate state laws protect workers
from being fired or demoted for tak-
ing advantage of laws protecting them
from discrimination and unsafe work-
place practices. And there are a num-
ber of other more complex reasons
that may make it illegal for an em-
ployer to fire youall boiling down
to the fact that an employer must deal
with you fairly and honestly.
Ive just received a warning from
my employer, and I suspect I will
be fired soon. What should I do?
If you find yourself on the receiving
end of a disciplinary notice you con-
sider to be unfair, there are several
steps you should take to avoid losing
your job.
First, be sure you understand ex-
actly what work behavior is being
challenged. Check your company
handbook to see if there is a clear
policy against what youve done. If
you are unclear, ask for a meeting
with your supervisor or human re-
sources staff to discuss the issue more
thoroughly.
If you think that there might be
some truth to what you are told, find
out what you can do to improve the
situation. Arrange a meeting with
your supervisor and ask her what you
can do to improve. Or you can make
your own suggestions. For example, if
your employer is unhappy with your
performance, consider requesting
training or educational materials. If
your employer thinks that you talk
too much on company time, ask to
move your workstation to a place
where you wont be quite so tempted
to talk. Make sure you document any
meeting or communication with your
supervisor regarding the discipline,
your performance and strategies you
can pursue to improve.
If you disagree with allegations
that your work performance or behav-
ior is poor, you may want to ask for
the assessment in writing. You can
then write a clarification and ask that
it be inserted in your personnel file.
But do this only if you feel your
employers assessment is clearly inac-
curate; otherwise you may risk esca-
lating a minor verbal reprimand into
a more major incident that will be
permanently recorded in your file.
Before you sit down to write, take
some time to reflect and perhaps dis-
cuss your situation with friends.
If you think you are likely to be
fired, see if any policy in the employee
handbook will buy you timefor
example, the right to file an appeal
so the controversy can die down and,
if necessary, you can change your
work habits.
Finally, read between the lines to
see whether your employers action
may be discriminatory or in other
ways unfair. Look particularly at the
timing. For example, if you were let
go shortly before your rights in the
company pension plan were perma-
nently locked in or vested, the com-
pany may be guilty of age discrimina-
W O R K P L A C E R I G H T S
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tion. Look also at uneven applications
of discipline: Are women more often
given substandard performance re-
views or fired before they could be
elevated to supervisor?
What can I do to protect any
legal rights I might have before
leaving my job?
Even if you decide not to challenge the
legality of your firing, you will be in a
much better position to enforce all of
your workplace rights if you keep careful
written records of everything that hap-
pens. For example, if you apply for un-
employment insurance benefits and your
former employer challenges that applica-
tion, you will probably need to prove
that you were dismissed for reasons that
were not related to your misconduct.
There are a number of ways to docu-
ment events. The easiest is to keep an
employment diary where you record and
date each significant work-related event
such as performance reviews, commen-
dations or reprimands, salary increases
or decreases and even informal com-
ments your supervisor makes to you
about your work. Note the date, time
and location for each event, which
members of management were involved
and whether or not witnesses were
present. Whenever possible, back up
your log with materials issued by your
employer, such as copies of the em-
ployee handbook, memos, brochures,
employee orientation videos and any
written evaluations, commendations or
criticisms of your work. In addition, if a
problem develops, ask to see your per-
sonnel file and make a copy of all re-
ports and reviews in it.
Am I entitled to severance pay if
Im fired?
No law requires an employer to provide
severance pay. Nevertheless, some em-
ployers voluntarily offer one or two
months salary to employees who are
laid off. A few are more generous to
long-term employees, basing severance
pay on a formula such as one months
pay for every year an employee worked
for the company.
An employer may be legally obli-
gated to give you some severance pay if
you were promised it, as evidenced by:
a written contract stating that
severance will be paid
a promise in an employee handbook
of severance pay
a long history of the company paying
severance to other employees in your
position, or
an oral promise to pay you sever-
ancealthough you may run into
difficulties proving the promise
existed.
My biggest concern about
losing my job is losing health
insurance coverage. Do I have
any rights?
Ironically, workers have more rights
to health insurance coverage after they
lose their jobs than while employed.
This is because of a 1986 law, the
Consolidated Omnibus Budget
Reconciliation Act (COBRA). Under
COBRA, employers with 20 or more
employees must offer them the option
of continuing to be covered by the
companys group health insurance
plan at the workers own expense for a
specific periodoften 18 months
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after employment ends. Family cover-
age is also included. In some other
circumstances, such as the death of
the employee, that employees depen-
dents can continue coverage for up to
36 months.
Another federal law, the Health
Insurance Portability and Account-
ability Act, makes it easier for em-
ployees to change jobs without the
fear of losing insurance coverageand
makes it easier for many employees to
get coverage in the first place. The
law imposes some restrictions on
group health plans, including HMOs.
Under this law:
Employees with preexisting condi-
tions may not be denied coverage
under a new health insurance plan if
they have been continuously covered
for 12 months under another plan.
Employees who do not have this
prior coverage may be denied
coverage based on a preexisting
condition for only one year.
No group health plan may discrimi-
nate in eligibility for coverage or
premiums based on health status,
physical or mental condition, claims
experience, receipt of healthcare,
medical history, genetic informa-
tion, evidence of insurability or
disability of the individual or
dependents seeking coverage.
Getting Money When
Youre Out of Work
If youve lost your job, you may be
desperately seeking income. Its best to
act quickly to apply for unemployment
and other possible benefits, as there is
often a delayin a few states, as long as
six weeksbetween the time you apply
and the date on which you actually
receive a check.
Here is a brief breakdown of what is
covered by each of the three major in-
come replacement programs.
Unemployment insurance. This program
may provide some financial help if you
lose your job, temporarily or perma-
nently, through no fault of your own.
Benefits will be less than your former pay
and temporaryoften lasting for about
26 weeks.
Workers compensation. When you
cannot work because of a work-related
injury or illness, this program is designed
to provide you with prompt replacement
income. It may also pay the medical bills
resulting from a workplace injury or illness;
compensate you for a permanent injury,
such as the loss of a limb; and provide
death benefits to the survivors of workers
who die from a workplace injury or illness.
For more information, see the questions
and answers on workers compensation
that appear earlier in this chapter.
Social Security disability insurance. This
is intended to provide income to adults
who, because of injury or illness, cannot
work for at least 12 months. Unlike the
workers compensation program, it does
not require that your disability be caused
by a workplace injury or illness.
W O R K P L A C E R I G H T S
4.33
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Also consider possible income from a
private disability insurance program if
you were paying for it through payroll
withholdings, or if your employer paid
for such premiums.
In addition, a few states offer disability
benefits as part of their unemployment
insurance programs. Typical program
requirements mandate that you submit
your medical records and show that you
requested a leave of absence from your
employer. Some may also require proof
that you intend to return to your job when
you recover. Call the local unemployment
insurance and workers compensation
insurance offices to determine whether
your state is one that maintains this kind
of coverage.
http://www.nolo.com
Nolo offers self-help information about a
wide variety of legal topics, including
workplace rights.
http://www.eeoc.gov
The U.S. Equal Employment Opportunity
Commission is the federal agency respon-
sible for enforcing federal fair employment
laws, including Title VII (which outlaws
discrimination in employment based on
race, gender, religion and national ori-
gin), the Equal Pay Act, the Age Dis-
crimination in Employment Act and the
Americans with Disabilities Act. The
agencys website is a gold mine of informa-
tion about these fair employment laws.
Among other things, it includes informa-
tion on your workplace rights, the text of
the fair employment laws and instructions
on how to file a charge against your em-
ployer.
http://www.dol.gov
The U.S. Department of Labor enforces
many of the laws that govern your rela-
tionship with your employer, including
wage and hour laws, health and safety
laws and benefits laws. This website offers
information about your rights under all of
the laws enforced by the department, and it
contains links to state labor department
websites.
http://www.law.cornell.edu
The Legal Information Institute at
Cornell Law School provides information
about discrimination in the workplace,
including relevant codes and regulations.
http://www.ahipubs.com
The Alexander Hamilton Institute serves
up common sense packaged as FAQs about
many aspects of employment, from benefits
to safety and health concerns. The infor-
mation is aimed at managers, but its
helpful for employees, too.
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5
Small Businesses
5.2 Before You Start
5.8 Legal Structures
for Small Businesses
5.15 Nonprofit Corporations
5.18 Small Business Taxes
5.24 Home-Based Businesses
5.29 Employers’ Rights &
Responsibilities
Business is never so healthy as
when, like a chicken, it must do a
certain amount of scratching for
what it gets.
HENRY FORD
Fo
r all sorts of personal and economic reasons, more Americans
are starting and running their own businesses today than ever before.
This trend has been helped by the increasing availability of powerful
and affordable data storage and communications equipment, most
notably the personal computer and the Internet. Because of
this
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accessible technology, todays savvy
small-time operator can often accom-
plish tasks that just a few decades ago
could be tackled only by large corpo-
rations.
But not all change has been posi-
tive. When it comes to the law, the
relatively informal world of just 40
years agowhere deals were often
sealed with a handshakehas given
way to a world where legal rules affect
almost every small business relation-
ship, including organizing the busi-
ness, dealing with co-owners, hiring
and supervising employees and relat-
ing to customers and suppliers. Stay-
ing on top of all these rules is as neces-
sary as it is challenging. Fortunately,
by using affordable, good quality self-
help legal resources and getting addi-
tional help from a knowledgeable
small business lawyer, you can master
the laws you need to know to keep
your business healthy.
Before
You Start
Your
imagination
is your preview
of lifes
coming
attractions.
ALBERT EINSTEIN
No matter what type of business
youre thinking of starting, there are
some practical and legal issues youll
face right away, including choosing a
name and location for your business,
deciding whether or not to hire em-
ployees, writing a business plan,
choosing a legal structure (sole propri-
etorship, partnership, corporation or
limited liability company), establish-
ing a system for reporting and paying
taxes and adopting policies to deal
with your customers. This section
addresses many of these concerns. As
you read, dont be discouraged by the
details. If you have chosen a business
that you will truly enjoy and, after
creating a tight business plan, are
confident youll make a decent profit,
your big jobs are done. Furthermore,
many people and affordable sources of
information are available to help you
cope with the practical details we
discuss here.
Im thinking of starting my own
business.What should I do first?
Be sure you are genuinely interested
in what the business does. If you
arent, you are unlikely to succeed in
the long runno matter how
lucrative your work turns out to be.
Yes, going into business with a firm
plan to make a good living is impor-
tant, but so, too, is choosing a
business that fits your life goals in an
authentic way. Here are a few things
you might want to consider before
you take the leap:
Do you know how to accomplish the
principal tasks of the business?
(Dont open a transmission repair
S M A L L B U S I N E S S E S
5.3
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shop if you hate cars, or a restaurant
if you cant cook.)
If the business involves working
with others, do you do this well?
If not, look into the many opportu-
nities to begin a one-person busi-
ness.
Do you understand basic business
tasks, such as bookkeeping and how
to prepare a profit-and-loss forecast
and cash-flow analysis? If not, learn
beforenot afteryou begin.
Does the business fit your personal-
ity? If you are a shy introvert, stay
away from businesses that require
lots of personal selling. If you are
easily bored, find a business which
will allow you to deal with new
material on a regular basis (publish-
ing a newsletter, for example).
What should I keep in mind
when choosing a name for my
business?
First, assume that you will have com-
petitors and that you will want to
market your products or services un-
der the name you choose. (This will
make your name a trademark.) For
marketing purposes, the best names
are those that customers will easily
remember and associate with your
business. Also, if the name is memo-
rable, it will be easier to stop others
from using it in the future.
Most memorable business names
are made-up words, such as Exxon and
Kodak, or are somehow fanciful or
surprising, such as Double Rainbow
ice cream and Penguin Books. And
some notable names are cleverly sug-
gestive, such as The Body Shop (a
store that sells personal hygiene prod-
ucts) and Accuride tires.
Names that tend to be forgotten
by consumers are common names
(names of people), geographic terms
and names that literally describe some
aspect of a product or service. For in-
stance, Steves Web Designs may be
very pleasing to Steve as a name, but
its not likely to help Steves custom-
ers remember his company when faced
with competitors such as Sams Web
Designs and Sheris Web Designs.
Similarly, names like Central Word
Processing Services or Robust Health
Foods are not particularly memorable.
Of course, over time even a com-
mon name can become memorable
through widespread use and advertis-
ing, as with Ben and Jerrys Ice Cream.
And unusual names of people can
sometimes be very memorable indeed,
as with Fuddruckers (restaurants and
family entertainment centers).
Choosing a Domain
Name
If your business will have a website, part
of choosing your business name will be
deciding on a domain name. Using all or
part of your business name in your
domain name will make your website
easier for potential customers to find. But
many domain names are already taken,
so youll want to see whats available
before you settle on a business name.
See
Conducting a Trademark Search
in
Chapter 8,
Trademarks
, for more infor-
mation on conducting name searches.
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How do I find out whether Im
legally permitted to use the
business name Ive chosen?
Your first step depends on whether
you plan to form a corporation or a
limited liability company (LLC). If
you do, you should check with the
Secretary of States office in your state
to see whether your proposed name is
the same or confusingly similar to an
existing corporate or LLC name in
your state. If it is, youll have to
choose a different name.
If you dont plan to incorporate or
form an LLC, check with your county
clerk to see whether your proposed
name is already on the list maintained
for fictitious or assumed business
names in your county. In the few
states where assumed business name
registrations are statewide, check with
your Secretary of States office. (The
county clerk should be able to tell you
whether youll need to check the
name at the state level.) If you find
that your chosen name or a very simi-
lar name is listed on a fictitious or
assumed name register, you shouldnt
use it.
If my proposed business name
isnt listed on a county or state
register, am I free to use it
however I like?
Not necessarily. Even if you are permit-
ted to use your chosen name as a corpo-
rate, LLC or assumed business name in
your state or county, you might not be
able to use the name as a trademark or
service mark. To understand what all
this is about, consider the potential
functions of a business name:
A business name may be a trade
name that describes the business for
purposes of bank accounts, invoices,
taxes and the public.
A business name may be a trade-
mark or servicemark used to iden-
tify and distinguish products or
services sold by the business (for
example, Ford Motor Co. sells Ford
automobiles, and McDonalds
Corporation offers McDonalds fast
food services).
While your corporate or assumed
business name registration may le-
gally clear the name for the first pur-
pose, it doesnt speak to the second.
For example, if your business is orga-
nized as a limited liability company
or corporation, you may get the green
light from your Secretary of State to
use IBM Toxics as your business name
(if no other corporation or LLC in
your state is using it or something
confusingly similar), but if you try to
use that name out in the marketplace,
youre asking for a claim of trademark
violation from the IBM general
counsels office.
To find out whether you can use
your proposed name as a trademark or
servicemark, you will need to do
whats known as a trademark search.
See Chapter 8, Trademarks.
Ive found out that the name I
want to use is available. What
do I need to do to reserve it for
my business?
If you are forming a corporation or an
LLC, every state has a procedureoper-
ated by the Secretary of States office
under which a proposed name can be
S M A L L B U S I N E S S E S
5.5
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reserved for a certain period of time,
usually for a fee. Additional reserva-
tion periods can usually be purchased
for additional fees. (For more informa-
tion about corporations and LLCs, see
Legal Structures for Small Businesses,
below.)
If you are not forming a corpora-
tion or an LLC, then you may need to
file a fictitious or assumed business
name statement with the agency that
handles these registrations in your
state (usually the county clerk, but
sometimes the Secretary of State).
Generally speaking, you need to file a
fictitious business name statement
only if your business name does not
include the legal names of all the
owners.
If you plan to use your business
name as a trademark or servicemark
and your service or product will be
marketed in more than one state (or
across territorial or international bor-
ders), you can file an application with
the U.S. Patent and Trademark Office
to reserve the name for your use. See
Chapter 8, Trademarks.
What should I keep in mind
when choosing a location for
my business?
Commercial real estate brokers are
fond of saying the three most impor-
tant factors in establishing a business
are location, location and location.
While true for some types of busi-
nessessuch as a retail sandwich shop
that depends on lunchtime walk-in
tradefor many, locating in a popu-
lar, high-cost area is a mistake. For
example, if you design computer soft-
ware, repair tile, import jewelry from
Indonesia or do any one of ten thou-
sand other things that dont rely on
foot traffic, your best bet is to search
out convenient, low-cost, utilitarian
surroundings. And even if yours is a
business that many people will visit,
consider the possibility that a low-
cost, offbeat location may make more
sense than a high-cost, trendy one.
What about zoning and other
rules that restrict where a
business may locate?
Never sign a lease without being ab-
solutely sure you will be permitted to
operate your business at that location.
If the rental space is in a shopping
center or other retail complex, this
involves first checking carefully with
management, because many have con-
tractual restrictions (for example, no
more than two pizza restaurants in the
Mayfair Mall). If your business will be
located in a non-shopping center area,
youll need to be sure that you meet
applicable zoning rules, which typi-
cally divide a municipality into resi-
dential, commercial, industrial and
mixed-use areas.
Youll also need to find out
whether any other legal restrictions
will affect your operations. For ex-
ample, some cities limit the number
of certain types of businesssuch as
fast food restaurants or coffee barsin
certain areas, and others require that a
business provide off-street parking,
close early on weeknights, limit ad-
vertising signs or meet other rules as a
condition of getting a permit. Fortu-
nately, many cities have business de-
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velopment offices that help small
business owners understand and cope
with restrictions.
What is a business plan, and
do I need to write one?
A business plan is a written document
that describes the business you want to
start and how it will become profit-
able. The document usually starts with
a statement outlining the purpose and
goals of your business and how you
plan to realize them, including a de-
tailed marketing plan. It should also
contain a formal profit-and-loss projec-
tion and cash-flow analysis designed to
show that if the business develops as
expected, it will be profitable.
Your business plan enables you to
explain your business prospects to po-
tential lenders and investors in a lan-
guage they can understand. Even
more important, the intellectual rigor
of creating a tight business plan will
help you see whether the business you
hope to start is likely to meet your
personal and financial goals. Many
times when budding entrepreneurs
take an honest look at their financial
numbers, they see that hoped-for
profits are unlikely to materialize. Or,
put another way, one of the most im-
portant purposes of writing a good
business plan is to talk yourself out of
starting a bad business.
I plan to sell products and services
directly to the public. What do I
need to know to comply with
consumer protection laws?
Many federal and state laws regulate
the relationship between a business
and its customers. These laws cover
such things as advertising, pricing,
door-to-door sales, written and im-
plied warranties and, in a few states,
layaway plans and refund policies. You
can find out more about consumer
protection laws by contacting the Fed-
eral Trade Commission, 6th and Penn-
sylvania Avenue, NW, Washington
DC 20850, 202-326-2222, http://
www.ftc.gov, and by contacting your
states consumer protection agency.
Although its essential to under-
stand and follow the rules that protect
consumers, most successful businesses
regard them as only a foundation for
building friendly customer service
policies designed to produce a high
level of customer satisfaction. For ex-
ample, many enlightened businesses
tell their customers they can return
any purchase for a full cash refund at
any time for any reason. Not only does
this encourage existing customers to
continue to patronize the business, but
it can be a highly effective way to get
customers to brag about the business
to their friends.
Selling Goods and
Services on Consignment
Many small business people, especially
those who produce art, crafts and spe-
cialty clothing items, sell on consignment.
In a consignment agreement, the owner
of goods (in legal jargon, the consignor)
puts the goods in the hands of another
person or businessusually a retailer (the
consignee)who then attempts to sell
S M A L L B U S I N E S S E S
5.7
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them. If the goods are sold, the consignee
receives a fee, which is usually a percent-
age of the purchase price, and the rest of
the money is sent to the consignor. For
example, a sculptor (the consignor) might
place his or her work for sale at an art
gallery (the consignee) with the under-
standing that if the artwork sells, the
gallery keeps 50% of the sale price. Or a
homeowner might leave old furniture with
a resale shop that will keep one-third of
the proceeds if the item sells. Typically,
the consignor remains the owner of the
goods until the consignee sells them.
As part of any consignment of valuable
items, the consignor (owner) wants to be
protected if the goods are lost or stolen
while in the consignees possession. The
key here is to establish that the consignee
has an insurance policy which will cover
any loss. When extremely valuable items
are being consigned, its often appropri-
ate for the cosignor to ask to be named
as a co-insured so that she can receive a
share of the insurance proceeds if a loss
occurs.
If youre a consignee, check your insur-
ance coverage. Before you accept the
risk of loss or theft, make sure your busi-
ness insurance policy covers you for loss
of personal property of others left in
your possessionand that the amount of
coverage is adequate. Getting full reim-
bursement for the selling price of con-
signed goods may require an added
supplement (called an endorsement) to
your insurance policy. Check with your
insurance agent or broker.
For a consignment contract, including
detailed insrtructions and guidance, as
well as small business forms and con-
tracts, see Nolos new business software,
Quicken Lawyer Business
.
ef
More Information About
Starting Your Small Business
Legal Guide for Starting & Running a
Small Business,
by Fred S. Steingold
(Nolo), provides clear, plain-English
explanations of the laws that affect busi-
ness owners every day. It covers partner-
ships, corporations, limited liability com-
panies, leases, trademarks, contracts,
franchises, insurance, hiring and firing
and much more.
Legal Forms for Starting & Running a Small
Business,
by Fred S. Steingold (Nolo),
contains the forms and instructions you
need to accomplish many routine legal
tasks, such as borrowing money, leasing
property and contracting for goods and
services.
The Small Business Start-Up Kit
, by Peri
H. Pakroo (Nolo), shows you how to
choose from among the basic types of
business organizations, write an effective
business plan, file the right forms in the
right place, acquire good bookkeeping
and accounting habits and get the proper
licenses and permits.
Small Time Operator
, by Bernard
Kamoroff, C.P.A. (Bell Springs Publishing),
is a good source of practical information
on getting a small business off the
groundfrom business licenses, to taxes,
to basic accounting. It includes ledgers
and worksheets to get you started.
Quicken Lawyer Business
, (software by
Nolo), contains over 60 interactive forms
and contracts that all small businesses
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
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should have, plus the text of five best-
selling Nolo business titles.
Running a One-Person Business
, by
Claude Whitmyer and Salli Rasberry (Ten
Speed Press), covers the nuts and bolts of
doing business on your own: finances,
time management, marketing and more.
How to Write a Business Plan
, by Mike
McKeever (Nolo), shows you how to write
the business plan necessary to finance
your business and make it work. It in-
cludes up-to-date sources of financing.
Guerrilla Marketing
, by Jay Conrad
Levinson (Houghton Mifflin), contains
hundreds of ideas and strategies to help
you market your business.
Marketing Without Advertising
, by
Michael Phillips and Salli Rasberry
(Nolo), shows you how to generate sales
and encourage customer relations without
spending a lot of money on advertising.
Legal
Structures
for Small
Businesses
There is no one legal structure thats
best for all small businesses. Whether
youre better off starting as a sole pro-
prietor or choosing one of the more
complicated organizational structures,
such as a partnership, corporation or
limited liability company (LLC), usu-
ally depends on several factors, in-
cluding the size and profitability of
your business, how many people will
own it and whether it will entail li-
ability risks not covered by insurance.
If Im the only owner, whats the
easiest way to structure my
business?
The vast majority of small business
people begin as sole proprietors, be-
cause its cheap, easy and fast. With a
sole proprietorship, theres no need to
draft an agreement or go to the trouble
and expense of registering a corpora-
tion or limited liability company
(LLC) with your state regulatory
agency. All it usually entails is getting
a local business license, and unless you
are doing business under your own
name, filing and possibly
publishing a
fictitious name statement.
If its so simple, why arent all
businesses sole proprietorships?
There are several reasons why doing
business as a sole proprietor is not ap-
propriate for everyone. First, a sole
proprietorship is possible only when a
business is owned by one person or, in
some cases, a husband and wife. Sec-
ond, the owner of a sole proprietorship
is personally responsible for all busi-
ness debts, whereas limited liability
companies and corporations normally
shield their owners assets from such
debts. And finally, unlike a corpora-
tion (or a partnership or LLC that
elects to be taxed as a corporation),
which is taxed separately from its own-
ers (something that can result in lower
taxes for some small businessessee
below), a sole proprietor and her busi-
S M A L L B U S I N E S S E S
5.9
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ness are considered to be the same
legal entity for tax purposes. This
means youll report all of the
businesss income, expenses and de-
ductions on your individual tax re-
turn.
Im starting my business with
several other people. What are
the advantages and disadvan-
tages of forming a general
partnership?
One big advantage of a general part-
nership is that you usually dont have
to register it with your state and pay
an often hefty fee, as you do to estab-
lish a corporation or limited liability
company. And because a partnership
is normally a pass through tax en-
tity (the partners, not the partnership,
are taxed on the partnerships profits),
filing income tax returns is easier than
it is for a regular corporation, where
separate tax returns must be filed for
the corporate entity and its owners.
But because the business-related acts
of one partner legally bind all others,
it is essential that you go into busi-
ness with a partner or partners you
completely trust. It is also essential
that you prepare a written partnership
agreement establishing, among other
things, each partners share of profits
or losses and day-to-day duties as well
as what happens if one partner dies or
retires.
Finally, a major disadvantage of
doing business as a partnership is that
all partners are personally liable for
business debts and liabilities (for ex-
ample, a judgment in a lawsuit).
While its true that a good insurance
policy can do much to reduce lawsuit
worries and that many small, savvy
businesses do not face debt problems,
its also true that businesses that face
significant risks in either of these areas
should probably organize themselves
as a corporation or LLC in order to
benefit from the limited liability these
business structures provide.
What exactly is limited liability”—
and why is it so important?
Some types of businessescorporations
and limited liability companies are the
most commonshield their owners
from personal responsibility for busi-
ness debts. For instance, if the business
goes bankrupt, its owners are not usu-
ally required to use their personal as-
sets to make good on business losses
unless they voluntarily assume respon-
sibility. Other types of businesses
sole proprietorships and general part-
nershipsdo not provide this shield,
which means their owners are person-
ally responsible for business liabilities.
To see how this works, assume some-
one obtains a large court judgment
against an incorporated business. Be-
cause corporate stockholders are not
personally liable for business debts,
their houses and other personal assets
cant be taken to pay the judgment,
even if the corporation files for bank-
ruptcy. By comparison, if a sole propri-
etorship or partnership gets into the
same kind of trouble, the houses, bank
accounts and other valuable personal
assets of the businesss owners (and
possibly their spouses) can be attached
and used to satisfy the debt.
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5. 10
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Why do so many small business
owners choose not to take
advantage of limited liability
protection?
Many small businesses simply dont
have major debt or lawsuit worries, so
they dont need limited liability pro-
tection. For example, if you run a
small service business (perhaps you
are a graphic artist, management con-
sultant or music teacher), your
chances of being sued or running up
big debts are low. And when it comes
to liability for many types of debts,
creating a limited liability entity
makes little practical difference for
newly formed businesses. Often, if
you want to borrow money from a
commercial lender or establish credit
with a vendor, you will be required to
pledge your personal assets or person-
ally guarantee payment of the debt
(waive limited liability status) should
your business be unable to pay.
Finally, organizing your business
to achieve limited liability status is
no substitute for purchasing a good
business insurance policy especially if
your business faces serious and pre-
dictable financial risks (for instance,
the risk that a customer may trip and
fall on your premises or that your
products may malfunction). After all,
without insurance, if a serious injury
occurs, all the assets of your busi-
nesswhich will probably amount to
a large portion of your net worth
can be grabbed to satisfy any resulting
court judgment. It follows that even if
you operate your business as a sole
proprietorship, if you purchase com-
prehensive business insurance, your
personal assets may not be at signifi-
cant risk and you may therefore con-
clude you dont need limited liability
status.
Given all its limitations, when is
it wise for a small business
person to seek limited liability
status?
You should consider forming a busi-
ness that offers its owners limited
liability if:
your business subjects you to a risk
of lawsuits in an area where insur-
ance coverage is unaffordable or
incomplete, or
your business will incur significant
debts and is well established and has
a good credit rating so that you no
longer need to personally guarantee
every loan or credit application.
The easiest and most popular way
to gain limited liability status is to
form a corporation or a limited liabil-
ity company (LLC).
S M A L L B U S I N E S S E S
5.11
SMALL BUSINESS STRUCTURES: AN OVERVIEW
Type of Entity Main Advantages Main Drawbacks
Sole Simple and inexpensive to create Owner personally liable for
Proprietorship and operate business debts and liabilities
Owner reports profit or loss on his
or her personal tax return
General Relatively easy and inexpensive to create Owners (partners) personally liable
Partnership and operate for business debts
Owners (partners) report their share of Must prepare and file separate partnership
profit or loss on their personal tax returns tax return
Limited Limited partners have limited personal General partners personally liable
Partnership liability for business debts as long as for business debts
they dont participate in management
General partners can raise cash without More expensive to create than a
involving outside investors in general partnership
management of business
Suitable mainly for companies that
invest in real estate or other businesses
Regular Owners have limited personal liability More expensive to create than
Corporation for business debts partnership or sole proprietorship
Owners fringe benefits (such as health Paperwork can seem burdensome to
insurance and pension plans) can be some owners
deducted as business expenses
Owners can split corporate profit among Separate taxable entity that must prepare
owners and corporation, sometimes and file a separate corporate tax
paying a lower overall tax rate
S Corporation Owners have limited personal liability More expensive to create than
for business debts partnership or sole proprietorship
Owners report their share of corporate More paperwork than for a limited liability
profit or loss on their personal tax returns company, which offers some of the same
advantages
Owners can use corporate loss to offset Income must be allocated to owners
income from other sources (such as another in proportion to their ownership interests
business in which they are active)
Deductibility of fringe benefits limited for
owners who own more than 2% of shares
Professional Owners have no personal liability for More expensive to create than
Corporation malpractice of other owners partnership or sole proprietorship
Paperwork can seem burdensome to
some owners
All owners must generally belong to, and
often be licensed to practice in, the same
profession
Nonprofit Corporation doesnt pay income taxes Full tax advantages available only to
Corporation groups organized for charitable,
Contributions to charitable corporations scientific, educational, literary or
are tax-deductible religious purposes
Fringe benefits can be deducted as Property transferred to corporation
business expense stays there; if corporation ends,
property must go to another nonprofit
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N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
5. 12
Limited All states except Massachusetts allow LLCs More expensive to create than
Liability to be organized with only one member partnership or sole proprietorship
Company
Owners have limited personal liability
for business debts even if they
participate in management
Profit and loss can be allocated Laws for creating LLCs in a few states may
differently than ownership interests not reflect latest federal tax changes
IRS rules now allow LLCs to choose
between being taxed as partnership
or corporation
Professional Same advantages as a regular limited Same as for a regular limited liability
Limited Liability liability company company
Company
Gives state-licensed professionals a way Members must all belong to the same
to enjoy those advantages profession
At least one state (CA) does not permit
professionals to organize as an LLC
Limited Liability Mostly of interest to partners in old-line Unlike a limited liability company or a
Partnership professions such as law, medicine and professional limited liability company, owners
accounting (partners) remain personally liable for many
Owners (partners) arent personally liable
types of obligations owed to business
for the malpractice of other partners
creditors, lenders and landlords
Owners report their share of profit or loss
Not available in all states
on their personal tax returns
Often limited to a short list of professions
Is forming a corporation difficult?
No. As long as you and close associates
and family members will own all of
the stock and none of the stock will be
sold to the public, the necessary docu-
mentsprincipally your articles of
incorporation and corporate bylaws
can usually be prepared in a few hours.
While
most states use the term ar-
ticles of incorporation to refer to the
basic document creating the corpora-
tion, some states (including Connecti-
cut, Delaware, New York and Okla-
homa) use the term certificate of in-
corporation. Washington calls the
document a certificate of formation
and Tennessee calls it a charter.
The first step is to check with your
states corporate filing office (usually
either the Secretary of State or Depart-
ment of Corporations) and conduct a
trademark search to be sure the name
you want to use is legally available.
You then fill in blanks in a pre-
printed form (available from most
states corporate filing offices or
websites) listing the purpose of your
corporation, its principal place of
business and the number and type of
shares of stock. Youll file these docu-
ments with the appropriate office,
along with a registration fee that will
usually be between $200 and $1,000,
depending on the state.
Type of Entity Main Advantages Main Drawbacks
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S M A L L B U S I N E S S E S
5.13
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as well as partnerships and limited
liability companies that have not
elected to be taxed as regular, or C,
corporationsare known as pass-
through tax entities, meaning that all
business profits and losses are re-
flected on the individual tax returns
of the owners. For example, if a sole
proprietors convenience store turns a
yearly profit of $85,000, this amount
goes right on his personal tax return.
By contrast, a regular profit corpora-
tion (and any partnership or LLC that
elects to be taxed like a corporation) is
a separate tax entitymeaning that
the business files a tax return and pays
its own taxes.
But the fact that a corporation is
taxed separately from its owners
doesnt always mean that profits will be
taxed twice. Thats because owners of
most incorporated small businesses are
also employees of those businesses; the
money they receive in the form of sala-
ries and bonuses is tax-deductible to
the corporation as an ordinary and nec-
essary business expense. If it pays sur-
plus money to owners in the form of
reasonable salaries, along with bonuses
and other fringe benifits, a corporation
does not have to show a profit, and
therefore will pay no corporate income
tax. In addition, most small corpora-
tions dont pay dividends, so the divi-
dends arent taxed twice.
Are there tax advantages to
forming a corporation?
Frequently, yes. Corporations pay
federal income tax at a lower rate than
do most individuals for the first
$75,000 of their profits15% of the
Youll also need to complete, but
not file, corporate bylaws. These will
outline a number of important corpo-
rate housekeeping details, such as
when annual shareholder meetings
will be held, who can vote and the
manner in which shareholders will be
notified if there is need for an addi-
tional special meeting.
Fortunately, a good self-help book
can make it easy and safe to incorpo-
rate your business without a lawyer.
What about operating my
corporation? Arent ongoing
legal formalities involved?
Assuming your corporation has not
sold stock to the public, conducting
corporate business is remarkably
straightforward and uncomplicated.
Often it amounts to little more than
recording key corporate decisions (for
example, borrowing money or buying
real estate) and holding an annual
meeting. Even these formalities can
often be done by written agreement
and dont usually necessitate a face-to-
face meeting between the directors.
Doesnt forming a corporation
mean income will be taxed
twiceonce at the corporate
level and then again when
dividends are paid to the
corporations owners
(shareholders)?
Taxation of business is complicated;
well be able to cover only the main
points here. First, understand that
most types of businessessole
proprietorships and corporations that
have qualified for subchapter S status,
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5. 14
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first $50,000 of profit and 25% of the
next $25,000. By contrast, in a sole
proprietorship or partnership, where
the business owner(s) pay taxes on all
profits at their personal income tax
rates, up to 39.6% could be subject to
federal income tax.
A corporation can often reduce
taxes by paying its owner-employees a
decent salary (which, of course, is tax-
deductible to the corporation but tax-
able to the employee), and then retain-
ing additional profits in the business
(say, for future expansion). The addi-
tional profits will be taxed at the
lower corporate tax rates. Under IRS
rules, however, the maximum amount
of profits most corporations are al-
lowed to retain is $250,000, and some
professional corporations are limited
to $150,000.
Recently Ive heard a lot about
limited liability companies. How
do they work?
For many years, small business people
have been torn between operating as
sole proprietors (or, if several people
are involved, as partnerships) or incor-
porating. On the one hand, many
owners are attracted to the tax-report-
ing simplicity of being a sole propri-
etors or partner. On the other, they
desire the personal liability protection
offered by incorporation. Until the
mid 1990s it was possible to safely
achieve these dual goals only by form-
ing a corporation and then complying
with a number of technical rules to
gain S-corporation status from the
IRS. Then the limited liability com-
pany (LLC) was introduced and slowly
gained full IRS acceptance.
LLCs can have many of the most
popular attributes of both partner-
ships (pass-through tax status) and
corporations (limited personal liabil-
ity for the owners). You can establish
an LLC by filing a document called
articles of organization with your
states corporate filing office (often the
Secretary or Department of State).
While most states use the term ar-
ticles of organization to refer to the
basic document creating an LLC, some
states (including Delaware, Missis-
sippi, New Hampshire, New Jersey
and Washington) use the term cer-
tificate of formation. Two other
states (Massachusetts and Pennsylva-
nia) call the document a certificate of
organization.
Can any small business register
as a limited liability company?
Most small businesses can be run as
LLCs because limited liability compa-
nies are recognized by all states. And
almost all states (except Massachu-
setts) now permit one-owner LLCs,
which means that sole proprietors can
easily organize their businesses as
LLCs to obtain both limited liability
and pass-through tax status.
Are there any drawbacks to
forming a limited liability
company?
Very few, beyond the fact that LLCs
require a moderate amount of paper-
work at the outset and a filing fee.
You must file Articles of Organization
with your states Secretary of State,
S M A L L B U S I N E S S E S
5.15
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Nonprofit
Corporations
In the long run you hit only
what you aim at. Therefore,
though you should fail
immediately, you had better
aim at something high.
HENRY DAVID THOREAU
A nonprofit corporation is a group of
people who join together to do some
activity that benefits the public, such
as running a homeless shelter, an art-
ists performance group or a low-cost
medical clinic. Making an incidental
profit from these activities is allowed
under legal and tax rules, but the
primary purpose of the organization
should be to do good work, not make
money. Nonprofit goals are typically
educational, charitable or religious.
How do nonprofit organizations
begin?
Most nonprofits start out as small,
informal loosely structured organiza-
tions. Volunteers perform the work,
and the group spends what little
money it earns to keep the organiza-
tion afloat. Formal legal papers (such
as a nonprofit charter or bylaws) are
rarely prepared in the beginning. Le-
gally, groups of this sort are consid-
ered nonprofit associations, and each
member can be held personally liable
for organizational debts and liabilities.
along with a filing fee that will range
from a few hundred dollars in some
states to almost $1,000 in others.
ef
More Information About
Choosing a Structure for
Your Small Business
Legal Guide to Starting & Running a
Small Business
, by Fred S. Steingold
(Nolo), explains what you need to know
to choose the right form for your business
and shows you what to do to get started.
Legal Forms for Starting & Running a
Small Business
, by Fred S. Steingold
(Nolo), provides all the forms youll need
to get your business up and running, no
matter what ownership structure you
choose.
LLC Maker,
by Anthony Mancuso (Nolo),
is interactive software containing all the
information and forms youll need to set
up an LLC on your own.
Form Your Own Limited Liability Com-
pany
, by Anthony Mancuso (Nolo),
explains how to set up an LLC in any
state, without the aid of an attorney.
Incorporate Your Business
, by Anthony
Mancuso (Nolo), explains how to set up
a corporation in any state.
How to Form Your Own Corporation
(California and Texas editions)
, by
Anthony Mancuso (Nolo), offers state-
specific instructions and forms for creat-
ing a corporation in those states.
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
5. 16
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Once a nonprofit association gets
going and starts to make money, or
wishes to obtain a tax exemption to
attract public donations and qualify
for grant funds, the members will
formalize its structure. Usually the
members decide to incorporate, but
forming an unincorporated nonprofit
association by adopting a formal asso-
ciation charter and operating bylaws is
an alternative.
Most groups form a nonprofit
corporation because it is the tradi-
tional formthe IRS and grant agen-
cies are very familiar with it. Also,
once incorporated, the individual
members of the nonprofit are not per-
sonally liable for debts of the organiza-
tiona big legal advantage over the
unincorporated association.
Will my association benefit from
becoming a nonprofit
corporation?
Here are some circumstances that
might make it worth your while to
incorporate and get tax-exempt status:
You want to solicit tax-deductible
contributions. Contributions to
nonprofits are generally tax deduct-
ible for those who make them. If
you want to solicit money to fund
your venture, youll make it more
attractive to potential donors if their
contributions are tax-deductible.
Your association makes a taxable profit
from its activities.
If your association
will generate any kind of income
from its activities, its wise to
incorporate so that you and your
associates dont have to pay income
tax on this money.
You want to apply for public or private
grant money. Without federal tax-
exempt status, your group is un-
likely to qualify for grants.
Your members want some protection from
legal liability. By incorporating your
association, you can generally
insulate your officers, directors and
members from liability for the
activities they engage in on behalf of
the corporation
Your advocacy efforts might provoke
legal quarrels. If, for instance, your
association is taking aim at a
powerful industry (such as tobacco
companies), it might be worth
incorporating so that your
associations officers and directors
will have some protection from the
spurious lawsuits that are sure to
comeand will also receive com-
pensation for their legal fees.
Forming a nonprofit corporation
brings other benefits as well, such as
lower nonprofit mailing rates and lo-
cal real estate and personal property
tax exemptions.
Is forming a nonprofit
corporation difficult?
Legally, no. To form a nonprofit cor-
poration, one of the organizations
founders prepares and files standard
articles of incorporationa short legal
document that lists the name and the
directors of the nonprofit plus other
basic information. The articles are
filed with the Secretary of States office
for a modest filing fee. After the ar-
ticles are filed, the group is a legally
recognized nonprofit corporation.
S M A L L B U S I N E S S E S
5.17
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Is there more to forming a
nonprofit than this simple legal
task?
Taxwise, there is more. In addition to
filing your articles, you will want to
apply for and obtain federal and state
nonprofit tax exemptions. If the for-
mation of your organization depends
on its nonprofit tax status, youll
likely want to know whether youll
qualify for tax exemption at the out-
set. Unfortunately, your corporation
must be formed before you submit
your federal tax exemption applica-
tion. Why? Because the IRS requires
that you submit a copy of your filed
articles with the exemption applica-
tion. Still, you should carefully review
the tax exemption application before
you submit your corporation papers.
Doing so will give you a good idea of
whether your organization will
qualify for a tax exemption or not.
What type of tax exemption do
most nonprofits get?
Most organizations obtain a federal
tax exemption under Section 501(c)(3)
of the Internal Revenue Code, for
charitable, education, religious, scien-
tific or literary purposes. States typi-
cally follow the federal lead and grant
state tax-exempt status to nonprofits
recognized by the IRS as 501(c)(3)
organizations.
How can my organization get a
501(c)(3) tax exemption?
Youll need to get the IRS Package
1023 exemption application. This is a
lengthy and technical application
with many references to the federal
tax code. Most nonprofit organizers
need help in addition to the IRS in-
structions that accompany the form.
But you can do it on your own if you
have a good self-help resource by your
side such as Nolos How to Form Your
Own Nonprofit Corporation, by Anthony
Mancuso, which shows you, line by
line, how to complete your application.
Are there any restrictions
imposed on 501(c)(3)
nonprofits?
You must meet the following condi-
tions to qualify for a 501(c)(3) IRS tax
exemption:
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
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The assets of your nonprofit must be
irrevocably dedicated to charitable,
educational, religious or similar
purposes. If your 501(c)(3) nonprofit
dissolves, any assets it owns must be
transferred to another 501(c)(3)
organization. (In your organizational
papers, you dont have to name the
specific organization that will
receive your assetsa broad dedica-
tion clause will do.)
Your organization cannot campaign
for or against candidates for public
office, and political lobbying
activity is restricted.
If your nonprofit makes a profit
from activities unrelated to its
nonprofit purpose, it must pay taxes
on the profit (but up to $1,000 of
unrelated income can be earned tax-
free).
ef
More Information About
Nonprofit Corporations
How to Form a Nonprofit Corporation
,
by Anthony Mancuso (Nolo), shows you
how to form a tax-exempt corporation in
all 50 states. In California, look for
How
to Form a Nonprofit Corporation in
California
, also by Anthony Mancuso
(Nolo).
The Law of Tax Exempt Organizations
,
by Bruce Hopkins (Wiley), is an in-depth
guide to the legal and tax requirements
for obtaining and maintaining a
501(c)(3) tax exemption and public
charity status with the IRS.
Small
Business
Taxes
THE MAN WHO IS
ABOVE HIS BUSINESS
MAY ONE DAY FIND HIS
BUSINESS ABOVE HIM.
SAMUEL DREW
Taxes are a fact of life for every small
business. Those who take the time to
understand and follow the rules will
have little trouble with tax authorities.
By contrast, those who are sloppy or
dishonest are likely to be dogged by
tax bills, audits and penalties. The
moral is simple: Meeting your obliga-
tions to report business information
and pay taxes is one of the cornerstones
of operating a successful business.
I want to start my own small
business. What do I have to do
to keep out of trouble with the
IRS?
Start by learning a new set of 3
Rs”—recordkeeping, recordkeeping
and (you guessed it) recordkeeping.
IRS studies show that poor records
not dishonestycause most small
business people to lose at audits or fail
to comply with their tax reporting
obligations, with resulting fines and
penalties. Even if you hire someone to
S M A L L B U S I N E S S E S
5.19
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keep your records, you need to know
how to supervise himif he goofs up,
youll be held responsible.
I dont have enough money in
my budget to hire a business
accountant or tax preparer. Is it
safe and sensible for me to keep
my own books?
Yes, if you remember to keep thor-
ough, current records. Consider using
a check register-type computer pro-
gram such as Quicken (Intuit) to track
your expenses, and if you are doing
your own tax return, use Intuits com-
panion program, Turbotax for Busi-
ness. To ensure that youre on the
right track, its a good idea to run
your bookkeeping system by a savvy
small business tax professional, such as
a CPA. With just a few hours of work,
she should help you avoid most com-
mon mistakes and show you how to
dovetail your bookkeeping system
with tax filing requirements.
When your business is firmly in
the black and your budget allows for
it, consider hiring a bookkeeper to do
your day-to-day payables and receiv-
ables. And hire an outside tax pro to
handle your heavy-duty tax work
not only are the fees a tax-deductible
business expense, but chances are your
business will benefit if you put more
of your time into running it and less
into completing paperwork.
Recordkeeping Basics
Keep all receipts and canceled checks for
business expenses. It will help if you
separate your documents by category,
such as:
auto expenses
rent
utilities
advertising
travel
entertainment, and
professional fees.
Organize your documents by putting
them into individual folders or envelopes,
and keep them in a safe place. If you are
ever audited, the IRS is most likely to zero
in on business deductions for travel and
entertainment, and car expenses. Remem-
ber that the burden will be on younot
the IRSto explain your deductions. If
youre feeling unsure about how to get
started or what documents you need to
keep, consult a tax professional familiar
with recordkeeping for small businesses.
What isand isnta tax-
deductible business expense?
Just about any ordinary, necessary and
reasonable expense that helps you
earn business income is deductible.
These terms reflect the purpose for
which the expense is made. For ex-
ample, buying a computer, or even a
sound system, for your office or store is
an ordinary and necessary business
expense, but buying the same items for
your family room obviously isnt. The
property must be used in a trade or
business, which means it is used with
the expectation of generating income.
In addition to the ordinary and
necessary rule, a few expenses are spe-
cifically prohibited by law from being
tax deductiblefor instance, you cant
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
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deduct a bribe paid to a public official.
Other deduction no-nos are traffic tick-
ets and clothing you wear on the job,
unless it is a required uniform. As a
rule, if you think it is necessary for your
business, it is probably deductible. Just
be ready to explain it to an auditor.
Business Costs That
Are Never Deductible
A few expenses are not deductible
even if they are business related,
because they violate public policy
(IRC §162). These expenses include:
any type of government fine, such
as a tax penalty paid to the IRS, or
even a parking ticket
bribes and kickbacks
any kind of payment made for
referring a client, patient or
customer, if it is contrary to a state
or federal law, and
expenses for lobbying and social
club dues.
Thankfully, very few other business
expenses are affected by these rules.
If I use my car for business, how
much of that expense can I write
off?
You must keep track of how much
you use your car for business in order
to figure out your deduction. (Youll
also need to produce these records if
youre ever audited.) Start by keeping
a log showing the miles for each busi-
ness use, always noting the purpose of
the trip. Then, at the end of the year,
you will usually be able to figure your
deduction by using either the mile-
age method (for the year 2001 you
can take 34.5¢ per mile deduction for
business usage) or the actual ex-
pense method (you can take the total
you pay for gas and repairs plus depre-
ciation according to a tax code sched-
ule, multiplied by the percentage of
business use). Figure the deduction
both ways and use the method that
benefits you most.
Can I claim a deduction for
business-related entertainment?
You may deduct only 50% of expenses
for entertaining clients, customers or
employees, no matter how many marti-
nis or Perriers you swigged. (Yes, this
is a fairly recent change. In the old
days you could write off 100% of every
entertainment expense, and until a few
years ago, 80%.)
The entertainment must be either
directly related to the business (such
as a catered business lunch) or associ-
ated with the business, meaning that
the entertainment took place immedi-
ately before or immediately after a
business discussion. Qualified busi-
ness entertainment includes taking a
client to a ball game, a concert or din-
ner at a fancy restaurant, or just invit-
ing a few of your customers over for a
Sunday barbecue at your home.
Parties, picnics and other social
events you put on for your employees
and their families are an exception to
the 50% rulesuch events are 100%
deductible. Keep in mind that if you are
audited, you must be able to show some
proof that it was a legitimate business
expense. So, keep a guest list and note
the business (or potential business) rela-
tionship of each person entertained.
S M A L L B U S I N E S S E S
5.21
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Commonly Overlooked
Business Expenses
Despite the fact that most people keep a
sharp eye out for deductible expenses,
its not uncommon to miss a few. Some
overlooked routine deductions include:
advertising giveaways and promotions
audio and video tapes related to
business skills
bank service charges
business association dues
business gifts
business-related magazines and books
(like this one)
casual labor and tips
casualty and theft losses
charitable contributions
coffee service
commissions
consultant fees
credit bureau fees
education to improve business skills
interest on credit cards for business
expenses
interest on personal loans used for
business purposes
office supplies
online computer services related to
business
parking and meters
petty cash funds
postage
promotion and publicity
seminars and trade shows
taxi and bus fare
telephone calls away from the business.
Must some types of business
supplies and equipment be fully
deducted in the year they are
purchased, but others deducted
over several years?
Current expenses, which include the
everyday costs of keeping your busi-
ness going, such as office supplies, rent
and electricity, can be deducted from
your businesss total income in the year
you incurred them. But expenditures
for things that will generate revenue in
future yearsfor example, a desk,
copier or carmust be capitalized,
that is, written off or amortized over
their useful lifeusually three, five or
seven yearsaccording to IRS rules.
There is one important exception to
this rule, discussed next.
Does this mean that, even if I buy
business equipment this year, I
must spread the deduction over a
period of five years?
Not necessarily. Normally the cost of
capital equipment”—equipment that
has a useful life of more than one
yearmust be deducted over a num-
ber of years, but there is one major
exception. In 2002, Internal Revenue
Code § 179 allowed you to deduct up
to $24,000 worth of capital assets in
any one year against your business
income. Even if you buy the equip-
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
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ment on credit, with no money down,
you can still qualify for this deduc-
tion. (The maximum deduction is
slated to rise to $25,00 in 2003.)
Business Assets That
Must Be Capitalized
Buildings
Cellular phones and beepers
Computer components and software
Copyrights and patents
Equipment
Improvements to business property
Inventory
Office furnishings and decorations
Small tools and equipment
Vehicles
Window coverings
A friend told me that
corporations get the best tax
breaks of any type of business,
so I am thinking of incorporating
my startup. What do you
recommend?
Theres a seed of truth in what your
friend told you, but keep in mind that
most tax benefits flow to profitable,
established businesses, not to startups
in their first few years. For example,
corporations can offer more tax-flex-
ible pension plans and greater medical
deductions than sole proprietors, part-
nerships or LLCs, but few startups
have the cash flow needed to take full
advantage of this tax break. Similarly,
the ability to split income between a
corporation and its ownersthereby
keeping income in lower tax brack-
etsis effective only if the business is
solidly profitable. And incorporating
adds state fees, as well as legal and
accounting charges, to your expense
load. So unless you are sure that sub-
stantial profits will begin to roll in
immediately, hold off.
For more information about choos-
ing the right structure for your busi-
ness, see Legal Structures for Small Busi-
nesses, above.
I am thinking about setting up a
consulting business with two of
my business associates. Do we
need to have partnership papers
drawn up? Does it make any
difference tax-wise?
If you go into business with other
people and split the expenses and
profits, under the tax code you are in
partnership whether you have signed a
written agreement or not. This means
that you will have to file a partnership
tax return every year, in addition to
your individual tax return.
Even though a formal partnership
agreement doesnt affect your tax sta-
tus, its essential to prepare one to es-
tablish all partners rights and respon-
sibilities vis-à-vis each other, as well
as to provide for how profits and
losses will be allocated to each part-
ner. For more information about part-
nerships, see Legal Structures for Small
Businesses, above.
S M A L L B U S I N E S S E S
5.23
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I am a building contractor with a
chance to land a big job. If I get
it, Ill need to hire people quickly.
Should I hire independent
contractors or employees?
If you will be telling your workers
where, when and how to do their jobs,
you should treat them as employees,
because thats how the IRS will clas-
sify them. Generally, you can treat
workers as independent contractors
only if they have their own businesses
and offer their services to several cli-
entsfor example, a specialty sign
painter with his own shop who you
hire to do a particular job.
If in doubt, err on the side of treat-
ing workers as employees.While clas-
sifying your workers as independent
contractors might save you money in
the short run (you wouldnt have to
pay the employers share of payroll
taxes or have an accountant keep
records and file payroll tax forms), it
may get you into big trouble if the
IRS later audits you. (The IRS is very
aware of the tax benefits of misclas-
sifying an employee as an independent
contractor and regularly audits com-
panies who hire large numbers of in-
dependent contractors.) If your com-
pany is audited, the IRS may reclas-
sify your independent contractors as
employeeswith the result that you
are assessed hefty back taxes, penalties
and interest.
Ive heard that I can no longer
claim a deduction for an office
in my home. But I also see that
the IRS has a form for claiming
home office expenses. Whats
the story?
Its not as confusing as it sounds. A
while back, the Supreme Court told a
doctor who was taking work home
from the hospital that he couldnt
take a depreciation deduction for the
space used at his condo. But this is
quite different from maintaining a
home-based business. If you run a
business out of your home, you can
usually claim a deduction for the por-
tion of the home used for business.
Also, you can deduct related costs
utilities, insurance, remodeling
whether you own or rent.
For more information about running
a home-based business, see the next
section.
I am planning a trip to
Los Angeles to attend a trade
show. Can I take my family
along for a vacation and still be
able to deduct the expenses?
If you take others with you on a busi-
ness trip, you can deduct business ex-
penses for the trip no greater than if you
were traveling alone. If on the trip your
family rides in the back seat of the car
and stays with you in one standard mo-
tel room, then you can fully deduct your
automobile and hotel expenses. You can
also fully deduct the cost of your air
tickets even if they feature a two-for-one
or bring along the family discount.
You cant claim a deduction for your
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familys meals or jaunts to Disneyland
or Universal Studios, however. And if
you extend your stay and partake in
some of the fun after the business is
over, the expenses attributed to the
nonbusiness days arent deductible,
unless you extended your stay to get
discounted airfare (the Saturday over-
night requirement). In this case, your
hotel room and your own meals would
be deductible.
ef
More Information About
Small Business Taxes
Tax Savvy for Small Business
, by
Frederick W. Daily (Nolo), tells small
business owners what they need to know
about federal taxes and shows them how
to make the right tax decisions.
Hiring Independent Contractors: The
Employers Legal Guide
, by Stephen
Fishman (Nolo), explains who qualifies as
an independent contractor, describes
applicable tax rules and shows employers
how to set up effective working agree-
ments with independent contractors.
Working for Yourself: Law & Taxes for
Freelancers, Independent Contractors &
Consultants,
by Stephen Fishman (Nolo),
is designed for the estimated 20 million
Americans who are self-employed and
offer their services on a contract basis.
Home-Based
Businesses
As technology advances, it becomes
more and more convenient and eco-
nomical to operate a business from
home. Depending on local zoning
rules, as long as the business is small,
quiet and doesnt create traffic or
parking problems, its usually legal to
do so. But as with any other business
endeavor, it pays to know the rules
before you begin.
Is a home-based business legally
different from other businesses?
No. The basic legal issues, such as
picking a name for your business and
deciding whether to operate as a sole
proprietorship, partnership, limited
liability company or corporation, are
the same. Similarly, when it comes to
signing contracts, hiring employees
and collecting from your customers,
the laws are identical whether you run
your business from home or the top
floor of a high-rise.
Are there laws that restrict a
persons right to operate a
business from home?
Municipalities have the legal right to
establish rules about what types of
activities can be carried out in differ-
ent geographic areas. For example,
laws and ordinances often establish
S M A L L B U S I N E S S E S
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zones for stores and offices (commer-
cial zones), factories (industrial zones)
and houses (residential zones). In
some residential areasespecially in
affluent communitieslocal zoning
ordinances absolutely prohibit all
types of business. In the great major-
ity of municipalities, however, resi-
dential zoning rules allow small non-
polluting home businesses, as long as
the home is used primarily as a resi-
dence and the business activities dont
negatively affect neighbors.
How can I find out whether
residential zoning rules allow
the home-based business I have
in mind?
Get a copy of your local ordinance
from your city or county clerks office,
the city attorneys office or your pub-
lic library, and read it carefully. Zon-
ing ordinances are worded in many
different ways to limit business activi-
ties in residential areas. Some are ex-
tremely vague, allowing customary
home-based occupations. Others
allow homeowners to use their houses
for a broadbut, unfortunately, not
very specificlist of business pur-
poses (for example, professions and
domestic occupations, crafts or ser-
vices). Still others contain a detailed
list of approved occupations, such as
law, dentistry, medicine, music les-
sons, photography, cabinet making.
If you read your ordinance and still
arent sure whether your business is
okay, you may be tempted to talk to
zoning or planning officials. But until
you figure out what the rules and
politics of your locality are, it may be
best to do this without identifying
and calling attention to yourself. (For
example, have a friend who lives
nearby make inquiries.)
The business I want to run from
home is not specifically allowed
or prohibited by my local
ordinance. What should I do to
avoid trouble?
Start by understanding that in most
areas zoning and building officials
dont actively search for violations.
The great majority of home-based
businesses that run into trouble do so
when a neighbor complainsoften
because of noise or parking problems,
or even because of the unfounded fear
that your business is doing something
illegal such as selling drugs.
It follows that your best approach
is often to explain your business
activities to your neighbors and make
sure that your activities are not worry-
ing or inconveniencing them. For
example, if you teach piano lessons or
do physical therapy from your home
and your students or clients will often
come and go, make sure your neigh-
bors are not bothered by noise or los-
ing customary on-street parking
spaces.
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I live in a planned development
that has its own rules for home-
based businesses. Do these
control my business activities or
can I rely on my citys home-
based business ordinance,
which is less restrictive?
In an effort to protect residential
property values, most subdivisions,
condos and planned unit develop-
ments create spe-
cial rulestypi-
cally called Cov-
enants, Conditions
and Restrictions
(CC&Rs)that
govern many as-
pects of property
use. Rules pertain-
ing to home-based
businesses are
often significantly
stricter than those
found in city ordi-
nances. As long as
the rules of your
planned develop-
ment are reason-
ably clear and
consistently en-
forced, you must
follow them.
Will the local ordinance
regulating home-based
businesses include rules about
specific activities, such as
making noise, putting up signs
or having employees?
Quite possibly. Many ordinances
especially those which are fairly vague
as to the type of business you can run
from your homerestrict how you can
carry out your
business. The
most frequent
rules limit your
use of on-street
parking, prohibit
outside signs,
limit car and
truck traffic and
restrict the num-
ber of employees
who can work at
your house on a
regular basis (some
prohibit employ-
ees altogether). In
addition, some
zoning ordinances
limit the percent-
age of your homes
floor space that can
be devoted to the
business. Again,
youll need to study your local ordi-
nance carefully to see how these rules
will affect you.
If Municipal Officials Say No
to Your Home-Based Business
In many cities and counties, if a planning or
zoning board rejects your business permit
appplication, you can appealoften to the city
council or county board of supervisors. While this
can be an uphill battle, it is likely to be less so if
you have the support of all affected neighbors.
You may also be able to get an overly restrictive
zoning ordinance amended by your municipalitys
governing body. For example, in some commu-
nities, people are working to amend ordinances
that prohibit home-based businesses entirely or
allow only traditional home-based businesses
to permit businesses that rely on the use of
computers and other hightech equipment.
S M A L L B U S I N E S S E S
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I sell my consulting services to a
number of businesses. Does
maintaining a home office help
me establish independent
contractor status with the IRS?
No. An independent contractor is a
person who controls both the outcome
of a project and the means of accom-
plishing it, and who offers services to
a number of businesses or individual
purchasers. Although having an office
or place of business is one factor the
IRS looks at in determining whether
an individual qualifies as an indepen-
dent contractor, it makes no difference
whether your office is located at home
or in a traditional business setting.
Are there tax advantages to
working from home?
Almost all ordinary and necessary
business expenses (everything from
wages to computers to paper clips) are
tax deductible, no matter where they
are incurredin a factory or office,
while traveling or at home.
But if you operate your business
from home and qualify under IRS
rules, you may be able to deduct part
of your rent from your income
taxesor if you own your home, take
a depreciation deduction.
You may also be eligible to deduct
a portion of your total utility, home
repair and maintenance, property tax
and house insurance costs, based on
the percentage of your residence you
use for business purposes.
To qualify for home-office deduc-
tions, the IRS requires that two legal
tests be met:
you must use your business space
regularly and exclusively for busi-
ness purposes, and
your home office must the be the
principal place where you conduct
your business. This rule is satisfied
if your office is used for administra-
tive or managerial activities, as long
as these activities arent often
conducted at another business
location. Alternatively, you must
meet clients at home or use a
separate structure on your property
exclusively for business purposes.
Note that the amount of your
deduction cant exceed your home-
based businesss total profit.
Insuring Your
Home-Based Business
Its a mistake to rely on a homeowners
or renters insurance policy to cover your
home-based business. These policies
often exclude or strictly limit coverage for
business equipment and injuries to
business visitors. For example, if your
computer is stolen or a client or business
associate trips and falls on your steps,
you may not be covered.
Fortunately, its easy to avoid these
nasty surprises. Sit down with your
insurance agent and fully disclose your
planned business operation. Youll find
that its relatively inexpensive to add
business coverage to your homeowners
policyand its a tax-deductible ex-
pense. But be sure to check pricessome
insurance companies provide special
cost-effective policies designed to protect
both homes and home-based businesses.
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How big will my home-office tax
deduction be if my business
qualifies under IRS rules?
To determine your deduction, you
first need to figure out how much of
your home you use for business as
compared to other purposes. Do this
by dividing the number of square feet
used for your home business by the
total square footage of your home. The
resulting percentage of business usage
determines how much of your rent (or,
if you are a homeowner, depreciation),
insurance, utilities and other expenses
are deductible. But remember, the
amount of the deduction cant be
larger than the profit your home-based
business generates. (Additional techni-
cal rules apply to calculating deprecia-
tion on houses you own to allow for
the fact that the structure, but not the
land, depreciates.) For more informa-
tion, see IRS Publication 587, Busi-
ness Use of Your Home (you can view it
online at http://www.irs.gov).
Do I need to watch out for any
tax traps when claiming
deductions for my home office?
Claiming a home-office deduction
increases your audit risk slightly, but
this neednt be a big fear if you care-
fully follow the rules.
Keep in mind that if you sell your
house, the depreciation portion of the
home-based office deductions you have
previously taken will be subject to tax
in that year (up to a maximum of
25%), whether you made a profit or
not. And you cant use the $250,000
per person exclusion of profits on the
sale of a home to offset this tax. For
example, if your depreciation deduc-
tions total $5,000 for the last seven
years, you will be taxed on this amount
in the year you sell your house. Despite
this tax, its generally wise to continue
to take your home-office deductions
each year. Especially for people who
dont plan to sell their houses anytime
soon, its usually beneficial to receive a
tax break today that you wont have to
repay for many years. You can use your
tax savings to help your business grow.
I have a full-time job, but I also
operate a separate part-time
business from home. Can I claim
a tax deduction for my home-
based business expenses?
Yes, as long as your business meets
certain IRS rules. It makes no differ-
ence that you work only part-time at
your home-based business or that you
have another occupation. But your
business must be more than a dis-
guised hobbyit has to pass muster
with the IRS as a real business.
The IRS defines a business as any
activity engaged in to make a profit.
If a venture makes moneyeven a
small amountin three of five con-
secutive years, it is presumed to pos-
sess a profit motive. (IRC §183(d).)
However, courts have held that some
activities that failed to meet this
three-profitable-years-out-of-five test
still qualify as a business if they are
run in a businesslike manner. When
determining whether a nonprofitable
venture qualifies for a deduction,
courts may look at whether you kept
thorough business records, had a sepa-
rate business bank account, prepared
S M A L L B U S I N E S S E S
5.29
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advertising or other marketing mate-
rials and obtained any necessary li-
censes and permits (a business license
from your city, for example).
ef
More Information About
Home-Based Business
Tax Savvy for Small Business,
by
Frederick W. Daily (Nolo), shows you
how to take the home-office deduction,
including depreciation and household
expenses.
The Best Home Businesses for the 21st
Century
, by Paul & Sarah Edwards (J.P.
Tarcher), profiles over 100 workable
home-based businesses, including infor-
mation about how each business works
and what sets of skills and opportunities
are necessary to succeed.
Working for Yourself: Law & Taxes for
Freelancers, Independent Contractors &
Consultants,
by Stephen Fishman (Nolo),
shows independent contractors how to
meet business start-up requirements,
comply with strict IRS rules and make
sure they get paid in full and on time.
Employers
Rights &
Responsibilities
At some point during your business
venture, you may need to hire people
to help you manage your workload.
When you do, youll be held account-
able to a host of state and federal laws
that regulate your relationship with
your employees. Among the things
youll be expected to know and under-
stand:
proper hiring practices, including
how to write appropriate job
descriptions, conduct interviews and
respect applicants privacy rights
wage and hour laws, as well as the
laws that govern retirement plans,
healthcare benefits and life insur-
ance benefits
workplace safety rules and regulations
how to write an employee handbook
and conduct performance reviews,
including what you should and
shouldnt put in an employees
personnel file
how to avoid sexual harassment as
well as discrimination based on
gender, age, race, pregnancy, sexual
orientation and national origin, and
how to avoid trouble if you need to
fire an employee.
This section provides you with an
overview of your role as an employer.
And you can find more guidance else-
where in this book. Employees
rightsincluding questions and an-
swers about wages, hours and work-
place safetyare discussed in Chapter
4; pension plans are covered in Chap-
ter 14.
First things first. How can I write
advertisements that will attract
the best pool of potential
employeeswithout getting in
legal hot water?
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Many small employers get tripped up
when summarizing a job in an adver-
tisement. This can easily happen if
youre not familiar with the legal
guidelines.
Nuances in an ad can be
used as evidence of discrimination
against applicants of a particular gen-
der, age or marital status.
There are a number of pitfalls
to avoid in job ads:
DONT USE USE
Salesman Salesperson
College Student Part-time Worker
Handyman General Repair
Person
Gal Friday Office Manager
Married Couple Two-Person Job
Counter Girl Retail Clerk
Waiter Wait Staff
Young Energetic
Also, requiring a high school or
college degree may be discriminatory
in some job categories.
You can avoid
problems by stating that an applicant
must have a degree or equivalent ex-
perience.
Probably the best way to write an
ad that meets legal requirements is to
stick to the job skills needed and the
basic responsibilities. Some examples:
Fifty-unit apartment complex
seeks experienced manager with gen-
eral maintenance skills.
Mid-sized manufacturing com-
pany has opening for accountant with
tax experience to oversee interstate
accounts.
Cook trainee position available in
new vegetarian restaurant.
Flexible
hours.
Help Wanted ads placed by federal
contractors must state that all quali-
fied applicants will receive consider-
ation for employment without regard
to race, color, religion, sex or national
origin.
Ads often express this with the
phrase, An Equal Opportunity Em-
ployer. To show your intent to be
fair, you may want to include this
phrase in your ad even if youre not a
federal contractor.
Any tips on how to conduct a
good, forthright interviewand
again, avoid legal trouble?
Good preparation is your best ally.
Before you begin to interview appli-
cants for a job opening, write down a
set of questions focusing on the job
duties and the applicants skills and
experience. For example:
Tell me about your experience in
running a mailroom.
How much experience did you
have in making cold calls on your last
job?
Explain how you typically go
about organizing your workday.
Have any of your jobs required
strong leadership skills?
By writing down the questions and
sticking to the same format at all in-
terviews for the position, you reduce
the risk that a rejected applicant will
later complain about unequal treat-
ment.
Its also smart to summarize the
applicants answers for your filesbut
dont get so involved in documenting
the interview that you forget to listen
closely to the applicant.
And dont be
so locked in to your list of questions
that you dont follow up on some-
S M A L L B U S I N E S S E S
5.31
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thing significant that an applicant has
said, or try to pin down an ambiguous
or evasive response.
To break the ice, you might give the
applicant some information about the
jobthe duties, hours, pay range, ben-
efits and career opportunities.
Ques-
tions about the applicants work history
and experience that may be relevant to
the job opening are always appropriate.
But dont encourage the applicant to
divulge the trade secrets of a present or
former employerespecially a competi-
tor.
That can lead to a lawsuit.
And be
cautious about an applicant who volun-
teers such information or promises to
bring secrets to the new position; such
an applicant will probably play fast and
loose with your own companys secrets,
given the chance.
Ive heard horror stories about
employers who get sued for
discriminatingboth by
employees and even by people
theyve interviewed but decided
not to hire. Whats the bottom
line?
Federal and state laws prohibit you
from discriminating against an em-
ployee or applicant because of race,
color, gender, religious beliefs, na-
tional origin, disabilityor age if the
person is at least 40 years old.
Also,
many states and cities have laws pro-
hibiting employment discrimination
based on other characteristics, such as
marital status or sexual orientation.
A particular form of discrimination
becomes illegal when Congress, a
state legislature or a city council de-
cides that a characteristicrace, for
examplebears no legitimate rela-
tionship to employment decisions.
As
an employer, you must be prepared to
show that your hiring and promotion
decisions have been based on objective
criteria and that the more qualified
applicant has always succeeded.
Still, when hiring, you can exercise
a wide range of discretion based on
business considerations.
You remain
free to hire, promote, discipline and
fire employees and to set their duties
and salaries based on their skills, ex-
perience, performance and reliabil-
ityfactors that are logically tied to
valid business purposes.
The law also prohibits employer
practices that seem neutral, but may
have a disproportionate impact on a
particular group of people. Again, a
policy is legal only if theres a valid
business reason for its existence. For
example, refusing to hire people who
dont meet a minimum height and
weight is permissible if its clearly
related to the physical demands of the
particular jobfelling and hauling
huge trees, for instance. But applying
such a requirement to exclude appli-
cants for a job as a cook or reception-
ist wouldnt pass legal muster.
How can I check out a
prospective employee without
violating his or her right to
privacy?
As an employer, you likely believe
that the more information you have
about job applicants, the better your
hiring decisions will be.
But make
sure any information you seek will
actually be helpful to you. Its often a
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waste of time and effort to acquire and
review transcripts and credit re-
portsalthough occasionally theyre
useful.
If youre hiring a bookkeeper,
for example, previous job experience
is much more important than the
grades the applicant received in a
community college bookkeeping pro-
gram ten years ago.
On the other
hand, if the applicant is fresh out of
school and has never held a bookkeep-
ing job, a transcript may yield some
insights.
Similarly, if youre hiring a
switchboard operator, information on
a credit report would be irrelevant.
But if youre filling a job for a bar
manager who will be handling large
cash receipts, you might want to see a
credit report to learn if the applicant
is in financial trouble.
To avoid claims that youve in-
vaded a prospective employees pri-
vacy, always obtain the applicants
written consent before you contact a
former employer, request a credit re-
port or send for high school or college
transcripts.
Finally, its usually not wise to re-
sort to screening applicants through
personality tests; laws and court rul-
ings restrict your right to use them in
most states.
Can I require job applicants to
pass a drug test?
It depends on the laws of your state.
Although many states allow employ-
ers to test all applicants for illegal
drug use, some states allow testing
only for certain jobsthose that re-
quire driving, carrying a weapon or
operating heavy machinery, for ex-
ample. Before requiring any applicant
to take a drug test, you should check
with your states department of labor
to find out what the law allows.
In general, you will be on safest
legal ground if you have a strong, le-
gitimate reason for testing appli-
cantsespecially if your reason in-
volves protecting the publics safety.
Is drug use a disability?
When it passed the Americans with
Disabilities Act, Congress refused to
recognize illegal drug use or current
drug addiction as a disability. There-
fore, if an applicant fails a legally ad-
ministered drug test, you will not
violate the ADA by refusing to hire
that applicant.
However, the ADA does protect
applicants who no longer use illegal
drugs and have successfully completed
(or are currently attending) a super-
vised drug rehabilitation program.
Although you can require these appli-
cants to take a drug test or show you
proof of their participation in a reha-
bilitation program, you cannot refuse
to hire them solely because they used
to take illegal drugs.
How do I avoid legal problems
when giving employee
evaluations?
Be honest and consistent with your
employees. If a fired employee ini-
tiates a legal action against you, a
judge or jury will probably see those
evaluationsand will want to see that
you were consistent in word and deed.
For example, a jury will sense that
something is wrong if you consis-
S M A L L B U S I N E S S E S
5.33
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tently rate a workers performance as
poor or mediocrebut continue to
hand out generous raises or perhaps
even promote the person. The logical
conclusion: You didnt take seriously
the criticisms in your evaluation re-
port, so you shouldnt expect the em-
ployee to take them seriously, either.
Its just as damaging to give an em-
ployee glowing praise in report after
reportperhaps to make the em-
ployee feel goodand then to fire
him or her for a single infraction.
That strikes most people as unfair.
And unfair employers often lose court
fights, especially in situations where a
sympathetic employee appears to have
been treated harshly.
If your system is working, employ-
ees with excellent evaluations should
not need to be fired for poor perfor-
mance. And employees with poor per-
formance shouldnt be getting big
raises.
As a small employer, what
should I keep in personnel files
and what right do employees
have to see whats inside?
Create a file for each employee in
which you keep all job-related infor-
mation, including:
job description
job application
offer of employment
IRS form W-4, the Employees
Withholding Allowance Certificate
receipt for employee handbook
periodic performance evaluations
sign-up forms for employee benefits
complaints from customers and co-
workers
awards or citations for excellent
performance
warnings and disciplinary actions,
and
notes on an employees attendance
or tardiness.
Experts recommend keeping one
separate file for all of your employees
INS I-9 Employment Eligibility Veri-
fication formsthe forms you have to
complete for new employees demon-
strating that they are authorized to
work in the United States. There are
two practical reasons for keeping these
forms in their own fileand out of
your workers personnel files. First,
this will limit the number of people
who know an employees immigration
status. If you keep an employees I-9
in her personnel file, anyone who re-
views that file (a supervisor, human
resources employee or payroll admin-
istrator) will know whether or not the
employee is a citizen. This could lead
to problems later, if the employee
claims that she was discriminated
against based on her immigration sta-
tus. If you keep the forms in a sepa-
rate file, fewer people will be aware of
the employees immigration status
and the employee will have a much
tougher time trying to prove that im-
portant employment decisions were
made on that basis.
Second, if the INS decides to audit
you, they are entitled to see I-9 forms
as they are kept in the normal course
of business. If you keep these forms in
each employees personnel file, that
means the government will rummage
through all of these filescausing
inconvenience for you and privacy
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concerns for your employees. On the
other hand, if you keep your forms in
a single folder, you can simply hand
over that folder if the INS comes
knocking.
Special Rules for
Medical Records
The Americans with Disabilities Act
(ADA) imposes very strict limitations on
how you must handle information ob-
tained from medical examinations and
inquiries. You must keep the information
in medical files that are separate from
nonmedical records, and you must store
the medical files in a separate locked
cabinet. To further guarantee the confi-
dentiality of medical records, designate a
specific person to have access to those
files.
The ADA allows very limited disclosure
of medical information. Under the ADA,
you may:
inform supervisors about necessary
restrictions on an employees duties
and about necessary accommodations
inform first aid and safety workers
about a disability that may require
emergency treatment and about
specific procedures that are needed if
the workplace must be evacuated, and
provide medical information required
by government officials and by
insurance companies that require a
medical exam for health or life
insurance.
Otherwise, dont disclose medical
information about employees. Although
the confidentiality provisions of the ADA
protect only some disabled workers,
some states laws also require confiden-
tial handling of medical records. The best
policy is to treat all medical information
about all employees as confidential.
Many states have laws giving em-
ployeesand former employees
access to their own personnel files.
How much access varies from state to
state. Typically, if your state allows
employees to see their files, you can
insist that you or another supervisor
be present to make sure nothing is
taken, added or changed. Some state
laws allow employees to obtain copies
of items in their files, but not neces-
sarily all items. For example, a law
may limit the employee to copies of
documents that he or she has signed,
such as a job application. If an em-
ployee is entitled to a copy of an item
in the file or if youre inclined to let
the employee have a copy of any docu-
ment in the file, yourather than the
employeeshould make the copy.
Usually, you wont have to let the
employee see sensitive items such as
information assembled for a criminal
investigation, reference letters and
information that might violate the
privacy of other people. In a few
states, employees may insert rebuttals
to information in their personnel files
with which they disagree.
Am I required to offer my
employees paid vacation,
disability, maternity or sick
leave?
No law requires you to offer paid va-
cation time or paid sick or disability
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leave to your employees. You could
choose to offer nonealthough a
policy like this could make it tough
to attract high-quality employees in a
competitive market. If you decide to
adopt a policy that gives your em-
ployees paid vacation or sick time,
you must apply the policy consis-
tently to all employees. If you offer
some employees a more attractive
package than others, you are opening
yourself up to claims of unfair treat-
ment.
The same rules apply to pregnancy
and maternity leave. No law requires
employers to provide paid leave for
employees during their pregnancy or
immediately after they give birth.
However, if you choose to offer paid
vacation, sick or disability leave, you
must allow pregnant women and
women who have just given birth to
make use of these policies. For ex-
ample, a new mother who is physi-
cally unable to work following the
birth of her child must be allowed to
use paid disability leave if such leave
is available to other employees.
Must I offer my employees
unpaid leave?
There are two situations in which you
might be legally required to offer
unpaid leave to your employees. First,
if the employee requesting leave
qualifies as disabled under the Ameri-
cans with Disabilities Act (see below
for an explanation of the ADA), and
requests the leave as a reasonable ac-
commodation for the disability, you
may be required to grant the leave
request. For example, an employee
who needs time off to undergo surgery
or treatment for a disabling condition
is probably entitled to unpaid leave,
unless you can show that providing
the leave would be an undue hardship
to your business.
Second, your employees might be
entitled to unpaid leave under the
Family and Medical Leave Act
(FMLA) or a similar state statute. See
Chapter 4, Workplace Rights, for an
explanation of when you must provide
leave under the FMLA.
What am I legally required to
do for my disabled employees?
The Americans with Disabilities Act
(ADA) prohibits employers from dis-
criminating against disabled appli-
cants or employees. However, the
ADA does not require employers to
hire or retain workers who cant do
their jobs. Only qualified workers
with disabilities”—employees who
can perform all the essential elements
of the job, with or without some form
of accommodation from their employ-
ersare protected by the law.
An employee is legally disabled if:
He has a physical or mental impair-
ment that substantially limits a
major life activity (such as the
ability to walk, talk, see, hear,
breathe, reason or take care of
oneself). Courts tend not to cat-
egorically characterize certain
conditions as disabilitiesinstead,
they consider the effect of the
particular condition on the particu-
lar employee.
He has a record or history of impair-
ment, or
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He is regarded by the employer as
disabled, even if the employer is in-
correct.
The ADA also requires employers
to make reasonable accommodations
for their disabled employees. This
means you may have to provide some
assistance or make some changes in
the job or workplace to enable the
worker to do their job. For example,
an employer might lower the height
of a workspace or install ramps to ac-
commodate a worker in a wheelchair,
provide voice-recognition software for
a worker with a repetitive stress disor-
der or provide TDD telephone equip-
ment for a worker with impaired
hearing.
It is your employees responsibility
to inform you of his disability and
request a reasonable accommoda-
tionyou dont have to be psychic to
follow the law. Once an employee
raises the issue, you must engage in a
dialogue with the worker to try to
figure out what kinds of accommoda-
tions might be effective and practical.
Although you dont have to provide
the precise accommodation your
worker requests, you do have to work
together to come up with a reasonable
solution.
Employers dont have to provide an
accommodation if it would cause their
business to suffer undue hardship”—
essentially, if the cost or effect of the
accommodation would be excessive.
There are no hard and fast rules about
when an accommodation poses an un-
due hardship. When faced with this
issue, courts consider a number of fac-
tors, including:
the cost of the accommodation
the size and financial resources of
the employer
the structure of the employers
business, and
the effect the accommodation would
have on the business.
Employees With
Mental Disabilities
The ADA applies equally to employees
with physical disabilities and employees
with mental or psychiatric disabilities.
Therefore, workers who suffer from
severe depression, bipolar disorder,
schizophrenia, attention deficit disorder
and other mental diseases or conditions
may be covered by the ADA, if their
condition meets the ADAs definition of a
disability.
Workers with mental disabilities are
also entitled to reasonable accommoda-
tions. For example, you might allow an
employee whose anti-depressant medica-
tion makes her groggy in the morning to
come in a few hours later, or provide an
office with soundproofed walls to reduce
distractions for an employee who suffers
from attention deficit disorder.
One of my employees just told
me that she was sexually
harassed by a coworker. What
should I do?
Most employers feel anxious when
faced with complaints of sexual ha-
rassment. And with good reason: such
complaints can lead to workplace ten-
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sion, government investigations and
even costly legal battles. If the com-
plaint is mishandled, even uninten-
tionally, an employer may unwit-
tingly put itself out of business.
Here are some basics to keep in
mind if you receive a complaint:
Educate yourself. Do some research
on the law of sexual harassment
learn what sexual harassment is,
how it is proven in court and what
your responsibilities are as an
employer. An excellent place to
start is Sexual Harassment on the Job,
by William Petrocelli and Barbara
Kate Repa (Nolo).
Follow established procedures. If you
have an employee handbook or other
documented policies relating to
sexual harassment, follow those
policies. Dont open yourself up to
claims of unfair treatment by
bending the rules.
Interview the people involved. Start by
talking to the person who com-
plained. Then talk to the employee
accused of harassment and any
witnesses. Get details: what was said
or done, when, where and who else
was there.
Look for corroboration or contradiction.
Usually, the accuser and accused
offer different versions of the
incident, leaving you with no way of
knowing whos telling the truth.
Turn to other sources for clues. For
example, schedules, time cards and
other attendance records (for
trainings, meetings, and so on) may
help you determine if each party was
where they claimed to be. Witnesses
may have seen part of the incident.
And in some cases, documents will
prove one side right. Its hard to
argue with an X-rated email.
Keep it confidential. A sexual harass-
ment complaint can polarize a
workplace. Workers will likely side
with either the complaining em-
ployee or the accused employee, and
the rumor mill will start working
overtime. Worse, if too many
details about the complaint are
leaked, you may be accused of
damaging the reputation of the
alleged victim or alleged harasser
and get slapped with a defamation
lawsuit. Avoid these problems by
insisting on confidentiality, and
practicing it in your investigation.
Write it all down. Take notes during
your interviews. Before the inter-
view is over, go back through your
notes with the interviewee, to make
sure you got it right. Write down
the steps you have taken to learn the
truth, including interviews you have
conducted and documents you have
reviewed. Document any action
taken against the accused, or the
reasons for deciding not to take
action. This written record will
protect you later, if your employee
claims that you ignored her com-
plaint or conducted a one-sided
investigation.
Cooperate with government agencies. If
the accuser makes a complaint with a
government agency (either the
federal Equal Employment Opportu-
nity Commission (EEOC) or an
equivalent state agency), that agency
may investigate. Try to provide the
agency with the materials it requests,
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but remember that the agency is
gathering evidence that could be
used against you later. This is a good
time to consider hiring a lawyer to
advise you.
Dont retaliate. It is against the law
to punish someone for making a
sexual harassment complaint. The
most obvious forms of retaliation are
termination, discipline, demotion,
pay cuts or threats of any of these
actions. More subtle forms of
retaliation may include changing
the shift hours or work area of the
accuser, changing the accusers job
responsibilities or reporting rela-
tionships and isolating the accuser
by leaving her out of meetings and
other office functions.
Take appropriate action against the
harasser. Once you have gathered all
the information available, sit down
and decide what you think really
happened. If you conclude that some
form of sexual harassment occurred,
figure out how to discipline the
harasser appropriately. Once you
have decided on an appropriate
action, take it quickly, document it
and notify the accuser.
My employees religious
differences are causing strife in
the workplace. What am I
required to do?
This is a tricky area. An increasing
number of employees are claiming
religious discrimination. And unfor-
tunately, the law in this delicate area
is unclear.
First, make sure you arent impos-
ing your religious beliefs on others.
You have the legal right to discuss
your own religious beliefs with an
employee, if youre so inclined, but
you cant persist to the point that the
employee feels youre being hostile,
intimidating or offensive. So if an em-
ployee objects to your discussion of
religious subjects or you get even an
inkling that your religious advances
are unwelcome, back off. Otherwise,
you may find yourself embroiled in a
lawsuit or administrative proceeding.
If employees complain to you that a
co-worker is badgering them with
religious views, you have a rightif
not a dutyto intervene, although
you must, of course, use the utmost
tact and sensitivity.
While you may feel that the best
way to resolve these knotty problems
is to simply banish religion from the
workplace, thats generally not a vi-
able alternative. Youre legally re-
quired to accommodate the religious
needs of employeesfor example, al-
lowing employees to pick and choose
the paid holidays they would like to
take during the year. You dont, how-
ever, need to do anything that would
cost more than a minimum amount or
that would cause more than minimal
inconvenience.
Some of my employees insist
they have a right to smoke
during breaks and at lunch, and
another group claims theyll quit
if I allow smoking on the
premises. Im caught in the
middle. What should I do?
Its well established that second-hand
tobacco smoke can harm the health of
S M A L L B U S I N E S S E S
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nonsmokers. Consequently, in many
states and municipalities, employers
are legally required to limit smoking
in the workplace. And a number of
locales have specific laws that ban or
limit smoking in public places; if
your workplace falls within the legal
definition of a public placea bar,
restaurant or hotel, for exampleyour
legal rights and responsibilities will
be clearly spelled out in the law.
A rule proposed by the Occupational
Health and Safety Administration
(OSHA) would allow only two choices:
youd have to either prohibit smoking
in the workplace, or limit it to areas
that are enclosed and ventilated di-
rectly to the outdoors. Under the rule,
you couldnt require employees to enter
the smoking areas when performing
their normal job duties. This proposal
is till under consideration.
Given the scientific facts and the
general direction in which the law is
moving, your safest legal course is to
restrict smoking in the workplace
and a total ban may be the only prac-
tical solution. Thats because in many
modern buildings, its too expen-
sivemaybe even impossibleto
provide a separate ventilation system
for a smokers room.
In addition to meeting the specific
requirements of laws and regulations
that limit or prohibit smoking in the
workplace, be aware that you may be
legally liable to nonsmoking employ-
ees if you dont take appropriate ac-
tions on their complaints.
Its been a bad year for my
businessand it looks as
though I may have to lay off
some workers. Are there legal
problems to avoid?
Generally, youre free to lay off or
terminate employees because business
conditions require it. But if you do
cut back, dont leave your business
open to claims that the layoffs were
really a pretext for getting rid of em-
ployees for illegal reasons.
Be sensitive to how your actions
may be perceived. If the layoff prima-
rily affects workers of a particular
race, or women or older employees,
someone may well question your mo-
tives. Its better to spread the pain
around; dont let the burden fall on
just one group of employees.
How can I make sure that my
employees dont reveal my
companys trade secrets to a
competitorespecially after
they leave the company?
You should take two steps to protect
your trade secrets from disclosure by
former employees: always treat your
trade secrets as confidential, and re-
quire any employee who will come in
contact with your trade secrets to sign
a nondisclosure agreement.
A trade secret is any information
that provides its owner with a com-
petitive advantage in the market, and
is treated as a secretthat is, handled
in a manner that can reasonably be
expected to prevent others from learn-
ing about it. Examples of trade se-
crets might include recipes, manufac-
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turing processes, customer or pricing
lists and ideas for new products. If
you own a trade secret, you have the
legal right to prevent anyone from
disclosing, copying or using it, and
can sue anyone who violates these
rights to your disadvantage.
Always keep your trade secrets con-
fidential. For example, you should
mark documents containing trade se-
crets confidential and limit their
circulation, disclose trade secret mate-
rial only to those employees with a
real need to know, keep materials in a
safe place and have a written policy
which makes it clear that trade secrets
are not to be revealed to outsiders.
In addition to taking steps to keep
your trade secrets confidential, you
should also require any employee who
will come in contact with your trade
secrets to sign a nondisclosure agree-
ment, or NDA. An NDA is a contract
in which the parties promise to keep
confidential any trade secrets dis-
closed during the employment rela-
tionship. You can find more informa-
tion and sample NDA forms in Non-
disclosure Agreements by Stephen
Fishman (Nolo).
What are my legal obligations
to an employee who is leaving
the company?
Surprisingly, your responsibility to
your employees doesnt necessarily
end when the employment relation-
ship ends. Even after an employee
quits or is fired, you must:
Provide the employees final pay-
check in accordance with state law.
Most states require that an em-
ployee receive this check fairly
quickly, sometimes just a day or
two after the last day of work.
Provide severance pay. No law
requires employers to provide
severance pay (although a few states
require employers to pay severance to
workers fired in a plant closure). But
if you promise it, you must pay it to
all employees who meet your policys
requirements.
Give information on continuation of
health insurance, under a federal law
called the Consolidated Omnibus
Budget Reconciliation Act (CO-
BRA). If you offer your employees
health insurance, and your company
has 20 or more employees, you must
offer departing employees the
option of continued coverage under
the companys group health insur-
ance plan, at the workers expense,
for a specified period.
Allow former employees to view
their personnel files. Most states
provide employees and former
employees with the legal right to
see their personnel file, and to
receive copies of some of the docu-
ments relating to their job. State
laws vary as to how long employers
must keep these records for former
employees.
I have to give a reference for a
former employee I had to fire. I
dont want to be too positive
about him, but I am also afraid
he might sue me for unflattering
remarks. Advice?
The key to protecting yourself is to
stick to the facts and act in good faith.
S M A L L B U S I N E S S E S
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Youll get in trouble only if you exag-
gerate or cover up the truthor are
motivated by a desire to harm your
former employee.
Former employees who feel ma-
ligned can sue for defamationcalled
slander if the statements were spoken
or libel if they were written. To win a
defamation case, a former employee
must prove that you intentionally
gave out false information and that
the information harmed his or her
reputation. If you can show that the
information you provided was true,
the lawsuit will be dismissed.
And even if it turns out that the
information provided is untrue, em-
ployers in most states are entitled to
some protection in defamation cases.
This protection is based on a legal
doctrine called qualified privilege.
To receive the benefits, you must
show that:
you made the statement in good
faith
you and the person to whom you
disclosed the information shared a
common interest, and
you limited your statement to this
common interest.
The law recognizes that a former
employer and a prospective employer
share a common interest in the at-
tributes of an employee. To get the
protection of the qualified privilege,
your main task is to stick to facts that
youve reasonably investigated and to
lay aside your personal feelings about
the former employee.
A practical policyand one that
gives you a high degree of legal pro-
tectionis simply not to discuss an
employee with prospective employers
if you cant say something positive.
Just tell the person inquiring that its
not your policy to comment on former
workers.
Where an employees record is
truly mixed, its usually possible to
accent the positive while you try to
put negative information into a more
favorable perspective. If you do choose
to go into detail, dont hide the bad
news. In very extreme cases (in which
the former employee committed a se-
rious crime or engaged in dangerous
wrongdoing), you could be sued by
the new employer for concealing this
information.
Do I have the same legal
obligations to independent
contractors as I do to
employees?
Generally, an employer has more obli-
gations, both legally and financially,
to employees than to independent
contractors. The workplace rights
guaranteed to employees do not pro-
tect independent contractors, for the
most part. And an employer must
make certain contributions to the
government on behalf of its employ-
ees, while independent contractors are
expected to make these payments
themselves.
Here are a number of rules that ap-
ply only to employees:
Anti-discrimination laws. Most laws
prohibiting employers from dis-
criminating against employees or
applicants for employment based
such characteristics as race, gender,
national origin, religion, age or
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disability do not protect indepen-
dent contractors.
Wage and hour laws. Independent
contractors are not covered by laws
governing the minimum wage,
overtime pay and the like.
Medical and parental leave laws.
You
are not required to offer indepen-
dent contractors medical or parental
leave.
Workers compensation laws.
You do
not have to provide workers compen-
sation for independent contractors.
Unemployment insurance. You do not
have to contribute to unemploy-
ment insurance for independent
contractors.
Social Security contributions. You are
not required to make any Social
Security payments on behalf of
independent contractors.
Wage withholding. You are not
required to withhold state or federal
income tax, or state disability
insurance payments (where appli-
cable) from the paychecks of inde-
pendent contractors.
When can I classify a worker as
an independent contractor?
Different government agencies use
different tests to decide whether
workers should be classified as inde-
pendent contractors or employees.
Generally, these tests are intended to
figure out whether an independent
contractor is truly a self-employed
businessperson offering services to the
general public. The more discretion a
worker has to decide how, when and
for whom to perform work, the more
likely that the worker is an indepen-
dent contractor. For example, an inde-
pendent contractor might do similar
work for other companies, provide the
tools and equipment to do the job,
decide how to do the job (including
when, where and in what order to do
the work) and hire employees or assis-
tants to help out with big jobs. On
the other hand, a worker who works
only for you, under conditions deter-
mined by you, is more likely to be
classified as an employee.
ef
More Information About
Employers’ Rights and
Responsibilities
The Employers Legal Handbook,
by Fred
Steingold (Nolo), explains employers
legal rights and responsibilities in detail.
Dealing With Problem Employees
, by
Amy DelPo and Lisa Guerin (Nolo), offers
employers advice and step-by-step
instructions for handling problems in the
workplace, from giving effective perfor-
mance evaluations to firing employees
who dont work out.
Everyday Employment Law: The Basics
,
by Lisa Guerin and Amy DelPo (Nolo),
provides all the basic information, tips
and real-world examples employers need
to answer their employment law questions.
Information on independent contractors
can be found in
Hiring Independent Con-
tractors
by Stephen Fishman (Nolo).
For information on federal discrimina-
tion laws and lists of state resources,
contact the Equal Employment Opportu-
nity Commission, 1801 L St., NW,
S M A L L B U S I N E S S E S
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Washington, DC, 20507, 800-669 3362,
http://www.eeoc.gov.
For information on wage and hour
laws, workers compensation and family
and medical leave, contact the Depart-
ment of Labor, 200 Constitution Ave.,
NW, Washington, DC, 20210, 202-
693-4650, http://www.dol.gov.
For a variety of helpful employment law
resourcesincluding fact sheets, sample
policies and morevisit the website of
CCH, Inc., at http://www.toolkit.cch.com.
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General Sites for
Small Businesses
http://www.nolo.com
Nolo offers free self-help information and
small business books, software and forms
on a wide variety of subjects, including
starting and running your small business.
http://www.americanexpress.
com/smallbusiness
The American Express Small Business
Exchange helps you find information,
resources and customers for your small
business.
http://www.nfibonline.com
The National Federation of Independent
Business provides news, workshops and
action alerts for small business owners.
The NFIB is the nations largest advocacy
organization for small and independent
businesses.
http://www.sba.gov
The Small Business Administration pro-
vides information about starting, financ-
ing and expanding your small business.
http://
smallbusiness
.yahoo.com
Yahoo offers an abundance of links to
resources for small business people.
Sites for Nonprofit
Corporations
http://www.igc.org
The Institute for Global Communication
offers an extensive list of links to resources
for activism and nonprofit development.
http://www.boardsource.org
BoardSource, formerly
the National Center
for Nonprofit Boards, provides informa-
tion and publications to help you run a
successful nonprofit organization.
Sites for Independent
Contractors and Home-
Based Businesses
http://www.hoaa.com
The Home Office Association of America is
a national association for home-based
business people. It offers resources, ideas
and benefits to help you run a more profit-
able business from home. The site also
contains an extensive list of links to other
sites of interest to the self-employed.
http://www.ssa.gov
The Social Security Administration pro-
vides lots of information on regulations
and benefits for self-employed people.
i
abb
6
Patents
6.2 Qualifying for a
Patent
6.7 Obtaining a Patent
6.9 Enforcing a Patent
6.12 Putting a Patent to
Work
6.14 How Patents Differ
From Copyrights and
Trademarks
To invent, you need a good
imagination and a pile of junk.
THOMAS EDISON
Many of us muse about the million-dollar idea: the inven-
tion that will make life easier for others and more lucrative for us.
Most of these ideas never get off the ground, however; we decide
its not really worth the time and effort to create the perfect dog
toothbrush, clothes hanger or juice squeezer. But every now and
then we may hit on a winneran idea worth developing, market-
ing and protecting. In these cases, we must turn to the patent
laws for help.
eeef
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This chapter addresses the basic legal
issues that arise in the patent area,
answering questions such as:
What is a patent?
When does a particular invention
qualify for a patent?
How do you get a patent in the U.S.
or abroad?
How are patent rights enforced?
How can you profit from your
patent?
Qualifying
for a Patent
THERE IS NOTHING WHICH
PERSEVERING EFFORT AND UNCEASING
AND DILIGENT CARE CANNOT
ACCOMPLISH.
SENECA
A patent is a document issued by the
U.S. Patent and Trademark Office
(PTO) that grants a monopoly for a
limited period of time on the manu-
facture, use and sale of an invention.
What types of inventions can be
patented?
The PTO issues three different kinds
of patents: utility patents, design pat-
ents and plant patents.
Design patents last for 14 years
from the date the patent issues. Plant
and utility patents last for 20 years
from the date of filing.
To qualify for a utility patentby
far the most common type of patent
an invention must be:
a process or method for producing a
useful, concrete and tangible result
(such as a genetic engineering
procedure, an investment strategy or
computer software)
a machine (usually something with
moving parts or circuitry, such as a
cigarette lighter, sewage treatment
system, laser or photocopier)
an article of manufacture (such as an
eraser, tire, transistor or hand tool)
a composition of matter (such as a
chemical composition, drug, soap or
genetically altered life form), or
an improvement of an invention
that fits within one of the first four
categories.
Often, an invention will fall into
more than one category. For instance,
a laser can usually be described both
as a process (the steps necessary to
produce the laser beam) and a ma-
chine (a device that implements the
steps to produce the laser beam). Re-
gardless of the number of categories
into which a particular invention fits,
it can receive only one utility patent.
If an invention fits into one of the
categories described above, it is known
as statutory subject matter and has
passed the first test in qualifying for a
patent. But an inventors creation
must overcome several additional
hurdles before the PTO will issue a
patent. The invention must also:
have some utility, no matter how
trivial
be novel (that is, it must be differ-
ent from all previous inventions in
some important way), and
P A T E N T S
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be nonobvious (a surprising and
significant development) to some-
body who understands the technical
field of the invention.
For design patents, the law requires
that the design be novel, nonobvious
and nonfunctional. For example, a
new shape for a car fender, bottle or
flashlight that doesnt improve its
functionality would qualify.
Finally, plants may qualify for a
patent if they are both novel and
nonobvious. Plant patents are issued
less frequently than any other type of
patent.
More Examples of
Patentable Subject
Matter
The following items are just some of the
things that might qualify for patent protec-
tion: biological inventions; carpet de-
signs; new chemical formulas, processes
or procedures; clothing accessories and
designs; computer hardware and periph-
erals; computer software; containers;
cosmetics; decorative hardware; electrical
inventions; electronic circuits; fabrics and
fabric designs; food inventions; furniture
design; games (board, box and instruc-
tions); housewares; jewelry; laser light
shows; machines; magic tricks or tech-
niques; mechanical inventions; medical
accessories and devices; medicines;
methods of doing business; musical
instruments; odors; plants; recreational
gear; and sporting goods (designs and
equipment).
What types of inventions are not
eligible for patent protection?
Some types of inventions will not
qualify for a patent, no matter how
interesting or important they are. For
example, mathematical formulas, laws
of nature, newly discovered substances
that occur naturally in the world, and
purely theoretical phenomenafor
instance, a scientific principle like
superconductivity without regard to
its use in the real worldhave long
been considered unpatentable. This
means, for example, that you cant
patent a general mathematical ap-
proach to problem solving or a newly
discovered pain killer in its natural
state.
In addition, the following catego-
ries of inventions dont qualify for
patents:
processes done entirely by human
motor coordination, such as choreo-
graphed dance routines or a method
for meditation
most protocols and methods used to
perform surgery on humans
printed matter that has no unique
physical shape or structure associ-
ated with it
unsafe new drugs
inventions useful only for illegal
purposes, and
nonoperable inventions, including
perpetual motion machines
(which are presumed to be non-
operable because to operate they
would have to violate certain
bedrock scientific principles).
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Can computer software qualify
for patent protection?
Yes. Even though you cant get a
patent on a mathematical formula per
se, you may be able to get protection
for a specific application of a formula.
Thus, software may qualify for a
patent if it produces a useful, concrete
and tangible result. For example, the
PTO will not issue a patent on the
complex mathematical formulae that
are used in space navigation, but will
grant a patent for the software and
machines that translate those equa-
tions and make the space shuttle go
where its supposed to go.
Can a business method qualify
for a utility patent?
A business method is a series of steps
that express some business activity,
for example, a method of calculating
an interest rate or a system for evalu-
ating employee performance. Before
1988, the PTO rarely granted patents
for methods of doing business. Then,
in 1988, the United States Court of
Appeals for the Federal Circuit
changed this. (State Street Bank &
Trust Co. v. Signal Financial Group,
Inc. 149 F.3d 1368 (Fed. Cir. 1998).)
The court ruled that patent laws were
intended to protect business methods,
so long as the method produced a
useful, concrete and tangible result.
In the six months following the
State Street ruling, patent filings for
business methods increased by 40%.
In response to the development of
these new methods, the PTO created a
new classification for such applica-
tions: Data processing: financial,
business practice, management or
cost/price determination.
Is it possible to obtain a patent
on forms of life?
Forms of life, from bacteria to cows,
that are genetically altered to have
new and useful characteristics or be-
haviors may qualify for utility pat-
ents. Also patentable are sequences of
DNA that have been created to test
genetic behaviors and the methods
used to accomplish this sequencing.
With the advent of cloning tech-
niques and the ability to mix genes
across speciesfor example, the hu-
man immune system genetic code
transplanted into a mouse for testing
purposesthe question of what life
forms can and cannot be patented
promises to be a subject of fierce de-
bate for years to come.
P A T E N T S
6.5
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What makes an invention novel?
In the context of a patent application,
an invention is considered novel when
it is different from all previous inven-
tions (called prior art) in one or
more of its constituent elements.
When deciding whether an invention
is novel, the PTO will consider all
prior art that existed as of the date the
inventor files a patent application on
the invention, or if necessary, as of the
date the inventor can prove he or she
first built and tested the invention. If
prior art is uncovered, the invention
may still qualify for a patent if the
inventor can show that he or she con-
ceived of the invention before the
prior art existed and was diligent in
building and testing the invention or
filing a patent application on it.
An invention will flunk the novelty
test if it was described in a published
document or put to public use more
than one year prior to the date the
patent application was filed. This is
known as the one-year rule.
When is an invention
considered nonobvious?
To qualify for a patent, an invention
must be nonobvious as well as novel.
An invention is considered
nonobvious if someone who is skilled
in the particular field of the invention
would view it as an unexpected or
surprising development.
For example, in August of 2000,
Future Enterprises invents a portable
high quality virtual reality system. A
virtual reality engineer would most
likely find this invention to be truly
surprising and unexpected. Even
though increased portability of a com-
puter-based technology is always ex-
pected in the broad sense, the specific
way in which the portability is ac-
complished by this invention would
be a breakthrough in the field and
thus unobvious. Contrast this with a
bicycle developer who uses a new,
light but strong metal alloy to build
his bicycles. Most people skilled in
the art of bicycle manufacturing
would consider the use of the new al-
loy in the bicycle to be obvious, given
that lightness of weight is a desirable
aspect of high-quality bicycles.
Knowing whether an invention
will be considered nonobvious by the
PTO is difficult because it is such a
subjective exercisewhat one patent
examiner considers surprising, an-
other may not. In addition, the exam-
iner will usually be asked to make the
nonobviousness determination well
after the date of the invention, be-
cause of delays inherent in the patent
process. The danger of this type of
retroactive assessment is that the ex-
aminer may unconsciously be affected
by the intervening technical improve-
ments. To avoid this, the examiner
generally relies only on the prior-art
references (documents describing pre-
vious inventions) that existed as of the
date of invention.
As an example, assume that in
2003, Future Enterprises application
for a patent on the 2000 invention is
being examined in the Patent and
Trademark Office. Assume further
that by 2003, you can find a portable
virtual reality unit in any consumer
electronics store for under $200. The
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patent examiner will have to go back
to the time of the invention to fully
appreciate how surprising and unex-
pected it was when it was first con-
ceived, and ignore the fact that in
2003 the technology of the invention
is very common.
What makes an invention useful?
Patents may be granted for inventions
that have some type of usefulness
(utility), even if the use is humorous,
such as a musical condom or a motor-
ized spaghetti fork. However, the in-
vention must workat least in
theory. Thus, a new approach to
manufacturing superconducting mate-
rials may qualify for a patent if it has a
sound theoretical basiseven if it
hasnt yet been shown to work in prac-
tice. But a new drug that has no theo-
retical basis and which hasnt been
tested will not qualify for a patent.
Remember that to qualify for a de-
sign or plant patent, the other two
types of patents obtained in the U.S.,
the inventor need not show utility
Are You the First?
As discussed previously, patents are
awarded only on new and nonobvious
inventions. How can an inventor find out
whether his or her invention is really
new? The place to start is to see whether
it has ever been patented. Although a
number of great inventions have never
received a patent, most have. A quick
spin through the patent database can
provide a good headstart on finding out
just how innovative an invention really is.
The Internet can be used for free access
to patents issued since 1971. The U.S.
Patent and Trademark Office
(http://www.uspto.gov) provides free
online databases where you simply type
in words which describe your invention
called keywords.
Commercial fee-based databases often
offer more choices than the free USPTO
site. Below are some fee-based patent
databases and a brief description of their
contents.
MicroPatent (http://
www.micropatent.com). You can
search U.S. and Japanese patents from
1976 to the present, International
patents issued under the Patent
Cooperation Treaty (PCT) from 1983
and European patents from 1988.
Delphion (http://
www.delphion.com). You can search
U.S patents from 1971 to the present
and full-text patents from the European
Patent Office, the World Intellectual
Property Organization PCT collection
and abstracts from Derwent world
patent index.
P A T E N T S
6.7
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LEXPAT (http://www.lexis-nexis.com).
You can search U.S. patents from
1971 to the present. In addition, the
LEXPAT library offers extensive prior-art
searching capability of technical
journals and magazines.
QPAT (http://www.qpat.com) and
Questel/Orbit (http://
www.questel.orbit.com). You can
search U.S. patents from 1974 to the
present and full-text European patents
from 1987 to the present.
Sometimes an inventor needs to search
for patents issued before 1971. All pat-
ents since the founding of the United
States count when deciding whether an
invention is sufficiently new to deserve a
patent. And if the invention involves time-
less technology (another way to core an
apple), these pre-1971 patents are as
important as those that were issued later.
A great resource for complete patent
searchingfrom the first patent ever
issued to the latestis a network of
special libraries called Patent and Trade-
mark Depository Libraries (PTDLs). Every
state but Connecticut has at least one.
While a complete patent search can be
done for free in these libraries, many of
them also offer computer searches for a
reasonable fee. Consult the PTO website
at http://www.uspto.gov to find the PTDL
nearest you.
Obtaining a
Patent
Many times a day I realize how
much my own outer and inner
life is built upon the labors of
my fellow men, both living and
dead, and how earnestly I must
exert myself in order to give in
return as much as I have
received.
ALBERT EINSTEIN
Because a patent grants the inventor a
monopoly on his or her invention for a
relatively long period of time, patent
applications are rigorously examined
by the Patent and Trademark Office
(PTO). Typically, a patent application
travels back and forth between the
applicant and the patent examiner
until both sides agree on which as-
pects of an invention the patent will
cover, if any. This process typically
takes between one and two years.
If an agreement is reached, the PTO
allows the application and publishes
a brief description of the patent in a
weekly publication called the Official
Gazette. If no one objects to the patent
as published, and the applicant pays
the required issuance fee, the PTO
provides the applicant with a docu-
ment called a patent deed, which we
colloquially refer to as a patent. The
patent deed consists primarily of the
information submitted in the patent
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application, as modified during the
patent examination process.
What information is typically
included in a patent
application?
There is no such thing as an auto-
matic patent through creation or us-
age of an invention. To receive patent
protection, an inventor must file an
application, pay the appropriate fees
and obtain a patent. To apply for a
U.S. patent, the inventor must file the
application with a branch of the U.S.
Department of Commerce known as
the U.S. Patent and Trademark Of-
fice, or PTO. A U.S. patent applica-
tion typically consists of:
an Information Disclosure State-
mentthat is, an explanation of
why the invention is different from
all previous and similar develop-
ments (the prior art)
a detailed description of the struc-
ture and operation of the invention
(called a patent specification) that
teaches how to build and use the
invention
a precise description of the aspects
of the invention to be covered by
the patent (called the patent claims)
all drawings that are necessary to
fully explain the specification and
claims
a Patent Application Declarationa
statement under oath that the
information in the application is
true, and
the filing fee.
In addition, small inventors often
include a declaration asking for a re-
duction in the filing fee.
Understanding the
Provisional Patent
Application
Often inventors want to have a patent
application on file when they go out to
show their invention to prospective
manufacturers because it will discourage
ripoffs. Also, inventors like to get their
invention on record as early as possible
in case someone else comes up with the
same invention. To accomplish both these
goals, an inventor may file what is known
as a Provisional Patent Application (PPA).
The PPA need only contain a complete
description of the structure and operation
of an invention and any drawings that
are necessary to understand itit need
not contain claims, formal drawings, a
Patent Application Declaration or an
Information Disclosure Statement.
An inventor who files a regular patent
application within one year of filing a
PPA can claim the PPAs filing date for
the regular patent application. If the
regular patent application includes any
new matter (technical information about
the invention) that wasnt in the PPA, the
inventor wont be able to rely on the
PPAs filing date for the new matter. The
PPAs filing date doesnt affect when the
patent on the invention will expire; it still
expires 20 years from the date the regu-
lar patent application is filed. So, the
PPA has the practical effect of delaying
examination of a regular patent applica-
tion and extendingup to one yearthe
patents expiration date.
P A T E N T S
6.9
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What happens if there are
multiple applications for the
same invention?
If a patent examiner discovers that
another pending application involves
the same invention and that both in-
ventions appear to qualify for a patent,
the patent examiner will declare that a
conflict (called an interference) exists
between the two applications. In that
event, a hearing is held to determine
who is entitled to the patent.
Who gets the patent depends on
such variables as who first conceived
the invention and worked on it dili-
gently, who first built and tested the
invention and who filed the first pro-
visional or regular patent application.
Because of the possibility of a patent
interference, it is wise to document all
invention-related activities in a signed
and witnessed inventors notebook so
that you can later prove the date the
invention was conceived and the steps
you took to build and test the inven-
tion or quickly file a patent applica-
tion.
How are U.S. patents protected
abroad?
Patent rights originate in the U.S.
Constitution and are implemented
exclusively by federal laws passed by
Congress. These laws define the kinds
of inventions that are patentable and
the procedures that must be followed
to apply for, receive and maintain
patent rights for the duration of the
patent.
All other industrialized countries
offer patent protection as well. While
patent requirements and rules differ
from country to country, several inter-
national treaties (including the Patent
Cooperation Treaty and the Paris Con-
vention) allow U.S. inventors to obtain
patent protection in other countries
that have adopted the treaties if the
inventors take certain required steps,
such as filing a patent application in
the countries on a timely basis and
paying required patent fees.
Enforcing a
Patent
Once a patent is issued, it is up to the
owner to enforce it. If friendly nego-
tiations fail, enforcement involves two
basic steps:
making a determination that the
patent is being illegally violated
(infringed), and
filing a federal court action to
enforce the patent.
Because enforcing a patent can be a
long and expensive process, many
patent infringment suits that could
have been filed, arent. Instead, the
patent owner often settles with the
infringer. Frequently, an infringer
will pay a reasonable license fee that
allows the infringer to continue using
the invention.
What constitutes infringement of
a patent?
To decide whether an inventor is vio-
lating a patent, it is necessary to care-
fully examine the patents claims
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(most patents contain more than one
of these terse statements of the scope
of the invention) and compare the
elements of each claim with the ele-
ments of the accused infringers de-
vice or process. If the elements of a
patent claim match the elements of
the device or process (called reading
on or teaching the device or pro-
cess), an infringement has occurred.
Even if the claims dont literally
match the infringing device, it is
possible that a court would find an
infringement by applying whats
known as the doctrine of equiva-
lents, that is, the invention in the
patent and the allegedly infringing
device or process are sufficiently
equivalent in what they do and how
they do it to warrant a finding of in-
fringement.
For example, Steve invents a tennis
racket with a score keeper embedded
in the racket handles end. The inven-
tion is claimed as a tennis racket
handle that combines grasping and
score keeping functions. Steve re-
ceives a patent on this invention.
Later, Megan invents and sells a ten-
nis racket with a transparent handle
that provides a more sophisticated
score keeping device than Steves
racket. Even though Megans inven-
tion improves on Steves invention in
certain respects, it will most likely be
held to be an infringement of Steves
invention, for one of two reasons:
Megans invention teaches the
same elements as those claimed in
Steves patent (a tennis racket handle
with two functions), or
when considering what it is and
how it works, Megans invention is the
substantial equivalent of Steves inven-
tion (the doctrine of equivalents).
What remedies are available for
patent infringement?
A patent owner may enforce his patent
by bringing a patent infringement ac-
tion (lawsuit) in federal court against
anyone who uses his invention without
permission. If the lawsuit is successful,
the court will take one of two ap-
proaches. It may issue a court order
(called an injunction) preventing the
infringer from any further use or sale of
the infringing device, and award dam-
ages to the patent owner. Or, the court
may work with the parties to hammer
out an agreement under which the in-
fringing party will pay the patent owner
royalties in exchange for permission to
use the infringing device.
Bringing a patent infringement ac-
tion can be tricky, because it is possible
for the alleged infringer to defend by
proving to the court that the patent is
really invalid (most often by showing
that the PTO made a mistake in issuing
the patent in the first place). In a sub-
stantial number of patent infringement
cases, the patent is found invalid and
the lawsuit dismissed, leaving the
patent owner in a worse position than
before the lawsuit.
When does patent protection
end?
Patent protection usually ends when
the patent expires. For all utility pat-
ents filed before June 8, 1995, the
patent term is 17 years from date of
P A T E N T S
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issuance. For utility patents filed on or
after June 8, 1995, the patent term is
20 years from the date of filing. For
design patents, the period is 14 years
from date of issuance. For plant pat-
ents, the period is 17 years from date
of issuance.
A patent may expire if its owner
fails to pay required maintenance fees.
Usually this occurs because attempts
to commercially exploit the underly-
ing invention have failed and the
patent owner chooses to not throw
good money after bad.
Patent protection ends if a patent is
found to be invalid. This may happen
if someone shows that the patent ap-
plication was insufficient or that the
applicant committed fraud on the
PTO, usually by lying or failing to
disclose the applicants knowledge
about prior art that would legally pre-
vent issuance of the patent. A patent
may also be invalidated if someone
shows that the inventor engaged in
illegal conduct when using the
patentsuch as conspiring with a
patent licensee to exclude other com-
panies from competing with them.
Once a patent has expired, the in-
vention described by the patent falls
into the public domain: It can be used
by anyone without permission from
the owner of the expired patent. The
basic technologies underlying televi-
sion and personal computers are good
examples of valuable inventions that
are no longer covered by in-force pat-
ents.
The fact that an invention is in the
public domain does not mean that
subsequent developments based on the
original invention are also in the pub-
lic domain. Rather, new inventions
that improve public domain technol-
ogy are constantly being conceived
and patented. For example, televisions
and personal computers that roll off
todays assembly lines employ many
recent inventions that are covered by
in-force patents.
The Life of an Invention
Although most inventors are concerned
with the rights a patent grants during its
monopoly or in-force period (from the
date the patent issues until it expires), the
law actually recognizes five rights
periods in the life of an invention. These
five periods are as follows:
1.Invention conceived but not yet
documented. When an inventor
conceives an invention but hasnt yet
made any written, signed, dated and
witnessed record of it, the inventor has
no rights whatsoever.
2.Invention documented but patent
application not yet filed. After making
a proper signed, dated and witnessed
documentation of an invention, the
inventor has valuable rights against
any inventor who later conceives the
same invention and applies for a
patent. The invention may also be
treated as a trade secret”—that is,
kept confidential. This gives the
inventor the legal right to sue and
recover damages against anyone who
immorally learns of the inventionfor
example, through industrial spying.
3.Patent pending (patent application
filed but not yet issued). During the
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patent pending period, including the
one-year period after a provisional
patent application is filed, the
inventors rights are the same as they
are in Period 2, above, with one
exception. Effective December 2000, if
the patent owner intends to also file for
a patent abroad, the PTO will publish
the application 18 months after the
earliest claimed filing date. Under the
new 18-month publication statute, an
inventor whose application is
published prior to issuance may obtain
royalties from an infringer from the
date of publication, provided the
application later issues as a patent and
the infringer had actual notice of the
published application. Otherwise, the
inventor has no rights whatsoever
against infringersonly the hope of a
future monopoly, which doesnt
commence until a patent issues.
By law, the PTO must keep all patent
applications secret until the application
is published or the patent issues,
whichever comes first. The patent
pending period usually lasts from one
to three years.
4.In-force patent (patent issued but hasnt
yet expired). After the patent issues,
the patent owner can bring and
maintain a lawsuit for patent
infringement against anyone who
makes, uses or sells the invention
without permission. The patents in-
force period lasts from the date it
issues until it expires. Also, after the
patent issues, it becomes a public
record or publication that prevents
others from getting patents on the
same or similar inventionsthat is, it
becomes prior art to anyone who
files a subsequent patent application.
5.Patent expired. After the patent
expires, the patent owner has no
further rights, although infringement
suits can still be brought for any
infringement that occurred during the
patents in-force period as long as the
suit is filed within the time required by
law. An expired patent remains a valid
prior-art reference forever.
Putting a
Patent to
Work
OUR ASPIRATIONS ARE OUR
POSSIBILITIES.
ROBERT BROWNING
On its own, a patent has no value.
Value arises only when a patent owner
takes action to realize commercial
gain from his or her monopoly posi-
tion. There are several basic ap-
proaches to making money from a
patent.
How can an inventor make
money with a patent?
Some inventors start new companies
to develop and market their patented
inventions. This is not typical, how-
ever, because the majority of inventors
would rather invent than run a busi-
ness. More often, an inventor makes
arrangements with an existing com-
P A T E N T S
6.13
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pany to develop and market the in-
vention. This arrangement usually
takes the form of a license (contract)
under which the developer is autho-
rized to commercially exploit the in-
vention in exchange for paying the
patent owner royalties for each inven-
tion sold. Or, in a common variation
of this arrangement, the inventor may
sell all the rights to the invention for
a lump sum.
What does it mean to license an
invention?
A license is written permission to use
an invention. A license may be exclu-
sive (if only one manufacturer is li-
censed to develop the invention) or
nonexclusive (if a number of manufac-
turers are licensed to develop it). The
license may be for the duration of the
patent or for a shorter period of time.
The developer itself may license
other companies to market or distrib-
ute the invention. The extent to
which the inventor will benefit from
these sub-licenses depends on the
terms of the agreement between the
inventor and the developer. Especially
when inventions result from work
done in the course of employment, the
employer-business usually ends up
owning the patent rights, and receives
all or most of the royalties based on
subsequent licensing activity. (See the
next question.)
In many cases, a developer will
trade licenses with other companies
called cross-licensingso that compa-
nies involved in the trade will benefit
from each others technology. For ex-
ample, assume that two computer
companies each own several patents
on newly developed remote-controlled
techniques. Because each company
would be strengthened by being able
to use the other companys inventions
as well as its own, the companies will
most likely agree to swap permissions
to use their respective inventions.
Can inventors who are
employed by a company benefit
from their inventions?
Typically, inventor-employees who
invent in the course of their employ-
ment are bound by employment
agreements that automatically assign
all rights in the invention to the em-
ployer. While smart research and de-
velopment companies give their in-
ventors bonuses for valuable inven-
tions, this is a matter of contract
rather than law.
If there is no employment agree-
ment, the employer may still own
rights to an employee-created inven-
tion under the employed to invent
doctrine. How does this rule apply? If
an inventor is employedeven with-
out a written employment agree-
mentto accomplish a defined task,
or is hired or directed to create an in-
vention, the employer will own all
rights to the subsequent invention.
If there is no employment agree-
ment and the inventor is not em-
ployed to invent, the inventor may
retain the right to exploit the inven-
tion, but the employer is given a non-
exclusive right to use the invention
for its internal purposes (called shop
rights). For example, Robert is a ma-
chinist in a machine shop and invents
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a new process for handling a particu-
lar type of metal. If Robert isnt em-
ployed to invent and hasnt signed an
employment agreement giving the
shop all rights to the invention, Rob-
ert can patent and exploit the inven-
tion for himself. The shop, however,
would retain the right to use the new
process without having to pay Robert.
How Patents
Differ From
Copyrights
and
Trademarks
While it is possible to invent defini-
tions that draw clear lines between
the areas of patent, copyright and
trademark (the three major types of
intellectual property protection),
there are complications when it comes
to certain innovative designs. In some
cases, a design may be subject to
patent, trademark and copyright pro-
tection all at the same time.
How do patents differ from
copyrights?
With the exception of innovative de-
signs, patents are closely associated
with things and processes which are
useful in the real world. Almost at the
opposite end of the spectrum, copy-
right applies to expressive arts such as
novels, fine and graphic arts, music,
phonorecords, photography, software,
video, cinema and choreography.
While it is possible to get a patent on
technologies used in the arts, it is
copyright that keeps one artist from
stealing another artists creative work.
An exception to the general rule
that patents and copyright dont over-
lap can be found in product designs.
It is theoretically possible to get a de-
sign patent on the purely ornamental
(nonfunctional) aspects of the product
design and also claim a copyright in
this same design. For example, the
stylistic fins of a cars rear fenders may
qualify for both a design patent (be-
cause they are strictly ornamental) and
copyright (as to their expressive ele-
ments). In practice, however, a prod-
uct is usually granted one type of pro-
tection or the othernot both.
For more information about copy-
right law, see Chapter 7.
P A T E N T S
6.15
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Whats the difference between
patent and trademark?
Generally speaking, patents allow the
creator of certain kinds of inventions
that contain new ideas to keep others
from making commercial use of those
ideas without the creators permission.
Trademark, on the other hand, is not
concerned with how a new technology
is used. Rather, it applies to the
names, logos and other devicessuch
as color, sound and smellthat are
used to identify the source of goods or
services and distinguish them from
their competition.
Generally, patent and trademark
laws do not overlap. When it comes to
a product design, howeversay, jew-
elry or a distinctively shaped musical
instrumentit may be possible to
obtain a patent on a design aspect of
the device while invoking trademark
law to protect the design as a product
identifier. For example, a surfboard
manufacturer might receive a patent
for a surfboard design that mimics the
design used in a popular surfing film.
Then, if the design is intended to
beand actually isused to distin-
guish the particular type of surfboard
in the marketplace, trademark law
may kick in to protect the appearance
of the board.
For more information about trade-
marks, see Chapter 8.
ef
More Information
About Patents
Patent It Yourself
, by David Pressman
(Nolo), takes you step by step through
the process of getting a patent without
hiring a patent lawyer. Patent It Yourself
software (for Windows) is also available.
Patent Searching Made Easy
, by David
Hitchcock (Nolo), shows you how to
search the U.S. Patent Database on the
internet and in the library.
How to Make Patent Drawings Yourself,
by Jack Lo and David Pressman (Nolo),
takes you step by step through the
process of making your own patent
drawing.
License Your Invention,
by Richard Stim
(Nolo), walks you through the process of
realizing your inventions commercial
potential.
Patent, Copyright & Trademark
, by
Stephen Elias and Richard Stim (Nolo),
provides concise definitions and ex-
amples of the important words and
phrases commonly used in patent law.
Nolos Patents for Beginners,
by David
Pressman and Richard Stim (Nolo), is a
primer that explains all of the essential
patent principles in plain English.
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http://www.nolo.com
Nolo offers self-help information about a
wide variety of legal topics, including
patent law.
http://www.uspto.gov
The U.S. Patent and Trademark Office is
the place to go for recent policy and statu-
tory changes and transcripts of hearings on
various patent law issues. The U.S.
Patent and Trademark Office maintains a
seachable electronic database of the front
page of all patents issued since 1971. This
site is an excellent way to initiate a search
for relevant patents. Also, the USPTO has
announced that it is putting the full U.S.
patent database online for free searching
near the end of 1998.
http://www.inventionconvention
.com
The National Congress of Inventor Orga-
nizations (NCIO) maintain this invention
website that includes links, trade show
information, and advice for inventors.
http://www.patentcafe.com
The Patent Café is an inventor resource
that provides software, inventor kits and
advice on patent searching, patent attor-
neys and marketing.
http://www.sci3.com
Sc[I]
3
provides in-depth patent searching
services, patent-related products and semi-
nars.
http://www.spi.org
The Software Patent Institute lets you
search for previous software developments
that may affect whether your software
qualifies for a patent.
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7
Copyrights
7.2 Copyright Basics
7.4 Copyright Ownership
7.6 Copyright Protection
7.10 Copyright Registration
and Enforcement
People seldom improve when they
have no other model but themselves
to copy after.
OLIVER GOLDSMITH
It has long been recognized that everyone benefits when cre-
ative people are encouraged to develop new intellectual and artis-
tic works. When the United States Constitution was written in
1787, the framers took care to include a copyright clause (Article
I, Section 8) giving Congress the power to promote the Progress
of Science and useful Arts by passing laws that give creative
people exclusive rights in their own artistic works for a limited
period of time.
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Copyright laws are not designed to
enrich creative artists, but to promote
human knowledge and development.
These laws encourage artists in their
creative efforts by giving them a
mini-monopoly over their works
called a copyright. But this monopoly
is limited when it conflicts with the
overriding purpose of encouraging
people to create new works of scholar-
ship or art.
This chapter introduces you to
copyright law and guides you through
the first steps of creating, owning and
protecting a copyright. To learn about
how copyrights differ fromand
work withpatents and trademarks,
see Chapters 6 and 8.
Copyright
Basics
IT IS NECESSARY TO ANY ORIGINALITY
TO HAVE THE COURAGE TO BE AN
AMATEUR.
WALLACE STEVENS
Copyright is a legal device that gives
the creator of a work of art or litera-
ture, or a work that conveys informa-
tion or ideas, the right to control how
that work is used. The Copyright Act
of 1976the federal law providing
for copyright protectiongrants au-
thors a bundle of exclusive rights over
their works, including the right to
reproduce, distribute, adapt or per-
form them.
An authors copyright rights may
be exercised only by the authoror
by a person or entity to whom the au-
thor has transferred all or part of her
rights. If someone wrongfully uses the
material covered by a copyright, the
copyright owner can sue and obtain
compensation for any losses suffered.
What types of creative work
does copyright protect?
Copyright protects works such as po-
etry, movies, video games, videos,
DVDs, plays, paintings, sheet music,
recorded music performances, novels,
software code, sculptures, photo-
graphs, choreography and architec-
tural designs.
To qualify for copyright protection,
a work must be fixed in a tangible
medium of expression. This means
that the work must exist in some
physical form for at least some period
of time, no matter how brief. Virtu-
ally any form of expression will
qualify as a tangible medium, includ-
ing a computers random access
memory (RAM), the recording media
that capture all radio and television
broadcasts and the scribbled notes on
the back of an envelope that contain
the basis for an impromptu speech.
In addition, the work must be
originalthat is, independently cre-
ated by the author. It doesnt matter
if an authors creation is similar to
existing works, or even if it is argu-
ably lacking in quality, ingenuity or
aesthetic merit. So long as the author
toils without copying from someone
else, the results are protected by copy-
right.
C O P Y R I G H T S
7.3
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Finally, to receive copyright protec-
tion, a work must be the result of at
least some creative effort on the part
of its author. There is no hard and fast
rule as to how much creativity is
enough. As one example, a work must
be more creative than a telephone
books white pages, which involve a
straightforward alphabetical listing of
telephone numbers rather than a cre-
ative selection of listings.
Does copyright protect an
authors creative ideas?
No. Copyright shelters only fixed,
original and creative expression, not
the ideas or facts upon which the ex-
pression is based. For example, copy-
right may protect a particular song,
novel or computer game about a ro-
mance in space, but it cannot protect
the underlying idea of having a love
affair among the stars. Allowing au-
thors to monopolize their ideas would
thwart the underlying purpose of
copyright law, which is to encourage
people to create new work.
For similar reasons, copyright does
not protect factswhether scientific,
historical, biographical or news of the
day. Any facts that an author discovers
in the course of research are in the
public domain, free to all. For in-
stance, anyone is free to use informa-
tion included in a book about how the
brain works, an article about the life
and times of Neanderthals or a TV
documentary about the childhood of
President Clintonprovided that they
express the information in their own
words.
Facts are not protected even if the
author spends considerable time and
effort discovering things that were
previously unknown. For example, the
author of the book on Neanderthals
takes ten years to gather all the neces-
sary materials and information for her
work. At great expense, she travels to
hundreds of museums and excavations
around the world. But after the book
is published, any reader is free to use
the results of this ten-year research
project to write his or her own book
on Neanderthalswithout paying the
original author.
How long does a copyright last?
For works published after 1977, the
copyright lasts for the life of the author
plus 70 years. However, if the work is a
work for hire (that is, the work is done
in the course of employment or has
been specifically commissioned) or is
published anonymously or under a
pseudonym, the copyright lasts be-
tween 95 and 120 years, depending on
the date the work is published.
All works published in the United
States before 1923 are in the public
domain. Works published after 1922,
but before 1964, are protected for 95
years from the date of publication if a
renewal was filed with the Copyright
Office during the 28th year after pub-
lication. If no renewal was filed, such
works are in the public domain in the
U.S. Works published during 1964-
1977 are protected for 95 years
whether or not a renewal was filed. If
the work was created, but not pub-
lished, before 1978, the copyright
lasts for the life of the author plus 70
years. However, even if the author
died over 70 years ago, the copyright
in an unpublished work lasts until De-
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cember 31, 2002. And if such a work
is published before 2003, the copy-
right lasts until December 31, 2047.
Is the Work Published?
In the complicated scheme of copyright
laws, which law applies to a particular
work depends on when that work is
published. A work is considered pub-
lished when the author makes it available
to the public on an unrestricted basis.
This means that it is possible to distribute
or display a work without publishing it if
there are significant restrictions placed
on what can be done with the work and
when it can be shown to others. For
example, Andres Miczslova writes an
essay called Blood Bath about the war
in Bosnia, and distributes it to five human
rights organizations under a non exclu-
sive license that places restrictions on
their right to disclose the essays con-
tents. Blood Bath has not been pub-
lished in the copyright sense. If
Miczslova authorizes posting of the essay
on the Internet, however, it would likely
be considered published.
Copyright
Ownership
HE WHO CAN COPY, CAN DO.
LEONARDO DA VINCI
A copyright is initially owned by a
creative works author or authors. But
under the law, a person need not actu-
ally create the work to be its author
for copyright purposes. A protectible
work created by an employee as part
of his or her job is initially owned by
the employerthat is, the employer
is considered to be the works author.
Such works are called works made for
hire. Works created by nonemployees
(independent contractors) may also be
works made for hire if they sign writ-
ten agreements to that effect and the
work falls within one of eight enu-
merated categories.
Like any other property, a copy-
right can be bought and sold. Trans-
fers of copyright ownership are unique
in one respect, however: Authors or
their heirs have the right to terminate
any transfer of copyright ownership
35 to 40 years after it is made.
What are the exceptions to the
rule that the creator of a work
owns the copyright?
Copyrights are generally owned by
the people who create the works of
expression, with some important ex-
ceptions:
If a work is created by an employee
in the course of his or her employ-
ment, the employer owns the
copyright.
If the work is created by an inde-
pendent contractor and the indepen-
dent contractor signs a written
agreement stating that the work
shall be made for hire, the com-
missioning person or organization
owns the copyright only if the work
is (1) a part of a larger literary work,
such as an article in a magazine or a
C O P Y R I G H T S
7.5
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poem or story in an anthology; (2)
part of a motion picture or other
audiovisual work, such as a screen-
play; (3) a translation; (4) a supple-
mentary work such as an afterword,
an introduction, chart, editorial
note, bibliography, appendix or
index; (5) a compilation; (6) an
instructional text; (7) a test or
answer material for a test; or (8) an
atlas. Works that dont fall within
one of these eight categories consti-
tute works made for hire only if
created by an employee within the
scope of his or her employment.
If the creator has sold the entire
copyright, the purchasing business
or person becomes the copyright
owner.
Who owns the copyright in a
joint work?
When two or more authors prepare a
work with the intent to combine their
contributions into inseparable or in-
terdependent parts, the work is con-
sidered joint work and the authors are
considered joint copyright owners.
The most common example of a joint
work is when a book or article has two
or more authors. However, if a book is
written primarily by one author, but
another author contributes a specific
chapter to the book and is given
credit for that chapter, then this prob-
ably wouldnt be a joint work because
the contributions arent inseparable or
interdependent.
The U.S. Copyright Office consid-
ers joint copyright owners to have an
equal right to register and enforce the
copyright. Unless the joint owners
make a written agreement to the con-
trary, each copyright owner has the
right to commercially exploit the
copyright, provided that the other
copyright owners get an equal share of
the proceeds.
Can two or more authors
provide contributions to a single
work without being considered
a joint authors?
Yes. If at the time of creation, the
authors did not intend their works to
be part of an inseparable whole, the
fact that their works are later put to-
gether does not create a joint work.
Rather, the result is considered a col-
lective work. In this case, each author
owns a copyright in only the material
he or she added to the finished prod-
uct. For example, in the 1950s,
Vladimir writes a famous novel full of
complex literary allusions. In the
1980s, his publisher issues a student
edition of the work with detailed an-
notations written by an English pro-
fessor. The student edition is a collec-
tive work. Vladimir owns the copy-
right in the novel, but the professor
owns the annotations.
What rights do copyright
owners have under the
Copyright Act?
The Copyright Act of 1976 grants a
number of exclusive rights to copy-
right owners, including:
reproduction rightthe right to
make copies of a protected work
distribution rightthe right to sell
or otherwise distribute copies to the
public
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right to create adaptations (called
derivative works)the right to
prepare new works based on the
protected work, and
performance and display rights
the rights to perform a protected
work (such as a stageplay) or to
display a work in public.
This bundle of rights allows a
copyright owner to be flexible when
deciding how to realize commercial
gain from the underlying work; the
owner may sell or license any of the
rights.
Can a copyright owner transfer
some or all of his specific rights?
Yes. When a copyright owner wishes
to commercially exploit the work
covered by the copyright, the owner
typically transfers one or more of
these rights to the person or entity
who will be responsible for getting
the work to market, such as a book or
software publisher. It is also common
for the copyright owner to place some
limitations on the exclusive rights
being transferred. For example, the
owner may limit the transfer to a spe-
cific period of time, allow the right to
be exercised only in a specific part of
the country or world or require that
the right be exercised only through
certain media, such as hardcover
books, audiotapes, magazines or com-
puters.
If a copyright owner transfers all of
his rights unconditionally, it is gener-
ally termed an assignment. When
only some of the rights associated
with the copyright are transferred, it
is known as a license. An exclusive
license exists when the transferred
rights can be exercised only by the
owner of the license (the licensee), and
no one elseincluding the person
who granted the license (the licensor).
If the license allows others (including
the licensor) to exercise the same
rights being transferred in the license,
the license is said to be nonexclusive.
The U.S. Copyright Office allows
buyers of exclusive and non-exclusive
copyright rights to record the trans-
fers in the U.S. Copyright Office. This
helps to protect the buyers in case the
original copyright owner later tries to
transfer the same rights to another
party.
Copyright
Protection
Probably the most important fact to
grasp about copyright protection is
that it automatically comes into exist-
ence when the protected work is cre-
ated. However, the degree of protec-
tion that copyright laws extend to a
protected work can be influenced by
later events.
What role does a copyright
notice play?
Until 1989, a published work had to
contain a valid copyright notice to
receive protection under the copyright
laws. But this requirement is no
longer in forceworks first published
after March 1, 1989 need not include
a copyright notice to gain protection
under the law.
C O P Y R I G H T S
7.7
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But even though a copyright notice
is not required, its still important to
include one. When a work contains a
valid notice, an infringer cannot claim
in court that he or she didnt know it
was copyrighted. This makes it much
easier to win a copyright infringement
case and perhaps collect enough dam-
ages to make the cost of the case
worthwhile. And the very existence of
a notice might discourage infringe-
ment.
Finally, including a copyright no-
tice may make it easier for a potential
infringer to track down a copyright
owner and legitimately obtain per-
mission to use the work.
What is a valid copyright notice?
A copyright notice should contain:
the word copyright
a c in a circle (©)
the date of publication, and
the name of either the author or the
owner of all the copyright rights in
the published work.
For example, the correct copyright
for the fifth edition of The Copyright
Handbook, by Stephen Fishman (Nolo),
is Copyright © 2001 by Stephen Fishman.
International Copyright
Protection
Copyright protection rules are fairly
similar worldwide, due to several interna-
tional copyright treaties, the most impor-
tant of which is the Berne Convention.
Under this treaty, all member countries
and there are more than 100, including
virtually all industrialized nationsmust
afford copyright protection to authors
who are nationals of any member coun-
try. This protection must last for at least
the life of the author plus 50 years, and
must be automatic, without the need for
the author to take any legal steps to
preserve the copyright.
In addition to the Berne Convention,
the GATT (General Agreement on Tariffs
and Trade) treaty contains a number of
provisions that affect copyright protection
in signatory countries. Together, the
Berne Copyright Convention and the
GATT treaty allow U.S. authors to en-
force their copyrights in most industrial-
ized nations, and allow the nationals of
those nations to enforce their copyrights
in the U.S.
When can I use a work without
the authors permission?
When a work becomes available for
use without permission from a copy-
right owner, it is said to be in the
public domain. Most works enter the
public domain because their copy-
rights have expired.
To determine whether a work is in
the public domain and available for
use without the authors permission,
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for example, if the author made dili-
gent attempts to correct the situation.
The exception is for materials put
to work under the fair use rule. This
rule recognizes that society can often
benefit from the unauthorized use of
copyrighted materials when the pur-
pose of the use serves the ends of
scholarship, education or an informed
public. For example, scholars must be
free to quote from their research re-
sources in order to comment on the
material. To strike a balance between
the needs of a public to be well in-
formed and the rights of copyright
owners to profit from their creativity,
Congress passed a law authorizing the
use of copyrighted materials in certain
circumstances deemed to be fair”—
even if the copyright owner doesnt
give permission.
Often, its difficult to know whether
a court will consider a proposed use to
be fair. The fair use statute requires the
courts to consider the following ques-
tions in deciding this issue:
Is it a competitive use? If the use
potentially affects the sales of the
copied material, its probably not
fair.
How much material was taken
compared to the entire work of
which the material was a part? The
more someone takes, the less likely
it is that the use is fair.
How was the material used?
Did the
defendant change the original by
adding new expression or meaning?
Did the defendant add value to the
original by creating new informa-
tion, new aesthetics, new insights
and understandings? If the use was
you first have to find out when it was
published. Then you can apply the
periods of time set out earlier in this
chapter. (See How long does a copyright
last?, above.) If the work was pub-
lished between 1923 and 1963, how-
ever, you must check with the U.S.
Copyright Office to see whether the
copyright was properly renewed. If
the author failed to renew the copy-
right, the work has fallen into the
public domain and you may use it.
The Copyright Office will check
renewal information for you, at a
charge of $65 per hour. (Call the Refer-
ence & Bibliography Section at 202-
707-6850.) You can also hire a private
copyright search firm to see if a re-
newal was filed. Finally, you may be
able to conduct a renewal search your-
self. The renewal records for works
published from 1950 to the present are
available online at http://lcweb.loc.gov/
copyright. Renewal searches for earlier
works can be conducted at the Copy-
right Office in Washington DC or by
visiting one of the many government
depository libraries throughout the
country. Call the Copyright Office for
more information.
With one important exception, you
should assume that every work is pro-
tected by copyright unless you can
establish that it is not. As mentioned
above, you cant rely on the presence
or absence of a copyright notice (©) to
make this determination, because a
notice is not required for works pub-
lished after March 1, 1989. And even
for works published before 1989, the
absence of a copyright notice may not
affect the validity of the copyright
C O P Y R I G H T S
7.9
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transformative, this weighs in favor
of a fair use finding.
Criticism,
comment, news reporting, research,
scholarship and nonprofit educa-
tional uses are also likely to be
judged fair uses. Uses motivated
primarily by a desire for a commer-
cial gain are less likely to be fair use.
As a general rule, if you are using a
small portion of somebody elses work
in a noncompetitive way and the pur-
pose for your use is to benefit the
public, youre on pretty safe ground.
On the other hand, if you take large
portions of someone elses expression
for your own purely commercial rea-
sons, the rule usually wont apply.
If You Want to Use
Material on the Internet
Each day, people post vast quantities of
creative material on the Internetmaterial
that is available for downloading by
anyone who has the right computer
equipment. Because the information is
stored somewhere on an Internet server, it
is fixed in a tangible medium and poten-
tially qualifies for copyright protection.
Whether it does, in fact, qualify depends
on other factors that you would have no
way of knowing about, such as when the
work was first published (which affects
the need for a copyright notice), whether
the copyright in the work has been
renewed (for works published before
1964), whether the work is a work made
for hire (which affects the length of the
copyright) and whether the copyright
owner intends to dedicate the work to the
public domain.
As a general rule, it is wise to operate
under the assumption that all materials
are protected by either copyright or
trademark law unless conclusive informa-
tion indicates otherwise. A work is not in
the public domain simply because it has
been posted on the Internet (a popular
fallacy) or because it lacks a copyright
notice (another fallacy). As a general rule
permission is needed to reproduce copy-
righted materials including photos, text,
music and artwork. Its best to track
down the author of the material and ask
for permission.
The most useful sources for finding
information and obtaining permission are
copyright collectives or clearinghouses.
These are organizations that organize
and license works by their members. For
example, the Copyright Clearinghouse
(http://www.copyright.com), and
icopyright (http://www.icopyright.com)
provide permissions for written materials.
You can use an Internet search engine to
locate other collectives for music, photos
and artwork.
The only exception to this advice is for
situations where you want to use only a
very small portion of text for educational
or nonprofit purposes. (See the previous
question for a discussion of the fair use
rule.)
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Copyright
Registration
and
Enforcement
Although every work pub-
lished after 1989 is
automatically pro-
tected by copyright,
you can strengthen
your rights by
registering your
work with the
U.S. Copyright
Office. This
registration makes
it possible to bring a lawsuit to protect
your copyright if someone violates
(infringes) it. The registration process
is straightforward and inexpensive, and
can be done without a lawyer.
Why register your work with the
U.S. Copyright Office?
You must register your copyright
with the U.S. Copyright Office before
you are legally permitted to bring a
lawsuit to enforce it.
You can register a copyright at any
time, but filing promptly may pay off
in the long run. Timely registra-
tion”—that is, registration within
three months of the works publication
date or before any copyright infringe-
ment actually beginsmakes it much
easier to sue and recover money from
an infringer. Specifically, timely regis-
tration creates a legal presumption
that your copyright is valid, and allows
you to recover up to $100,000 (and
possibly lawyers fees) without having
to prove any actual monetary harm.
How do you register a copyright?
You can register your copyright by
filing a simple form and depositing
one or two samples of the work (de-
pending on what it is) with the U.S.
Copyright Office. There are different
forms for different types of works
for example, form TX is for literary
works while form VA is for a visual
art work. Forms and instructions may
be obtained from the U.S. Copyright
Office by telephone, (202) 707-9100,
or online at http://www.loc.gov/copy-
right. Registration currently costs
$30 per work. If youre registering
several works that are part of one se-
ries, you may be able to save money
by registering the works together
(called group registration).
How are copyrights enforced? Is
going to court necessary?
If someone violates the rights of a
copyright owner, the owner is entitled
to file a lawsuit in federal court asking
the court to:
issue orders (restraining orders and
injunctions) to prevent further
violations
award money damages if appropri-
ate, and
in some circumstances, award
attorney fees.
Whether the lawsuit will be effective
and whether damages will be awarded
depends on whether the alleged in-
fringer can raise one or more legal de-
C O P Y R I G H T S
7.11
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fenses to the charge. Common legal
defenses to copyright infringement are:
too much time has elapsed between
the infringing act and the lawsuit
(the statute of limitations defense)
the infringement is allowed under
the fair use doctrine (discussed above)
the infringement was innocent (the
infringer had no reason to know the
work was protected by copyright)
the infringing work was indepen-
dently created (that is, it wasnt
copied from the original), or
the copyright owner authorized the
use in a license.
If someone has good reason to be-
lieve that a use is fairbut later finds
herself on the wrong end of a court or-
dershe is likely to be considered an
innocent infringer at worst. Innocent
infringers usually dont have to pay any
damages to the copyright owner, but
do have to cease the infringing activity
or pay the owner for the reasonable
commercial value of that use.
ef
More Information
About Copyrights
The Copyright Handbook: How to
Protect & Use Written Works
, by
Stephen Fishman (Nolo), is a complete
guide to the law of copyright. The book
includes forms for registering a copy-
right.
Copyright Your Software,
by Stephen
Fishman (Nolo), explains copyright
protection for computer software and
include all the forms and instructions
necessary for registering a software
copyright.
Patent, Copyright
&
Trademark
, by
Stephen Elias and Richard Stim (Nolo),
provides concise definitions and ex-
amples of the important words and
phrases commonly used in copyright law.
Getting Permission: How to License &
Clear Copyrighted Materials Online &
Off,
by Richard Stim (Nolo), spells out
how to obtain permission to use art,
music, writing or other copyrighted
works and includes a variety of permis-
sion and licensing agreements.
The Public Domain: How to Find & Use
Copyright-Free Writings, Music, Art &
More,
by Stephen Fishman (Nolo), is an
authoritative book devoted to what is
and is not protected by copyright law.
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
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p
http://www.nolo.com
Nolo offers self-help information about a
wide variety of legal topics, including
copyright law.
http://lcweb.loc.gov/copyright
The U.S. Copyright office offers regula-
tions, guidelines, forms and links to other
helpful copyright sites.
http://fairuse.stanford.edu
This is one of the leading websites for
measuring fair use. It provides academic
fair use links and guidelines.
http://www.benedict.com
The Copyright Website has articles, good
links and slick design. Best of all, you can
examine actual examples from real cases.
http://www.ipmall.fplc.edu
The Intellectual Property Mall provided
by the Franklin Pierce Law Center is a
source of ever-changing links and informa-
tion about copyrights, trademarks and
patents.
i
i
abb
8
Trademarks
8.2 Types of Trademarks
8.5 Trademark Protection
8.8 Using and Enforcing
a Trademark
8.11 Conducting a
Trademark Search
8.14 Registering a
Trademark
8.18 How Trademarks
Differ From Patents
and Copyrights
A good name lost is seldom regained.
JOEL HAWES
Most of us encounter many trademarks each day; we might
eat Kelloggs cornflakes for breakfast, drive our Ford car to work
and sit down at an IBM computer. But as we go about our daily
tasks, we rarely think about the laws behind the familiar words
and images that identify the products and services we use.
eeef
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Trademark law consists of the legal
rules that govern how businesses may:
distinguish their products or
services in the marketplace to
prevent consumer confusion, and
protect the means theyve chosen to
identify their products or services
against use by competitors.
This chapter will introduce you to
trademark law and answer common
questions about choosing, using and
protecting a trademark.
Types of
Trademarks
The term trademark is commonly
used to describe many different types
of devices that label, identify and dis-
tinguish products or services in the
marketplace. The basic purpose of all
these devices is to inform potential
customers of the origin and quality of
the underlying products or services.
What is a trademark?
A trademark is a distinctive word,
phrase, logo, graphic symbol, slogan
or other device that is used to identify
the source of a product and to distin-
guish a manufacturers or merchants
products from others. Some examples
are Nike sports apparel, Gatorade
beverages and Microsoft software. In
the trademark context, distinctive
means unique enough to help custom-
ers recognize a particular product in
the marketplace. A mark may either
be inherently distinctive (the mark is
unusual in and of itself, such as Milky
Way candy bars) or may become dis-
tinctive over time because customers
come to associate the mark with the
product or service (for example, Beef
& Brew restaurants).
Consumers often make their pur-
chasing choices on the basis of recog-
nizable trademarks. For this reason, the
main thrust of trademark law is to
make sure that trademarks dont over-
lap in a manner that causes customers
to become confused about the source of
a product. However, in the case of
trademarks that have become fa-
mousfor example, McDonaldsthe
courts are willing to prohibit a wider
range of uses of the trademark (or any-
thing close to it) by anyone other than
the famous marks owner. For instance,
McDonalds was able to prevent the
use of the mark McSleep by a motel
chain because McSleep traded on the
McDonalds mark reputation for a par-
ticular type of service (quick, inexpen-
sive, standardized). This type of sweep-
ing protection is authorized by federal
and state statutes (referred to as
antidilution laws) designed to prevent
the weakening of a famous marks
reputation for quality.
What is a servicemark?
For practical purposes, a servicemark
is the same as a trademarkbut while
trademarks promote products, service-
marks promote services and events. As
a general rule, when a business uses
its name to market its goods or ser-
vices in the yellow pages, on signs or
in advertising copy, the name quali-
T R A D E M A R K S
8.3
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fies as a servicemark. Some familiar
servicemarks: Jack in the Box (fast
food service), Kinkos (photocopying
service), ACLU (legal service), Block-
buster (video rental service), CBSs
stylized eye in a circle (television net-
work service) and the Olympic
Games multicolored interlocking
circles (international sporting event).
What is a certification mark?
A certification mark is a symbol, name
or device used by an organization to
vouch for products and services pro-
vided by othersfor example, the
Good Housekeeping Seal of Ap-
proval. This type of mark may cover
characteristics such as regional origin,
method of manufacture, product qual-
ity and service accuracy. Some other
examples of certification marks: Stilton
cheese (a product from the Stilton lo-
cale in England), Carneros wines (from
grapes grown in the Carneros region of
Sonoma/Napa counties) and Harris
Tweeds (a special weave from a specific
area in Scotland).
What is a collective mark?
A collective mark is a symbol, label,
word, phrase or other mark used by
members of a group or organization to
identify goods, members, products or
services they render. Collective marks
are often used to show membership in a
union, association or other organization.
The use of a collective mark is re-
stricted to members of the group or
organization that owns the mark.
Even the group itselfas opposed to
its memberscannot use the collec-
tive mark on any goods it produces. If
the group wants to identify its prod-
uct or service, it must use its own
trademark or servicemark.
EXAMPLE
The letters ILGWU on a shirt label is
the collective mark that identifies the shirt
as a product of a member of the Interna-
tional Ladies Garment Workers Union.
If, however, the ILGWU wanted to start
marketing its own products, it could not
use the ILGWU collective mark to iden-
tify them; the union would have to get a
trademark of its own.
What is trade dress?
In addition to a label, logo or other
identifying symbol, a product may
come to be known by its distinctive
packagingfor example, Kodak film
or the Galliano liquor bottleand a
service by its distinctive decor or
shape, such as the decor of Gap cloth-
ing stores. Collectively, these types of
identifying features are commonly
termed trade dress. Because trade
dress often serves the same function as
a trademark or service-markthe
identification of goods and services in
the marketplacetrade dress can be
protected under the federal trademark
laws and in some cases registered as a
trademark or servicemark with the
Patent and Trademark Office.
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What kinds of things can be
considered trademarks or
service marks?
Most often, trademarks are words or
phrases that are clever or unique
enough to stick in a consumers mind.
Logos and graphics that become
strongly associated with a product
line or service are also typical. But a
trademark or servicemark can also
consist of letters, numbers, a sound, a
smell, a color, a product shape or any
other nonfunctional but distinctive
aspect of a product or service that
tends to promote and distinguish it in
the marketplace. Titles, character
names or other distinctive features of
movies, television and radio programs
can also serve as trademarks or
servicemarks when used to promote a
service or product. Some examples of
unusual trademarks are the pink color
of housing insulation manufactured
by Owens-Corning and the shape of
the Absolut vodka bottle.
Whats the difference between
a business name and a
trademark or servicemark?
The name that a business uses to iden-
tify itself is called a trade name.
This is the name the business uses on
its stock certificates, bank accounts,
invoices and letterhead. When used to
identify a business in this wayas an
entity for nonmarketing purposes
the business name is given some pro-
tection under state and local corporate
and fictitious business name registra-
tion laws, but it is not considered a
trademark or entitled to protection
under trademark laws.
If, however, a business uses its
name to identify a product or service
produced by the business, the name
will then be considered a trademark
or servicemark and will be entitled to
protection if it is distinctive enough.
For instance, Apple Computer Corpo-
ration uses the trade name Apple as a
trademark on its line of computer
products.
Although trade names by them-
selves are not considered trademarks
for purposes of legal protection, they
may still be protected under federal
and state unfair competition laws
against a confusing use by a compet-
ing business.
If my trade name is registered
with the Secretary of State as a
corporate name, or placed on a
fictitious business name list, can
I use it as a trademark?
Not necessarily. When you register a
corporate name with a state agency or
place your name on a local fictitious
business name register, there is no
guarantee that the name has not al-
ready been taken by another business
as a trademark. It is only the trade
name aspect of the name that is af-
fected by your registration. This
means that before you start using your
business name as a trademark, you
will need to make sure it isnt already
being used as a trademark by another
company in a context that precludes
your using it. For more information
about trademark searches, see Conduct-
ing a Trademark Search, below.
T R A D E M A R K S
8.5
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Trademark
Protection
If a trademark or servicemark is pro-
tected, the owner of the mark can:
prevent others from using it in a
context where it might confuse
consumers, and
recover money damages from
someone who used the mark know-
ing that it was already owned by
someone else.
Trademark law also protects fa-
mous marks by allowing owners to
sue to prevent others from using the
same or similar mark, even if cus-
tomer confusion is unlikely.
Not all marks are entitled to an
equal amount of protection, how-
everand some arent entitled to any
protection at all.
What laws offer protection to
trademark owners?
The basic rules for resolving disputes
over who is entitled to use a trade-
mark come from decisions by federal
and state courts (the common law).
These rules usually favor the business
that first used the mark where the
second use would be likely to cause
customer confusion. A number of
additional legal principles used to
protect owners against improper use
of their marks derive from federal
statutes known collectively as the
Lanham Act (Title 15 U.S.C. §§ 1051
to 1127). And all states have statutes
that govern the use and protection of
marks within the states boundaries.
In addition to laws that specifically
protect trademark owners, all states
have laws that protect one business
against unfair competition by another
business, including the use by one
business of a name already used by
another business in a context thats
likely to confuse customers.
What types of marks are entitled
to the most legal protection?
Trademark law grants the most legal
protection to the owners of names,
logos and other marketing devices that
are distinctivethat is, memorable
because they are creative or out of the
ordinary, or because they have become
well known to the public through
their use over time or because of a mar-
keting blitz.
Inherently Distinctive
Marks
Trademarks that are unusually creative
are known as inherently distinctive
marks. Typically, these marks consist of:
unique logos or symbols (such as the
McDonalds Golden Arch and the
IBM symbol)
made-up words or words that have
no dictionary meaning such as
Exxon
or
Kodak
(called "fanciful" or
"coined" marks)
words that are surprising or
unexpected in the context of their
usage, such as Time Magazine or
Diesel for a bookstore (called
arbitrary marks), and
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words that cleverly connote qualities
about the product or service, such as
Slenderella diet food products
(called suggestive or evocative
marks).
Which marks receive the least
protection?
Trademarks and servicemarks consist-
ing of common or ordinary words are
not considered inherently distinctive
and receive less protection under fed-
eral and state laws. Typical examples
of trademarks using common or ordi-
nary words are:
peoples names, such as Petes
Muffins or Smith Graphics
geographic terms, such as Northern
Dairy or Central Insect Control, and
descriptive termsthat is, words
that attempt to literally describe the
product or some characteristic of the
product, such as Rapid Computers,
Clarity Video Monitors or Ice Cold
Ice Cream.
However, nondistinctive marks
may be come distinctive through use
over time or through intensive mar-
keting efforts.
What about Ben and Jerrys Ice
Cream? Even though Ben and
Jerry are common names, isnt
the Ben and Jerrys trademark
entitled to maximum protection?
Absolutely. Even if a mark is not in-
herently distinctive, it may become
distinctive if it develops great public
recognition through long use and
exposure in the marketplace. A mark
that becomes protected in this way is
said to have acquired a secondary
meaning. In addition to Ben and
Jerrys, examples of otherwise com-
mon marks that have acquired a sec-
ondary meaning and are now consid-
ered to be distinctive include Sears
(department stores) and Park n Fly
(airport parking services.)
What cannot be protected
under trademark law?
There are five common situations in
which there is no trademark protec-
tion. In any of these situations the
intended trademark cannot be regis-
tered and the owner has no right to
stop others from using a similar name.
Generally, when speaking of what
cannot be protected under trademark
law, we are referring to the standards
established under the Lanham Act
(the federal statute that provides for
registration of marks and federal court
remedies in case a mark is infringed).
Nonuse. An owner may lose trade-
mark protection if she abandons a
trademark. This can happen in
many ways. The most common is
when the mark is no longer used in
commerce and there is sufficient
evidence that the owner intends to
T R A D E M A R K S
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discontinue its use. Under the
Lanham Act, a trademark is pre-
sumed to be abandoned after three
years of nonuse. But, if the owner
can prove that she intended to
resume commercial use of the mark,
she will not lose trademark protec-
tion.
Generics and genericide. A generic
term describes a type of goods or
services; it is not a brand name.
Examples of generic terms are
computer, eyeglasses and
eBook. Consumers are used to
seeing a generic term used in
conjunction with a trademark (for
example, Avery labels or Hewlett-
Packard printers). On some occa-
sions, a company invents a new
word for a product (for example,
Kleenex for a tissue) that functions
so successfully as a trademark that
the public eventually comes to
believe that it is the name of the
goods. This is called genericide.
When that happens, the term loses
its trademark protection. Other
famous examples of genericide are
aspirin, yo-yo, escalator,
thermos and kerosene.
Confusingly similar marks. A mark
will not receive trademark protection
if it is so similar to another existing
trademark that it causes confusion
among consumers. This standard,
known as likelihood of confusion, is a
foundation of trademark law. Many
factors are weighed when considering
likelihood of confusion. The most
important are: the similarity of the
marks, the similarity of the goods,
the degree of care exercised by the
consumer when making the pur-
chase, the intent of the person using
the similar mark and any actual
confusion that has occurred.
Weak marks. A weak trademark will
not be protected unless the owner
can prove that consumers are aware
of the mark. There are three types of
weak marks: descriptive marks,
geographic marks that describe a
location and marks that are primarily
surnames (last names). When an
applicant attempts to register a weak
mark, the PTO will permit the
applicant to submit proof of distinc-
tiveness or to move the application
from the Principal Register to the
Supplemental Register. (See Regis-
tering a Trademark, below, for more
information about the different
benefits offered these registers.)
Functional features. Trademark law,
like copyright law, will not protect
functional features. Generally, a
functional feature is something that is
necessary for the item to work. The
issue usually arises with product
packaging or shapes. For instance, the
unique shape of the Mrs. Butterworth
bottle is not a functional feature
because it is not necessary for the
bottle to work. Therefore, it is eligible
for trademark protection.
Are Internet domain names
names for sites on the World
Wide Webprotected by
trademark law?
Domain name registration, by itself,
does not permit you to stop another
business from using the same name
for its business or product. Instead, it
gives you only the right to use that
specific Internet address. To protect
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your domain name as a trademark, the
name must meet the usual trademark
standards. That is, the domain name
must be distinctive or must achieve
distinction through customer aware-
ness, and you must be the first to use
the name in connection with your
type of services or products. An ex-
ample of a domain name that meets
these criteria and has trademark pro-
tection is Amazon.com. Amazon.com
was the first to use this distinctive
name for online retail sales and the
name has been promoted to customers
through advertising and sales.
Using and
Enforcing a
Trademark
Generally, a trademark is owned by
the business that first uses it in a
commercial contextthat is, attaches
the mark to a product or uses the
mark when marketing a product or
service. A business may also obtain
trademark protection if it files for
trademark registration before anyone
else uses the mark. (Trademark regis-
tration is discussed in more detail in
the series of questions, Registering a
Trademark, below.)
Once a business owns a trademark,
it may be able to prevent others from
using that mark, or a similar one, on
their goods and services.
More specifically, what does it
mean to use a trademark?
In trademark law, use means that
the mark is at work in the market-
place, identifying the underlying
goods or services. This doesnt mean
that the product or service actually
has to be sold, as long as it is legiti-
mately offered to the public under the
mark in question. For example, Rob-
ert creates a website where he offers
his new inventiona humane mouse-
trapfor sale under the trademark
MiceFree. Even if Robert doesnt
sell any traps, he is still using the
trademark as long as MiceFree ap-
pears on the traps or on tags attached
to them and the traps are ready to be
shipped when a sale is made. Simi-
larly, if Kristin, a trademark attorney,
puts up a website to offer her services
under the servicemark Trademark
Queen, her servicemark will be in use
as long as she is ready to respond to
customer requests for her advice.
How can a business reserve a
trademark for future use?
It is possible to acquire ownership of a
mark by filing an intent-to-use
(ITU) trademark registration applica-
tion with the U.S. Patent and Trade-
mark Office before someone else has
actually started using the mark. The
filing date of this application will be
considered the date of first use of the
mark if the applicant actually uses the
mark within the required time lim-
itssix months to three years after
the PTO approves the mark, depend-
ing on whether the applicant seeks
and pays for extensions of time.
T R A D E M A R K S
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For more information about trade-
mark registration, see Registering a
Trademark, below.
When can the owner of a
trademark stop others from
using it?
Whether the owner of a trademark
can stop others from using it depends
on such factors as:
whether the trademark is being used
on competing goods or services
(goods or services compete if the sale
of one is likely to affect the sale of
the other)
whether consumers would likely be
confused by the dual use of the
trademark, and
whether the trademark is being used
in the same part of the country or is
being used on related goods (goods
that will probably be noticed by the
same customers, even if they dont
compete with each other).
In addition, under federal and state
laws known as antidilution statutes,
a trademark owner may go to court to
prevent its mark from being used by
someone else if the mark is famous
and the later use would dilute the
marks strengththat is, weaken its
reputation for quality (called
tarnishment) or render it common
through overuse in different contexts.
Antidilution statutes can apply even
if there is no way customers would be
likely to confuse the source of the goods
or services designated by the later mark
with the famous marks owner. For in-
stance, consumers would not think that
Microsoft Bakery is associated with
Microsoft, the software company, but
Microsoft Bakery could still be forced to
choose another name under federal and
state antidilution laws.
How does a trademark owner
prevent others from using the
mark?
Typically, the owner will begin by
sending a letter, called a cease and
desist letter, to the wrongful user,
demanding that it stop using the
mark. If the wrongful user continues
to infringe the mark, the owner can
file a lawsuit to stop the improper use.
The lawsuit is usually filed in federal
court if the mark is used in more than
one state or country, and in state court
if the dispute is between purely local
marks. In addition to preventing fur-
ther use of the mark, a trademark
owner can sometimes obtain money
damages from the wrongful user.
When can a trademark owner
get money from someone who
has infringed the owners mark?
If a trademark owner proves in federal
court that the infringing use is likely
to confuse consumers and that it suf-
fered economically as a result of the
infringement, the competitor may have
to pay the owner damages based on the
loss. And if the court finds that the
competitor intentionally copied the
owners trademark, or at least should
have known about the mark, the com-
petitor may have to give up the profits
it made by using the mark as well as
pay other damages, such as punitive
damages, fines or attorney fees. On the
other hand, if the trademarks owner
has not been damaged, a court has dis-
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cretion to allow the competitor to con-
tinue to use the trademark under lim-
ited circumstances designed to avoid
consumer confusion.
Do people have the right to use
their last names as marks even if
someone else is already using
them for a similar business?
It depends on the name. A mark that
is primarily a surname (last name)
does not qualify for protection under
federal trademark law unless the name
becomes well known as a mark
through advertising or long use. If
this happens, the mark is said to have
acquired a secondary meaning.
If a surname acquires a secondary
meaning, it is off limits for all uses
that might cause customer confusion,
whether or not the name is registered.
Sears, McDonalds, Hyatt, Champion,
Howard Johnsons and Calvin Klein
are just a few of the hundreds of sur-
names that have become effective and
protected marks over time.
Also, a business that tries to capi-
talize on the name of its owner to take
advantage of an identical famous
name being used as a trademark may
be forced, under the state or federal
antidilution laws, to stop using the
name. This may happen if the trade-
mark owner files a lawsuit.
TM and ®:
What do they mean?
Many people like to put a TM (or SM
for servicemark) next to their mark to let
the world know that they are claiming
ownership of it. However, it is not legally
necessary to provide this type of notice;
the use of the mark itself is the act that
confers ownership.
The R in a circle ( ® ) is a different
matter entirely. This notice may not be
put on a mark unless it has been regis-
tered with the U.S. Patent and Trademark
Officeand it should accompany a mark
after registration is complete. Failure to
put the notice on a registered trademark
can greatly reduce the possibility of
recovering significant damages if it later
becomes necessary to file a lawsuit
against an infringer.
T R A D E M A R K S
8.11
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Conducting a
Trademark
Search
If you want to find out whether the
trademark youve chosen for your
products or services is available, youll
need to conduct a trademark search
an investigation to discover potential
conflicts between your desired mark
and any existing marks. Ideally, the
search should be done before you be-
gin to use a mark; this will help you
avoid the expensive mistake of infring-
ing a mark belonging to someone else.
Why do I need to conduct a
trademark search?
The consequences of failing to con-
duct a reasonably thorough trademark
search may be severe, depending on
how widely you intend to use your
mark and how much it would cost
you to change it if a conflict later
develops. If the mark you want to use
has been federally registered by some-
one else, a court will presume that
you knew about the registration
even if you did not. You will be pre-
cluded from using the mark in any
context where customers might be-
come confused. And if you do use the
mark improperly, you will be cast in
the role of a willful infringer. Will-
ful infringers can be held liable for
large damages and payment of the
registered owners attorney fees; they
can also be forced to stop using the
mark altogether.
My business is local. Why
should I care what name or
mark someone else in another
part of the country is using?
Most small retail or service-oriented
business owners well know the mantra
for success: location, location, location.
But as the Internet takes firm hold in
the late 1990s, the concept of location,
while still central to business success,
takes on a whole new meaning. Instead
of being rooted in physical space, busi-
nesses are now required to jockey for
locations in the virtual or electronic
space known as the Internet.
Vast numbers of businesseseven
local enterprisesare putting up
their own websites, creating a new
potential for competition (and confu-
sion) in the marketplace. Because of
this, every business owner must pay
attention to whether a proposed name
or mark has already been taken by an-
other business, regardless of the loca-
tion or scope of that business.
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Can I do my own trademark
search?
Yes. Although the most thorough
trademark searches are accomplished
by professional search firms such as
Thomson & Thomson, it is also pos-
sible to conduct a preliminary online
trademark search to determine if a
trademark is distinguishable from
other federally registered trademarks.
You can accomplish this with the
PTOs trademark databases (http://
www.uspto.gov), which provide free
access to records of federally regis-
tered marks or marks that are pend-
ing. In addition, privately owned fee-
based online trademark databases
often provide more current PTO
trademark information. Below are
some private fee-based online search
companies:
Saegis (http://www.thomson-
thomson.com). Provides access to all
Trademarkscan databases (state, fed-
eral and international trademark data-
bases), domain name databases, com-
mon law sources on the Internet and
access to newly filed United States
federal trademark applications. Saegis
also provides access to Dialog services,
discussed next.
Dialog (http://www.dialog.com).
Provides access to Trademarkscan da-
tabases including state and federal
registration and some international
trademarks and provides common law
searching of news databases.
MicroPatent (http://
www.micropatent.com). Provides ac-
cess to federal and state trademarks.
Trademark.com (http://
www.trademark.com). Provides access
to current federal registration infor-
mation.
Trademark Register (http://
www.trademarkregister.com). Pro-
vides access to current federal registra-
tion information.
Marks on Line (http://
www.marksonline.com). This is a
comprehensive trademark link site
providing access to federal registra-
tion information and a listing of state
and international trademark offices.
LEXIS/NEXIS (http://www.lexis-
nexis.com). LEXIS provides access to
federal and state registrations. You can
also search for non-registered trade-
marks through its NEXIS news ser-
vices. The PTO uses NEXIS to evalu-
ate descriptive and generic terms.
You can also visit one of the Patent
and Trademark Depository Libraries
available in every state. These libraries
offer a combination of hardcover direc-
tories of federally registered marks and
an online database of both registered
marks and marks for which a registra-
tion application is pending. To find
the Patent and Trademark Depository
Library nearest you, consult the PTO
website at http://www.uspto.gov.
You should also search for marks
that have not been registered.
This is important because an exist-
ing mark, even if its unregistered,
would preclude you from:
registering the same or a confus-
ingly similar mark in your own
name, and
using the mark in any part of the
country or commercial transaction
where customers might be confused.
T R A D E M A R K S
8.13
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You can search for unregistered
marks in the Patent and Trademark
Depository Libraries and on the
Internet. In the libraries, use the
available product guides and other
materials. On the Internet, look for
online shopping websites and review
the inventory for items similar to
yours. For example, go to eToys
(http://www.etoys.com) to find hun-
dreds of trademarked toys. You can
also search for unregistered marks by
using an Internet search engine. Enter
your proposed name in the search
field of an Internet search engine
(such as Alta Vista). You will get a
report of every instance that the name
appears on Web pages indexed by that
engine. Because no search engine is
100% complete, you should do this
same search on a several different
search engines.
How can I find out whether a
mark I want to use is already
being used as a domain name
(the name of a site on the World
Wide Web)?
Every website is identified by a
unique phrase known as a domain
name. For example, the domain
name for Nolo is Nolo.com. Because
so much business is now being done
online, most people will want to be
able to use their proposed mark as a
domain name so that their customers
can easily locate them on the Web.
The easiest way to find out if a do-
main name is already in use is to
check with one of the dozens of online
companies that have been approved to
register domain names. You can ac-
cess a listing of these registrars
through InterNICs site at http://
www.internic.net or ICANNs site at
http://www.icann.org. ICANN is the
organization that oversees the process
of approving domain name registrars.
Would it be better to have a
professional firm conduct my
trademark search?
Many people do prefer to pay a profes-
sional search firm to handle a trade-
mark search. This can make sense if
your financial plans justify an initial
outlay of several hundred dollars, the
minimum cost for a thorough profes-
sional search for both registered and
unregistered marks. Depending on
the search firm, you may also get a
legal opinion as to whether your pro-
posed mark is legally safe to use in
light of existing registered and unreg-
istered marks. Obtaining a legal opin-
ion may provide important protection
down the road if someone later sues
you for using the mark.
How do I find a professional
search firm?
There are many trademark search ser-
vices in the United States. Here are
three of the most well known:
The Sunnyvale Center on Innova-
tion, Invention and Ideas (Sc[i]3)
(http://www.sci3.com). Sc[i]3 (pro-
nounced sigh-cubed) is one of three
Patent and Trademark Depository Li-
brariesthe others are in Detroit and
Houstonthat have formed partner-
ships with the U.S. Patent and Trade-
mark Office. Under this partnership,
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Sc[i]3 is encouraged to offer a variety
of information servicesincluding
trademark searchesfor very reason-
able fees.
Trademark Express (http://
www.tmexpress.com). Trademark Ex-
press is a private company that, in
addition to other trademark-related
services, offers a full choice of trade-
mark searches.
Thomson & Thomson (http://
www.thomson-thomson.com).
Thomson & Thomson is the trade-
mark search service of choice for the
legal professional.
If you dont like doing business at a
distance, you can find trademark
search services in your area by looking
in the Yellow Pages of the nearest
good-sized city under trademark con-
sultants or information brokers. If
that yields nothing, consult the adver-
tisements in a local legal journal or
magazine. Finally, you can find a
good list of trademark search firms at
http://www.ggmark.com.
Registering a
Trademark
It is possible to register certain types
of trademarks and servicemarks with
the U.S. Patent and Trademark Office
(PTO). Federal registration puts the
rest of the country on notice that the
trademark is already taken, and makes
it easier to protect a mark against
would-be copiers.
How does a mark qualify for
federal registration?
To register a trademark with the
PTO, the marks owner first must put
it into use in commerce that Con-
gress may regulate. This means the
mark must be used on a product or
service that crosses state, national or
territorial lines or that affects com-
merce crossing such linesfor ex-
ample, a catalog business or a restau-
rant or motel that caters to interstate
or international customers. Even if the
owner files an intent-to-use (ITU)
trademark application (ITU applica-
tions are discussed in the previous set
of questions), the mark will not actu-
ally be registered until it is used in
commerce.
Once the PTO receives a trademark
registration application, the office
must answer the following questions:
Is the trademark the same as or
similar to an existing mark used on
similar or related goods or services?
Is the trademark on the list of
prohibited or reserved names?
Is the trademark genericthat is,
does the mark describe the product
itself rather than its source?
Is the trademark too descriptive (not
distinctive enough) to qualify for
protection?
If the answer to each question is
no, the trademark is eligible for reg-
istration and the PTO will continue
to process the application.
T R A D E M A R K S
8.15
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I know the PTO wont register a
mark if its not distinctive or
already in use. But are there
other types of marks that are
ineligible for federal
registration?
Yes. The PTO wont register any
marks that contain:
names of living persons without
their consent
the U.S. flag
other federal and local governmental
insignias
the name or likeness of a deceased
U.S. President without his widows
consent
words or symbols that disparage
living or deceased persons, institu-
tions, beliefs or national symbols, or
marks that are judged immoral,
deceptive or scandalous.
As a general rule the PTO takes a
liberal view of the terms immoral and
scandalous and will rarely refuse to
register a mark on those grounds.
If the PTO decides that a mark is
eligible for federal registration,
what happens next?
Next, the PTO publishes the trade-
mark in the Official Gazette (a publica-
tion of the U.S. Patent and Trade-
mark Office). The Gazette states that
the mark is a candidate for registra-
tion; this provides existing trademark
owners with an opportunity to object
to the registration. If someone objects,
the PTO will schedule a hearing to
resolve the dispute.
Is it possible to federally register
a mark made up of common or
ordinary words?
Yes, if the combination of the words
is distinctive. But even if the entire
mark is judged to lack sufficient dis-
tinctiveness, it can be placed on a list
called the Supplemental Register.
(Marks that are considered distinc-
tiveeither inherently or because
they have become well knownare
placed on a list called the Principal
Register.) Marks on the Supplemental
Register receive far less protection
than do those on the Principal Regis-
ter. The benefits granted by each type
of registration are discussed in more
detail in the next question.
What are the benefits of federal
trademark registration?
It depends on which register carries
the mark. Probably the most impor-
tant benefit of placing a mark on the
Principal Register is that anybody
who later initiates use of the same or a
confusingly similar trademark may be
presumed by the courts to be a will-
ful infringer and therefore liable for
large money damages.
Placing a trademark on the Supple-
mental Register produces signifi-
cantly fewer benefits, but still pro-
vides notice of ownership. This notice
makes it far less likely that someone
will use that identical mark; the fear
of being sued for damages should
keep potential infringers away. Also,
if the trademark remains on the
Supplemental Register for five
yearsmeaning that the registration
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isnt canceled for some reasonand
the mark remains in use during that
time, it may be moved to the Princi-
pal Register under the secondary
meaning rule (secondary meaning will
be presumed).
Even if a mark is not registered, it is
still possible for the owner to sue the
infringer under a federal statute which
forbids use of a false designation of
origin (Title 15 U.S.C. § 1125). It is
usually much easier to prove the case
and collect large damages, however, if
the mark has been registered.
How long does federal
registration last?
Once a trademark or servicemark is
placed on the Principal Register, the
owner receives a certificate of registra-
tion good for an initial term of ten
years. The registration may lapse be-
fore the ten-year period expires, how-
ever, unless the owner files a form
within six years of the registration
date (called the Section 8 Declaration)
stating that the mark is either still in
use in commerce or that the mark is
not in use for legitimate reasons.
The Section 8 Declaration is usu-
ally combined with a Section 15 Dec-
laration, which effectively renders the
trademark incontestable except for
limited reasons.
The original registration may be
renewed indefinitely for additional
ten-year periods if the owner files the
required renewal applications (called a
Section 9 Affidavit) with the U.S.
Patent and Trademark Office. A Sec-
tion 8 Declaration must also be filed
at the time of trademark renewal.
Failure to renew a registration does
not void all rights to the mark, but if
the owner fails to re-register, the spe-
cial benefits of federal registration
will be lost.
What happens if there is a
conflict between an Internet
domain name and an existing
trademark?
The answer depends on the nature of
the conflict. There are three reasons
why a conflict may develop between
the owner of a trademark and the
owner of a domain name:
The domain name registrant is a
cybersquatter. If a domain name is
registered in bad faithfor example,
the name is registered with the intent
of selling it back to a company with
the same namethe domain name
can be taken away under federal law
or under international arbitration
rules for domain name owners. A vic-
tim of cybersquatting in the U.S. can
now sue under the provisions of the
Anticybersquatting Consumer Protec-
tion Act (ACPA) or can fight the
cybersquatter using an international
arbitration system created by the
Internet Corporation of Assigned
Names and Numbers (ICANN). The
ICANN arbitration system is usually
faster and less expensive than suing
under the ACPA. In addition, it does
not require an attorney. For informa-
tion on the ICANN policy visit the
organizations website at http://
www.icann.org.
The domain name infringes an
existing trademark. If a domain
name is likely to confuse consumers
T R A D E M A R K S
8.17
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because it is similar to an existing
trademark, the owner of the federally
owned trademark can sue for infringe-
ment in federal court. For example,
its likely that the Adobe company,
makers of graphics software, would be
able to prevent another software com-
pany from using the domain name of
www.adoobie.com.
The domain name dilutes a fa-
mous trademark. If a domain name
dilutes the power of a famous trade-
mark, the trademark owner can sue
under federal laws to stop the contin-
ued use. Dilution occurs when the
domain name blurs or tarnishes the
reputation of a famous trademark. For
example, Gucci could probably pre-
vent a company from using the do-
main name guccigoo.com for the
purpose of selling baby diapers.
Can a business register its mark
at the state level?
It is possible to register a mark with
the state trademark agency, although
the state registration does not offer the
same level of protection provided by
federal law. The main benefit of state
registration is that it notifies anyone
who checks the list that the mark is
owned by the registrant. This fact will
lead most would-be users of the same
mark to choose another one rather
than risk a legal dispute with the reg-
istered marks owner. If the mark is
also federally registered, this notice is
presumed and the state registration
isnt necessary. If, however, the mark
is used only within the state and
doesnt qualify for federal registration,
state registration is a good idea.
How to Register Your
Trademark
For most trademarks already in use,
federal registration is a relatively straight-
forward process. You use a simple two-
sided form provided by the PTO to:
describe your mark
state when it was first used
describe the products or services on
which the mark will be used, and
suggest the classification under which
the mark should be registered (there
are approximately 40 classifications
for goods and services; the PTO can
help you figure out which one is right
for your mark).
In addition, your form must be accom-
panied by:
a drawing of your mark (for word
marks, this simply involves setting the
mark out in the middle of a page in
capital letters)
samples of how your proposed mark is
being used, and
the registration feecurrently $325.
On its website, http://www.uspto.gov,
the PTO offers two electronic registration
options. PrinTEAS lets you fill in the form
online but requires you to print out and
mail in a hardcopy. eTEAS lets you both
fill in and file the form online.
If you are applying to register your
mark on the basis of its intended use (See
How can a business reserve a trademark
for future use?
, above), then you neednt
provide the samples or the date of first
use, but you cant complete your registra-
tion until you put your mark into actual
use and file some additional paperwork
with the PTO.
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The PTO offers a free booklet contain-
ing plain English instructions for filling
out this form, and also provides help on
its website: http://www.uspto.com. For
more information about registering your
trademark, see the resource list at the
end of this chapter.
How
Trademarks
Differ From
Patents and
Copyrights
Trademarks are often mentioned in
the same breath as copyrights and
patents. While they do sometimes
apply to the same thing, theyre more
often defined by their differences. Its
important to understand how trade-
mark law differs from other laws pro-
tecting creative works (collectively
called intellectual property laws);
rules and benefits depend on the type
of intellectual property at issue.
How does trademark differ from
copyright?
Copyright protects original works of
expression, such as novels, fine and
graphic arts, music, phonorecords,
photography, software, video, cinema
and choreography by preventing
people from copying or commercially
exploiting them without the copy-
right owners permission. But the
copyright laws specifically do not
protect names, titles or short phrases.
Thats where trademark law comes in.
Trademark protects distinctive words,
phrases, logos, symbols, slogans and
any other devices used to identify and
distinguish products or services in the
marketplace.
There are, however, areas where
both trademark and copyright law
may be used to protect different as-
pects of the same product. For ex-
ample, copyright laws may protect the
artistic aspects of a graphic or logo
used by a business to identify its
goods or services, while trademark
may protect the graphic or logo from
use by others in a confusing manner
in the marketplace. Similarly, trade-
mark laws are often used in conjunc-
tion with copyright laws to protect
advertising copy. The trademark laws
protect the product or service name
and any slogans used in the advertis-
ing, while the copyright laws protect
the additional creative written expres-
sion contained in the ad.
For more information about copy-
right law, see Chapter 7, Copyrights.
Whats the difference between
patent and trademark?
Patents allow the creator of certain
kinds of inventions that contain new
ideas to keep others from making
commercial use of those ideas without
the creators permission. For example,
Tom invents a new type of hammer
that makes it very difficult to miss the
nail. Not only can Tom keep others
from making, selling or using the
T R A D E M A R K S
8.19
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precise type of hammer he invented,
but he may also be able to apply his
patent monopoly rights to prevent
people from making commercial use
of any similar type of hammer during
the time the patent is in effect (20
years from the date the patent appli-
cation is filed).
Generally, patent and trademark
laws do not overlap. When it comes to
a product design, howeversay, jew-
elry or a distinctively shaped musical
instrumentit may be possible to
obtain a patent on a design aspect of
the device while invoking trademark
law to protect the design as a product
identifier. For instance, an auto manu-
facturer might receive a design patent
for the stylistic fins that are part of a
cars rear fenders. Then, if the fins
were intended to beand actually
areused to distinguish the particu-
lar model car in the marketplace,
trademark law may kick in to protect
the appearance of the fins.
For more information about patent
law, see Chapter 6, Patents.
ef
More Information
About Trademarks
Trademark: Legal Care for Your Business
& Product Name,
by Stephen Elias
(Nolo), shows you how to choose a
legally strong business and product
name, register the name with state and
federal agencies and sort out any name
disputes that arise.
Patent, Copyright & Trademark
, by
Stephen Elias and Richard Stim (Nolo),
provides concise definitions and examples
of the important words and phrases
commonly used in trademark law.
Domain Names: How to Choose &
Protect a Great Name for Your Website
,
by Stephen Elias & Patricia Gima (Nolo).
This how-to book provides information on
selecting, registering and protecting a
domain name.
McCarthy on Trademarks and Unfair
Competition
, by J. Thomas McCarthy
(Clark Boardman Callaghan), is a book
intended for lawyers that provides an
exhaustive treatment of trademark law.
Trademark LawA Practitioners Guide,
by Siegrun D. Kane (Practicing Law
Institute), is a good overview of trade-
mark law written for lawyers.
Trademark Registration Practice,
by James
E. Hawes (Clark Boardman Callaghan), a
book for trademark lawyers, provides the
ins and outs of registering a trademark with
the U.S. Patent and Trademark Office.
The following associations of trademark
lawyers offer a number of helpful publica-
tions. Write or call for a list of available
materials.
International Trademark Association (INTA)
1133 Avenue of the Americas
New York, NY 10036
212-768-9887
http://www.inta.org
American Intellectual Property Law
Association (AIPLA)
2001 Jefferson Davis Highway, Suite 203
Arlington, VA 22202
703-415-0780
http://www.aipla.org
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
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http://www.nolo.com
Nolo Press offers self-help information
about a wide variety of legal topics, in-
cluding trademarks.
http://www.marksonline.com
This comprehensive trademark site provides
trademark searching services, news and
links as well as domain name information.
Its easy to navigate, contains lots of prac-
tical information for trademark owners
and includes links to state and federal
trademark offices.
http://www.inta.org
The International Trademark Association
(INTA) provides trademark services, pub-
lications and online resources.
o
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http://www.uspto.gov
The U.S. Patent and Trademark Office
provides new trademark rules and regula-
tions and, as of August 1998, is expected
to put the federal registered trademark
database online.
http://www.sci3.com
The Sunnyvale Center for Invention, Inno-
vation and Ideas (a Patent and Trade-
mark Depository Library), provides infor-
mation about their excellent, low-cost
trademark search service conducted by the
Centers librarians.
http://www.ggmark.com
This site, maintained by a trademark
lawyer, provides basic trademark informa-
tion and a fine collection of links to other
trademark resources.
i
i
abb
9
Your Money
9.2 Purchasing Goods
and Services
9.7 Using Credit and
Charge Cards
9.10 Using an ATM or
Debit Card
9.11 Strategies for
Repaying Debts
9.18 Dealing With the IRS
9.22 Debt Collections
9.25 Bankruptcy
9.28 Rebuilding Credit
Too many people spend money they
havent earned, to buy things they
dont want, to impress people they
dont like.
WILL ROGERS
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9. 2
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Americas economy is driven by
consumer spending. When we open
any newspaper or magazine, turn on
the radio or television, or take a drive
across town, were bombarded with
ads urging us to spend our hard-
earned dollars. And so we do. We pull
out our cash, checks, credit cards, and
increasingly, debit cards.
What the ads dont tell you is what
to do when things go wrongfor ex-
ample, when the item you buy is de-
fective, when you lose your credit
card, when you need extra time to pay
or when you fall behind and the bill
collectors start calling.
Fortunately, many federal (and
some state) laws provide some protec-
tions to consumers; this chapter de-
scribes some of those that are most
important. While no law substitutes
for common sense, comparison shop-
ping and avoiding offers that sound
too good to be true, if you do face
problems as a consumer, many laws
can help.
Purchasing
Goods and
Services
I did not have three thousand
pairs of shoes: I had one
thousand and sixty.
IMELDA MARCOS
While 19th century business relation-
ships were governed by the doctrine
caveat emptor or let the buyer be-
ware, the notion that a buyer-seller
arrangement should be fair gained
ground in the 20th century. As a re-
sult, you now have a right to receive
nondefective goods and services that
meet a minimum standard.
When I buy something, is it
covered by a warranty?
Generally, yes. A warranty (also called
a guarantee) is an assurance about the
quality of goods or services you buy,
and is intended to give you recourse if
something you purchase fails to live
up to what you were promised.
Some warranties are implied and
some are expressed. Virtually every-
thing you buy comes with two im-
plied warrantiesone for merchant-
ability and one for fitness. The im-
plied warranty of merchantability is
an assurance that a new item will
work if you use it for a reasonably
expected purpose. For used items,
the warranty of merchantability is a
promise that the product will work as
Y O U R M O N E Y
9.3
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expected, given its age and condition.
The implied warranty of fitness ap-
plies when you buy an item with a
specific (even unusual) purpose in
mind. If you communicated your spe-
cific needs to the seller, the implied
warranty of fitness assures you that
the item will fill your need.
Most expressed warranties state
something such as the product is
warranted against defects in materials
or workmanship for a specified time.
Most either come directly from the
manufacturer or are included in the
sales contract you sign with the seller.
But an expressed warranty may also be
in an advertisement or on a sign in
the store (all dresses 100% silk), or
it may even be an oral description of a
products features.
How long does a warranty last?
In most states, an implied warranty
lasts forever. In a few states, however,
the implied warranty lasts only as
long as any expressed warranty that
comes with a product. In these states,
if there is no expressed warranty, the
implied warranty lasts forever.
Can a seller avoid a warranty
by selling a product as is?
The answer depends on whether the
warranty is express or implied (see the
previous questions for an explanation
of implied and express warranties) and
in what state you live. Sellers cannot
avoid express warranties by claiming
the product is sold as is. On the
other hand, if there is no express war-
ranty, sellers can sometimes avoid an
implied warranty by selling the item
as is. Some states prohibit all as is
sales. And in all states, the buyer
must know that the item is sold as
is in order for the seller to avoid an
implied warranty.
How do I enforce a warranty if
something is wrong with what I
bought?
Most of the time, a defect in an item
will show up immediately and you
can ask the seller or manufacturer to
fix or replace it. If the seller wont, or
tries only once and the fixed or re-
placed item is still defective, you can
withhold payment (or refuse to pay a
credit card charge). If you are uncom-
fortable doing this or have already
paid for the item, call the seller and
try to work out an arrangement. If the
seller refuses, try to mediate the dis-
pute through a community or Better
Business Bureau mediation program.
(For more information about media-
tion, see Chapter 17.)
If you cant get anywhere infor-
mally, you can sue. In most states, if
the seller or manufacturer wont make
good under a warranty you must sue
within four years of when you discov-
ered the defect.
Do I have any recourse if the
item breaks after the warranty
expires?
Usually not. But in most states, if the
item gave you some trouble while it
was under the warranty and you had it
repaired by someone authorized by the
manufacturer to make repairs, the
manufacturer must extend your origi-
nal warranty for the amount of time
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the item sat in the shop. If you think
youre entitled to an extension, call the
manufacturer and ask to speak to the
department that handles warranties.
You may have other options as
well. If your product was trouble-free
during the warranty period, the
manufacturer may offer a free repair
for a problem that arose after the war-
ranty expired if the problem is wide-
spread. Many manufacturers have se-
cret fix it listsitems with defects
that dont affect safety and therefore
dont require a recall, but that the
manufacturer will repair for free. It
cant hurt to call and ask.
I just bought a stereo system
and the salesclerk tried to sell
me an extended warranty
contract. Should I have
bought it?
Probably not. Merchants encourage
you to buy extended warranties (also
called service contracts) because they
are a source of big profits for stores,
which pocket up to 50% of the
amount you pay.
Rarely will you have the chance to
exercise your rights under an extended
warranty. Name-brand electronic
equipment and appliances usually
dont break down during the first few
years (and if they do theyre covered
by the original warranty), and often
have a lifespan well beyond the length
of the extended warranty.
I think I was the victim of a scam.
Can I get my money back?
Federal and state laws prohibit unfair
or deceptive trade acts or practices. If
you think youve been cheated, imme-
diately let the appropriate government
offices know. Although any govern-
ment investigation will take some
time, these agencies often have the
resources to go after unscrupulous
merchants. And, the more agencies
you notify, the more likely someone
will take notice of your complaint and
act on it.
Unfortunately, government agen-
cies are rarely able to get you your
money back. If the business is a repu-
table one, however, it may refund your
money when a consumer fraud law
enforcement investigator shows up. It
certainly cant hurt to complain.
If you cant get relief from a gov-
ernment agency, consider suing the
company in small claims court.
Everybodys Guide to Small Claims
Court, by Ralph Warner (Nolo), pro-
vides extensive information on how to
sue in small claims court.
How to File a
Complaint for Fraud
The National Fraud Information Center, a
project of the National Consumers League,
can help you if youve been defrauded.
NFIC provides:
assistance in filing a complaint with
appropriate federal agencies
recorded information on current fraud
schemes
tips on how to avoid becoming a fraud
victim, and
direct ordering of consumer
publications in English or Spanish.
Y O U R M O N E Y
9.5
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You can contact NFIC at P.O. Box
65868, Washington, DC 20035, 800-
876-7060, 202-737-5084 (TTD), http://
www.fraud.org.
Also contact your local prosecutor to find
out if it investigates consumer fraud com-
plaints. Finally, contact any local newspa-
per, radio station or television station
action line. Especially in metropolitan
areas, these folks often have an army of
volunteers ready to pursue consumer
complaints.
I received some unordered
merchandise in the mail and
now Im getting billed. Do I
have to pay?
You dont owe any money if you re-
ceive an item you never ordered. Its
considered a gift. If you get bills or
collection letters from a seller who
sent you something you never
ordered, write to the seller stating
your intention to treat the item as a
gift. If the bills continue, insist that
the seller send you proof of your
order. If this doesnt stop the bills,
notify the state consumer protection
agency in the state where the mer-
chant is located.
If you sent for something in re-
sponse to an advertisement claiming a
free gift or trial period, but are
now being billed, be sure to read the
fine print of the ad. It may say some-
thing about charging shipping and
handling; or worse, you may have
inadvertently joined a club or sub-
scribed to a magazine. Write the
seller, offer to return the merchandise
and state that you believe the ad was
misleading.
I just signed a contract to have
carpeting installed in my house
and I changed my mind. Can I
cancel?
Possibly. Under the Federal Trade
Commissions Cooling Off Rule, you
have until midnight of the third busi-
ness day after a contract was signed to
cancel either of the following:
door-to-door sales contracts for more
than $25, or
a contract for more than $25 made
anywhere other than the sellers
normal place of businessfor
instance, at a sales presentation at a
hotel or restaurant, outdoor exhibit,
computer show or trade show (other
than public car auctions and craft
fairs).
Do I have the right to cancel
any other kinds of contracts?
The federal Truth in Lending Act lets
you cancel some loans up until mid-
night of the third business day after
you signed the contract. It applies
only to loans for which you pledged
your home as security, as long as the
loan is not a first mortgage. For ex-
ample, the Act applies to home im-
provement loans and second mort-
gages. If the lender never notified you
of the three-day right to cancel, you
have even longer to cancel your loan.
In addition, many states have laws
that allow you to cancel written con-
tracts covering the purchase of certain
goods or services within a few days of
signing, including contracts for dance
or martial arts lessons, credit repair
services, health club memberships,
N o l o s E n c y c l o p e d i a o f E v e r y d a y L a w
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dating services, weight loss programs,
time share properties and hearing
aids. In a few states, you can also can-
cel a contract if you negotiated the
transaction in a language other than
English but the seller did not give
you a copy of the contract in that lan-
guage. Call your state consumer pro-
tection agency (check directory assis-
tance in your state capital) to find out
what contracts, if any, are covered in
your state.
I ordered some clothes through a
catalogue and theres a delay in
shipping. Can I cancel my order?
If you order goods by mail, phone, com-
puter or fax (other than photo
development, magazine subscriptions,
seeds or plants), the Federal Trade Com-
missions Mail or Telephone Order
Rule requires that the seller ship to
you within the time promised or, if
no time was stated, within 30 days.
If the seller cannot ship within
those time frames, the seller must
send you a notice with a new shipping
date and offer you the option of can-
celing your order and getting a re-
fund, or accepting the new date. If
you opt for the second deadline, but
the seller cant meet it, it must send a
notice requesting your signature to
agree to yet a third date. If you dont
return the notice, the seller must au-
tomatically cancel your order and re-
fund your money. The seller must is-
sue the refund promptlywithin
seven days if you paid by check or
money order and within one billing
cycle if you charged your purchase.
Do I have the right to a cash
refund after I make a purchase?
Generally, no. A seller isnt required
to offer refunds or exchanges, though
many do.
But at least four states do have laws
governing refund policies:
California. Sellers who do not allow
a full cash or credit refund (or an
equal exchange) within seven days
of purchase must post the stores
refund-credit-exchange policy. If the
seller fails to post the policy, you
may return the goods, for a full
refund, within 30 days of your
purchase.
Florida. If the seller has no refund
policy, such a statement must be
posted in the store. If a no refund
isnt posted, you may return unused
goods in the original packaging
within seven days for a full refund.
New York. Sellers with a no refund
policy must post it. If a seller does
not post a policy, youre entitled to
a choice of cash or credit refund
within 20 days if goods are not used
or damaged.
Virginia. Sellers must post their
refund or exchange policies unless
they give a full cash refund (or full
credit) within 20 days after purchase.
Y O U R M O N E Y
9.7
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ef
More Information About
Purchasing Goods and Services
Everybodys Guide to Small Claims
Court
, by Ralph Warner (Nolo), has
extensive information on pursuing your
rights in the event a seller or manufac-
turer wont make good on a warranty.
The Direct Marketing Association is a
membership organization made up of
mail-order companies and other direct
marketers. If you have a complaint about
a particular company, contact Mail-
Order Action Line, c/o DMA, 1111 19th
Street, NW, Suite 1100, Washington,
DC 20036, 202-955-5030, http://
www.the_dma.org. DMA may contact
the mail-order company and try to re-
solve your problem.
Using Credit
and Charge
Cards
American adults hold approximately
two billion total credit and charge
cardsan average of nine cards per
person. Buying on credit has become a
cornerstone of the American economy.
But buying on credit can be very ex-
pensivethe interest rate on bank
credit cards averages about 18%; on
gasoline company and department
store cards, its over 20%. Only
charge cards (also called travel and
entertainment cards), such as Ameri-
can Express and Diners Club, dont
generally impose interest. Of course,
charge cards usually require that you
pay off the entire balance each month.
My credit card debt is
consuming my life. How can I
cut credit card costs?
If you have more than one card, pay
down the balances with the highest
interest rates and then use (or obtain) a
card with a low rate. Because there is
great competition among credit card
issuers, you might get a rate reduction
simply by asking for one from your
current credit card company.
Which Cards
Should You Keep?
When you think about the costs of using
your credit cards, you may decide that
youre better off canceling most of them.
If so, youll have to choose which cards
to keep. If you dont carry a monthly
balance, keep a card with no annual fee,
but make sure it has a grace period. If
you carry a balance each month, get rid
of the cards that come with the worst of
the following features:
High interest rates.
Unfair interest calculations. Avoid cards
that charge interest on the average
daily balance, not the balance due.
Heres why. Lets say you pay $1,200
of your $1,500 balance in January. If
your bank uses the average daily
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balance method, in February it will
charge you interest on the $1,500
average daily balance from January,
not on the $300 you still owe.
No grace periods. This means you pay
interest from the time of purchase until
the time of payment even if you pay
your balance in full.
Nuisance fees. Get rid of cards with
late payment fees, over-the-limit fees,
inactivity fees, fees for not carrying a
balance or for carrying a balance under
a certain amount or a flat monthly fee
thats a percentage of your credit limit.
Im always getting credit card
offers with low interest rates in
the mail. Should I sign up and
transfer the balance from my
current card to the new card?
It depends. Check the fine print of the
offer. Many credit card companies offer
a teaser ratea low rate that lasts for
a short period of time. Once the
teaser period is over, a much higher
rate kicks in. Also be sure to consider
any annual fees, grace periods and nui-
sance fees (see Which Cards Should
You Keep?, above) before you switch.
I cant afford the minimum
payment required on my
statement. Can I pay less?
Most card companies insist that you
make the monthly minimum pay-
ment, which is usually 2% to 2.5% of
the outstanding balance. If you can
convince the card issuer that your
financial situation is desperate, the
issuer may cut your payments in half.
In some cases, the issuer may waive
payments altogether for a few months.
This courtesy is usually extended only
to people who have never made late
payments.
Bear in mind that paying nothing
or very little on your credit card
should be a temporary solution only.
The longer you pay only a small
amount, the quicker your balance will
increase due to interest charges.
My checking account and Visa
card are from the same bank.
Can the bank take money out of
my checking account to cover
my missed credit card
payments?
No. A bank that takes money out of a
deposit account to cover a missed
credit card payment violates the fed-
eral Truth in Lending Act. You can
sue for damagesthe amount taken
out of your account and any other
damages you suffer, such as lost inter-
est or bounced-check fees.
My wallet was stolen. Will I
have to pay charges that the
thief made using my credit
cards?
No. Federal law limits your liability
for unauthorized charges made on your
credit or charge card after it has been
lost or stolen. If you notify the card
issuer within a reasonable time after
you discover the loss or theft (usually
30 days), youre not responsible for
any charges made after the notifica-
tion, and are liable for only the first
$50 of charges made before you noti-
fied the card issuer. In practice, card
issuers rarely even charge the $50.
Y O U R M O N E Y
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I purchased an item using my
credit card and it fell apart. Can
I refuse to pay?
Maybe. Under federal law, you must
first attempt in good faith to resolve
the dispute with the merchant. If that
fails, you can withhold payment on
non-seller-issued cards only if the
purchase was for more than $50 and
was made within your home state or
within 100 miles of your home. This
limitation applies only if you used a
card not issued by the seller, such as a
MasterCard. There is no $50, 100-
mile or in-state limitation if you use a
sellers card, such as your Sears card.
The 100-mile limitation is easy to
calculate when purchases are made in
person. But if you order through the
mail, over the telephone or using your
computer, the law is unclear as to
where the purchase took place. Your
best bet is to claim that the purchase
was made in the state where you live
(even if the catalogue company is on
the other side of the country) because
you placed the order from home.
My credit card billing statement
contains an error. What should I
do?
Immediately write a letter to the cus-
tomer service department of the card
issuer. Give your name, account num-
ber, an explanation of the error and
the amount involved. Enclose copies
of supporting documents, such as
receipts showing the correct amount
of the charge. You must act quickly
the issuer must receive your letter
within 60 days after it mailed the bill
to you.
Under the federal Fair Credit Bill-
ing Act, the issuer must acknowledge
receipt of your letter within 30 days,
unless it corrects the bill within that
time. Furthermore, the issuer must,
within two billing cycles (but in no
event more than 90 days), correct the
error or explain why it believes the
amount to be correct.
During the two-billing-cycle/90-
day period, the issuer cannot report
the amount to credit bureaus or other
creditors as delinquent. The issuer can
charge you interest on the amount you
dispute during this period, but if it
later agrees that you were correct, it
must drop the interest accrued.
Must I give my phone number
when I use a credit card?
Most often, no. Several states, includ-
ing California, Delaware, Georgia,
Kansas, Massachusetts, Minnesota,
Nevada, New Jersey, New York, Or-
egon, Pennsylvania, Rhode Island and
Wisconsin, bar merchants from re-
cording personal information when
you use a credit card. Furthermore,
merchant agreements with Visa and
MasterCard prohibit them from re-
quiring a customer to furnish a phone
number when paying with Visa or
MasterCard.
I took out a cash advance using
my credit card, and feel I was
gouged. What are all those fees?
Cash advances usually come with the
following fees:
Transaction fees.
Most banks charge a
transaction fee of up to 4% for
taking a cash advance.
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No grace period. Most banks charge
interest from the date the cash
advance is posted, even if you pay it
back in full when your bill comes.
Interest rates. The interest rate is
often higher on cash advances than
it is on ordinary credit card charges.
Using an ATM
or Debit Card
A bank is a place where they
lend you an umbrella in fair
weather and ask for it back
when it begins to rain.
ROBERT FROST
Banks issue ATM cards to allow cus-
tomers to withdraw money, make de-
posits, transfer money between ac-
counts, find out their balances, get
cash advances and even make loan pay-
ments at all hours of the day or night.
Debit cards combine the functions
of ATM cards and checks. Debit cards
are issued by banks, but can be used at
stores. When you pay with a debit
card, the money is automatically de-
ducted from your checking account.
What are the advantages of
using an ATM or debit card?
There are generally two advantages:
You dont have to carry your check-
book and identification, but you can
make purchases directly from your
checking account.
You pay immediatelywithout
running up interest charges on a
credit card bill.
Are there disadvantages?
Yes. You dont have the 20- to 25-
day delay in paying the bill. Also, you
dont have the right to withhold pay-
ment (the money is immediately re-
moved from the account) in the event
of a dispute with the merchant over
goods or services. Finally, many banks
charge transaction fees when you use
an ATM or debit card at locations
other than those owned by the bank.
Do I have to pay if theres a
mistake on my statement or
receipt?
Although ATM statements and debit
receipts dont usually contain errors,
mistakes do happen. If you find an
error, you have 60 days from the date
of the statement or receipt to notify
the bank. Always call first and follow
up with a letter. If you dont notify
the bank within 60 days, it has no
obligation to investigate the error and
youre out of luck.
The bank has ten business days
from the date of your notification to
investigate the problem and tell you
the result. If the bank needs more
time, it can take up to 45 days, but
only if it deposits the disputed
amount of money into your account.
If the bank later determines that there
was no error, it can take the money
back, but it must first send you a
written explanation.
Y O U R M O N E Y
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If Your ATM Card
Is Lost or Stolen
If your ATM or debit card is lost or stolen
(never, never, never keep your personal
identification numberPINnear your
card), call your bank immediately, and
follow up with a confirming letter. Under
the federal Electronic Fund Transfers Act,
your liability is:
$0after you report the card missing
up to $50if you notify the bank within
two business days after you realize the
card is missing (unless you were on
extended travel or in the hospital)
up to $500if you fail to notify the
bank within two business days after
you realize the card is missing (unless
you were on extended travel or in the
hospital) , but do notify the bank within
60 days after your bank statement is
mailed to you listing the unauthorized
withdrawals
unlimitedif you fail to notify the bank
within 60 days after your bank
statement is mailed to you listing the
unauthorized withdrawals.
In response to consumer complaints
about the possibility of unlimited liability,
Visa and MasterCard now cap the
liability on debit cards at $50. A few
states have capped the liability for
unauthorized withdrawals on an ATM or
debit card at $50 as well. And some
large debit card issuers wont charge you
anything if unauthorized withdrawals
appear on your statement.
ef
More Information About Credit,
Charge, ATM and Debit Cards
Money Troubles: Legal Strategies to
Cope With Your Debts
, by Robin Leonard
and Deanne Loonon (Nolo), contains
extensive information on credit, charge,
ATM and debit card laws and practical
usage tips.
The Federal Deposit Insurance Corpora-
tion, 550 17th Street, NW, Washington,
DC 20429, 877-275-3342, http://
www.fdic.gov, publishes free pamphlets,
including
Fair Credit Billing.
The Federal Trade Commission,CRC-240,
Washington, DC 20580, 877-FTC-HELP
(382-4357), http://www.ftc.gov, pub-
lishes free pamphlets, including
Billing
Errors, Fair Credit Billing, Lost or Stolen
Credit and ATM Cards
and
Solving
Credit Problems.
Strategies for
Repaying Debts
If you think nobody cares
if youre alive, try missing
a couple of car payments.
EARL WILSON
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The recent economic downturn has
left many folks in financial trouble.
Many others never reaped any benefit
from the previous economic boom and
have struggled with debt for an even
longer time. Today, many people are
either unemployed or forced to work
harder than ever (often in more than
one job), earning less, saving little
and struggling with debt. If this story
sounds familiar to you, youre not
alone. Here are some specific sugges-
tions for dealing with debts.
I feel completely overwhelmed
by my debts and dont know
where to begin. What should I do?
Take a deep breath and realize that for
the most part, your creditors want to
help you. Whether youre behind on
your bills or are afraid of getting be-
hind, call your creditors. Let them
know whats going onjob loss, re-
duction in hours, medical problem or
whateverand ask for help. Suggest
possible solutions such as a temporary
reduction of your payments, skipping
a few payments and tacking them on
at the end of a loan or paying them off
over a few months, dropping late fees
and other charges or even rewriting a
loan. If you need help negotiating
with your creditors, consider contact-
ing a nonprofit debt counseling orga-
nization, such as Myvesta.org (http://
www.myvesta.org) or a local Con-
sumer Credit Counseling Service office
(to find the office nearest you, contact
the National Foundation for Consumer
Credit at 800-388-2227 or visit http://
www.nfcc.org).
Im afraid I might miss a car
paymentshould I just let the
lender repossess?
No. Before your car payment is due,
call the lender and ask for extra time.
If youre at least a few months into
the loan and havent missed any pay-
ments, the lender will probably let
you miss one or two months pay-
ments and tack them on at the end. If
you dont pay or make arrangements
with the lender, the lender can repos-
sess without warning, although many
will warn you and give you a chance
to pay whats due.
If your car is repossessed, you can
get it back by paying the entire bal-
ance due and the cost of repossession
or, in some cases, by paying the cost
of the repossession and the missed
payments, and then making payments
under your contract. If you dont get
the car back, the lender will sell it at
an auction for far less than its worth.
Youll owe the lender the difference
between the balance of your loan and
what the sale brings in. The amount
is usually in the thousands.
If you are far behind on your car
payments and cant catch up, think
hard about whether you can really af-
ford the car. If you decide to give up
your car, there are two options that are
almost always better than waiting for
the dealer to repossess it. First, if you
act quickly, you can sell the car your-
self and use the proceeds to pay off the
loan (or most of the loan). Youll get
more for the car if you sell it yourself
than the dealer will by selling it at an
auction after repossessionwhich
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means youll be able to pay off more of
the loan. Or, you can voluntarily sur-
render your car to the dealer before
repossession. This will save you expen-
sive repossession costs and attorneys
fees. Because it also makes life easier
for the dealer, try to negotiate a deal.
Many dealers will agree to waive any
deficiency balance or promise not to
report the default or repossession to
credit bureaus.
How soon after I miss a house
payment will the bank begin
foreclosure proceedings?
This varies from state to state and
lender to lender, but most lenders
dont start foreclosure proceedings
until youve missed four or five pay-
ments. Before taking back your house,
a lender would usually rather rewrite
the loan, suspend principal payments
for a while (have you pay interest
only), reduce your payments or even
let you miss a few payments and
spread them out over time.
If your loan is owned by one of the
giant U.S. government mortgage
holders, Fannie Mae or Freddie Mac,
foreclosure could come even more
slowly. Fannie Mae and Freddie Mac
often work with homeowners to avoid
foreclosure when a loan is delinquent.
If your loan is insured by a federal
agency such as the Department of
Housing and Urban Development
(HUD), the Federal Housing Adminis-
tration (FHA), the Veterans Adminis-
tration (VA) or the Farmers Home Ad-
ministration (FmHA), the lender may
be required to try to help you avoid
foreclosure. Contact the federal agency
to find out more.
Might I be better off just selling
my house?
Youre certainly better off selling the
house than having it go to foreclosure.
If you can find a buyer who will offer
to pay at least what you owe your
lender, take the offer. If the offer is for
less than what you owe your lender,
your lender can block the sale. But
many lenders will agree to a short
sale”—where the sale brings in less
than you owe the lender and the lender
agrees to forego the rest. Some lenders
require documentation of any financial
or medical hardship you are experienc-
ing before agreeing to a short sale.
Can I just walk away from
the house?
If you get no offers for your house or
the lender wont approve a short sale,
you can walk away from your house.
To do this, you transfer your owner-
ship interest in your home to the
lender called a deed in lieu of fore-
closure. Keep in mind that with a
deed in lieu, you wont get any cash
back, even if you have lots of equity in
your home. The deed in lieu may also
appear on your credit report as a nega-
tive mark. If you opt for a deed in
lieu, try to get concessions from the
lender after all, you are saving it the
expense and hassle of foreclosing on
your home. For example, ask the
lender to eliminate negative references
on your credit report or give you more
time to stay in the house.
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Beware of the IRS
IRS regulations could cost you money if
you settle a debt or if a creditor writes off
money you owe. The rules state that if a
creditor agrees to forego a debt you
owe, you must treat the amount you
didnt pay as income. Similarly, if a
creditor ceases collection efforts, de-
clares a debt uncollectible and reports it
as a tax loss to the IRS, you must treat
this amount as income. This includes any
amount owed after a house foreclosure
or property repossession, or on a credit
card bill.
The rule applies to a debt or part of a
debt for $600 or more forgiven by any
bank, credit union, savings and loan or
other financial institution. The institution
must send you and the IRS a Form 1099-
C at the end of the tax year. These forms
report that income, which means that
when you file your tax return for the tax
year in which your debt was forgiven,
the IRS will make sure that you report the
amount on the Form 1099-C as income.
There are five exceptions to this rule
stated in the Internal Revenue Code,
three of which apply to consumers. Even
if the financial institution issues a Form
1099-C or 1099-A, you do not have to
report the income if:
the cancellation of the debt is intended
as a gift (this would be unusual)
you discharge the debt in bankruptcy, or
you were insolvent before the creditor
agreed to waive the debt.
The Internal Revenue Code does not
define what is meant by insolvent. Gener-
ally it means that your debts exceed the
value of your assets. To figure out
whether or not you are insolvent, you will
have to total up your assets and your
debts, including the debt that was for-
given or written off.
Lets say your assets are worth
$35,000 and your debts total $45,000.
You are insolvent to the tune of $10,000.
If a creditor forgives or writes off debts
up to that amount, you will not have to
include the Form 1099-C income on your
tax return.
On the other hand, lets say your assets
and debts are $35,000 and $45,000
respectively, but your creditor forgives or
writes off a $14,000 debt. Now, you
can ignore $10,000 of the Form 1099-C
income (the amount you are insolvent),
but you will have to report $4,000 on
your tax return.
My utility bill was huge because
of a very cold winter. Do I have
to pay it all at once?
Maybe not. Many utility companies
offer customers an amortization pro-
gram. This means that if your bills are
higher in certain months than others,
the company averages your yearly bills
so you can spread out the large bills.
Also, if you are elderly, disabled or
earn a low income, you may be eligible
for reduced ratesask your utility
company.
Im swamped with student loans
and cant afford my payments.
What can I do to avoid default?
First, know that youre right to do all
you can to avoid default, rather than
ignoring your loans and hoping theyll
just go away. If you default, the amount
you owe will probably skyrocket be-
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cause the government can add a hefty
collections feeoften up to 25% of the
principal.
To avoid default, contact the com-
panies that service your student loans
and tell them why you cant make
your payments. You may be eligible
for a deferment or forbearanceways
of postponing repayment. In very lim-
ited circumstances, you may be able
to cancel a loan. Also talk to your loan
holders about flexible payment op-
tionsmany now offer payments
geared to borrowers incomes.
In addition, consider consolidating
your student loans. You can consoli-
date federal student loans through the
governments direct lending program
or through a private loan servicing
company, such as Sallie Mae or USA
Group. With loan consolidation, you
can lower your monthly payments by
extending your repayment period; you
may also be able to lower your interest
rate. Most loan consolidators offer
flexible repayment options based on
your income, and you may be able to
consolidate even if one or more of
your loans is in default. Types of loans
eligible for consolidation, repayment
options and interest rates vary slightly
from lender to lender. Contact loan
servicers for more information:
Federal Direct Consolidation Loan
Center: 800-557-7392, http://
www.ed.gov/DirectLoan/
consolid.html
Sallie Mae: 800-340-1086, http://
www.Salliemae.com
USA Group: 888-272-5543, http://
www.usagroup.com.
Finally, if you can prove that repay-
ment would cause you extreme hard-
ship, you may be able to discharge
your student loans in bankruptcy.
I defaulted on a student loan a
long time ago and I just
received collection letters. I cant
afford very much, but I can pay
something. Any suggestions?
The Higher Education Act allows you
to rehabilitate your student loan by
making reasonable and affordable
payments based on your income and
expenses. The holder cannot insist on
a monthly minimum. If you make six
consecutive monthly payments on
time, you will become eligible to ap-
ply for new federal student loans or
grants if you want to return to school.
You must continue to make the
monthly payments, however, until
you make at least 12 consecutive pay-
ments. Then your loans will come out
of default. The default notation will
come off your credit report, and if you
return to school, you can apply for an
in-school deferment to postpone your
payments.
If you do not return to school, after
you make 12 consecutive monthly
payments, the holder of your loan will
sell it back to a regular loan servicing
company. (This is called loan rehabili-
tation.) Your new loan servicer will
put you on a standard ten-year repay-
ment plan, which may cause your
monthly payments to increase dra-
matically. If you cant afford them,
you will need to apply for a deferment
(if you are eligible) or request a flex-
ible repayment option.
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I paid off my student loan a long
time ago, but the Department of
Education recently wrote me
saying I still owe it. Help!
You need documentation. First,
contact your school and ask for its De-
partment of Education report showing
the loans status. Then, think about
ways you can show that you paid the
loan: Do you have canceled checks or
old bank statements? Can you get mi-
crofiche copies of checks from your
bank or a government regulatory
agency if your bank is out of business?
Does an old roommate remember see-
ing you write a check every month?
Can you get old credit reports (check
with lenders from whom youve bor-
rowed in years past) which may show a
payment status on an old loan? Get old
tax returns (from the IRS, if necessary)
showing that you itemized the interest
deduction on student loan payments
back when that was permitted. The
last holder of the loan might have a
copy of the signed promissory note.
Any of these things will help you prove
to the Department of Education that
you paid your loan.
To find out more about the status
of your loan, visit the Department of
Educations website at http://
www.ed.gov or the National Student
Loan Data Systems website at http://
www.nslds.ed.gov. Or call 800-4-
FED-AID or the student loan om-
budsman at 877-557-2575.
When can a creditor garnish my
wages, place a lien on my
house, seize my bank account or
take my tax refund?
For the most part, a creditor must sue
you, obtain a court judgment and then
solicit the help of a sheriff or other law
enforcement officer to garnish wages.
Even then, the maximum the creditor
can take is 25% of your net payand
you can protest that amount in court
if you cant live on only 75% of your
wages.
In two situations your wages may be
garnished without your being sued:
Most federal administrative agencies
(including the IRS and the Depart-
ment of Education) can garnish your
wages to collect debts owed to that
agency.
Up to 50% of your wages can be
garnished to pay child support or
alimony (even
more if you dont
currently support
any dependents or
if you are in arrears).
To place a lien on your
house or empty your bank
account, almost all creditors
must first sue you, get a judg-
ment and then use a law enforce-
ment officer. A few creditors, such
as an unpaid contractor who worked
on your house, can put a lien on your
house without suing. And again, the
IRS is an exceptionit can place a
lien or empty your bank account with-
out suing first.
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Y O U R M O N E Y
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Your tax refund can never be taken
unless the Treasury Department re-
ceives such a request from the IRS,
the Department of Education or a
child support collection agency.
If You Bounce a Check
In every state, writing a bad check is a
crime. Aggressive district attorneys dont
hesitate to prosecute, especially given that
an estimated 450 million rubber checks
are written each year. If you are pros-
ecuted, you may be able to avoid a trial if
your county has a diversion program
where you attend classes for bad check
writers. You must pay the tuition and make
good on the bad checks you wrote.
Even if you escape criminal prosecu-
tion, youll be charged a bad check
processing fee by your bank. Many
banks charge as much as $20 or $30. In
addition, most creditors who receive a
bad check can sue for damages. Before
suing you, the creditor usually must first
make a written demand that you make
good on the bad check. If you dont pay
up within approximately 30 days, the
creditor can sue you. Damages recover-
able by the merchant vary from state to
state, but are often a minimum of $50,
and in most states more like a few
hundred or a thousand dollars.
Can I go to jail for not paying
my debts?
Debtors prisons were eliminated in
the U.S. by 1850. In a few unusual
situations, however, you could be
jailed: you willfully violate a court
order, especially an order to pay child
support; you are convicted of willfully
refusing to pay income taxes; or you
are about to conceal yourself or your
property to avoid paying a debt for
which a creditor has a judgment
against you.
ef
More Information
About Repaying Debts
Money Troubles: Legal Strategies to
Cope With Your Debts,
by Robin
Leonard and Deanne Loonin (Nolo),
explains your legal rights and offers
practical strategies for dealing with
debts and creditors.
Take Control of Your Student Loans,
by Robin Leonard
and Deanne Loonin
(Nolo), provides strategies for repaying
your loans, dealing with loan collectors
and getting out of default.
The Ultimate Credit Handbook
, by Gerri
Detweiler (Penguin Books), provides tips
on doubling your credit and cutting your
debt.
Surviving Debt: A Guide for Consumers
,
by Gary Klein, Deanne Loonin and
Jonathan Sheldon (National Consumer
Law Center), contains tips on dealing
with debt collectors and repaying debts.
Myvesta.org, 800-680-3328, http://
www.myvesta.org, offers free publications,
recommended books, a forum for posting
your debt questions, information on
obtaining your credit report and special
programs to help you get out of debt.
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National Foundation for Consumer
Credit, 800-388-2227, http://
www.nfcc.org, can put you in contact
with the CCCS office located nearest you.
The Federal Student Aid Information
Center, 800-4-FED-AID, (433-3243)
provides information about federal
student loan programs.
The Federal Trade Commission, CRC-240,
Washington, DC 20580, 877-FTC-HELP
(382-4357), http://www.ftc.gov, publishes
nearly 50 free pamphlets on debts and
credit. Go to the FTC website and click
on Consumer Preotection, or call or
write and ask for a complete list.
Dealing With
the IRS
Of all debts men are least
willing to pay the taxes.
RALPH WALDO EMERSON
No three letters bring more fear to the
average American than IRS. Yet, at
one time or another in our lives,
nearly everyone will owe a tax bill
they cant pay, need extra time to file
a tax return or even get audited. This
section suggests several strategies for
dealing with the governments largest
bureaucracy.
How long should I keep my tax
papers?
Keep anything related to your tax re-
turnW-2 and 1099 forms, receipts
and canceled checks for deductible
itemsfor at least three years after you
file. The IRS usually has three years
from the day you file your return to
audit you. For example, if you filed
your 1997 tax return on April 15,
1998, keep those records until at least
April 16, 2001. To be completely safe,
you should keep your records for six
years. The reason is that the IRS can
audit you up to six years after you file
if the IRS believes you underreported
your income by 25% or more.
One last caution: Keep records
showing purchase costs and sales fig-
ures for real estate, stocks or other in-
vestments for at least three years after
you sell these assets. This is because
you must be able to show your taxable
gain or loss to an auditor.
If I cant pay my taxes, should I
file a return anyway?
Absolutely. The consequences of fil-
ing and not paying are less severe than
those for simply not filing. If you
dont file a tax return, the IRS will
assess a penalty of up to 25% of the
tax due, plus interest. In addition, the
IRS could criminally charge you for
failing to file a return (although it
isnt likely to). By contrast, if you file
a return but cant pay, youll only be
on the hook for interest and penalties
of 6%12% on any amounts you owe.
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Who has access to my IRS files?
The federal Privacy Act of 1976 de-
clares tax files to be confidential.
This was an attempt by Congress to
correct the abuses of power uncovered
in the Watergate scandal. Even IRS
officials cannot rummage willy-nilly
through your tax files unless they are
involved in some kind of case involv-
ing you and your taxes. Consequently,
individuals, businesses and credit
reporting agencies do not have access
to your tax information unless you
authorize its release to the IRS in
writing.
The privacy law has exceptions,
however, and IRS security is some-
times lax. Your IRS files are shared
with other federal and state agencies
that can demonstrate a need to
know. This usually occurs when your
affairs are being investigated by a law
enforcement agency. In fairness to the
IRS, most leakage of information is
the result of sloppiness by other fed-
eral or state agencies granted access to
IRS files. Furthermore, computer
hackers have broken into IRS and
government databases and retrieved
private tax information. While viola-
tion of the Privacy Act is a crime, vio-
lators are rarely prosecuted.
Do many people cheat on their
taxes? And what will happen to
me if I cheat on mine?
No one really knows how many
people cheat the IRS, but several years
ago an independent poll found that
20% of Americans admitted to cheat-
ing. This is somewhat in line with
government studies showing that
82% of us faithfully file and pay our
taxes every year. The IRS claims that
most cheating is by self-employed
small business people who do not
have taxes withheld by their employ-
ers. Arguably, cheating by the self-
employed approaches 100% if you
count small violations like mailing a
personal letter with a business-bought
stamp.
If you are caught in some major
cheating, the government can (but
rarely does) throw you in jail. Fewer
than 1,500 individuals are jailed in
the U.S. for tax crimes each year,
many of whom also are charged with
drug crimes. That is really not many
people, considering there are over 200
million American adults.
The IRS would much prefer col-
lecting money to putting anyone in
prison. More likely, if youre caught
cheating, youll be assessed heavy pen-
alties, and will probably be audited
for several years.
I am faced with a tax bill that I
cant pay. Am I completely at
the IRSs mercy, or do I have
some options?
There are six ways to deal with a tax
bill you cant pay:
Borrow from a financial institution,
family or friends and pay the tax bill
in full.
Negotiate a monthly payment plan
with the IRS. This will include
interest and penalty charges.
File for Chapter 13 bankruptcy to
set up a payment plan for your
debts, including your taxes.
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Find out whether you can wipe out
the debt in a Chapter 7 bankruptcy
(only certain tax debts are dis-
chargeable).
Make an offer in compromise by
filing IRS Form 656, Offer in
Compromise. That is, ask the IRS to
accept less than the full amount
due.
Ask the IRS to designate your debt
temporarily uncollectible if you are
out of work or your income is very
low. This will buy you time to get
back on your feet before dealing
with the IRS. Interest and penalties
will continue to accrue.
Tax Avoidance Schemes
Dont Work
Dozens of tax avoidance schemes
emerge every decade. Some promoters
are very persuasive, particularly if you
are predisposed to believing that its
possible to opt out of the tax system. Sad
to say, these promoters are all snake-oil
salesmen, the most successful of whom
make millions peddling their products at
expensive seminars and through
underground publications. One recent
scheme involves holding your assets in
multiple family trusts, limited partnerships
and offshore banks. While these artifices
may put your assets beyond the reach of
your creditors, they wont beat the IRS.
I made a mistake on my tax
return and am now being billed
for the taxes, plus interest and
penalties. Do I have to pay it all?
Maybe not. The IRS must charge you
interest on your tax bill, but penalties
are discretionary. The IRS abates (can-
cels) one-third of all penalties it
charges. The trick is to convince the
IRS that you had reasonable cause (a
good excuse) for failing to observe the
tax law. Examples that might work
include:
serious illness or a death in the
family
destruction of your records by a
flood, fire or other catastrophe
wrong advice from the IRS over the
phone
bookkeeper or accountant error, or
your being in jail or out of the
country at the time the tax return
was due.
You can ask anyone at the IRS to
cancel a penalty, in person or over the
phone. And, you can ask for a penalty
to be canceled even if you already paid
it. The best way to get the IRSs at-
tention is to use IRS Form 843, Claim
for Refund and Request for Abatement.
Send this form to your IRS Service
Center.
Can the IRS take my house
if I owe back taxes?
The IRS can seize just about anything
you ownincluding your home and
pension plans. There is a list of items
exempt by federal law from IRS sei-
zures, but it is hardly generous, and
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doesnt include your residence. More-
over, state homestead protection laws
dont apply to the IRS. With that
said, the good news is that the federal
Taxpayer Bill of Rights discourages
the IRS from taking homes of people
who owe back taxes. In addition, the
IRS doesnt like the negative public-
ity generated when it takes a home,
unless of course it is the home of a
notorious public enemy.
Nevertheless, if the IRS collection
division has triedand failedto get
any cooperation from a tax debtor (for
example, if the debtor has not an-
swered correspondence or returned
phone calls, or has made threats, lied
about her income or hidden her as-
sets), the IRS may go after a residence
as a last resort. An IRS tax collector
cant make the decision on his own
it must come from top IRS personnel.
If the IRS lets you know that it
plans to take your house, your
Congressperson may be able to inter-
vene and put some pressure on the IRS
to stop the seizure. And, if the seizure
would add you and your family to the
ranks of the homeless, you can contact
your local IRS Problems Resolution
Office to plead that the seizure would
create a substantial hardship.
In the unhappy event the IRS does
seize your home, all may not be lost.
The IRS must sell the home at public
auction, usually held about 45 days
after the seizure. Then, the high bid-
der at auction must wait 180 days to
get clear title. In this interim period
you have the right to redeem (buy
back) the home by coming up with
the bid price plus interest.
What are my chances of getting
through an audit without owing
additional taxes?
Although only about 1% of all tax
returns are audited, the IRS has a
pretty high success rate. Fewer than
15% of all IRS audit victims make a
clean getaway. This is primarily be-
cause the IRSs sophisticated com-
puter selection process makes it likely
that the agency will audit returns in
which adjustments are almost a
certainty.
If you receive an audit notice, focus
on limiting the damage rather than
getting off scot-free. Most adjust-
ments made following an audit result
from poor taxpayer records, so make
sure you have organized documenta-
tion to back up your deductions, ex-
emptions and other claims. Ignore the
tales about dumping a box of receipts
on the auditors desk in the hope that
she will throw up her hands and let
you off rather than go through the
mess. It doesnt work like that. If you
have any significant worries, get a tax
pro to represent you or to help you
navigate through the perilous audit
waters.
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Can I challenge the IRS if I get
audited and dont agree with
the result?
Yes, you do not have to accept any
audit report. In most cases, you can
appeal by sending a protest letter to
the IRS within 30 days after receiving
the audit report. If you request an
appeals consideration, you will be
granted a meeting with an appeals
officer who is not part of the IRS divi-
sion that performed your audit. See
IRS Publication 5, Your Appeal Rights
and How to Prepare a Protest If You
Dont Agree.
If your appeal fails, you still can file
a petition in Tax Court. This is a fairly
inexpensive and simple process if the
audit bill is for less than $50,000. If
its for more, you will most likely need
the help of a tax attorney.
Generally, it pays to contest an au-
dit report by appealing and going to
court. About half the people who chal-
lenge their audit report succeed in
lowering their tax bill.
ef
More Information
About Dealing With the IRS
Stand Up to the IRS
, by Frederick W.
Daily (Nolo), explains your legal rights
and offers practical strategies for dealing
with the IRS.
Surviving an Audit
, by Frederick W.
Daily (Nolo), provides a wealth of
information for minimizing the damage
when you are audited.
Debt
Collections
Laws prohibit debt collectors from
using abusive or deceptive tactics to
collect a debt. Unfortunately, many
collectors ignore the rules and dont
play fair. In addition, creditors and
debt collectors have powerful collec-
tion tools once they have won a law-
suit for the debt. Here are some fre-
quently asked questions and answers
to help you deal with debt collectors.
Collection agencies have been
calling me all hours of the day
and night. Can I get them to
stop contacting me?
Its against the law for a bill collector
who works for a collection agency (as
opposed to working in the collections
department of the creditor itself) to
call you at an unreasonable time. The
law presumes that calls before 8 a.m.
or after 9 p.m. are unreasonable. But
other hours may be unreasonable too,
such as daytime hours for a person who
works nights. The law, the federal Fair
Debt Collection Practices Act
(FDCPA), also bars collectors from
calling you at work if you ask them
not to, harassing you, using abusive
language, making false or misleading
statements, adding unauthorized
charges and many other practices. Un-
der the FDCPA, you can demand that
the collection agency stop contacting
you, except to tell you that collection
efforts have ended or that the creditor
or collection agency will sue you. You
must put your request in writing.
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Im also getting calls from the
collections department of a local
merchant I did business with.
Can I tell that collector to stop
contacting me?
Usually not. The FDCPA applies only
to bill collectors who work for collec-
tion agencies. While many states have
laws prohibiting all debt collectors
including those working for the credi-
tor itselffrom harassing, abusing or
threatening you, these laws dont give
you the right to demand that the col-
lector stop contacting you. There is at
least one exception: Residents of New
York City can use a local consumer
protection law to write any bill collec-
tor and say, Leave me alone. A few
states, including Colorado and Massa-
chusetts, prohibit all collectors from
calling you at work if you tell them
not to.
A bill collector insisted that I wire
the money I owe through Western
Union. Am I required to do so?
No, and it could be expensive if you
do. Many collectors, especially when a
debt is more than 90 days past due,
will suggest several urgency pay-
ment options, including:
Sending money by express or overnight
mail. This will add at least $10 to
your bill; a first class stamp is fine.
Wiring money through Western Unions
Quick Collect or American Expresss
Moneygram. This is another $10
down the drain.
Putting your payment on a credit card.
Youll never get out of debt if you
do this.
You Can Run,
But You
Cant Hide
In this technological age, its easy to run
from collectorsbut hard to hide. Collec-
tors use many different resources to find
debtors. They may contact relatives,
friends, neighbors and employers, posing
as long-lost friends to get these people to
reveal your new whereabouts. In addi-
tion, collectors often get information from
post office change of address forms, state
motor vehicle registration information,
voter registration records, former land-
lords and banks.
Can a collection agency
add interest to my debt?
In most cases, yes. But only if either:
the original agreement allows for
additional interest during collection
proceedings, or
state law authorizes the addition of
interest.
Virtually all states do allow this inter-
est.
A collection agency sued me
and won. Will I still get calls
and letters demanding payment?
Probably not. Before obtaining a court
judgment, a bill collector generally has
only one way of getting paid: demand
payment. This is done with calls and
letters. You can ignore the phone calls
and throw out your mail, and the col-
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lector cant do much else short of suing
you. Once the collector (or creditor)
sues and gets a judgment, however,
you can expect more aggressive collec-
tion actions. If you have a job, the col-
lector will try to garnish up to 25% of
your net wages. The collector may also
try to seize any bank or other deposit
accounts you have. If you own real
property, the collector will probably
record a lien, which will have to be
paid when you sell or refinance your
property. Even if youre not currently
working or have no property, youre
not home free. Depending on the state,
court judgments can last up to 20 years
and, in many states, can be renewed so
they last even longer.
What can I do if a bill collector
violates the FDCPA?
Document the violation as soon as it
occurs. Write down what happened,
when it happened and who witnessed
it. In some states, you can tape record
phone conversations with debt collec-
tors without their knowledge. But
beware. In about a dozen states, this is
illegal. Instead, try to have a witness
present (or on another phone exten-
sion) the next time you talk to the
collector.
Then file a complaint with the Fed-
eral Trade Commission (the address
and phone number are at the end of
this section). Next, complain to your
state consumer protection agency. Fi-
nally, send a copy of your complaint
to the creditor who hired the collec-
tion agency. If the violations are se-
vere enough, the creditor may stop
the collection efforts.
Also, you can sue a collection agency
(and the creditor that hired the agency)
in small claims court for violating the
FDCPA. You are less likely to win if
you can prove only a few minor viola-
tions. If the violations are outrageous,
you can sue the collection agency and
creditor in regular civil court. One
Texas jury awarded a debtor $11 mil-
lion when a debt collector made death
and bomb threats against her and her
husband that frightened them so much
they moved out of the county.
ef
More Information
About Debt Collections
Money Troubles: Legal Strategies to
Cope With Your Debts
, by Robin Leonard
and Deanne Loonin (Nolo), explains your
legal rights and offers practical strategies
for dealing with debts and creditors.
The Federal Trade Commission, CRC-240,
Washington, DC 20580, 877-FTC-HELP
(382-4357), http://www.ftc.gov, publishes
free pamphlets on debts and credit, includ-
ing a couple on the Fair Debt Collections
Practices Act. It also takes complaints about
collection agencies.
Y O U R M O N E Y
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Bankruptcy
Where everything is bad it
must be good to know the worst.
FRANCIS HERBERT BRADLEY
If you are seriously in debt, you might
consider filing for bankruptcy. Here
are some common questions and an-
swers designed to help you understand
the bankruptcy process and what
bankruptcy can and cannot do for you.
What exactly is bankruptcy?
Bankruptcy is a federal court process
designed to help consumers and busi-
nesses eliminate their debts or repay
them under the protection of the bank-
ruptcy court. Bankruptcys roots can
be traced to the Bible. (Deuteronomy
15:1-2 —“Every seventh year you shall
practice remission of debts. This shall
be the nature of the remission: Every
creditor shall remit the due that he
claims from his neighbor; he shall not
dun his neighbor or kinsman.)
Arent there different kinds
of bankruptcy?
Yes. Bankruptcies can generally be
described as liquidation or reorga-
nization.
Liquidation bankruptcy is called
Chapter 7. Under Chapter 7 bank-
ruptcy, a consumer or business asks
the bankruptcy court to wipe out (dis-
charge) the debts owed. Certain debts
cannot be dischargedthese are dis-
cussed below. In exchange for the dis-
charge of debts, the business assets or
the consumers nonexempt property
are soldthat is, liquidatedand the
proceeds are used to pay off creditors.
The property a consumer might lose is
discussed below.
In any reorganization bankruptcy,
you file a plan with the bankruptcy
court proposing how you will repay
your creditors. Some debts must be
repaid in full; others you pay only a
percentage; others arent paid at all.
Some debts you have to pay with in-
terest; some are paid at the beginning
of your plan and some at the end.
There are several types of reorgani-
zation bankruptcy. Consumers with
secured debts under $871,550 and
unsecured debts under $290,525 can
file for Chapter 13. Family farmers
can file for Chapter 12. Consumers
with debts in excess of the Chapter
13 debt limits or businesses can file
for Chapter 11a complex, time-
consuming and expensive process.
What generally happens in
consumer bankruptcy cases?
In a Chapter 7 case, you file several
forms with the bankruptcy court list-
ing income and expenses, assets, debts
and property transactions for the past
two years. The cost to file is $200,
which may be waived for people who
receive public assistance or live below
the poverty level. A court-appointed
person, the trustee, is assigned to
oversee your case. About a month
after filing, you must attend a meet-
ing of creditors where the trustee
reviews your forms and asks ques-
tions. Despite the name, creditors
rarely attend. If you have any nonex-
empt property, you must give it (or
its value in cash) to the trustee. The
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meeting lasts about five minutes.
Three to six months later, you receive
a notice from the court that all debts
that qualified for discharge were dis-
charged. Then your case is over.
Chapter 13 is a little different. You
file the same forms plus a proposed
repayment plan, in which you describe
how you intend to repay your debts
over the next three, or in some cases
five, years. The cost to file is $185 (it
cannot be waived but it can be paid in
installments), and a trustee is assigned
to oversee the case. Here, too, you at-
tend the meeting of creditors, but of-
ten one or two creditors attend this
meeting, especially if they dont like
something in your plan. After the
meeting of the creditors, you attend a
hearing before a bankruptcy judge who
either confirms or denies your plan. If
your plan is confirmed, and you make
all the payments called for under your
plan, any remaining balance on a dis-
chargeable debt will be wiped out at
the end of your case (see
Nondischargeable Debts, below, to
learn which debts will have balances
that are not wiped out at the end of
the case).
Nondischargeable Debts
The following debts are nondischarge-
able in both Chapter 7 and Chapter 13.
If you file for Chapter 7, these will
remain when your case is over. If you file
for Chapter 13, these debts will have to
be paid in full during your plan. If they
are not, the balance will remain at the
end of your case:
debts you forget to list in your
bankruptcy papers, unless the creditor
learns of your bankruptcy case
child support and alimony
debts for personal injury or death
caused by your intoxicated driving
student loans, unless it would be an
undue hardship for you to repay
fines and penalties imposed for
violating the law, such as traffic tickets
and criminal restitution
recent income tax debts and all other
tax debts, and
debts you couldnt discharge in a
previous bankruptcy because that
bankruptcy was dismissed due to your
fraud or other bad acts.
In addition, the following debts may be
declared nondischargeable by a bank-
ruptcy judge in Chapter 7 if the creditor
challenges your request to discharge
them. These debts may be discharged in
Chapter 13. You can include them in
your planat the end of your case, the
balance is wiped out:
debts you incurred on the basis of fraud,
such as lying on a credit application
credit purchases of $1,150 of more for
luxury goods or services made within
60 days of filing
loans or cash advances of $1,150 or
more taken within 60 days of filing
debts from willful or malicious injury to
another person or another persons
property
debts from embezzlement, larceny or
breach of trust, and
debts you owe under a divorce decree
or settlement unless after bankruptcy
you would still not be able to afford to
pay them or the benefit youd receive
by the discharge outweighs any
detriment to your ex-spouse (who
would have to pay them if you
discharge them in bankruptcy).
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What property might I lose if I
file for bankruptcy?
You lose no property in Chapter 13.
In Chapter 7, you select property you
are eligible to keep from either a list
of state exemptions or exemptions
provided in the federal Bankruptcy
Code. Most debtors use the exemp-
tions provided by their state.
Exemptions are generally as follows:
Equity in your home, called a homestead
exemption. Under the Bankruptcy
Code, you can exempt up to
$17,425. Some states have no
homestead exemption; others allow
debtors to protect all or most of the
equity in their home.
Insurance. You usually get to keep
the cash value of your policies.
Retirement plans. Pensions which
qualify under the Employee Retire-
ment Income Security Act (ERISA)
are fully protected in bankruptcy. So
are many other retirement benefits;
often, however, IRAs and Keoghs
are not.
Personal property. Youll be able to
keep most household goods, furni-
ture, furnishings, clothing (other
than furs), appliances, books and
musical instruments. You may be
limited up to $1,000 or so in how
much jewelry you can keep. Most
states let you keep a vehicle with
more than $2,400 of equity. And
many states give you a wild card
amount of moneyoften $1,000 or
morethat you can apply toward
any property.
Public benefits. All public benefits,
such as welfare, Social Security and
unemployment insurance, are fully
protected.
Tools used on your job. Youll prob-
ably be able to keep up to a few
thousand dollars worth of the tools
used in your trade or profession.
Wages. In most states, you can
protect at least 75% of earned but
unpaid wages.
Why choose Chapter 13
over Chapter 7?
Although the overwhelming number
of people who file for bankruptcy
choose Chapter 7, there are several
reasons why people select Chapter 13:
You cannot file for Chapter 7
bankruptcy if you received a Chap-
ter 7 or Chapter 13 discharge within
the previous six years.
You have valuable nonexempt
property.
Youre behind on your mortgage or
car loan. In Chapter 7, youll have to
give up the property or pay for it in
full during your bankruptcy case. In
Chapter 13, you can repay the
arrears through your plan, and keep
the property by making the pay-
ments required under the contract.
You have debts that cannot be
discharged in Chapter 7.
You have codebtors on personal
(nonbusiness) loans. In Chapter 7,
the creditors will go after your
codebtors for payment. In Chapter
13, the creditors may not seek
payment from your codebtors for
the duration of your case.
You feel a moral obligation to repay
your debts or you want to learn
money management.
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ef
More Information
About Bankruptcy
How to File for Chapter 7 Bankruptcy
, by
Stephen Elias, Albin Renauer, Robin
Leonard and Kathleen Michon (Nolo), is
a complete guide to filing for Chapter 7
bankruptcy, including all the forms you
need.
Nolos Law Form Kit: Personal Bankruptcy
,
by Stephen Elias, Albin Renauer, Robin
Leonard and Kathleen Michon (Nolo), con-
tains all the forms and instructions neces-
sary for filing a Chapter 7 bankruptcy.
Chapter 13 Bankruptcy: Repay Your
Debts
, by Robin Leonard (Nolo), contains
the forms and instructions necessary to
file your own Chapter 13 bankruptcy or
successfully work with a lawyer.
Bankruptcy: Is It the Right Solution to
Your Debt Problems?
, by Robin Leonard
(Nolo), provides tools to help you decide
if filing for bankruptcy is for you and, if
so, which type is best.
Will Bankruptcy Law
Change for the Worse?
In March 2001, the U.S. Congress passed
legislation that would make it difficultor
impossiblefor some people to file for
bankruptcy. The House and Senate were
scheduled to meet in September 2001 to
work out differences between their respec-
tive versions of the bill. That meeting was
cancelled due to the events of September
11. At the time this book went to print,
Congressional committees were once
again discussing whether a final version
of the legislation could be hammered out.
However, the future of the legislation is
uncertain. Many experts believe that the
legislation is no longer a priority, espe-
cially given the recent downturn in the
economy and rising unemployment.
The legislation is very unfriendly to
debtors. Among other things, it would
prohibit some people from filing for bank-
ruptcy, add to the list of debts that
people cannot get rid of in bankruptcy
and make it harder for people to come
up with manageable repayment plans.
To learn more about the legislation,
check Legal Updates on Nolos website
(http://www.nolo.com).
Rebuilding
Credit
People who have been through a fi-
nancial crisisbankruptcy, reposses-
sion, foreclosure, history of late pay-
ments, IRS lien or levy or something
similarmay think they will never
get credit again. Not true. Following
some simple steps, you can rebuild
your credit in just a couple of years.
Whats the first step in
rebuilding credit?
To avoid getting into financial prob-
lems in the future, you must under-
stand your flow of income and ex-
penses. Some people call this making a
budget. Others find the term budget
Y O U R M O N E Y
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too restrictive and use the term spend-
ing plan. Whatever you call it, spend
at least two months writing down every
expenditure you make. At each months
end, compare your total expenses with
your income. If youre overspending,
you have to cut back or find more in-
come. As best you can, plan how youll
spend your money each month. If you
have trouble putting together your own
budget, consider getting help from a
nonprofit group, such as Myvesta.org or
your local Consumer Credit Counseling
Service, which provides budgeting help
for free or at a low cost.
Okay, Ive made my budget.
What do I do next?
Now its time to clean up your credit
report. Credit reports are compiled by
credit bureausprivate, for-profit com-
panies that gather information about
your credit history and sell it to banks,
mortgage lenders, credit unions, credit
card companies, department stores,
insurance companies, landlords and
even a few employers.
Credit bureaus get most of their data
from creditors. They also search court
records for lawsuits, judgments and
bankruptcy filings. And they go
through county records to find recorded
liens (legal claims against property).
To create a credit file for a given
person, a credit bureau searches its
computer files until it finds entries
that match the name, Social Security
number and any other available iden-
tifying information. All matches are
gathered together to make the report.
Noncredit data in a credit report
usually includes names you previously
used, past and present addresses, So-
cial Security number, employment
history, marriages and divorces. Your
credit history includes the names of
your creditors, type and number of
each account, when each account was
opened, your payment history for the
previous 2436 months, your credit
limit or the original amount of a loan,
and your current balance. The report
will show if an account has been
turned over to a collection agency or
is in dispute.
How to Get Your
Credit Report
There are three major credit bureaus
Equifax, Trans Union and Experian. The
federal Fair Credit Reporting Act (FCRA)
entitles you to a copy of your credit
report, and you can get one for free if
any of the following are true:
you were denied credit because of
information in your credit report and
you request a copy within 60 days of
being denied credit
you receive public assistance
you are unemployed and plan to apply
for a job within 60 days, or
you believe your file contains errors
due to fraud.
Residents of Colorado, Georgia, Mary-
land, Massachusetts, New Jersey and
Vermont are entitled to a free copy of
their report once a year from each credit
bureau.
If you don't qualify for a free report,
youll have to pay about $8.50 (less in
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some states) to obtain one. Write to
Equifax (P.O. Box 740241, Atlanta, GA
30374, 800-685-1111, http://
www.equifax.com), Trans Union (Con-
sumer Disclosure Center, P.O. Box 1000,
Chester, PA 19022, 800-888-4213,
http://www.tuc.com) or Experian (P.O.
Box 2002, Allen, TX 75013, 888-397-
3742, http://www.experian.com).
Send the following information:
your full name (including generations
such as Jr., Sr., III)
your birth date
your Social Security number
your spouses name (if relevant)
your telephone number, and
your current address and addresses for
the previous five years.
What should I do if I find
mistakes in my report?
As you read through your report,
make a list of everything out of date:
Lawsuits, paid tax liens, accounts
sent out for collection, late pay-
ments and any other adverse infor-
mation older than seven years.
Bankruptcies older than ten years
from the discharge or dismissal.
(Credit bureaus often list Chapter
13 bankruptcies for only seven
years, but they can stay for as many
as ten.)
Credit inquiries (requests by compa-
nies for a copy of your report) older
than two years.
Next, look for incorrect or mislead-
ing information, such as:
incorrect or incomplete name,
address, phone number, Social
Security number or employment
information
bankruptcies not identified by their
specific chapter number
accounts not yours or lawsuits in
which you were not involved
incorrect account historiessuch as
late payments when you paid on
time
closed accounts listed as openit
may look as if you have too much
open credit, and
any account you closed that doesnt
say closed by consumer.
After reviewing your report, com-
plete the request for reinvestigation
form the credit bureau sent you or
send a letter listing each item that is
incorrect or too old to be reported.
Once the credit bureau receives your
request, it must investigate the items
you dispute and contact you within
30 days. If you dont hear back within
30 days, send a follow-up letter.
If you are right, or if the creditor
who provided the information can no
longer verify it, the credit bureau
must remove the information from
your report. Often credit bureaus will
remove an item on request without an
investigation if rechecking the item is
more bother than its worth.
If the credit bureau insists that the
information is correct, call the bureau
to discuss the problem:
Experian: 888-397-3742
Trans Union: 800-916-8800
Equifax: 800-685-1111
If you dont get anywhere with the
credit bureau, contact the creditor
directly and ask that the information
be removed. Write to the customer
Y O U R M O N E Y
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service department, vice president of
marketing and president or CEO. If
the information was reported by a col-
lection agency, send the agency a copy
of your letter, too.
If the creditor will not remove the
information, remind the creditor that
under the 1997 amendments to the
Fair Credit Reporting Act, the credi-
tor must do the following:
refrain from reporting information
they know is incorrect
refrain from ignoring information
they know contradicts what they
have on file, and
provide credit bureaus with correct
information when that information
becomes available.
If a credit bureau is including the
wrong information in your report, or
you want to explain a particular entry,
you have the right to put a brief ex-
planatory statement in your report.
The credit bureau must give a copy of
your statementor a summaryto
anyone who requests your report. Be
clear and concise; use the fewest words
possible.
Ive been told that I need to use
credit to rebuild my credit. Is this
true?
Yes. The one type of positive informa-
tion creditors like to see in credit
reports is credit payment history. If
you have a credit card, use it every
month. (Make small purchases and
pay them off to avoid interest
charges.) If you dont have a credit
card, apply for one. If your application
is rejected, try to find a cosigner or
apply for a secured cardwhere you
deposit some money into a savings
account and then get a credit card
with a line of credit close to the
amount you deposited. But beware.
Dont apply for new credit before
getting back on your feet. Defaulting
on new credit will only make matters
worse.
What else can I do to
rebuild my credit?
After youve cleaned up your credit
report, work on getting positive infor-
mation into your record. Here are two
suggestions:
If your credit report is missing
accounts you pay on time, send the
credit bureaus a recent account
statement and copies of canceled
checks showing your payment
history. Ask that these be added to
your report. The credit bureau doesnt
have to add anything, but often will.
Creditors like to see evidence of
stability, so if any of the following
information is not in your report,
send it to the bureaus and ask that it
be added: your current employment,
your previous employment (espe-
cially if youve been at your current
job fewer than two years), your
current residence, your telephone
number (especially if its unlisted),
your date of birth and your checking
account number. Again, the credit
bureau doesnt have to add these,
but often will.
How long does it take
to rebuild credit?
If you follow the steps outlined above,
it will take about two years to rebuild
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your credit to the point that you
wont be turned down for a major
credit card or loan. After approxi-
mately four years, you may be able to
qualify for a mortgage.
ef
More Information About
Rebuilding Your Credit
Credit Repair
, by Robin Leonard and
Deanne Loonin (Nolo), is a quick guide to
lawfully rebuilding your credit. It contains
several strategies for improving credit,
sample credit reports with explanations on
how to read them and the text of the
federal and many state credit reporting
laws.
Money Troubles: Legal Strategies to Cope
With Your Debts
, by Robin Leonard and
Deanne Loonin (Nolo), explains your legal
rights and offers practical strategies for
dealing with debts and creditors, includ-
ing rebuilding your credit.
The Federal Trade Commission, CRC-240,
Washington, DC 20580, 877-FTC-HELP
(382-4357), http://www.ftc.gov, pub-
lishes free pamphlets on debts and credit,
including
Building a Better Credit Record
,
Cosigning a Loan
,
Fair Credit Reporting
and
Fix Your Own Credit Problems and
Save Money
.
The Federal Deposit Insurance Corpora-
tion, 550 17th Street, NW, Washington,
DC 20429, 877-275-3342, 800-925-
4618 (TDD), http://www.fdic.gov,
publishes free pamphlets about credit,
including
Fair Credit Reporting
.
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p
http://www.nolo.com
Nolo offers self-help information about a
wide variety of legal topics, including ad-
vice about consumer law, debts and credit.
http://www.fraud.org
The National Fraud Information Center
helps you file a complaint with federal
agencies if youve benn defrauded. It also
offers information on how to avoid becom-
ing the victim of a scam.
http://www.financenter.com
The FinanCenter provides financial advice
and includes a calculator to help you com-
pare various financing alternatives when
youre making a budget or considering a
major purchase, such as a home or automo-
bile. The cool graphics alone make visiting
this site worthwhile.
http://www.bbb.org
The Better Business Bureau provides gen-
eral information on their programs and
services, including alerts, warnings and
updates about businesses. You can also
find information about filing a complaint
against a business and using the BBBs
dispute resolution program.
http://www.lawguru.com
The Internet Law Library provides the texts
of finance, economic and consumer protection
laws including the federal bankruptcy code
and bankruptcy rules, banking laws, Fed-
Y O U R M O N E Y
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eral Trade Commission publications and
selected state consumer protection laws.
http://www.pueblo.gsa.gov
The Consumer Information Center provides
the latest in consumer news as well as
many publications of interest to consumers,
including the Consumer Information
Catalog.
http://www.fdic.gov
http://www.ftc.gov
Both the Federal Deposit Insurance Corpo-
ration and the Federal Trade Commission
offer consumer protection rules, guides and
publications.
http://www.irs.ustreas.gov
The Internal Revenue Service provides tax
information, forms and publications.
http://www.agin.com/lawfind
This site provides an extensive list of
online bankruptcy-related materials, in-
cluding other online bankruptcy sites.
i
i
abb
10
Cars and Driving
10.2 Buying a New Car
10.7 Leasing a Car
10.10 Buying a Used Car
10.12 Financing a Vehicle
Purchase
10.13 Insuring Your Car
10.16 Your Driver’s License
10.19 If You’re Stopped
by the Police
10.21 Drunk Driving
10.23 Traffic Accidents
WHEN SOLOMON SAID THAT THERE WAS
A TIME AND A PLACE FOR EVERYTHING
HE HAD NOT ENCOUNTERED THE PROBLEM
OF PARKING AN AUTOMOBILE.
BOB EDWARDS
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Together, Americans own more
than 137 million automobilesthats
at least one car for every 1.7 people in
the country. It is not surprising that
this average is well above that for the
rest of the world, where there is
approximately one car for every 12
people. Plainly, Americans love their
carsor at least the mobility they
provide. For the privilege of owning
and operating a vehicle, we pay an
average of more than $8,000 per year.
We also expend plenty of time and
energy figuring out which cars to buy,
how to insure and maintain them, and
how to keep out of trouble on the
road. This chapter provides answers to
many of your questions about owning
a car and driving responsibly.
Buying a
New Car
These days, the average new car costs
more than $20,000. For that amount
of money, you would hope for a
hassle-free buying experience and a
safe and reliable product. Unfortu-
nately, new car buyers are frequently
overwhelmed with the pressure to buy
immediately or spend more than
planned, and worsethe product you
bring home might be plagued with
problems ranging from annoying en-
gine pings, to frequent stalls, to
safety hazards such as poor accelera-
tion or carbon monoxide leaks.
I want to get a good deal on a
new car. What make and model
should I buy?
There are several good resources to
help you comparison shop when
youre looking for a new car. Consumer
Reports magazine publishes an annual
car-buying issue that compares price,
features, service history, resale value
and reliability. Other helpful sources
of information are Motor Trend maga-
zine and The Car Buyers Art, by
Darrell Parrish (Book Express). Fi-
nally, many websites provide price
and feature information. To start, try
http://www.autosite.com, http://
www.carwizard.com or http://
www.carprices.com.
When deciding which car to buy,
resist the urge to buy more car than
you can affordand dont talk your-
self into a more expensive car by fi-
nancing it for four or five years. Youll
pay a bundle in interest that way.
Do you have any tips for
negotiating with a car dealer?
Negotiating price with a dealer is
almost never a pleasant experience.
And, if you dont do it well, you are
likely to pay hundreds or thousands of
dollars more for a car. Here are some
tips for getting the best deal.
Know which car you want (or a few
you are interested in), which fea-
tures you want and what you can
afford to pay before you walk into
the dealership. Then, stick to your
guns.
Know the dealers cost for the car
before you start negotiating. Then,
C A R S A N D D R I V I N G
10.3
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use this figure as the starting point
from which you negotiate up. The
dealer invoice price is how much the
dealer paid for the car. Many
websites list dealer invoice prices.
But the dealers final cost is often
even lower, because manufacturers
offer dealers behind-the-scenes
financial incentives. To find out the
cars true cost to the dealer, you can
order a report from Consumer Reports
(http://www.consumerreports.org or
800-888-8275) for about $12.
Dont buy in a hurry. You need
time to compare prices. And
usually, the longer you take and the
more times you walk away, the
lower the price will go.
Order your new car if the one you
want is not on the lot. Cars on the
lot frequently have options you
dont want, which jack up the price.
Dont make a deposit on a vehicle
before the dealership has accepted
your offer.
If a rebate is offered, negotiate the
price as if the rebate didnt exist.
And have the rebate sent to your
homedont allow the dealership to
apply it to the amount you owe.
Rebates come from the manufac-
turer and shouldnt be a reason to
pay the dealer more for the car.
Dont discuss the possibility of a
trade-in until you fix the price for
your new car.
Dont trade in your old vehicle
without doing your homework. A
dealer will give you the low Kelley
Blue Book value, at most. (The Kelley
Blue Book lists wholesale and retail
prices for cars by year and model.
You can find it in libraries, book-
stores or online at http://
www.kbb.com.) Take a look at
classified ads to get an idea of how
much you could get if you sold your
car yourself. Or, order a used car
price report from Consumer Reports
magazine (http://
www.consumerreports.org or 800-
258-1169). Dont accept less than
what you can get on the street. Or,
forget the trade-in and sell your old
car yourself.
You might want to read up on the
sales tactics dealerships use to get
you to pay top dollar. Armed with
this information, you will be better
able to deflect the tactics and get a
good deal. There are lots of books on
this subject. Two of the best are
Dont Get Taken Every Time, by
Remar Sutton (Penguin Books), and
SoYou Wanna Buy a Car, by Bruce
Fuller and Tony Whitney (Self-
Counsel Press).
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What other information do I
need to know before I buy
my new car?
Be sure you know the following before
you sign any contract:
what the warranty covers and how
long it lasts
how you might lose warranty
coverage (such as driving off-road)
whether an extended warranty is
available to you, and if so, the
following:
what it will cost
what it covers
how long it lasts
whether it duplicates coverage
provided by the manufacturers
warranty
how likely it is that youll need it
(whether the covered parts have a
history of problems)
the vehicles estimated miles per
gallon for city and highway driving,
and
the dealers suggested maintenance
schedule.
Is there anything I should do
when my new car is delivered?
Yes. Before signing a receipt and pay-
ing for your new vehicle, do the fol-
lowing:
Check the vehicle against your
order, item by item. Make sure all
features are included.
Inspect the vehicle for damage.
Some new vehicles are damaged
during manufacturing or in transit.
For this reason, never take delivery
of a new vehicle at night. Even in
good artificial light, its hard to see
nicks or dents. Youll also miss
subtle changes in paint that may
indicate the car was damaged in
transit and was repainted.
Test drive the vehicle and pay
attention to odd noises, smells or
vibrations.
Make sure the warranty matches
what the dealer agreed to.
If I change my mind after I buy
a new car, do I have the right
to cancel the contract?
No. Unfortunately, many people
think they have a right to change
their mind, drive the car back to the
dealer a day or two after buying, and
cancel the contract. But the truth is,
the dealer doesnt have to take the car
back and probably wont, and youll
be stuck with a car you no longer
want or cannot afford. Never buy a
car unless you are absolutely certain
you want it and can afford it.
This misunderstanding is so wide-
spread that one stateCalifornia
requires the following to be included
in new car contracts:
California law does not provide for a
cooling off or other cancellation period
for vehicle sales. Therefore, you cannot
later cancel this contract simply because
you change your mind, decide the vehicle
costs too much, or wish you had acquired a
different vehicle. After you sign below, you
may only cancel this contract with the
agreement of the seller or for legal cause,
such as fraud.
C A R S A N D D R I V I N G
10.5
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Soon after I brought my new car
home, it started having problems.
How do I know if its a lemon?
An estimated 150,000 vehicles each
year (or 1% of new cars) are lemons.
Although the precise definition of a
lemon varies by state, in general, a
new car is a lemon if a number of at-
tempts have been made to repair a
substantial defect and the car con-
tinues to have this defect. A substan-
tial defect is one that impairs the cars
use, value or safety, such as faulty
brakes or turn signals. Minor defects,
such as loose radio and door knobs,
dont qualify.
In all states, the defect must occur
within a certain period of time (usu-
ally 1 or 2 years) or within a certain
number of miles (usually 12,000 or
24, 000). And you must usually meet
one of the following standards for re-
pair attempts:
the defect is a serious safety defect
involving brakes or steering and
remains unfixed after one repair
attempt
the defect is not a serious safety
defect and remains unfixed after
three or four repair attempts (the
number depends on the state), or
the vehicle is in the shop for a
certain number of days (usually 30)
in a one year period.
How to Find Your
States Lemon Law
If you want to find out if your car quali-
fies as a lemon in your state, get a copy
of your states lemon law. If you have
access to the Internet, http://
www.autopedia.com has links to each
states lemon law. Or, see this books
Appendix on Legal Research for informa-
tion on how to find the law in the library.
For a summary of each states lemon law,
check out
Return to Sender
, by Nancy
Barron (National Consumer Law Center).
You can order the book from NCLC at
http://www.consumerlaw.org or 617-
523-8089.
What should I do if my new car
is a lemon?
If your new car meets the lemon law
requirements for your state (see the
previous question), every state gives
you the right to obtain a refund or
replacement vehicle from the manu-
facturer. The process for getting this
relief is different in each state. In all
states, you must first notify the manu-
facturer of the defect. If youre not
offered a satisfactory settlement, most
states require you to go to arbitration
before going to court. Automakers use
the following types of arbitration pro-
grams:
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in-house programs run by the auto
makers
programs set up by the Better
Business Bureaus Auto Line
programs run by the American
Automobile Association or the
National Automobile Dealers
Association, and
programs run through a state
consumer protection agency.
You probably wont get to choose
which program to usethe manufac-
turer selects it. If you do have a
choice, however, know that consumers
who appear before a state consumer
protection agency usually fare much
better than those who use a
manufacturers in-house program or a
private arbitration program run by
the BBB, AAA or NADA.
What happens at a lemon law
arbitration?
At the arbitration hearing, the arbi-
trator hears both sides of the dispute.
The arbitrator has approximately 60
days to decide if your car is a lemon
and if youre entitled to a refund or a
replacement. Consumers who bring
substantial documentation to the
hearing tend to do better than those
with little evidence to back up their
claims. The types of documentation
that can help include:
brochures and ads about the vehicle
an arbitration panel is likely to
make the manufacturer live up to its
claims
vehicle service records showing how
often you took the car into the shop,
and
any other documents showing your
attempts to get the dealer to repair
your car, including old calendars
and phone records.
It is important to take the arbitra-
tion seriously and be as prepared as
possible. Although usually you can
appeal a bad arbitration decision in
court, the decision can greatly influ-
ence your case. For example, the
manufacturer may be able to use the
decision as evidence against you.
If I continue to drive my car
while I wait for a decision, will
it hurt my case?
Because it often takes a long time to
get relief, most lemon laws allow you
to keep using your car while pursuing
a claim. But keep in mind that some
courts may look less favorably on
your case if you are able to drive your
car. And of course, you should never
drive your car if it is unsafe to do so.
Secret Warranty
Adjustments
Many automobile manufacturers have
secret warranty, or warranty adjust-
ment, programs. Under these programs,
a manufacturer makes repairs for free on
vehicles with persistent problems after a
warranty expires in order to avoid a
recall and bad press. According to the
Center for Auto Safety, at any given time
there are a total of 500 secret adjust-
ment warranty programs available
through automobile manufacturers. The
C A R S A N D D R I V I N G
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Center for Auto Safetys website, at
http://www.autosafety.org, and the Car
Talk site, at http://www.cartalk.cars.
com/Got-a-car/lemon, have information
about many of these programs.
Unfortunately, consumers arent told of
these warranty adjustments unless they
come forward after the warranty has
expired, complain about a problem and
demand that the manufacturer repair it.
A few states, including California,
Connecticut, Virginia and Wisconsin,
require manufacturers to tell eligible
consumers when they adopt a secret
warranty adjustment, usually within 90
days of adopting the program.
What if I dont like the
arbitrators decision?
If you dont like the ruling, you can
usually sue the manufacturer in court.
You may want to do this if you have
substantial consequential dam-
agesthat is, damages that resulted
from owning the lemon, such as the
cost of renting a car while your lemon
was in the shop or time off from work
every time your car broke down.
ef
More Information
About Lemons
If you think your new car is a lemon, an
excellent book to help you sort out your
rights and remedies is
Return to Sender
, by
Nancy Barron (National Consumer Law
Center). You can order the book from
NCLC at http://www.consumerlaw.org or
617-523-8089.
Leasing a Car
More than one-third of new car own-
ers lease, rather than purchase, their
vehicles. Although leasing isnt for
everyone, some people swear by it.
Before you sign on the dotted line, be
sure you know what youre getting
into.
What are the advantages of
leasing a new car?
There are three main reasons people
lease, rather than buy, a new vehicle:
People who like to drive a new car
every few years will pay much less
by leasing than if they buy. They
also dont have to deal with getting
rid of their old carthey just turn
it in at the end of the lease period.
Lease payments are lower than loan
payments for any given car.
Leasing gives people the opportu-
nity to drive a more expensive car
than they could afford to buy.
Are there any obvious
disadvantages to leasing?
Yesthere are many.
If you continually lease your cars,
you will have never-ending car
payments. If you look forward to
paying off your car and owning it
free and clear, dont lease.
If you decide to buy the car at the
lease-end, youll pay several thou-
sands of dollars more than if you
had bought initially. For example,
if you buy a car, paying $500 a
month for four years, youll pay a
total of $24,000. You might be
able to lease it for only $400 a
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month (total payments of $19,200),
but youll probably have to pay
another $8,000 to keep itand if
you finance that $8,000, youll pay
even more.
Most leases charge you as much as
25¢ a mile if you exceed the annual
mileage limitusually between
12,000 and 15,000 miles. If you
plan to do extensive driving, leasing
probably isnt for you.
Its very, very expensive to break a
lease early. If you no longer want, or
can afford, to keep your carfor
example, because you lost your job
or your financial situation
changedyou are stuck.
If you lease a lemon, the leasing
company has to do the complaining
(remember, you dont own the car)
in order to get redress.
Are all leasing costs disclosed
up front?
Not necessarily. While the federal
Consumer Leasing Act requires lease
agreements to include a statement of
costs (such as the number and amount
of regular payments), insurance re-
quirements, the penalty for defaulting,
and whether youll have a balloon pay-
ment at the end, many lease agree-
ments are ambiguously drafted, with
key provisions buried in the fine
print.
Even the revised regulations
which strengthened the existing dis-
closures and added othersdo not
eliminate all of the abuses. For ex-
ample, the revised law does not obli-
gate a dealer to disclose the interest
rate thats been built into your pay-
ments. If you want to lease, youll
have to be a diligent consumer will-
ing to read all the fine print. Also, ask
a lot of questions and demand that the
answers be put in writing.
Is there any way to find out the
interest rate on a lease?
Yes. Ask the dealer for something
called the leasing factor. Multiply
that factor by 24 and youll get the
approximate interest rate.
Are there any good
leasing deals?
Yesespecially those heavily adver-
tised by car manufacturers. Those
deals usually offer low monthly pay-
ments or a high value for the vehicle
at the end (so that youre not paying
for a lot of depreciation during the
lease term), and offer to lock-in the
price youd have to pay at lease-end if
you want to keep the vehicle.
To get these good deals, you cannot
deviate from the advertised terms. If
you want air conditioning, a larger
engine or any other feature thats not
in the ad, the dealer will throw out
the entire lease offer and youll wind
up paying a bundle.
Another way to get a good deal is
to explore financing your lease
through someone other than the
dealer. A number of independent
companies offer leaseslook for these
companies in your telephone Yellow
Pages under AutomotiveLeasing.
Also, if you belong to a credit union
or AAA, ask about the possibility of
financing your lease through them.
Such deals are still in their infancy,
but are catching on.
C A R S A N D D R I V I N G
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When buying a new car, I
usually shop in the fall when
dealers are trying to get rid of
old inventory. Does this strategy
work for leasing?
In general, no. Because dealers have
lost money on cars sitting in their
lots, they often increase the monthly
lease payments to make up for lost
revenue.
If I do lease a vehicle, who pays
for maintenance and repairs?
Your lease agreement will specify who
must pay. In addition, the agreement
should come with a manufacturers
warranty. Ideally, it will cover the
entire length of the lease and the num-
ber of miles you are likely to drive.
Most lease agreements obligate you
to pay for excessive wear and tear.
This means that when you return the
vehicle at lease-end, the dealer could
charge you to fix anything deemed ex-
cessive. You should insist that the
dealer specify in writing exactly what
is meant by excessive before you sign
the lease contract.
Finally, look for a deal that in-
cludes gap insurance. If the vehicle
is stolen or totaled, gap insurance will
pay the difference between what you
owe under the lease and what the
dealer can recover on the vehicle (as-
suming its not stolen)a difference
that could amount to thousands of
dollars.
Can I cancel my lease
agreement early?
Probably not, unless youre willing to
pay a substantial penalty. If you want
to cancel your lease, look carefully at
the provision describing what hap-
pens if you default or want to termi-
nate the lease early. The provision
may state that youll owe an enormous
sum of money, or may use a complex
formula to calculate what you owe.
While the federal Consumer Leas-
ing Act gives you the right to cancel
the lease if the termination formula is
so complex that you cant easily figure
out how much you owe, this will be
hard for you to assert with success.
Because of successful consumer law-
suits, lawyers for car manufacturers
have rewritten lease contracts to avoid
most of the ambiguities.
Even so, if you cant understand the
formula, write to the dealer stating
that you want to terminate the lease
early but that the termination provi-
sion of the lease agreement is ambigu-
ous. State further that you know you
are entitled to sue for damages be-
cause of the dealers failure to use a
reasonable formula. Finally, state that
you are willing to waive your right to
sue if the dealer will waive the balance
you owe.
If you cant get the dealer to drop
his claim that you owe money, try to
negotiate to reduce your payments or
to extend them over time.
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ef
More Information About
Leasing a Car
Both the Federal Trade Commission (at
http://www.ftc.gov) and the Federal
Reserve Board (at http://
federalreserve.gov) publish brochures to
help you understand your rights when
leasing a car.
Buying a
Used Car
HORSEPOWER WAS A WONDERFUL
THING WHEN ONLY HORSES HAD IT.
ANONYMOUS
While buying a used car might be the
only way you can afford a new set of
wheels, its a transaction ripe with
potential disaster. We probably all
know someone who bought a used
carassured that my grandmother
drove it once a week for ten years to
church and the grocery store”—only
to have it need $5,000 of work shortly
after bringing it home.
How do I go about finding
a used car?
Its best if you have some idea of the
make, model and year that youre
interested in. There are many good
sources to help you compare cars.
Consumer Reports magazine publishes
an annual car-buying issue, compar-
ing price, features, service histories,
resale values and reliability. Other
sources of information are Motor Trend
magazine and Used Cars, by Darrell
Parrish (Book Express). Once youve
made this preliminary decision, look
at the listings in your local newspa-
per. Dont forget weekly advertising
papers or local automobile publica-
tions as well. Call any mechanics that
you trust to see if they know of any
available vehicles. Finally, check with
car dealers; they often have used cars
that people have traded in.
How much should I spend on a
used car?
Check the wholesale and retail values
of the cars that interest you. Book-
stores and libraries have copies of the
Kelley Blue Book (which lists wholesale
and retail prices), or you can find it
online at http://www.kbb.com. Lend-
ers and insurance companies should be
able to give you the same information.
For a small fee (about $10), Con-
sumer Reports (http://
www.consumerreports.org or 800-
258-1169) will tell you how much a
particular car is worth, taking into
consideration the cars mileage, con-
dition and additional equipment
(such as power windows or compact
disc player). The report also provides
information about the cars reliability.
You can also get most of this informa-
tion from the Kelley Blue Book website
at http://www.kbb.com.
Once you know the vehicles
wholesale and retail values, youll
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want to pay wholesale (the lower
number) and the seller will want to
charge retail (the higher number).
Youll probably settle somewhere in
between. Your final price will depend
on a number of factors, including the
condition of the car and the person
from whom you buy it.
The Buyers Guide
Federal law requires an automobile
dealer to post a Buyers Guide in every
used car it offers for sale (motorcycles
and most recreational vehicles are
exempt from this requirement). Among
other things, the Buyers Guide tells you
whether the vehicle is sold as is or with
a warranty and describes the warranty.
Be sure to get the Buyers Guide when
you buy a used car and make sure it
reflects any changes to warranty cover-
age that you negotiated with the dealer.
The Buyers Guide becomes part of the
sales contractif the dealer refuses to
make good on the warranty, youll need
it as proof of your original agreement.
Obviously, price isnt the only
factor to consider when buying
a used car. What else do I need
to know?
With used cars, reliability is as im-
portant as price. You should do the
following:
Have the car checked out by a
mechanic you trust.
Have the car inspected by a diagnos-
tic center. These businesses will
check virtually every aspect and
component of a car. Theyre more
expensivebut more thorough
than a mechanic.
Ask for copies of the maintenance
records for the life of the car.
From your state motor vehicle
department, find out all previous
owners, the mileage each time it
was sold and all states (other than
where you live) where the car has
been registered. If this information
doesnt match up or looks fishy,
dont buy the car.
Do your own visual inspection
youll want to look for oddities that
might indicate damage (such as
scratches or new paint).
Also, look at the vehicle identifica-
tion number (VIN) on the lower left-
hand side of the front windshield. If it
shows any signs of tampering, the car
may be stolen. And finally, if youre
buying the car from a private party (as
opposed to a car dealer), make sure the
person selling the car actually holds
title. Ask to see the sellers drivers
license (or other form of ID) and the
title certificate for the vehicle.
Will a warranty protect me if I
get a bad deal on a used car?
If youre buying a used car from a
dealer, the dealer will probably offer
you an extended warranty. Before
buying, be sure you know exactly
what is covered and what isnt, and
for how long. Youll also need to
know the type of problems the car has
had in the past, and what types of
problems that particular make of car
is likely to have in the future. It
makes no sense to buy an extended
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warranty that doesnt cover emissions,
for example, if the type of car youre
buying is likely to have emission
problems in a year or so.
If youre buying a car from a pri-
vate party, check to see if the car is
still under a factory warranty or if the
original owner purchased an extended
warrantyand whether either of these
warranties can be transferred to you as
the new owner.
Used Car Lemon Laws
Arizona, California, Connecticut, Wash-
ington D.C., Florida, Hawaii, Iowa,
Massachusetts, Maryland, Maine, Minne-
sota, New Hampshire, New Jersey, New
York and Ohio have lemon laws or
warranty coverage for used cars. If
youre in one of these states and you buy
a used car that turns out to be defective,
contact your state attorney general or
department of consumer affairs for the
details of the law and how you can get
redress under it. You can also obtain a
copy of most of these laws by visiting
http://www.autopedia.com.
Financing a
Vehicle
Purchase
If you are like most people, you dont
have a large sum of cash to plunk
down for a new or used car. This
means youll have to finance your
purchase. Of course, after you spend
time shopping for a car and negotiat-
ing a good deal, the last thing youll
want to do is haggle over financing
terms. But if you dont shop around
for the best financing deal and read
the finance contract carefully, you
could end up paying lots more for a
loan than you should.
I want to buy a car, but Im not
sure how to finance my
purchase. Do you have any
general advice?
Clearly, if you can pay for the pur-
chase outright youll save money by
not paying any interest charges. But if
you dont happen to have $20,000
lying around and need to borrow
money to buy your new car, consider
the following sources:
The car dealer. Many offer generous
termsfor example, interest at
1.5% or 2%especially in the early
fall when dealers are anxious to clear
out stock to make room for new
models. Be careful that these low-
interest loans dont require you to
buy upgraded featuressuch as air
conditioning or rust protectionor
credit insurance. And dont assume
you are getting the best deal
around. Always compare dealer
terms to those of banks and credit
unions.
Banks you do business with. Dealer
financing isnt your only option.
Before you buy, contact the banks
where you have your savings,
checking, credit card or business
accounts. Ask about the going rate
for car loans. Also ask about dis-
C A R S A N D D R I V I N G
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count rates for loans tied to your
other accounts.
Credit unions. If youre a member of a
credit union (or are eligible to join
one), be sure to investigate its car
loans. Historically, credit unions
have offered some of the best loan
terms.
Regardless of who finances the con-
tract, if you want a good interest rate
but have a poor credit history, youll
need to either put a substantial
amount down or get a cosigner.
Do You Need Credit
Insurance?
Many dealers and lenders will ask you to
buy credit insuranceinsurance that will
pay off your loan if you die or become
disabled. Before you add this cost to
your contract, consider whether you
really need it. Remember, you can
always sell the car and use the proceeds
to pay off the loan. In fact, most financial
experts say credit insurance is unneces-
sary and advise consumers not to buy it.
If you do decide you want this protection,
you can almost always buy this type of
insurance from an outside source at a
much better price.
If I borrow money for the
purchase, what should the
lender tell me about my loan?
If you get a car loan from a bank,
credit union or car dealer, the federal
Truth in Lending Act requires that
the lender disclose, in writing, impor-
tant information about your loan,
including:
your right to a written itemization
of the amount borrowed
the total amount of the loan
the monthly finance charge
the annual percentage rate (APR)
the number, amount and due dates
of all payments, and
whether any late payment fee or
penalty may be imposed.
Insuring Your
Car
Certainly those so inclined can
have lots of fun imagining
possible needs for insurance.
HAYDEN CURRY
Most states require that every regis-
tered vehicle or licensed driver have
some vehicle liability insurance. But
even where its not required by law,
most drivers have some liability cov-
erage. Before you buy auto insurance,
you must decide how much coverage
you need and what types of coverage
are appropriate for you. And of course,
youll want to find ways to cut your
insurance costs.
Who is usually covered under
an auto insurance liability
policy?
An auto insurance liability policy
usually covers the following people no
matter what car they are driving:
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Named insuredthe person or people
named in the policy.
Spousea spouse not named in the
policy, unless he or she does not live
with the named insured.
Other relativeanyone living in the
household with the named insured
who is related by blood, marriage or
adoption, usually including a legal
ward or foster child.
Auto insurance liability policies
also cover anyone driving the insured
vehicle with permission. Someone
who steals the car is not covered.
Which vehicles are normally
covered under an auto
insurance liability policy?
Named vehiclesan accident in a
nonnamed vehicle is covered only if
a named insured (see above) was
driving.
Added vehiclesany vehicle with
which the named insured replaces
the original named vehicle, and any
additional vehicle the named
insured acquires during the policy
period (you may be required to
notify the company of the new or
different vehicle within 30 days
after you acquire it).
Temporary vehiclesany vehicle,
including a rental vehicle, that
substitutes for an insured vehicle that
is out of use because it needs repair or
service, or has been destroyed.
What kinds of damage are
covered under an auto
insurance liability policy?
Liability insurance covers money owed
when a driver is at fault for hurting
another person or damaging another
car. Coverage includes medical costs
for diagnosis and treatment of inju-
ries, property damage, loss of use of
damaged property, expenses incurred
(such as the cost of renting a replace-
ment vehicle), lost income and costs
of defending a lawsuit.
In addition, an injured person is
entitled to a certain amount of gen-
eral damages, also referred to as pain
and suffering.
What is collision coverage?
Collision coverage pays for property
damage to your vehicle resulting from
a collision.
What is comprehensive
coverage?
Comprehensive coverage pays for
property damage to your vehicle re-
sulting from anything other than a
collision, such as a theft or a break-in.
What is uninsured motorist
coverage?
If you have an accident with an unin-
sured vehicle or hit-and-run driver, the
place to turn for compensation for your
injuries is the uninsured motorist
(UM) coverage of your own vehicle
insurance policy. Normally, UM covers
only bodily injury and not property
damage to your vehicle. Vehicle dam-
age would be covered by the collision
coverage of your own policy.
What are the limits on my
ability to collect under an
uninsured motorist provision?
UM coverage usually limits your abil-
ity to collect as follows:
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If your accident involves a hit-and-
run driver, you must notify the
police within 24 hours of the accident.
If your accident involves a hit-and-
run driver, the drivers car must
have actually hit youbeing forced
off the road by a driver who disap-
pears is not sufficient.
Your UM coverage will be reduced
by any amounts you receive under
other insurance coverage, such as
your personal medical insurance or
any applicable workers compensa-
tion coverage.
If you or a relative are injured by an
uninsured motorist while you are in
someone elses car, your UM cover-
age will be secondary to the UM
coverage of that other cars owner.
What is no-fault automobile
insurance?
Under no-fault insurance, each
persons own insurance company pays
for his or her medical bills and lost
wagesup to certain dollar amounts
regardless of who was at fault.
About half the states have some
form of no-fault law, often referred to
in policies as Personal Injury Protec-
tion (PIP). The advantage of no-fault
insurance is prompt payment of medi-
cal bills and lost wages without any
arguments about who caused the acci-
dent. But most no-fault insurance
provides extremely limited coverage:
No-fault pays benefits for medical
bills and lost income only. It
provides no compensation for pain,
suffering, emotional distress,
inconvenience or lost opportunities.
No-fault coverage does not pay for
medical bills and lost income higher
than the PIP limits of each persons
policy. PIP benefits often fail to
reimburse fully for medical bills and
lost income.
No-fault often does not apply to
vehicle damage; those claims are
paid under the liability insurance of
the person at fault, or by your own
collision insurance.
When No-Fault
Benefits Arent Enough
All no-fault laws permit an injured driver
to file a liability claim, and lawsuit if
necessary, against another driver who
was at fault in an accident. The liability
claim permits an injured driver to obtain
compensation for medical and income
losses above what the PIP benefits have
paid, as well as compensation for pain,
suffering and other general damages.
Whether and when you can file a li-
ability claim for further damages against
the person at fault in your accident de-
pends on the specifics of the no-fault law
in your state. In some states, you can
always file a liability claim for all dam-
ages in excess of your PIP benefits. In
others you must meet a monetary thresh-
old, a serious injury threshold, or both,
before you can file a liability claim.
My auto insurance rates seem to
keep going up. How can I cut
some of the cost?
Here are a few suggestions for ways to
reduce your premiums:
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Shop around for insurance. Just
because your current company once
offered you the best deal doesnt
mean its still competitive.
Increase your deductibles.
Reduce your collision or compre-
hensive coverage on older cars.
Find out what discounts are avail-
able from your company (or from a
different company). Discounts are
often given to people who:
use public transit or carpool to
work
take a class in defensive driving
(especially if you are older)
own a car with safety features such
as airbags or anti-lock brakes
install anti-theft devices
are students with good academic
records
have no accidents or moving
violations, or
have multiple insurance policies
with the same companysuch as
automobile and homeowners
insurance.
Find out which vehicles cost more
to insure. If youre looking to buy a
new car, call your insurance agent
and find out which cars are expen-
sive to repair, targeted by thieves or
involved in a higher rate of acci-
dents. These vehicles all have higher
insurance rates.
Consolidate your policies. Most of
the time you will pay less if all
owners or drivers who live in the
same household are on one policy or
at least are insured with the same
company.
ef
More Information
About Insuring Your Car
How to Insure Your Car
, by The Merritt
Editors (Merritt Publishing), is a step-by-
step guide to buying the right kind of
auto insurance at a price you can afford.
Your Drivers
License
To a teenager, a drivers license seems
magicala ticket to freedom. For the
rest of us, drivers licenses arent much
more than scraps of paper or plastic
bearing bad pictures. But every now
and then a question may arise about a
license: Is it still good if I move to
another state? What if I take a trip to
a foreign country? And how do I know
if Im in danger of losing my license?
State laws governing how you can
get, use and lose your drivers license
vary tremendously. We cant answer
every question here, but we do discuss
some of the bigger issues that arise in
connection with driving privileges.
Is my drivers license good
in every state?
If you have a valid license from one
state, you may use it in other states
that you visit. But if you make a per-
manent move to another state, youll
C A R S A N D D R I V I N G
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have to take a trip to the local depart-
ment of motor vehicles to apply for a
new license. Usually, you must do
this within 30 days after moving to
the new state. Most states will issue
your new license without requiring
tests, though some may ask you to
take a vision test and a written exam
covering basic driving rules.
In some situations, you may be un-
sure as to whether you need to apply
for a new license. If you make fre-
quent business trips to another state,
or even if you attend school in a state
away from home, theres no need to
get another drivers license. But when
you set up housekeeping in the new
state and pay taxes there as well, its
time to apply.
Young Drivers Who
Cross State Lines
Adults who visit another state may rely on
their drivers licenses, but the same may
not be true for young drivers. The driving
age varies significantly from state to state
(from 15 to 21), and a state that makes
people wait longer to drive may not honor
a license from a state that issues licenses
to younger folks.
For example, if you are
16 and legally allowed to drive in your
home state, but travel to another state
where the legal age limit for driving is
17, you may not be permitted to drive in
that state.
A young driver who plans to
drive in another state where the legal limit
is above his or her age should call that
states department of motor vehicles to
find out what the rules are.
If I get a ticket in another state,
will it affect my license?
Forty-eight states belong either to an
agreement called the Drivers License
Compact or to the Non-Resident
Violator Compact. (The only states
that dont are Michigan and Wiscon-
sin.) When you get a ticket in one of
these states, the department of motor
vehicles will relay the information to
your stateand the violation will
affect your driving record as if the
ticket had been issued in your home
state.
Can I use my license in a
foreign country?
Many countries, including the United
States, have signed an international
agreement allowing visitors to use
their own licenses in other nations.
Before traveling to another country,
contact its consulate office or embassy
to find out whether your license will
be sufficient. Look in the telephone
book under the name of the country.
Or, visit the U.S. State Department
website at http://www.travel.state.gov.
In addition, you may want to ob-
tain an International Drivers Permit,
issued by the American Automobile
Association. This document translates
the information on your drivers li-
cense into ten languages. Many coun-
tries require the permit, not because it
meets their requirements for a license,
but because it is a ready-made copy of
the important information on your
American license.
Finally, if you intend to stay in an-
other country for an extended period
of time, you should check with the
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consulate to find out whether youll
need to apply for a license in that
country. Every country will have its
own rules about when a visit turns
into something more permanent.
When can my drivers license
be suspended or revoked?
Driving a car is considered a privi-
legeand a state wont hesitate to
take it away if a driver behaves irre-
sponsibly on the road. A state may
temporarily suspend your driving
privileges for a number of reasons,
including:
driving under the influence of
alcohol or drugs
refusing to take a blood-alcohol test
driving without liability insurance
speeding
reckless driving
leaving the scene of an injury
accident
failing to pay a driving-related fine
failing to answer a traffic summons,
or
failing to file an accident report.
In addition, many states use a
point system to keep track of a
drivers moving violations: Each mov-
ing violation is assigned a certain
number of points. If a driver accumu-
lates too many points within a given
period of time, the department of mo-
tor vehicles suspends the license.
If you have too many serious prob-
lems as a driver, your state may take
away (revoke) your license altogether.
If this happens, youll have to wait a
certain period of time before you can
apply for another license. Your state
may deny your application if you have
a poor driving record or fail to pass
required tests.
Finally, a few states revoke or
refuse to renew the drivers licenses of
parents who owe back child support.
(See Chapter 16, Parents and Children,
for more information.)
My elderly friend is becoming
unsafe at the wheel. Will her
license be taken away?
The number of drivers over 65 years
old has more than doubled in the last
20 years. At present, there are 13 mil-
lion older drivers; by the year 2020
there will be 30 million. Studies show
that, as a group, older drivers drive
less than younger drivers, but they
have more accidents per mile.
Elderly, unsafe drivers who con-
tinue to drive despite the advice of
family and friends often do not come
to the attention of the state until the
inevitablethe driver is stopped for
erratic driving or, worse, is involved
in an accident. A few states try to
screen out unsafe older drivers by re-
quiring more frequent written tests.
But the added tests are expensive and
dont always identify unsafe driving
habits.
All licensing departments accept
information from police officers, fami-
lies and physicians about a drivers
abilities. If a licensing agency moves
to cancel someones license as the re-
sult of an officers observations, an
accident or the report of family mem-
bers or a doctor, the driver usually has
an opportunity to protest.
C A R S A N D D R I V I N G
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What will happen if Im caught
driving with a suspended or
revoked license?
Youll probably be arrested. Driving
with a suspended or revoked license is
usually considered a crime that carries
a heavy fine and possibly even jail
time. At worst, it may be a felony;
youll end up in state prison or with
an obligation to perform many hours
of community service. The penalties
will probably be heaviest if the sus-
pension or revocation was the result of
a conviction for driving under the
influence of alcohol or drugs (DUI).
The Whole Truth and
Nothing but the Truth
Many states will ask you specific ques-
tions regarding your health when you
renew your drivers license. For example,
you might receive a questionnaire that
asks you whether you have ever had
seizures, strokes, heart problems, dizzi-
ness, eyesight problems or other medical
troubles. If you have medical problems
and answer the questions truthfully, an
examiner may question you further and
may even deny you a license. If you
dont tell the truth, you may get your
licensebut youre setting yourself up for
big legal trouble if you are in an acci-
dent caused by one of these impairments.
Its not that different from driving a car
when you know the brakes are bad: If
you go out on the road with defective
equipment that you know about (includ-
ing the driver), you greatly increase the
chance that you will be held responsible
if the defect causes an accident.
If Youre
Stopped by
the Police
Most of us know the fear of being
pulled over by the police. An officer
may stop your car for any number of
reasons, including an equipment de-
fect (such as a burned-out headlight),
expired registration tags, a moving
violation or your cars resemblance to
a crime suspects car. You may also
have to stop if you encounter a police
roadblock or sobriety checkpoint.
What should I do if a police
officer pulls me over?
Remain as calm as possible, and pull
over to the side of the road as quickly
and safely as you can. Roll down your
window, but stay in the cardont
get out unless the officer directs you
to do so. Its a good idea to turn on
the interior light, turn off the engine,
put your keys on the dash and place
your hands on top of the steering
wheel. In short, make yourself visible
and do nothing that can be mistaken
for a dangerous move. For example,
dont reach for a purse or backpack or
open the glove box unless youve
asked the officers permission, even if
you are just looking for your license
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and registration
card. The officer
may think youre
reaching for a
weapon.
When the officer
approaches your win-
dow, you may want to
ask (with all the
politeness you
can muster)
why you were stopped. If you are at all
concerned that the person who
stopped you is not actually a police
officer (for example, if the car that
pulled you over is unmarked), you
should ask to see the officers photo
identification along with her badge. If
you still have doubts, you can ask that
the officer call a supervisor to the
scene or you can request that you be
allowed to follow the officer to a po-
lice station.
If an officer pulls me over for a
traffic violation, can she search
me or my car?
In most cases, no. Just because an
officer has a justifiable reason for
making a traffic stopand even if she
issues you a valid ticket for a traffic
violationthat does not automati-
cally give the officer authority to
search you or your car. If the officer
has a reasonable suspicion (based on
observable facts, and not just a
hunch) that you are armed and dan-
gerous or involved in criminal activ-
ity, then the officer can do a pat-
down search of you, and can search
the passenger compartment of your
car. The officer can also frisk any
purses, bags or other objects within
the car that might reasonably contain
a weapon. The officer does have the
authority, however, to ask you and
any passengers to exit the car during a
traffic stop.
If my car is towed and
impounded, can the police
search it?
Yes. If your car is impounded, the
police are allowed to conduct a thor-
ough search of it, including its trunk
and any closed containers that they
find inside. This is true even if your
car was towed after you parked it ille-
gally, or if the police recover your car
after it is stolen.
The police are required, however,
to follow fair and standardized proce-
dures when they search your car, and
may not stop you and impound your
car simply to perform a search.
I was pulled over at a roadblock
and asked to wait and answer
an officers questions. Is this
legal?
Yes, as long as the police use a neutral
policy when stopping cars (such as
stopping all cars or stopping every
third car) and minimize any inconve-
nience to you and the other drivers.
The police cant single out your car
unless they have good reason to be-
lieve that youve broken the law.
C A R S A N D D R I V I N G
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Drunk
Driving
If youre caught while driving drunk
or under the influence of drugs, youll
face serious legal penalties. Many
states will put you in jail, even for a
first offense, and almost all will im-
pose hefty fines. If youre convicted
more than once, you may also lose
your drivers license.
How drunk or high does
someone have to be before he
can be convicted of driving
under the influence?
In most states, its illegal to drive a
car while impaired by the effects of
alcohol or drugs (including prescrip-
tion drugs). This means that there
must be enough alcohol or drugs in
the drivers body to prevent him from
thinking clearly or driving safely.
Many people reach this level well
before theyd be considered drunk
or stoned.
How can the police find out
whether a driver is under the
influence?
Police typically use three methods of
determining whether a driver has had
too much to be driving:
Observation. A police officer will pull
you over if he notices that you are
driving erraticallyswerving,
speeding, failing to stop or even
driving too slowly. Of course, you
may have a good explanation for
your driving (tiredness, for ex-
ample), but an officer is unlikely to
buy your story if he smells alcohol
on your breath or notices slurred
words or unsteady movements.
Sobriety tests. If an officer suspects
that you are under the influence, he
will probably ask you to get out of
the car and perform a series of
balance and speech tests, such as
standing on one leg, walking a
straight line heel-to-toe or reciting a
line of letters or numbers. The
officer will look closely at your eyes,
checking for pupil enlargement or
constriction, which can be evidence
of intoxication. If you fail these
tests, the officer may arrest you or
ask you to take a chemical test.
Blood-alcohol level. The amount of
alcohol in your body is understood
by measuring the amount of alcohol
in your blood. This measurement
can be taken directly, by drawing a
sample of your blood, or it can be
calculated by applying a mathemati-
cal formula to the amount of alcohol
in your breath or urine. Some states
give you a choice of whether to take
a breath, blood or urine testothers
do not. If you test at or above the
level of intoxication for your state
(.08 to .10 percent blood-alcohol
concentration, depending on the
state), you are presumed to be
driving under the influence unless
you can convince a judge or jury
that your judgment was not im-
paired and you were not driving
dangerously. In many states, this
level is even lower for young drivers.
(In California, the level is .05% for
drivers under 21.) Defense attorneys
often question the validity of the
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conversion formula when drivers
alcohol levels are based on breath or
urine tests.
The New National
Drunk Driving
Standard
On October 23, 2000, President Clinton
signed a new law encouraging states to
pass laws that define drunk driving as
having a blood alcohol concentration
(BAC) of .08%. Many states currently set
the level for drunk driving at .10% BAC.
States have until October 1, 2003 to
change their laws to meet the federal
standard. Otherwise, theyll lose a
portion of their federal highway funds.
Do I have to take a blood,
breath or urine test if asked to
do so by the police?
No, but it may be in your best inter-
ests to take the test. Many states will
automatically suspend your license if
you refuse to take a chemical test.
And if your drunk driving case goes
to trial, the prosecutor can tell the
jury that you wouldnt take the test,
which may lead the jury members to
conclude that you refused because you
were, in fact, drunk or stoned.
Am I entitled to talk to an
attorney before I decide which
chemical test to take?
The answer depends on where you
live. In California, for example, you
dont have the right to speak with an
attorney first. But many other states
allow you to talk to your lawyer be-
fore you take a chemical test.
If I am pulled over, does the
officer have to read me my
rights before he asks me how
much I had to drink?
No. During a traffic stop, an officer
does not have to read you your rights
until you are under arrest. (See Chap-
ter 18 for a description of Miranda
rights.) Determining whether you are
under arrest can be trickyyou can
be under arrest even before a police
officer says you are. But if an officer is
just asking you questions at the side
of the road or even if you are detained
in the officers car for a few minutes,
you are probably not under arrest.
Keep in mind that you dont have to
answer an officers questions, whether
you are under arrest or notand
whether or not the officer has read
your rights to you. Of course, some-
times it is wise to do so, as long as
you dont say anything that can be
used against you.
When to Get a Lawyer
Defending against a charge of drunk
driving is tricky business. To fight this
charge, you need someone who under-
stands scientific and medical concepts,
and can question tough witnesses,
including scientists and police officers. If
you want to challenge your DUI charge,
youre well advised to hire an attorney
who specializes in these types of cases.
C A R S A N D D R I V I N G
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Traffic
Accidents
Anyone who drives or rides in a car
long enough is likely to be involved
in at least a minor fender-bender.
Anyone who rides a bicycle or motor-
cycle knows the roads are even more
dangerous for two-wheelers. And on
our crowded streets, pedestrians, too,
are often involved in accidents with
buses, cars and bikes. Knowing a few
laws of the road, and the best steps to
take when an accident occurs, can
help ease the pain of any accident that
occursand help make any insurance
claims process less painful, too.
What should I do if Im involved
in a traffic accident?
The most important thing to do is
document the entire situation by tak-
ing careful notes soon after the acci-
dent. Good notes (rather than relying
on your memory) will help with the
claim processand increase your
chances of receiving full compensation
for your injuries and damage to your
vehicle.
Write things down as soon as you
can: begin with what you were doing
and where you were going, the people
you were with, the time and the
weather. Include every detail of what
you saw, heard and felt. Be sure to
include everything that othersthose
involved in the accident or witnesses
said about the accident.
Finally, make daily notes of the
effects of your injuries. Always in-
clude pain, discomfort, anxiety, loss of
sleep or other problems which are not
as visible or serious as other injuries.
Reporting to the DMV
In many states, you must report a vehicle
accident resulting in physical injury or a
certain amount of property damage to
the state department of motor vehicles.
Check with your insurance agent or your
local department of motor vehicles to find
out the time limits for filing this report;
you often have just a few days. Be sure
to ask whether youll need any specific
form for the report.
If you must file a report, and the report
asks for a statement about how the acci-
dent occurred, give only a very brief
statementand admit no responsibility
for the accident. Similarly, if the official
form asks what your injuries are, list
every injury and not just the most serious
or obvious. An insurance company may
later gain access to the report, and if you
have admitted some fault in it, or failed
to mention an injury, you might run into
some trouble explaining yourself.
What determines who is
responsible for a traffic
accident?
Figuring out who is at fault in a traf-
fic accident is a matter of deciding
who was careless. Each state has a set
of traffic rules (which apply to auto-
mobiles, motorcycles, bicycles and
pedestrians) that tell people how they
are supposed to drive and provide
guidelines for measuring liability.
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Sometimes it is obvious that one
driver violated a traffic rule which
caused the accidentfor example, one
driver runs a stop sign and crashes
into another. In other situations,
whether or not there was a violation
will be less obvious. A common ex-
ample is a crash that occurs when
drivers merge into a single lane of
traffic. And at other times, neither
driver violated a traffic rule, although
one driver may still have been care-
less.
Finding Your States
Traffic Rules
The traffic rules are contained in each
states Vehicle Code. You can usually
obtain a simplified version of these
rulesoften called the Rules of the
Road”—from the department of motor
vehicles (DMV). Most DMV offices also
have the complete Vehicle Code. Or, you
can find the Vehicle Code in a public
library, law library or the Internet. (See
this books Appendix on Legal Research
for more information on how to find state
laws.)
What if the cause of the
accident is not clear?
It is sometimes difficult to say that
one particular act caused an accident.
This is especially true if what you
claim the other driver did is vague or
seems minor. But if you can show that
the other driver made several minor
driving errors or committed several
minor traffic violations, you can argue
that the combination of those actions
caused the accident.
Special Rules for
No-Fault Policyholders
Almost half the states have some form of
no-fault auto insurance, also called
Personal Injury Protection. (See
Insuring
Your Car
, above.)
In general, no-fault coverage eliminates
injury liability claims and lawsuits in
smaller accidents in exchange for direct
payment by the injured persons own
insurance company of medical bills and
lost wagesup to certain dollar
amountsregardless of who was at fault
for the accident. Usually, no-fault does
not cover vehicle damage; those claims
are still handled by filing a liability claim
against the one who is responsible for
the accident, or by looking to your own
collision insurance.
Who is liable if my car is rear-
ended in a crash?
The driver who hit you from behind is
almost always at fault, regardless of
your reason for stopping. Traffic rules
require that a driver travel at a speed
at which she can stop safely if a ve-
hicle ahead stops suddenly. In rear-
end accidents, the vehicle damage
provides strong proof of liability. If
the other cars front end and your cars
rear end are both damaged, there is no
doubt that you were struck from be-
hind.
C A R S A N D D R I V I N G
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In some situations, both you and
the car behind you are stopped when a
third car runs into the car behind you,
pushing it into the rear of your car. In
that case, the driver of the third car is
at fault and you should file a claim
against her insurance.
Are there any other clear
patterns of liability in traffic
accidents?
A car making a left turn is almost al-
ways liable to a car coming straight in
the other direction.
According to traf-
fic rules, a car making a left turn must
wait until it can safely complete the
turn before moving in front of oncom-
ing traffic.
There may be exceptions to
this rule if:
the car going straight was going too
fast (this is usually difficult to
prove)
the car going straight went through
a red light, or
the left-turning car began its turn
when it was safe but something
unexpected happened which made it
have to slow down or stop its turn.
Police Reports:
Powerful Evidence
If the police responded to the scene of
your accident, they probably made a
written accident report (particularly if
someone was injured).
Sometimes a police report will plainly
state that a driver violated a specific
Vehicle Code section and that the viola-
tion caused the accident. It may even
indicate that the officer issued a citation.
Other times, the report merely describes
or briefly mentions negligent driving.
Any mention in a police report of a
Vehicle Code violation or other evidence
of careless driving will provide support
for your claim that the other driver was at
fault.
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http://www.nolo.com
Nolo offers self-help information about a
wide variety of legal topics, including
what to do if youre in an accident.
http://www.kbb.com
Kelley Blue Book can give you the resale
and wholesale values of your vehicle, as
well as new car prices.
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http://www.edmunds.com
Edmunds offers information about buying
a new car, including reviews, comparisons,
prices and strategies.
http://www.bbb.org
The Better Business Bureau offers tips on
buying new and used cars, including fi-
nancing suggestions.
http://www.autopedia.com
Autopedia is an encyclopedia of automo-
tive-related information. In addition to
articles on many topics, it includes links to
each states lemon law.
http://www.consumerreports.org
Consumer Reports provides articles on how
to buy or lease a car and, for a small fee, a
price service for both new and used cars.
http://www.nhtsa.dot.gov
The National Highway Traffic Safety
Administration provides recall notices,
service bulletins, defect investigations,
consumer complaints and other data about
vehicle problems.
http://www.leaseguide.com
Automobile Leasing: The Art of the Deal
offers information about leasing a car,
including frequently asked questions, an
auto consumers lease kit and tips for get-
ting a good deal.
http://www.insure.com
The Insurance News Network provides
information about choosing auto insurance,
including an interactive experts forum.
http://www.dui.com
The Driver Performance Institutes provide
information about driving under the influ-
ence.
http://www.motorists.org
This national organization for motorists
offers lots of information on fighting traf-
fic tickets.
i
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11
Travel
11.2 Airlines
11.11 Rental Cars
11.16 Hotels and Other
Accommodations
11.21 Travel Agents
11.25 Travel Scams
Travel is the frivolous part of
serious lives, and the serious
part of frivolous ones.
MADAME SWETCHINE
Each year, Americans spend billions of dollars on traveling.
And though most of us fondly recall our annual vacationsthe
trip to Europe after graduating from college or our childrens faces
the first time they visited a Disney theme parkwe often share
with one another the horror stories: The plane that took off
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16 hours late, the rental company that
charged $1,000 for returning the car
with a slight scratch or the tour com-
pany that went out of business the
night before the trip. The questions
and answers in this chapter are de-
signed to help your travels go more
smoothlyand to let you know your
rights should you encounter troubles
along the way.
Airlines
The terrorist attacks on September
11, 2001, fundamentally changed
airline travel. If you havent flown
since the attacks, you might be sur-
prised to see armed national guard
troops in the gate area, security
guards inspecting passengers shoes
and food and people becoming irate
when they learn that they must leave
personal items, such as grandpas an-
tique pocket knife or Aunt Lucys
silver knitting needles, behind be-
cause they pose a security risk.
Although some changes are consis-
tent across airlines and airports be-
cause they are mandated by the fed-
eral Aviation Security Act
or by the Federal Aviation
Administration, other
changes will depend on a
number of factors, in-
cluding which airline
you are using, which
airports you will be
flying into and out of and whether
your flight is domestic or interna-
tional. Prudent travelers will do a
little homework to find out about
such things as permissible personal
items, necessary identification and
number and size of bags.
Of course, a lot of things havent
changed. Airlines still overbook
flights and bump passengers. Ticket
prices are still a confusing game of
luck. And baggage still gets lost
much too often.
What personal items can I no
longer bring with me in my
carry-on baggage?
According to the Federal Aviation
Administration, you cannot bring any
of the following items onto the plane
with youeither on your person or in
your carry-on baggage:
knives of any length, composition or
description (including steak knives
and plastic knives)
all cutting and puncturing instru-
ments, including pocketknives,
carpet knives, box cutters, ice picks,
straight razors, metal scissors and
metal nail files
T R A V E L
11.3
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corkscrews
athletic equipment that could be
used as a weapon, such as baseball/
softball bats, golf clubs, pool cues,
ski poles and hockey sticks
fireworks, such as signal flares,
sparklers or other explosives
flammable liquids or solids, such as
fuel, paints, lighter refills and
matches
certain dangerous household items,
such as drain cleaners and solvent
pressure containers, such as spray
cans, butane fuel, scuba tanks,
propane tanks, CO2 cartridges and
self-inflating rafts
weapons, such as firearms, ammuni-
tion, gunpowder, mace, tear gas or
pepper spray
dry ice, gasoline-powered tools, wet-
cell batteries, camping equipment
with fuel, radioactive materials
(except limited quantities), poisons
and infectious substances.
Some personal care itemssuch as
perfume and aerosol hairspraycon-
tain hazardous materials. You may
take those on board with you if they
total no more than 70 ounces. The
contents of each container cannot ex-
ceed 16 fluid ounces.
Although strike-anywhere
matches, lighters with flammable liq-
uid reservoirs and lighter fluid are
forbidden, you may carry ordinary
matches and lighters on your person.
You may carry dry ice for packing
perishables so long as it doesnt weigh
more than four pounds and so long as
the package is vented.
If you need to carry with you medi-
cally necessary items such as needles
and syringes, you should contact the
airline in advance to find out what
kind of documentation (such as a pre-
scription) you will need to get the
items through security.
The best thing you can do is a care-
ful appraisal of your items and put
into checked baggage anything that
looks remotely threateningor call
your airline to find out its position on
the item.
Can my family still accompany
me to the gate when I fly?
No. As of the printing of this book,
regulations from the Federal Aviation
Administration required that only
passengers with proof of travel be al-
lowed beyond security checkpoints
and into the gate area. If you would
like to accompany a minor or a passen-
ger who needs extra assistance, contact
your airline in advance to find out
what procedures you have to follow.
How do airlines calculate fares?
The price of most airfares is deter-
mined by complicated computer pro-
grams which calculate how many pas-
sengers are likely to book seats on any
given flight. But rather than fly with
empty seats, an airline might offer
discount fares. Ticket prices may also
be affected by competition with other
airlines that offer discounted prices.
The result is that passengers on the
same flight could be paying as many
as a dozen different fares.
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Benefits and Risks
of E-Tickets
E-tickets arent really tickets at all, but are
reservations for air travel that are kept in
the airlines computer system instead of
being printed on paper. Prior to the
September 11 terrorist attacks, all you
needed to travel on an e-ticket was a
photo ID and credit card. Although the
Federal Aviation Administration still
allows airlines to use e-tickets, youre
going to need more than just your
drivers license to get into the gate area
and onto the plane. The documentation
rules vary by airline, so check with your
carrier before going to the airport to
make sure you have what you need.
Most airlines require a photo ID, credit
card and e-ticket receipt or confirmation
email.
If you are booked on a single airline
and are flying in the United States, you
will most likely have little trouble using
your e-ticket. In fact, many find e-tickets
to be convenient, since theres no paper
ticket to keep track of or use.
E-tickets are not foolproof, however,
especially if you are traveling internation-
ally. Many countries require that you
show some sort of ticket to gain access to
a boarding area, and sometimes your e-
ticket receipt and itinerary is not enough.
In addition, some countries require that
you present a roundtrip ticket at the point
of entrythey want you to visit, but they
dont want you to stay. If you have an e-
ticket, you might have trouble convincing
officials that you have booked passage
out of their country. If you are traveling
internationally by e-ticket, carry your
itinerary and receipt with you.
On the domestic front, if your flight is
canceled, your airline must first print a
paper ticket before it can put you on
another airlines flight. This can be time
consuming. And, if your airline goes on
strike, other airlines that might honor a
paper ticket wont accept your e-ticket. If
you have an e-ticket and an airline strike
is imminent, exchange your e-ticket for a
paper ticket as soon as possible.
Whats all that fine print on the
back of my airline ticket?
The back of all standard airline tickets
has at least 11 paragraphs of fine print
under the heading Conditions of
Contract. In Paragraph 3 youll find
a statement that various applicable
tariffs and the Carriers Conditions
of Carriage and Related Regulations
are incorporated into the contract.
This means that each airline has filed
with the U.S. Department of Trans-
portation a series of statements about
its obligations to its passengers and
T R A V E L
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its limitations of liability. These tar-
iffs and conditions are the terms of
your contract with the airline.
The Conditions of Carriage cover
everything from the number of bags
you can check to the type of compen-
sation you receive if your flight is de-
layed or canceled. Boarding priority,
check-in requirements and most of
the other fine-print terms that de-
scribe an airlines rights and responsi-
bilities to its passengers are set forth
in the Conditions of Carriage.
Conditions of Carriage vary from
airline to airline. Although most air-
line tickets look identical, the subtle
differences in the hidden terms can
make a substantial difference in your
rights as a passenger. You can obtain
a summary of the hidden terms and
conditions of most major airlines con-
tracts by requesting a copy of United
States Air Carriers, Conditions of Con-
tract, Summary of Incorporated Terms
(Domestic Air Transportation) from the
Air Transport Association, Distribu-
tion Center, P.O. Box 511, Annapo-
lis, MD, 20701. Enclose a $65 check
payable to ATAA. You can also call
the ATAA at 800-497-3326.
Are there restrictions on
my airline ticket?
Before the substantial deregulation of
the airline industry in the 1980s, un-
used tickets were almost as good as
cashtickets could be cashed in,
traded and even used on other airlines.
This is still true for many full-fare,
unrestricted tickets.
Most tickets, however, carry some
sort of restrictions. Today, tickets
usually have any or all of the follow-
ing features:
Nontransferable. A nontransferable
ticket can be used only by the
passenger whose name appears on
the face of the ticket. If the names
on the ID and the ticket do not
match, the airline can confiscate the
ticket. If a ticket is nontransferable
but refundable, however, you may
be able to cash in the old ticket and
buy a new one with the new
passengers name.
Nonrefundable. A nonrefundable
ticket means you cannot get your
money back if you decide not to
travel. But each airline has
exceptions. If you cannot make a
flight for which you have a nonre-
fundable ticket, you may be able to
apply the ticket toward a future
flight or exchange it for credit
toward future travel. If the fare has
dropped on a flight for which you
have a nonrefundable ticket, you
may be able to get re-ticketed. In
either situation, you will probably
have to pay a fee to make the
change.
Penalties. Often, there are penalties
for canceling or making changes.
Do airlines offer discounted
tickets or let you change a ticket
if you need to travel because of
death or serious illness?
In certain exceptional cases, the air-
lines will allow nonrefundable tickets
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to be refunded if you need to cancel
because of the illness or death of your
traveling companion or a close rela-
tive. Similarly, an airline may offer a
discounted fare (sometimes minor,
sometimes generous) when a close
relative becomes seriously ill or dies
and you need to travel without any
advanced planning. Who must be ill
or have died for you to obtain a be-
reavement fare varies among airlines
for example, some airlines will give
a discounted fare to attend the funeral
of a parent, child, sibling, spouse or
in-laws only, while other airlines in-
clude nonmarital partners and their
immediate family members.
What should I do if I lose
my ticket?
Contact the airline immediately. You
will be required to fill out a lost-
ticket application. The airline will
either issue a replacement ticket (after
you sign an agreement to reimburse it
for the cost of the replacement ticket
if someone uses your lost ticket) or
force you to purchase a replacement
ticket at the currently available fare
(often outrageously expensive because
you dont get any advance purchase
discounts). In addition, you usually
have to pay some sort of service charge
or penalty for issuing a replacement
ticket.
After waiting three months to a
year, the airline will issue you a re-
fund for the price of your replacement
ticket if your lost ticket was not used
during that time.
Am I entitled to be compensated
if the airline overbooks and I get
bumped off the flight?
If a flight is overbooked, the airline is
required to ask passengers to
volunteer to take a later flight. Nor-
mally, the airline will offer some kind
of incentive such as a free domestic or
international round-trip ticket. If an
insufficient number of passengers
volunteer to be bumped from a flight,
the airline must begin involuntary
bumping. Generally, passengers with
the most recent reservations or those
who checked in the latest are the first
to be bumped.
If you are bumped, you are entitled
to compensation if you have a con-
firmed reservation (your ticket has an
ok or hk in the Status column)
and the scheduled plane has a seating
capacity of more than 60 passengers.
Even if you meet both of these re-
quirements, the airline might refuse
to compensate you if any of the fol-
lowing is true:
You did not comply with the
airlines ticketing, check-in and
reconfirmation requirements.
You are not acceptable for transpor-
tation under the airlines usual rules
and practicesfor example, you are
drunk.
The entire flight was canceled.
A smaller aircraft was substituted
for safety or operational reasons.
You refuse an offer to take a seat in
a different section (class) of the
aircraft at no extra charge.
T R A V E L
11.7
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The airline offers to place you on
another flight or flights scheduled
to reach your final destination
within one hour of the scheduled
arrival of the original flight.
Am I entitled to compensation if
my flight is delayed, diverted or
canceled?
A flight is considered on-time if it
arrives at its destination within 15
minutes of the scheduled arrival time.
Generally, a 15-minute delay will not
affect your schedule very much.
Longer delays can have serious conse-
quences, particularly if you cannot
make a connecting flight.
If your trip is delayed because of
overbooking, the rules discussed in
the previous question apply. If the
delay is caused by any other reason,
your rights depend on whether its a
domestic or international flight.
Domestic flights. Generally, airlines
are not obliged to provide any com-
pensation if the delay, diversion or
cancellation was caused by factors out-
side of the airlines control, such as
bad weather or air traffic congestion
at a particular airport. On the other
hand, airlines are required to compen-
sate you for problems deemed in their
control, such as mechanical difficul-
ties or late-arriving crew members.
The offered compensation can vary
substantially among airlinesfull-
service airlines are likely to offer more
generous terms, such as meals, hotels,
alternate transportation or even emer-
gency toiletries in the event of an
overnight delay, while budget or no-
frills airlines may offer little, if any,
compensation.
International flights. Recovering
damages for an international flight
delay is very difficult if the delay was
caused by anything other than the
airlines overbooking. Under an inter-
national treaty called the Warsaw
Convention, an airline can escape
liability for damages caused by flight
delay if it can show that it took all
necessary measures to avoid the dam-
age or that it was impossible to take
such measures.
If your international flight is
delayed, you may be able to persuade
the airline that it should cover direct
costs caused by the delay, such as
meal, hotel or telephone expenses. To
back up your argument, you can
quote Article 19 of the Warsaw Con-
vention which states: The Carrier
shall be liable for damages occasioned
by delay in the transportation by air
of passengers, baggage or goods.
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Compensation for Involuntarily Bumping
(Flights Within or Leaving U.S.)
Scheduled Arrival Domestic International Flights
of New Flight Flights (Departing From the U.S.)
New flight scheduled No compensation No compensation
to arrive less than one hour
after original flight
New flight scheduled to arrive Value of ticket segment, Value of ticket segment,
between one and two hours $200 maximum $200 maximum
after original flight
New flight scheduled to arrive Twice the value N/A
more than two hours after of ticket segment,
original flight (domestic only) $400 maximum
New flight scheduled to arrive N/A Twice the value of ticket
more than four hours after segment, $400 maximum
original flight (international only)
m
Compensation for Involuntarily Bumping
(Flight Departing European Union Country)
Scheduled Duration or
Distance of Original Flight Arrival at Destination Compensation
Less than two hours or Within two hours of 75 ECUs
3,500 kilometers originally scheduled arrival (approximately $50)
Less than two hours or More than two hours late 150 ECUs
3,500 kilometers (approximately $100)
Over two hours or Within two hours of 150 ECUs
over 3,500 kilometers originally scheduled arrival (approximately $100)
Over two hours or More than two hours late 300 ECUs
over 3,500 kilometers (approximately $200)
T R A V E L
11.9
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Am I entitled to compensation if
my baggage is lost or damaged?
The airlines treatment of baggage is a
constant source of passenger com-
plaints. At some point, nearly every
airline passenger has waited for what
seemed like an eternity for his or her
baggage to show up on the baggage
carousel. Many passengers can identify
with the old suitcase commercial
which showed a gorilla jumping up
and down on the passengers bags and
throwing the passengers suitcase
around a room.
To be fair, most of the time bag-
gage does arrive, in good shape, on
the same flight you were on. When
your luggage is damaged, delayed or
lost, however, the results can be disas-
trous. The best way to protect yourself
from the most serious losses is to fol-
low one simple rule: Never put any-
thing valuable or irreplaceable (such
as jewelry), or that you might ur-
gently need (such as medications), in
checked baggage. Your compensation
will rarely cover your actual loss.
Domestic flights. An airline can limit
the amount it must pay if baggage is
lost, damaged or delayed to $1,250
per passenger. You can get around
this limit by declaring at check-in a
higher value for the baggage, up to
the airlines maximum, which is
likely to be between $2,500 and
$5,000. If you declare a higher value,
the airline will charge you a fee based
on a percentage of the declared value.
The airline then becomes liable up to
the declared value if it loses, damages
or delays delivery of the baggage, un-
less the airline can prove that the ac-
tual loss was lower than the declared
value.
International flights. The Warsaw
Convention provides the rules under
which liability for lost, delayed or
damaged baggage is determined;
these rules will not work to your ad-
vantage. Damages are calculated based
on the weight of the baggage, regard-
less of the real value of the baggage or
its contents. The Warsaw Convention
states that the value for lost or dam-
aged baggage is $9.07 per pound (or
$20 per kilogram).
If your bag was weighed before the
flight, then the value is determined
by multiplying the weight of the bag
times $9.07. For example, a 20-pound
bag would be valued at $181.40. If
your bags were not weighed, the air-
line will generally assume that all of
your bags weighed a total of 70
pounds, and will reimburse you
$634.90.
To add insult to injury, an airline
can completely avoid responsibility
for lost or damaged baggage if it can
prove that the damage was occa-
sioned by error in piloting, in the
handling of the aircraft or in naviga-
tion and that, in all other respects,
the airline and its agents have taken
all necessary measures to avoid the
damage. It is difficult to understand
why an airline should not be liable for
your lost or damaged baggage if one
of its pilots mishandles the airplane.
On the other hand, if a pilot seriously
mishandles the plane, your baggage
may be the least of your concerns.
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Are there any legal protections
for the credits I earn in a
frequent flyer program?
While frequent flyer programs can
provide you with some travel bar-
gains, understand that there are few
legal protections for the credits you
earn. Under the rules of almost all
frequent flyer programs, the airline
can change award levels, have credits
expire or even cancel the whole pro-
gram without warning.
Does it pay to belong to
more than one frequent flyer
program?
Some travelers will pay more for their
tickets if they receive frequent flyer
credit or will take an indirect or in-
convenient flight on an airline in or-
der to get frequent flyer credit. One
way to avoid this frequent flyer trap is
to join more than one program.
Although you can get travel awards
faster by concentrating your travel on
one airline, you may get better fares
and connections if you dont restrict
yourself in that way. When you com-
pare tickets, keep in mind that fre-
quent flyer miles are worth approxi-
mately 2¢ per mile; use that figure to
help calculate which option is best.
The 2¢ per mile estimate was calcu-
lated by dividing the average cost of a
domestic round trip ticket (approxi-
mately $500) by the number of fre-
quent flyer miles needed for such a
ticket (25,000 miles).
Can I trade or sell my frequent
flyer awards?
You can use your frequent flyer
awards or give them to anyone you
choose, but you cannot sell or trade
them. Despite this clear limitation,
frequent flyer awards are often bar-
tered. Many of the deeply discounted
tickets advertised in newspapers are
actually tickets obtained by agents
using purchased frequent flyer awards.
Because airlines require you to present
a photo ID when you check in and are
traveling on a ticket obtained through
a frequent flyer program, it is difficult
to use these purchased coupons.
I have a ticket on an airline that
seems headed for bankruptcy.
What can I do?
When an airline goes bankrupt, you
technically become one of the airlines
creditors in bankruptcy. If you file a
claim in the bankruptcy court, there
is a chance you will recover some very
small percentage of the value of the
ticket, but more likely you will re-
cover nothing at all.
In the past, most airlines would
honor a bankrupt airlines ticket and
allow you on a substitute flight. But
these days, given the competitive na-
ture of the airline industry, this is
rarely done. Sometimes, as a gesture
of good will (and a way of luring new
customers), an airline will offer a spe-
cial discounted fare for passengers
holding tickets on a bankrupt airline.
If you have a ticket on a bankrupt air-
line and are a frequent flyer on an-
other airline, try to negotiate free or
T R A V E L
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discounted travel using the bankrupt
airlines ticket. Trip cancellation or
trip interruption insurance can some-
times cover the cost of a replacement
ticket.
If you have an e-ticket, run fast to
the nearest ticket counter for your air-
line and exchange it for a paper ticket.
Any airline nice enough to accept pas-
sengers from a bankrupt airline will
accept only those passengers with pa-
per tickets.
Rental Cars
A TOURIST IS A FELLOW WHO TRAVELS
THOUSANDS OF MILES SO HE CAN BE
PHOTOGRAPHED STANDING IN FRONT
OF HIS CAR.
EMILE GANEST
Whether on business or vacation, you
may need to rent a car for at least part
of your trip. This section outlines
some of your basic rights as a renter.
Most laws related to rental cars were
enacted by state legislatures or de-
rived from cases interpreting those
state laws.
Do I have any recourse if the
rental car company doesnt
provide me with the type of car I
reserved?
If you have guaranteed payment and
the company does not have the car
you reserved available for you, the
company must do everything it can to
find you a different car from its fleet.
Theoretically, the company must find
you a car from another rental car com-
pany if it has no suitable substitute,
but in practice this rarely happens. If
the alternate car found for you is more
expensive, you should not have to pay
the difference.
If you havent put down a deposit
or guarantee, the company is still re-
quired to have a car available. But
rental car companies often overbook
to cover no-shows, which means that
the class of car you reserved wont be
available. The rental car company will
usually provide you with a larger,
more expensive car and tell you it is
giving you a free upgrade. Most
renters are happy to accept the up-
grade to a larger, more expensive car.
If you accept a smaller, cheaper car
than the one you reserved, the rental
company is obliged to charge you the
lower rate. If you refuse to accept a
substitute car, you will probably have
difficulty getting compensation after-
wardyou had a duty to reduce your
damages by accepting a car that was a
reasonable substitute for the car you
reserved.
What if the company fails to
provide any car at all?
A companys overbooking may mean
that no cars are available when you
arrive. Your only real alternatives may
be to find a substitute rental car at a
different company or to take a taxi
and seek reimbursement from the
original car rental company. In addi-
tion, the rental car company may offer
you future discounts.
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My son was told he couldnt
rent a car because hes only 20.
Is that legal?
Yes. Most major companies refuse to
rent a car to someone who is under
21, or in some cases 25, unless that
person is an employee using a corpo-
rate account or is military personnel
traveling on orders. Companies that
do rent to people as young as 21 usu-
ally charge an additional fee for driv-
ers between 21 and 24.
This discrimination is not illegal.
Rental car companies can do business
with whomever they choose, as long
as they do not discriminate based on
race, religion, national origin, sex or
other categories protected under civil
rights laws.
Do I need a credit card to rent a
car?
Most rental car companies require a
major credit card as a way to secure a
deposit from you at the time of rental,
although you can use the card or cash
when you actually pay for the car. The
company will check your credit limit
and freeze an amount slightly
greater than your estimated rental
charges against your card, meaning
that this amount is not available for
you to charge. This freeze can last for
several days after you return the car,
even once the actual amount is
charged or you pay with cash.
If you dont have a credit card, you
can get a prepaid voucher through
your travel agent by paying for the
rental car first at the travel agency and
bringing the voucher to the rental
counter. The voucher may not cover
taxes, surcharges, additional drivers,
upgrades and other charges, so be sure
to find out exactly what is included
with the voucher before you pick up
the car. Many companies require you
to present a credit card or provide
some other form of deposit even if you
are using a voucher, so call ahead to
find out.
Can a rental car company
charge a penalty if I dont show
up or if I cancel my reservation?
Nearly all rental car companies charge
penalties for four-wheel drives,
minivans, convertibles and other spe-
cialty rentals if you fail to cancel a
reservation in advance or are a no-
show. Some companies are testing
similar policies on their standard
rental cars.
Can a rental car company
screen me based on my driving
record?
Yes, and many companies now screen
drivers when they rent in vacation-
popular destinations such as Arizona,
California, Florida, Nevada, New
York, Virginia and Washington, DC.
Sales agents conduct screening checks
by entering your license number into
a computer program that calls up your
drivers record as reported by your
state department of motor vehicles. If
your record doesnt meet the screen-
ing criteria of the rental company, the
agent will refuse to rent you a car.
Instead of screening you, some
rental car companies may require you
T R A V E L
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to sign a statement that you have an
acceptable driving record. This shifts
the responsibility for providing accu-
rate information away from the com-
pany and to you. If you have an acci-
dent and signed a statement that
turns out to be incorrect, the rental
car company could use it against you
by claiming that you acted in viola-
tion of the rental agreement.
Screening Standards
Generally, a rental car company that
screens drivers will deny you a vehicle if,
during the past 36-month period, you:
were caught driving with a suspended
or invalid license
had one instance of drunk driving, hit-
and-run, driving a stolen car or other
serious offense
had three moving violations, or
were at fault in two accidents.
The standards adopted by each rental
car company vary and are subject to
change, so you need to inquire about the
specific rental screening standards of any
company you are considering using.
If your driving record is questionable,
do the following:
Call your motor vehicle department to
see if your state makes driver records
available. If it doesnt, then relax and
dont worry about being screened.
If your state makes driver records
available, when you call to reserve a
rental car, ask if the company screens
driving records and whether it
maintains a nationwide blacklist.
Get your driver record evaluated by a
screening company. Several compa-
nies evaluate driving records to
determine in advance whether drivers
will be disqualified from renting. TML
Information Services, the leading
evaluator of vehicle records for rental
car companies, operates a program
for drivers from states that make driver
record data available online. For
around $11 (less for AAA members),
you can get an evaluation of your
driving record against the criteria for
screening risky drivers used by six
major rental car companies. You can
reach TML on the Web at http://
web2.tml.com or by phone at 800-
743-7891.
If you dont want to pay for an
evaluation, get a copy of your driving
record from the motor vehicle agency
in your state (allow plenty of time),
obtain the screening criteria of the
rental car companies you are
considering and make an evaluation
on your own.
If you are traveling for business, rent
from a company that has a liability
agreement with your employerthe
screening company may overlook
items that would otherwise disqualify
you.
Finally, if you are disqualified by a
screening system, have someone you are
traveling with rent the car and do the
driving.
How do rental car companies
establish rental rates?
Car rental fees are set by each com-
pany and vary depending on the loca-
tion of the rental office, time period
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the car will be rented, season, car
model, special promotions or vacation
packages, and your eligibility for dis-
counts. In addition, because many
rental car companies have franchises,
the rates and policies of the central
office may vary substantially from
those of a local office. There is noth-
ing illegal about these multiple
prices, and there is nothing to stop
you from asking about special fares
when you rent or for a reduction
after the rental if
you learn that a
better rate was
available but
was not offered
to you. Al-
though the
company is
not obligated
to offer you
the lower price, it
may do so to maintain
good customer relations.
Can the rental car
company tack on
other fees?
Yes, but the company
must tell you about the
fees before you rent. Here are the
most common fees youre likely to
encounter:
Mileage charges. While many compa-
nies offer unlimited mileage,
mileage charge policies change
frequently, and you should ask each
time you rent.
Fees for renting at an airport. Renting
at an airport may be more expensive
than renting at an urban or subur-
ban location because airports and
local governments often add sur-
charges and taxes to rental car rates.
Additional driver fees. Most rental car
companies charge extra for anyone
who drives the car other than the
person who signs the rental agree-
ment. Often, additional driver
charges are waived for your spouse,
immediate family member or busi-
ness associate.
Young driver fees. As
indicated above, many
rental car companies
add a daily surcharge for
any driver aged 21 to 24.
Child safety seat fees. All
states require
children under a
certain age to be
placed in child
car seats. If you
dont bring your
own seat, you
will be required
to rent one,
usually at a cost of $3-$5
per day or $25 per week. You may
be charged more for one-way rent-
als, and you may be required to
make an extra deposit for the seat if
you are paying cash for the car
rental.
Vehicle drop-off fees. Many rental car
companies charge high rates for
dropping off a car at a location other
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