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

Table of Contents

About This Book

Houses

1.2 Buying a House

1.9 Selling Your House

1.15 Deeds

Neighbors

2.2 Boundaries

2.3 Fences

2.4 Trees

2.6 Views

2.8 Noise

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

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

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

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

Copyrights

7.2 Copyright Basics

7.4 Copyright Ownership

7.6 Copyright Protection

7.10 Copyright Registration

and Enforcement

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

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

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

Travel

11.2 Airlines

11.11 Rental Cars

11.16 Hotels and Other

Accommodations

11.21 Travel Agents

11.25 Travel Scams

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

Healthcare

Directives and

Powers of Attorney

13.2 Healthcare Directives

13.7 Durable Powers of

Attorney for Finances

13.11 Conservatorships

Older Americans

14.2 Social Security

14.8 Medicare

14.12 Pensions

14.19 Retirement Plans

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

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

Courts and

Mediation

17.2 Representing Yourself

in Court

17.13 Small Claims Court

17.21 Mediation

17.27 Dealing With Your

Lawyer

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

eeef

•

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.

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

1. 2

Buying

a House

Before you look for a house, it’s essen-

tial to determine how much you can

afford to pay and what your financing

options are. You’ll also need to decide

whether you want to work with a real

estate agent or broker, and finally,

even if you think you’ve found your

dream home, you’ll need to master the

ins and outs of house inspections. This

section will help you find your way

through the house-buying maze—and

to your new front door.

I’m 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-

owner’s 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 you’ve 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 you’ll be able to borrow and

how much you’ll need for a down pay-

ment and closing costs.

Unless you’re in a very slow mar-

ket, with lots more sellers than buy-

ers, you will want to do more than

prequalify for a loan—you 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 loan—rather 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

1. 3

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 you’ve 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 lender’s risk.

To avoid problems, always check

your credit report and clean up your

file if necessary—before, 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

don’t offer loans (called “no-loan”

sites) and those that do. No-loan sites

don’t 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 you’ll get cur-

rent rates, APR, points, even settle-

ment costs for each loan from dozens

of lenders. If you choose to complete

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

1. 4

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 don’t 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, don’t forget private sources

of mortgage money—parents, 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.

What’s 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

1. 5

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

you’re 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 can’t 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.

What’s 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. Don’t 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 seller’s 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

you’ve agreed to pay her separately,

she won’t 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, it’s 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.

What’s 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,

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

1. 6

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 it’s a listing

by a FSBO—For 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

don’t 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

H O U S E S

1. 7

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 you’ve 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 builder—some-

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 you’re 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 club—the 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-

tions—from 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 they’re compatible with your

lifestyle. If you don’t understand

something, ask for more information

and seek legal advice if necessary.

Usually, getting relief from overly

restrictive CC&Rs after you move in

isn’t easy. You’ll 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, you’ll prob-

ably need formal permission from the

association in addition to complying

with city zoning rules.

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1. 8

How can I make sure that the

house I’m 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 building’s 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 you’re get-

ting what you paid for. If an inspector

discovers problems—such as an anti-

quated plumbing system or a major

termite infestation—you 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

I’m making an offer to buy a

house, but I don’t want to lock

myself into a deal that might not

work out. How can I protect

myself?

Real estate offers almost always contain

contingencies—events 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.

H O U S E S

1. 9

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:

Buy a fixer-upper cheap.

Buy a small house (with remodeling

potential) and add on later.

Buy a house at an estate or probate sale.

Buy a house subject to foreclosure (when

a homeowner defaults on his mortgage).

Buy a shared-equity house, pooling

resources with someone other than a

spouse or partner.

Rent out a room or two in the house.

Buy a duplex, triplex or house with an

in-law unit.

Lease a house you can’t afford now with

an option to buy later.

Buy a limited-equity house built by a

nonprofit organization.

Buy a house at an auction.

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 Consumer’s

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 you’re 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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1. 10

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 there’s a large pool

of buyers—causing prices to go up.

This may occur in the following situa-

tions:

• Your area is considered especially

attractive—for 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.

• There’s a jump in house buying

activity, as often occurs in spring.

Of course, if you have to sell imme-

diately—because of financial reasons,

a divorce, a job move or an imperative

health concern—and you don’t 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 details—from 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 there’s

more competition for homes, or when

you’re 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 you’re 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 yourself—such as showing the

house—and using a real estate broker’s

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

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%

broker’s 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

market—called “appraising” a house’s

value. The most important factors

used to determine a house’s 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 house’s value. Public record of-

fices, such as the county clerk or

recorder’s 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 Recorder’s 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 good—hide 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. Don’t

overlook small but obvious problems,

such as a leaking faucet or loose door-

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

1. 12

knob. Find ways to improve the look of

your house without spending much

money—a 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:

• price—you want more money

• financing—you want a larger down

payment

• occupancy—you need more time to

move out

• buyer’s sale of current house—you

don’t want to wait for this to occur

• inspections—you 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 other’s 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 it’s

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

1. 13

estate brokers are increasingly requir-

ing that sellers complete disclosure

forms, regardless of whether it’s

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 suffered—for 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 like—for

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 don’t duplicate coverage.

You don’t need a warranty for the

heating system, for example, if your

furnace is just six months old and still

covered by the manufacturer’s 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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1. 14

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.

I’m 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 haven’t 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 you’re an unmarried

taxpayer who’s 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.)

That’s 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 you’re claiming the

exclusion, you must file Form 2119

with your tax return.

H O U S E S

1. 15

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-

erty—those little color-coded cards—

was all-important? Real-life deeds

aren’t nearly so colorful, but they’re

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 can’t transfer real

estate without having something in

writing. In some situations, a docu-

ment other than a deed is used—for

example, in a divorce, a court order

may transfer real estate from the

couple to just one of them.

I’m confused by all the different

kinds of deeds—quitclaim deed,

grant deed, warranty deed.

Does it matter which kind of

deed I use?

Probably not. Usually, what’s most

important is the substance of the

deed: the description of the property

being transferred and the names of the

old and new owners. Here’s 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 couple’s real

estate to the other. This can be espe-

cially useful if it isn’t clear how much

of an interest, if any, one spouse has in

property that’s held in another

spouse’s name.

A grant deed transfers your owner-

ship and implies certain promises—

that the title hasn’t 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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1. 16

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; it’s usually called the

County Recorder’s Office, Land Reg-

istry Office or Register of Deeds. In

most counties, you’ll 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 county’s filing system.

There will be a small fee, probably

about $5 a page, for recording.

What’s a trust deed?

A trust deed (also called a deed of

trust) isn’t like the other types of

deeds; it’s not used to transfer prop-

erty. It’s 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.

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

1. 17

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. It’s especially

useful if you’re deciding where to live

based on home prices, schools, crime, sala-

ries and other factors.

http://www.homeadvisor.com

Microsoft’s Home Advisor helps with all

aspects of buying or selling a home–from

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 nation’s 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.

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

1. 18

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 houses—including pur-

chase price, sales date, address, number of

bedrooms and baths, square footage and

property tax information.

abb

•

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, neighbors—who may not know each other well,

if at all—are 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.

eeef

•

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2.2

Boundaries

Most of us don’t 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 don’t want

to pay a surveyor. Can’t 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 Recorder’s 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 minor—for instance, a small

fence in the wrong place—you may

think you shouldn’t worry. But you’re

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 don’t act promptly,

you could lose part of your property.

When one person uses another’s 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 neighbor’s 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 doesn’t

stop, waste no time in having a lawyer

get a judge’s 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

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 don’t 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 fences—fences of bushes or

trees—if they meet the ordinance’s

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 nothing’s 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 doesn’t

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-

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

2.4

cumstances is a phone call to the plan-

ning or zoning department or the city

attorney’s office. The neighbor will be

ordered to conform; if she doesn’t, the

city can fine her and even sue.

My neighbor’s fence is hideous.

Can I do anything about it?

As long as a fence doesn’t pose a threat

of harm to neighbors or those passing

by, it probably doesn’t violate any law

just because it’s ugly. Occasionally,

however, a town or subdivision allows

only certain types of new fences—such

as board fences—in an attempt to

create a harmonious architectural

look. Some towns also prohibit certain

materials—for 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-

ness—it’s high, ugly and has no rea-

sonable use to the owner—it 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 neighbor’s 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 other’s 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, it’s 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 you’re taking

the initiative to fix a fence that’s al-

ready an eyesore and might deterio-

rate into a real danger.

Trees

WOODMAN, SPARE THAT TREE.

OUCH NOT A SINGLE BOUGH:

IN YOUTH IT SHELTERED ME,

ND I’LL PROTECT IT NOW.

—GEORGE POPE MORRIS

N E I G H B O R S

2.5

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

neighbor’s 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 neighbor’s

property or destroy the tree itself.

Deliberately Harming

a Tree

In almost every state, a person who

intentionally injures someone else’s 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 neighbor’s 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

that’s 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

tree’s owner money to compensate for

the harm done. You can sue to enforce

that right—but you probably won’t

have to, once you tell your neighbor

what the law is.

My neighbor’s tree looks like it’s

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 you’re 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 tree—on 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

city’s laws and policies, call the city

attorney’s office.

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

2.6

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 don’t 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. You’ll 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 one’s 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 neighbor’s 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

another’s 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 don’t 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

2.7

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 doesn’t 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 prohibited—for 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 can’t 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 won’t help, you

can take the neighbor to court your-

self, but be prepared for a lengthy and

expensive experience.

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

2.8

I want to buy a house with a

great view. Is there anything I

can do to make sure I won’t ever

lose the view—and 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 you—one 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

2.9

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 town’s noise ordinance

says, ask at the public library or the

city attorney’s 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,

you’ll 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 doesn’t 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. Isn’t

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. It’s the landlord’s job to

enforce both sides of this bargain.

If the neighbor’s 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.

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

2.10

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 neighbor’s dog barks all the

time, and it’s 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

you’re losing patience (or sleep) over a

neighbor’s noisy dog:

1. Ask your neighbor to keep the dog

quiet. Sometimes owners are blissfully

unaware that there’s a problem. If the

dog barks for hours every day—but

only when it’s left alone—the owner

may not know that you’re 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 won’t 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 clerk’s office

• the local district attorney’s 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 there’s 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

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 aren’t too interested in barking

dog problems. And summoning a

police cruiser to a neighbor’s 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.

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.

http://www.nolo.com

Nolo offers self-help information about a

wide variety of legal topics, including

neighbor law.

abb

•

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•

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

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

3. 2

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

It’s important to carefully read—and

fully understand—the 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 landlord’s 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.

What’s 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

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 term—most often

for six months or a year, but some-

times longer—as 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

landlord’s 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 day’s 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 possible—no matter what the

tenant’s reason for leaving—rather

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 law—for 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 act—for 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

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

3. 4

tenant doesn’t 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.

What’s 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 driver’s 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-

ior—such as damaging property—that

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

safety—can 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 didn’t 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 American’s 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

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 person’s marital status or sexual

orientation. And some cities and

counties have added other criteria,

such as one’s 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 HUD’s 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

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

3. 6

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 can’t 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 state’s 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

used—for example, to cover unpaid

rent—and 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 hasn’t 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

state’s 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

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 tenancy—for example, if the

tenant doesn’t 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 manager’s

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 rent—the 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 out—either voluntarily or by

eviction.

Landlords may normally make cer-

tain deductions from a tenant’s 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 amount—plus 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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3. 8

Tenants’

Privacy Rights

In most states, the tenant’s duty to

pay rent is conditioned on the

landlord’s 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 tenant’s 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 state’s landlord-

tenant statutes, listed at the end of

this chapter.

Is it legal for a landlord to

answer questions about a

tenant’s 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 tenant’s 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

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,

it’s no longer legal to be a slumlord.

Landlords must repair and maintain

their rental property or face financial

losses and legal problems from ten-

ants—who may withhold rent and

pursue other legal remedies—and

from government agencies that en-

force housing codes.

What are the landlord’s 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 state’s 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 tenant’s rights if the

landlord refuses to maintain the

property?

If a landlord doesn’t 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 month’s

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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3. 10

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-

ant—or others—for 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 landlord’s 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 landlord’s failure—his negli-

gence—caused the tenant’s 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 landlord’s responsibility

to maintain the steps (this would

usually be the case, because the

steps are part of the common area,

which is the landlord’s 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

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.

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. Here’s 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 problems—whether in the

tenant’s 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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3. 12

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? Yes—if it’s 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 landlord’s 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 tenants—both in individual

rental units and common areas such

as parking garages and elevators.

Local police departments, the

landlord’s 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

• 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 dealers—be 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

tenant’s 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).

• Don’t 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.

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

3. 14

• 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 manager—the person who

interacts with all tenants and has access

to master keys. Landlords should

scrupulously check a manager’s

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 didn’t cause—or even

know about—the danger.

What are a landlord’s 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

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.

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.

Landlord’s

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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3. 16

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 OSHA’s

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 problems—such 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

City’s 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

landlord’s 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 lawyer’s

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-

L A N D L O R D S A N D T E N A N T S

3.17

tory eviction and invasion of privacy

suffered by tenants and guests.

• Carry liability insurance on all

vehicles used for business purposes,

including the manager’s car or truck

if he or she will use it on the job.

• Make sure your policy is “occurence

based,” not “claims based.” Here’s

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 ended—which 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 renter’s insurance

cover?

The average renter’s 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 tenant’s 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

renter’s policies include personal li-

ability coverage ($100,000 is a typical

amount) for injuries or damage caused

by the tenant—for example, if a

tenant’s garden hose floods the

neighbor’s cactus garden, or a tenant’s

guest is injured on the rental property

due to the tenant’s negligence.

Renter’s insurance is a package of

several types of insurance designed to

cover tenants for more than one risk.

Each insurance company’s package

will be slightly different—types 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. There’s lots

of information on the Web—type

“renters’ insurance” into your favorite

search engine to learn more.

Resolving

Disputes

Legal disputes—actual and poten-

tial—come in all shapes and sizes for

landlords and tenants. Whether it’s 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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3. 18

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

there’s a problem—for example, a

disagreement about the landlord’s

right to enter a tenant’s apart-

ment—see 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.

We’ve talked about the problem

and still don’t agree. What

should we do next?

If you can’t 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.

More Information About

Mediation

For information on local mediation

programs, call your mayor’s or city

manager’s 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 doesn’t work, is

there a last step before going to

a lawyer?

If you decide not to mediate your

dispute, or mediation fails, it’s 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.

L A N D L O R D S A N D T E N A N T S

3.19

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

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

3. 20

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

3.21

More Information About

Landlord-Tenant Law

From the landlord’s point of view:

Every Landlord’s 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 tenant’s point of view:

Every Tenant’s 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:

Everybody’s 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 you’re 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

book’s white pages for names of these

organizations.

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

3.22

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.

abb

•

eeef

•

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 you’re 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:

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

4. 2

• 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 person—perhaps someone

who is younger than you are—to 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 you’re 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 workers—such 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 rights—giving

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 worker’s 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

4.3

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 higher—or 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 Island’s mini-

mum wage is $6.15 per hour. Em-

ployers must pay whichever minimum

wage rate—federal or state—is 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 Labor’s

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 I’m 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 FLSA—and 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 employee’s 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.

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

4. 4

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 time—the 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 worked—and 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 pay—before the

extra hours are worked. Check with

your state’s 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, you’ll 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

ployers to pay non-exempt employees

overtime (time and a half the worker’s

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 aren’t entitled to over-

time.

In this area, however, it’s 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 law—federal or

state—is 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

employer’s 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 restaurant’s 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 Alphonse’s tips dip

to, say, $1 an hour, Denis may credit the

tip amount toward Alphonse’s 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.

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

4. 6

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 that—days 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 company’s 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 calls—you

cannot consume alcohol, or you must

stay within a certain radius of work,

for example—you 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 isn’t your own and will

require that your employer compen-

sate you.

And—as always—be 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

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.

What laws ensure my right to

take vacations?

Here’s 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, it’s 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 employment—six

months or a year are common—before

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 it—all 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 limits—generally 72

hours—as the time in which this pay-

ment must be made if an employee

quits. But you’ll need to check with

your state’s 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

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

4. 8

accrued paid benefits—vacation, sick

leave and personal leave days—toward

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

employees—an 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 FMLA—this 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 laws—and 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 state’s department of labor for

more information.

What if a member of my family

gets sick—can I take time off to

care for him or her?

Possibly. Workers’ rights under the

Family and Medical Leave Act

(FMLA)—or under your state’s ver-

sion of it—also 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 agency’s website at http://

www.dol.gov.

You generally must file a claim

under the FMLA within two years of

an employer’s violation. If the viola-

tion was willful (intentional), you’ll

have up to three years to file.

W O R K P L A C E R I G H T S

4.9

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.

More Information About

Wages, Hours and Time Off

You can check into your employer’s

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 Nolo’s 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

agency’s website at http://www.dol.gov.

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4. 10

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 doesn’t 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

agency’s 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 someone’s clothing or

hair becomes caught in it. But even after

a worker has been injured, employers

sometimes fail—or even refuse—to 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

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 won’t 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

state’s labor department should have

up-to-date information about these. If

you can’t 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.

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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4. 12

Workers’

Compensation

If you are injured on the job—or suf-

fer a work-related illness or disease

that prevents you from working—you

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 company—also 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-

pany—or self-insuring employer—who

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 employer’s

or employee’s 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 employee’s

conduct violated company policy.

If your employer’s 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 court—for 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

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-

tions—for 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 aren’t 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, it’s covered. For example,

you’ll 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 doctor’s

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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4. 14

What kind of benefits will I

receive?

The workers’ compensation system

provides replacement income, medical

expenses and sometimes vocational

rehabilitation benefits—that 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, you’ll 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,

you’ll fare reasonably well in most

states. You will be eligible for these

wage-loss replacement benefits as soon

as you’ve 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 you’re 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’ compensation—but 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

Your doctor’s report will have a big

impact upon the benefits you receive.

While it’s 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 don’t), 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 employer’s 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 company’s expense if you

clearly state you don’t 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 company’s

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 plan—with

the cost being paid for by the workers’

comp insurance company.

To understand your rights, contact

your state worker’s compensation

office (also called industrial relations

office). You can also get copy of your

state’s rules—or, 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 previously—will I still be

covered?

If the previous injury was also work-

related, workers’ compensation should

provide full coverage. If it wasn’t, you

may receive lower-level benefits.

If your earlier injury occurred at a

former job, it’s generally up to your

current employer’s insurance company

and your former employer to sort out

who’s responsible for paying your

benefits—sometimes they will split

the costs between them.

How do I find a good workers’

compensation lawyer—and how

much will it cost?

You usually don’t 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, you’ll probably want to

do some research to familiarize yourself

with your rights and duties. For ex-

ample, many claims are denied based

on a doctor’s report claiming that you

are not injured. If you dispute this, you

may have a right to obtain a second

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4. 16

doctor’s 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 mouth—talk 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 attorney’s 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 Won’t Pay

Some workers’ compensation carriers

take an aggressive stance and deny

legitimate claims for workers’ compensa-

tion. When this happens, it’s often

because the insurer claims you haven’t

been injured or, if you have, that it’s 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 agency—called

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 employer’s part.

W O R K P L A C E R I G H T S

4.17

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.

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

workplace—and 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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4. 18

is that no worker can be forced to

retire.

Under the ADEA, there has to be a

valid reason—not related to age—for

all employment decisions, especially

lay-offs. Examples of valid reasons

would be poor job performance by the

employee or an employer’s 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 job—referred 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 worker’s ability to ad-

equately perform the particular job

does, in fact, diminish after the age

limit is reached, it’s 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 I’m 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

4.19

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 agency’s

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.

I’ve 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 it’s not

legal. The federal Older Workers

Benefit Protection Act forbids

• using an employee’s age as the basis

for discrimination in benefits, and

• targeting older workers for their

staff cutting programs.

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4. 20

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 waivers—also

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 you—in 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 Women’s League

666 Eleventh Street, NW, Suite 700

Washington, DC 20001

202-783-6686

The Older Women’s 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

4.21

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 discrimination—and 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 harassment—many 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 agency’s

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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4. 22

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, it’s 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 before—and

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 positions—or 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.

I’m being sexually harassed at

work. What is the first thing I

should do?

Tell the harasser to stop. Surprisingly

often—some experts say up to 90% of

the time—this 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

company’s complaint procedure or

through the legal system. And be sure

to document what’s 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

What if the harassment doesn’t

stop even after I’ve confronted

the harasser?

If confronting the harasser doesn’t

work, complain, complain, complain.

Talk to your supervisor. Talk to the

harasser’s supervisor. If that doesn’t

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

them—or at least make copies. An

anonymous, obnoxious photo or joke

posted on a bulletin board is not any-

one else’s personal property, so you are

free to take it down and keep it as

evidence. If that’s not possible, photo-

graph the workplace walls. Note the

dates the offensive material was

posted—and 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 done—and 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 file—before 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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4. 24

If You’re Afraid of

Offending

The super-cautious advice—don’t talk

with co-workers about anything but

business—is 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 wouldn’t say or do something in

front of your spouse or parents, it’s

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 doesn’t

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 doesn’t end the

harassment, you may want to take

more forceful action. Consider giving

a copy of your letter to the harasser’s

supervisor—along with a memo ex-

plaining that the behavior has become

more outrageous.

If the harassment still does not

abate—or if you believe the supervisor

is sympathetic to the harassment or

the harasser—send 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 situation—something realistic

that might help end the discomfort,

such as transferring the harasser to a

more distant worksite. If it’s 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

4.25

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.

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 body—and to

be employed—lament 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-

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

4. 26

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 ADA’s protections extend to dis-

abled workers—defined 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 it’s always a good idea to

document your request). Just tell your

employer what your disability is and

why you need an accommodation. If

you aren’t 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 don’t, 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

4.27

modation that you want, as long as it

provides another one that is effective.

You don’t have to accept a particu-

lar accommodation, but be prepared to

defend your choice on the grounds

that the accommodation isn’t 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 Don’t

Need to Cost a Bundle

According to ergonomic and job

accommodation experts, the cost of

accommodating a particular worker’s

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 couldn’t

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 reasonable—some 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 employees—for example,

by modifying the height of desks

and equipment, installing computer

screen magnifiers or installing

telecommunications devices for the

deaf

• restructuring jobs—for example,

allowing a ten-hour/four-day

workweek so that a worker can

receive weekly medical treatments

• modifying exams and training

materials—for 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 employee’s and

employer’s imaginations—and the

reality that might make one or more

of these accommodations financially

impossible in a particular workplace.

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4. 28

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 hardship—a

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

employee’s 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 agency’s

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

state’s 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

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 don’t 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 isn’t illegal (see

below). For example, your employer

can terminate you simply because she

doesn’t 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 didn’t like

her” or “She didn’t 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 employer’s 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

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

4. 30

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 you—all boiling down

to the fact that an employer must deal

with you fairly and honestly.

I’ve 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 you’ve 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 won’t 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

employer’s 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 time—for

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 employer’s 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

4.31

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

I’m 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 month’s

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-

ance—although 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

company’s group health insurance

plan at the workers’ own expense for a

specific period—often 18 months—

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

4. 32

after employment ends. Family cover-

age is also included. In some other

circumstances, such as the death of

the employee, that employee’s 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 coverage—and

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

You’re Out of Work

If you’ve lost your job, you may be

desperately seeking income. It’s best to

act quickly to apply for unemployment

and other possible benefits, as there is

often a delay—in a few states, as long as

six weeks—between 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 temporary—often 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

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

agency’s 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 it’s

helpful for employees, too.

abb

•

eeef

•

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

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

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. 2

accessible technology, today’s 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 ago—where deals were often

sealed with a handshake—has 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 life’s

coming

attractions.

—ALBERT EINSTEIN

No matter what type of business

you’re thinking of starting, there are

some practical and legal issues you’ll

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, don’t 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 you’ll 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.

I’m thinking of starting my own

business.What should I do first?

Be sure you are genuinely interested

in what the business does. If you

aren’t, you are unlikely to succeed in

the long run—no 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?

(Don’t open a transmission repair

S M A L L B U S I N E S S E S

5.3

shop if you hate cars, or a restaurant

if you can’t 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

before—not after—you 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, Steve’s Web Designs may be

very pleasing to Steve as a name, but

it’s not likely to help Steve’s custom-

ers remember his company when faced

with competitors such as Sam’s Web

Designs and Sheri’s 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 Jerry’s Ice Cream.

And unusual names of people can

sometimes be very memorable indeed,

as with Fuddrucker’s (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 you’ll want to see what’s available

before you settle on a business name.

See

Conducting a Trademark Search

Chapter 8,

Trademarks

, for more infor-

mation on conducting name searches.

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. 4

How do I find out whether I’m

legally permitted to use the

business name I’ve 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 State’s 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, you’ll have to

choose a different name.

If you don’t 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 State’s office. (The

county clerk should be able to tell you

whether you’ll 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 shouldn’t

use it.

If my proposed business name

isn’t listed on a county or state

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 McDonald’s

Corporation offers McDonald’s fast

food services).

While your corporate or assumed

business name registration may le-

gally clear the name for the first pur-

pose, it doesn’t 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,

you’re asking for a claim of trademark

violation from the IBM general

counsel’s office.

To find out whether you can use

your proposed name as a trademark or

servicemark, you will need to do

what’s known as a trademark search.

See Chapter 8, Trademarks.

I’ve 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 procedure—oper-

ated by the Secretary of State’s 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

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-

nesses—such as a retail sandwich shop

that depends on lunchtime walk-in

trade—for 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 don’t 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,

you’ll 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.

You’ll 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 business—such as

fast food restaurants or coffee bars—in

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-

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. 6

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

state’s consumer protection agency.

Although it’s 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 business—usually 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

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 consignee’s 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, it’s 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 you’re 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 possession—and 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 Nolo’s new business software,

Quicken Lawyer Business

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

ground—from 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

5.8

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 that’s

best for all small businesses. Whether

you’re 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 I’m the only owner, what’s the

easiest way to structure my

business?

The vast majority of small business

people begin as sole proprietors, be-

cause it’s cheap, easy and fast. With a

sole proprietorship, there’s 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 it’s so simple, why aren’t 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 businesses—see

below), a sole proprietor and her busi-

S M A L L B U S I N E S S E S

5.9

ness are considered to be the same

legal entity for tax purposes. This

means you’ll report all of the

business’s income, expenses and de-

ductions on your individual tax re-

turn.

I’m 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 don’t 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 partnership’s 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 partner’s 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 it’s true that a good insurance

policy can do much to reduce lawsuit

worries and that many small, savvy

businesses do not face debt problems,

it’s 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 businesses—corporations

and limited liability companies are the

most common—shield 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-

nerships—do 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

can’t 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 business’s owners (and

possibly their spouses) can be attached

and used to satisfy the debt.

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. 10

Why do so many small business

owners choose not to take

advantage of limited liability

protection?

Many small businesses simply don’t

have major debt or lawsuit worries, so

they don’t 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-

ness—which 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 don’t 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 don’t 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 doesn’ t 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

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) aren’t 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-

ments—principally 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

state’s 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. You’ll 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

S M A L L B U S I N E S S E S

5.13

as well as partnerships and limited

liability companies that have not

elected to be taxed as regular, or C,

corporations—are 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

proprietor’s 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 entity—meaning that

the business files a tax return and pays

its own taxes.

But the fact that a corporation is

taxed separately from its owners

doesn’t always mean that profits will be

taxed twice. That’s 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 don’t pay dividends, so the divi-

dends aren’t 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 profits—15% of the

You’ll 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? Aren’t 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 don’t usually necessitate a face-to-

face meeting between the directors.

Doesn’t forming a corporation

mean income will be taxed

twice—once at the corporate

level and then again when

dividends are paid to the

corporation’s owners

(shareholders)?

Taxation of business is complicated;

we’ll be able to cover only the main

points here. First, understand that

most types of businesses—sole

proprietorships and corporations that

have qualified for subchapter S status,

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. 14

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 I’ve 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

state’s 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 state’s Secretary of State,

S M A L L B U S I N E S S E S

5.15

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.

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 you’ll 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 you’ll 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

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 form—the 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-

tion—a 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, you’ll 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, it’s wise to

incorporate so that you and your

associates don’t 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

association’s officers and directors

will have some protection from the

spurious lawsuits that are sure to

come—and 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 organization’s

founders prepares and files standard

articles of incorporation—a 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 State’s 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

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, you’ll

likely want to know whether you’ll

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?

You’ll 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 Nolo’s 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

5.18

• 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 don’t have to name the

specific organization that will

receive your assets—a 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).

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 dishonesty—cause 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

keep your records, you need to know

how to supervise him—if he goofs up,

you’ll be held responsible.

I don’t 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 Intuit’s com-

panion program, Turbotax for Busi-

ness. To ensure that you’re on the

right track, it’s 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 you—not

the IRS—to explain your deductions. If

you’re 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 is—and isn’t—a 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 isn’t. 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 deductible—for instance, you can’t

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. 20

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. (You’ll

also need to produce these records if

you’re 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% rule—such 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

Commonly Overlooked

Business Expenses

Despite the fact that most people keep a

sharp eye out for deductible expenses,

it’s 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 business’s total income in the year

you incurred them. But expenditures

for things that will generate revenue in

future years—for example, a desk,

copier or car—must be “capitalized,”

that is, written off or “amortized” over

their useful life—usually three, five or

seven years—according 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

year—must 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

5. 22

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?

There’s 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 owners—thereby

keeping income in lower tax brack-

ets—is 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 doesn’t affect your tax sta-

tus, it’s 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

I am a building contractor with a

chance to land a big job. If I get

it, I’ll 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 that’s 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-

ents—for 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 wouldn’t have to

pay the employer’s 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

employees—with the result that you

are assessed hefty back taxes, penalties

and interest.

I’ve 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. What’s

the story?

It’s 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 couldn’t

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 can’t claim a deduction for your

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

5.24

family’s 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 aren’t 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.

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

Employer’s 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 doesn’t create traffic or

parking problems, it’s 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

person’s 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

5.25

zones for stores and offices (commer-

cial zones), factories (industrial zones)

and houses (residential zones). In

some residential areas—especially in

affluent communities—local 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 don’t

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 clerk’s office,

the city attorney’s 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 broad—but, unfortunately, not

very specific—list 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

aren’t 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

don’t actively search for violations.

The great majority of home-based

businesses that run into trouble do so

when a neighbor complains—often

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.

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. 26

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 city’s 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 rules—typi-

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 home—restrict 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 home’s

floor space that can

be devoted to the

business. Again,

you’ll 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 appeal—often 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 municipality’s

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

5.27

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 incurred—in 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

taxes—or 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 aren’t 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 can’t exceed your home-

based business’s total profit.

Insuring Your

Home-Based Business

It’s a mistake to rely on a homeowner’s

or renter’s 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, it’s easy to avoid these

nasty surprises. Sit down with your

insurance agent and fully disclose your

planned business operation. You’ll find

that it’s relatively inexpensive to add

business coverage to your homeowner’s

policy—and it’s a tax-deductible ex-

pense. But be sure to check prices—some

insurance companies provide special

cost-effective policies designed to protect

both homes and home-based 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

5. 28

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 can’t 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 needn’t 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 can’t 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, it’s generally wise to continue

to take your home-office deductions

each year. Especially for people who

don’t plan to sell their houses anytime

soon, it’s usually beneficial to receive a

tax break today that you won’t 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 hobby—it 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 money—even a

small amount—in 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

advertising or other marketing mate-

rials and obtained any necessary li-

censes and permits (a business license

from your city, for example).

More Information About

Home-Based Business

Tax Savvy for Small Business,

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, you’ll be held account-

able to a host of state and federal laws

that regulate your relationship with

your employees. Among the things

you’ll 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

shouldn’t put in an employee’s

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. Employee’s

rights—including questions and an-

swers about wages, hours and work-

place safety—are 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

employees—without getting in

legal hot water?

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5. 30

Many small employers get tripped up

when summarizing a job in an adver-

tisement. This can easily happen if

you’re 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:

DON’T 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 you’re not a

federal contractor.

Any tips on how to conduct a

good, forthright interview—and

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 applicant’s 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.

It’s also smart to summarize the

applicant’s answers for your files—but

don’t get so involved in documenting

the interview that you forget to listen

closely to the applicant.

And don’t be

so locked in to your list of questions

that you don’t follow up on some-

S M A L L B U S I N E S S E S

5.31

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

job—the duties, hours, pay range, ben-

efits and career opportunities.

Ques-

tions about the applicant’s work history

and experience that may be relevant to

the job opening are always appropriate.

But don’t encourage the applicant to

divulge the trade secrets of a present or

former employer—especially 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 company’s secrets,

given the chance.

I’ve heard horror stories about

employers who get sued for

discriminating—both by

employees and even by people

they’ve interviewed but decided

not to hire. What’s 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, disability—or 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 characteristic—race, for

example—bears no legitimate rela-

tionship to employment decisions.

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-

ity—factors 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 there’s a valid

business reason for its existence. For

example, refusing to hire people who

don’t meet a minimum height and

weight is permissible if it’s clearly

related to the physical demands of the

particular job—felling and hauling

huge trees, for instance. But applying

such a requirement to exclude appli-

cants for a job as a cook or reception-

ist wouldn’t 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. It’s often a

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. 32

waste of time and effort to acquire and

review transcripts and credit re-

ports—although occasionally they’re

useful.

If you’re 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 you’re hiring a

switchboard operator, information on

a credit report would be irrelevant.

But if you’re 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 you’ve in-

vaded a prospective employee’s pri-

vacy, always obtain the applicant’s

written consent before you contact a

former employer, request a credit re-

port or send for high school or college

transcripts.

Finally, it’s 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 jobs—those 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 state’s 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-

cants—especially if your reason in-

volves protecting the public’s 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

evaluations—and 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

tently rate a worker’s performance as

poor or mediocre—but continue to

hand out generous raises or perhaps

even promote the person. The logical

conclusion: You didn’t take seriously

the criticisms in your evaluation re-

port, so you shouldn’t expect the em-

ployee to take them seriously, either.

It’s just as damaging to give an em-

ployee glowing praise in report after

report—perhaps to make the em-

ployee feel good—and 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 shouldn’t be getting big

raises.

As a small employer, what

should I keep in personnel files—

and what right do employees

have to see what’s 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 Employee’s

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 employee’s attendance

or tardiness.

Experts recommend keeping one

separate file for all of your employees’

INS I-9 Employment Eligibility Veri-

fication forms—the 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 file—and out of

your workers’ personnel files. First,

this will limit the number of people

who know an employee’s immigration

status. If you keep an employee’s 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 employee’s 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 employee’s personnel file, that

means the government will rummage

through all of these files—causing

inconvenience for you and privacy

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. 34

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 employee’s 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, don’t disclose medical

information about employees. Although

the confidentiality provisions of the ADA

protect only some disabled workers,

some state’s 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-

ployees—and 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 you’re inclined to let

the employee have a copy of any docu-

ment in the file, you—rather than the

employee—should make the copy.

Usually, you won’t 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

S M A L L B U S I N E S S E S

5.35

leave to your employees. You could

choose to offer none—although 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 can’t 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-

ers—are 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 disabilities—instead,

they consider the effect of the

particular condition on the particu-

lar employee.

• He has a record or history of impair-

ment, or

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. 36

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 employee’s responsibility

to inform you of his disability and

request a reasonable accommoda-

tion—you don’t 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 don’t have to provide

the precise accommodation your

worker requests, you do have to work

together to come up with a reasonable

solution.

Employers don’t 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 employer’s

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 ADA’s 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-

S M A L L B U S I N E S S E S

5.37

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. Don’t 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 who’s 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. It’s 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,

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. 38

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.

• Don’t 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 accuser’s 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 aren’t impos-

ing your religious beliefs on others.

You have the legal right to discuss

your own religious beliefs with an

employee, if you’re so inclined, but

you can’t persist to the point that the

employee feels you’re 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 right—if

not a duty—to 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, that’s generally not a vi-

able alternative. You’re legally re-

quired to accommodate the religious

needs of employees—for example, al-

lowing employees to pick and choose

the paid holidays they would like to

take during the year. You don’t, 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 they’ll quit

if I allow smoking on the

premises. I’m caught in the

middle. What should I do?

It’s 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

5.39

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 place—a bar,

restaurant or hotel, for example—your

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:

you’d 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 couldn’t 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. That’s because in many

modern buildings, it’s too expen-

sive—maybe even impossible—to

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 don’t take appropriate ac-

tions on their complaints.

It’s been a bad year for my

business—and it looks as

though I may have to lay off

some workers. Are there legal

problems to avoid?

Generally, you’re free to lay off or

terminate employees because business

conditions require it. But if you do

cut back, don’t 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. It’s better to spread the pain

around; don’t let the burden fall on

just one group of employees.

How can I make sure that my

employees don’t reveal my

company’s trade secrets to a

competitor—especially 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 secret—that 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-

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

5.40

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 doesn’t necessarily

end when the employment relation-

ship ends. Even after an employee

quits or is fired, you must:

• Provide the employee’s 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 policy’s

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 company’s group health insur-

ance plan, at the worker’s 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

don’t 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

5.41

You’ll get in trouble only if you exag-

gerate or cover up the truth—or are

motivated by a desire to harm your

former employee.

Former employees who feel ma-

ligned can sue for defamation—called

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

you’ve reasonably investigated and to

lay aside your personal feelings about

the former employee.

A practical policy—and one that

gives you a high degree of legal pro-

tection—is simply not to discuss an

employee with prospective employers

if you can’t say something positive.

Just tell the person inquiring that it’s

not your policy to comment on former

workers.

Where an employee’s record is

truly mixed, it’s 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, don’t 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

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

5.42

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.

More Information About

Employers’ Rights and

Responsibilities

The Employer’s 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 don’t 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

5.43

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

resources—including fact sheets, sample

policies and more—visit the website of

CCH, Inc., at http://www.toolkit.cch.com.

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 nation’s 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.

abb

•

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

it’s 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 winner—an idea worth developing, market-

ing and protecting. In these cases, we must turn to the patent

laws for help.

eeef

•

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

6. 2

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 patent—by

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 inventor’s 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

6.3

• 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 doesn’t 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 phenomena—for

instance, a scientific principle like

superconductivity without regard to

its use in the real world—have long

been considered unpatentable. This

means, for example, that you can’t

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 don’t 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).

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

6. 4

Can computer software qualify

for patent protection?

Yes. Even though you can’t 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 it’s 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 species—for example, the hu-

man immune system genetic code

transplanted into a mouse for testing

purposes—the 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

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 exercise—what 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

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

6. 6

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 work—at least in

theory. Thus, a new approach to

manufacturing superconducting mate-

rials may qualify for a patent if it has a

sound theoretical basis—even if it

hasn’t yet been shown to work in prac-

tice. But a new drug that has no theo-

retical basis and which hasn’t 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

• 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

searching—from the first patent ever

issued to the latest—is 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

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

6. 8

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-

ment—that 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 Declaration—a

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 it—it 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 PPA’s filing date for

the regular patent application. If the

regular patent application includes any

new matter (technical information about

the invention) that wasn’t in the PPA, the

inventor won’t be able to rely on the

PPA’s filing date for the new matter. The

PPA’s filing date doesn’t 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 extending—up to one year—the

patent’s expiration date.

P A T E N T S

6.9

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 inventor’s 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, aren’t. 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 patent’s claims

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

6. 10

(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 infringer’s 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 don’t literally

match the infringing device, it is

possible that a court would find an

infringement by applying what’s

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 handle’s 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 Steve’s

racket. Even though Megan’s inven-

tion improves on Steve’s invention in

certain respects, it will most likely be

held to be an infringement of Steve’s

invention, for one of two reasons:

• Megan’s invention teaches the

same elements as those claimed in

Steve’s patent (a tennis racket handle

with two functions), or

• when considering what it is and

how it works, Megan’s invention is the

substantial equivalent of Steve’s 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

6.11

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 applicant’s 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

patent—such 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

today’s 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 hasn’t 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 invention—for

example, through industrial spying.

3.Patent pending (patent application

filed but not yet issued). During the

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

6. 12

patent pending period, including the

one-year period after a provisional

patent application is filed, the

inventor’s 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 infringers—only the hope of a

future monopoly, which doesn’t

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 hasn’t

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 patent’s 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 inventions—that 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

patent’s 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

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-licensing—so that compa-

nies involved in the trade will benefit

from each other’s 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 company’s 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 employed—even with-

out a written employment agree-

ment—to 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

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

6. 14

a new process for handling a particu-

lar type of metal. If Robert isn’t em-

ployed to invent and hasn’t 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

stealing another artist’s creative work.

An exception to the general rule

that patents and copyright don’t 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 car’s rear fenders may

qualify for both a design patent (be-

cause they are strictly ornamental) and

ments). In practice, however, a prod-

uct is usually granted one type of pro-

tection or the other—not both.

For more information about copy-

right law, see Chapter 7.

P A T E N T S

6.15

What’s 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 creator’s 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 devices—such

as color, sound and smell—that 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, however—say, jew-

elry or a distinctively shaped musical

instrument—it 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

be—and actually is—used 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.

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 invention’s 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.

Nolo’s Patents for Beginners,

by David

Pressman and Richard Stim (Nolo), is a

primer that explains all of the essential

patent principles in plain English.

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

6.16

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]

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.

abb

•

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.

eeef

•

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

7. 2

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

the first steps of creating, owning and

protecting a copyright. To learn about

how copyrights differ from—and

work with—patents and trademarks,

see Chapters 6 and 8.

Basics

IT IS NECESSARY TO ANY ORIGINALITY

TO HAVE THE COURAGE TO BE AN

AMATEUR.

—WALLACE STEVENS

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 1976—the federal law providing

for copyright protection—grants au-

thors a bundle of exclusive rights over

their works, including the right to

reproduce, distribute, adapt or per-

form them.

An author’s copyright rights may

be exercised only by the author—or

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

compensation for any losses suffered.

What types of creative work

does copyright protect?

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 computer’s 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

original—that is, independently cre-

ated by the author. It doesn’t matter

if an author’s 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

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

book’s white pages, which involve a

straightforward alphabetical listing of

telephone numbers rather than a cre-

ative selection of listings.

Does copyright protect an

author’s 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

people to create new work.

For similar reasons, copyright does

not protect facts—whether 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 Clinton—provided 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 Neanderthals—without paying the

original author.

How long does a copyright last?

For works published after 1977, the

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-

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

7. 4

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 essay’s 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.

Ownership

HE WHO CAN COPY, CAN DO.

—LEONARDO DA VINCI

A copyright is initially owned by a

creative work’s 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 employer—that is, the employer

is considered to be the work’s 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

• 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

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 don’t 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

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 wouldn’t be a joint work because

the contributions aren’t inseparable or

interdependent.

The U.S. Copyright Office consid-

ers joint copyright owners to have an

equal right to register and enforce the

make a written agreement to the con-

trary, each copyright owner has the

right to commercially exploit the

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

The Copyright Act of 1976 grants a

number of exclusive rights to copy-

right owners, including:

• reproduction right—the right to

make copies of a protected work

• distribution right—the right to sell

or otherwise distribute copies to the

public

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

7. 6

• 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

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 else—including 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

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.

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 force—works 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

But even though a copyright notice

is not required, it’s still important to

include one. When a work contains a

valid notice, an infringer cannot claim

in court that he or she didn’t 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),

International Copyright

Protection

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 nations—must

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 author’s 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 author’s permission,

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

7. 8

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 doesn’t

give permission.

Often, it’s 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, it’s 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.

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

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/

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 can’t 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

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 else’s work

in a noncompetitive way and the pur-

pose for your use is to benefit the

public, you’re on pretty safe ground.

On the other hand, if you take large

portions of someone else’s expression

for your own purely commercial rea-

sons, the rule usually won’t apply.

If You Want to Use

Material on the Internet

Each day, people post vast quantities of

creative material on the Internet—material

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

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. It’s best to track

down the author of the material and ask

for permission.

The most useful sources for finding

information and obtaining permission are

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.”)

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

7. 10

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 work’s publication

date or before any copyright infringe-

ment actually begins—makes 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 lawyer’s 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.

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 you’re 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

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

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 wasn’t

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 fair—but later finds

herself on the wrong end of a court or-

der—she is likely to be considered an

innocent infringer at worst. Innocent

infringers usually don’t 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.

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.

by Stephen

Fishman (Nolo), explains copyright

protection for computer software and

include all the forms and instructions

necessary for registering a software

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

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

7.12

http://www.nolo.com

Nolo offers self-help information about a

wide variety of legal topics, including

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.

abb

•

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 Kellogg’s 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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8. 2

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 they’ve 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 manufacturer’s or merchant’s

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 don’t 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-

mous—for example, McDonald’s—the

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 mark’s owner. For instance,

McDonald’s was able to prevent the

use of the mark McSleep by a motel

chain because McSleep traded on the

McDonald’s 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 mark’s

reputation for quality.

What is a servicemark?

For practical purposes, a servicemark

is the same as a trademark—but 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

fies as a servicemark. Some familiar

servicemarks: Jack in the Box (fast

food service), Kinko’s (photocopying

service), ACLU (legal service), Block-

buster (video rental service), CBS’s

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 others—for 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 itself—as opposed to

its members—cannot 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

packaging—for example, Kodak film

or the Galliano liquor bottle—and 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-mark—the

identification of goods and services in

the marketplace—trade 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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8. 4

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 consumer’s 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.

What’s 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 way—as 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 isn’t 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

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-

ever—and some aren’t 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 state’s 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 that’s

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 distinctive—that 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

McDonald’s Golden Arch and the

IBM symbol)

• made-up words or words that have

no dictionary meaning such as

Exxon

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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8. 6

• 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:

• people’s names, such as Pete’s

Muffins or Smith Graphics

• geographic terms, such as Northern

Dairy or Central Insect Control, and

• descriptive terms—that 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 Jerry’s Ice

Cream? Even though Ben and

Jerry are common names, isn’t

the Ben and Jerry’s 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

Jerry’s, 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

8.7

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 Web—protected 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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8. 8

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 context—that 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 doesn’t 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 invention—a humane mouse-

trap—for sale under the trademark

“MiceFree.” Even if Robert doesn’t

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-

its—six 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

8.9

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 don’t

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

mark’s strength—that 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 mark’s 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 owner’s 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

owner’s 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 trademark’s owner

has not been damaged, a court has dis-

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

8. 10

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, McDonald’s, Hyatt, Champion,

Howard Johnson’s 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

Office—and 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

Conducting a

Trademark

If you want to find out whether the

trademark you’ve chosen for your

products or services is available, you’ll

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 owner’s 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 businesses—even

local enterprises—are 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.

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

8. 12

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

PTO’s 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 it’s 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

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

cess a listing of these registrars

through InterNIC’s site at http://

www.internic.net or ICANN’s 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-

braries—the others are in Detroit and

Houston—that have formed partner-

ships with the U.S. Patent and Trade-

mark Office. Under this partnership,

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

8. 14

Sc[i]3 is encouraged to offer a variety

of information services—including

trademark searches—for 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 don’t 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 mark’s 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 lines—for 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 generic—that 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

I know the PTO won’t register a

mark if it’s not distinctive or

already in use. But are there

other types of marks that are

ineligible for federal

registration?

Yes. The PTO won’t 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 widow’s

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

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-

tive—either inherently or because

they have become well known—are

placed on a list called the Principal

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

years—meaning that the registration

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

8. 16

isn’t canceled for some reason—and

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 faith—for example,

the name is registered with the intent

of selling it back to a company with

the same name—the 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

organization’s 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

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,

it’s 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 mark’s owner. If the mark is

also federally registered, this notice is

presumed and the state registration

isn’t necessary. If, however, the mark

is used only within the state and

doesn’t 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 fee—currently $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 needn’t

provide the samples or the date of first

use, but you can’t complete your registra-

tion until you put your mark into actual

use and file some additional paperwork

with the PTO.

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

8. 18

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, they’re more

often defined by their differences. It’s

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

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 owner’s permission. But the

protect names, titles or short phrases.

That’s 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.

What’s 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 creator’s 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

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, however—say, jew-

elry or a distinctively shaped musical

instrument—it 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

car’s rear fenders. Then, if the fins

were intended to be—and actually

are—used 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.

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 Law—A 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

8.20

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.

It’s 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.

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

Center’s 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.

abb

•

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

haven’t earned, to buy things they

don’t want, to impress people they

don’t like.

—WILL ROGERS

eeef

•

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

9. 2

America’s 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, we’re 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 don’t tell you is what

to do when things go wrong—for 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 warranties—one 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

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

product’s 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 won’t, 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 can’t get anywhere infor-

mally, you can sue. In most states, if

the seller or manufacturer won’t 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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9.4

the item sat in the shop. If you think

you’re 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” lists—items with defects

that don’t affect safety and therefore

don’t require a recall, but that the

manufacturer will repair for free. It

can’t 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

don’t break down during the first few

years (and if they do they’re 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 you’ve 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 can’t hurt to complain.

If you can’t get relief from a gov-

ernment agency, consider suing the

company in small claims court.

Everybody’s 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 Consumer’s League,

can help you if you’ve 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

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 I’m getting billed. Do I

have to pay?

You don’t owe any money if you re-

ceive an item you never ordered. It’s

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 doesn’t 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

Commission’s “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 seller’s

normal place of business—for

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

9. 6

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 there’s 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-

mission’s “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 can’t meet it, it must send a

notice requesting your signature to

agree to yet a third date. If you don’t

return the notice, the seller must au-

tomatically cancel your order and re-

fund your money. The seller must is-

sue the refund promptly—within

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 isn’t 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 store’s

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”

isn’t 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, you’re 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

More Information About

Purchasing Goods and Services

Everybody’s Guide to Small Claims

Court

, by Ralph Warner (Nolo), has

extensive information on pursuing your

rights in the event a seller or manufac-

turer won’t 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

cards—an 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-

pensive—the interest rate on bank

credit cards averages about 18%; on

gasoline company and department

store cards, it’s over 20%. Only

charge cards (also called travel and

entertainment cards), such as Ameri-

can Express and Diners Club, don’t

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

you’re better off canceling most of them.

If so, you’ll have to choose which cards

to keep. If you don’t 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.

Here’s why. Let’s say you pay $1,200

of your $1,500 balance in January. If

your bank uses the average daily

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

9. 8

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

that’s a percentage of your credit limit.

I’m 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” rate—a 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 can’t 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 damages—the 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), you’re 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

9.9

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

seller’s 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.

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

9. 10

• 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 don’t have to carry your check-

book and identification, but you can

make purchases directly from your

checking account.

• You pay immediately—without

running up interest charges on a

credit card bill.

Are there disadvantages?

Yes. You don’t have the 20- to 25-

day delay in paying the bill. Also, you

don’t 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 there’s a

mistake on my statement or

receipt?

Although ATM statements and debit

receipts don’t 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 don’t notify

the bank within 60 days, it has no

obligation to investigate the error and

you’re 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

9.11

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 number—PIN—near your

card), call your bank immediately, and

follow up with a confirming letter. Under

the federal Electronic Fund Transfers Act,

your liability is:

• $0—after you report the card missing

• up to $50—if 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 $500—if 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

• unlimited—if 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 won’t charge you

anything if unauthorized withdrawals

appear on your statement.

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 you’re alive, try missing

a couple of car payments.

—EARL WILSON

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

9. 12

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, you’re not

alone. Here are some specific sugges-

tions for dealing with debts.

I feel completely overwhelmed

by my debts and don’t 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 you’re behind on

your bills or are afraid of getting be-

hind, call your creditors. Let them

know what’s going on—job loss, re-

duction in hours, medical problem or

whatever—and 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).

I’m afraid I might miss a car

payment—should I just let the

lender repossess?

No. Before your car payment is due,

call the lender and ask for extra time.

If you’re at least a few months into

the loan and haven’t 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 don’t 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 what’s 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 don’t get

the car back, the lender will sell it at

an auction for far less than it’s worth.

You’ll 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 can’t 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). You’ll get

more for the car if you sell it yourself

than the dealer will by selling it at an

auction after repossession—which

Y O U R M O N E Y

9.13

means you’ll 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

don’t start foreclosure proceedings

until you’ve 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?

You’re 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 won’t 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 won’t 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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9. 14

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

didn’t 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.

Let’s 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, let’s 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 rates—ask your utility

company.

I’m swamped with student loans

and can’t afford my payments.

What can I do to avoid default?

First, know that you’re right to do all

you can to avoid default, rather than

ignoring your loans and hoping they’ll

just go away. If you default, the amount

you owe will probably skyrocket be-

Y O U R M O N E Y

9.15

cause the government can add a hefty

collections fee—often up to 25% of the

principal.

To avoid default, contact the com-

panies that service your student loans

and tell them why you can’t make

your payments. You may be eligible

for a deferment or forbearance—ways

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-

tions—many now offer payments

geared to borrowers’ incomes.

In addition, consider consolidating

your student loans. You can consoli-

date federal student loans through the

government’s 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 can’t

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 can’t afford them,

you will need to apply for a deferment

(if you are eligible) or request a flex-

ible repayment option.

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

9. 16

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 loan’s 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 you’ve 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

Education’s website at http://

www.ed.gov or the National Student

Loan Data System’s 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 pay—and

you can protest that amount in court

if you can’t 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 don’t

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 exception—it can place a

lien or empty your bank account with-

out suing first.

Y O U R M O N E Y

9.17

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 don’t

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, you’ll 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 don’t 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?

Debtor’s 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.

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.

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

9. 18

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 can’t pay, need extra time to file

a tax return or even get audited. This

section suggests several strategies for

dealing with the government’s largest

bureaucracy.

How long should I keep my tax

papers?

Keep anything related to your tax re-

turn—W-2 and 1099 forms, receipts

and canceled checks for deductible

items—for 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 can’t 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

don’t 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

isn’t likely to). By contrast, if you file

a return but can’t pay, you’ll only be

on the hook for interest and penalties

of 6%–12% on any amounts you owe.

Y O U R M O N E Y

9.19

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 you’re caught

cheating, you’ll be assessed heavy pen-

alties, and will probably be audited

for several years.

I am faced with a tax bill that I

can’t pay. Am I completely at

the IRS’s mercy, or do I have

some options?

There are six ways to deal with a tax

bill you can’t 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.

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

9. 20

• 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

Don’t Work

Dozens of tax avoidance schemes

emerge every decade. Some promoters

are very persuasive, particularly if you

are predisposed to believing that it’s

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 won’t 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 IRS’s 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 own—including 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

Y O U R M O N E Y

9.21

doesn’t include your residence. More-

over, state homestead protection laws

don’t 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 doesn’t 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 tried—and failed—to 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

can’t 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 IRS’s 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 auditor’s desk in the hope that

she will throw up her hands and let

you off rather than go through the

mess. It doesn’t 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.

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

9.22

Can I challenge the IRS if I get

audited and don’t 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

Don’t 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

it’s 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.

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 don’t

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?

It’s 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.

Y O U R M O N E Y

9.23

I’m 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 itself—from harassing, abusing or

threatening you, these laws don’t 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 Union’s

Quick Collect or American Express’s

Moneygram. This is another $10

down the drain.

• Putting your payment on a credit card.

You’ll never get out of debt if you

do this.

You Can Run,

But You

Can’t Hide

In this technological age, it’s easy to run

from collectors—but 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-

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

9.24

lector can’t 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 you’re not currently

working or have no property, you’re

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.

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

9.25

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. Bankruptcy’s 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.”)

Aren’t 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 discharged—these are dis-

cussed below. In exchange for the dis-

charge of debts, the business assets or

the consumer’s nonexempt property

are sold—that is, liquidated—and 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 aren’t 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 11—a 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

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

9. 26

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 don’t 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 couldn‘t 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 plan—at 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 person’s

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 you’d receive

by the discharge outweighs any

detriment to your ex-spouse (who

would have to pay them if you

discharge them in bankruptcy).

Y O U R M O N E Y

9.27

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. You’ll 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 money—often $1,000 or

more—that 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. You’ll 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.

• You’re behind on your mortgage or

car loan. In Chapter 7, you’ll 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.

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

9.28

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.

Nolo’s 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 difficult—or

impossible—for 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 Nolo’s website

(http://www.nolo.com).

Rebuilding

Credit

People who have been through a fi-

nancial crisis—bankruptcy, reposses-

sion, foreclosure, history of late pay-

ments, IRS lien or levy or something

similar—may think they will never

get credit again. Not true. Following

some simple steps, you can rebuild

your credit in just a couple of years.

What’s 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

9.29

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 month’s

end, compare your total expenses with

your income. If you’re overspending,

you have to cut back or find more in-

come. As best you can, plan how you’ll

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, I’ve made my budget.

What do I do next?

Now it’s time to clean up your credit

report. Credit reports are compiled by

credit bureaus—private, 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 24–36 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,

you’ll have to pay about $8.50 (less in

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

9. 30

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 spouse’s 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 histories—such as

late payments when you paid on

time

• closed accounts listed as open—it

may look as if you have too much

open credit, and

• any account you closed that doesn’t

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 don’t 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 it’s 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 don’t 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

9.31

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 statement—or a summary—to

anyone who requests your report. Be

clear and concise; use the fewest words

possible.

I’ve 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 don’t have a credit

card, apply for one. If your application

is rejected, try to find a cosigner or

apply for a secured card—where 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.

Don’t 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 you’ve 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 doesn’t

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 you’ve been at your current

job fewer than two years), your

current residence, your telephone

number (especially if it’s unlisted),

your date of birth and your checking

account number. Again, the credit

bureau doesn’t 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

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

9.32

your credit to the point that you

won’t be turned down for a major

credit card or loan. After approxi-

mately four years, you may be able to

qualify for a mortgage.

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

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 you’ve 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

you’re 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 BBB’s

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

9.33

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.

abb

•

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

eef

•

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

10. 2

Together, Americans own more

than 137 million automobiles—that’s

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

cars—or 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 worse—the 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

you’re 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 Buyer’s 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 afford—and don’t talk your-

self into a more expensive car by fi-

nancing it for four or five years. You’ll

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 don’t 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 dealer’s 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

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 dealer’s final cost is often

even lower, because manufacturers

offer dealers behind-the-scenes

financial incentives. To find out the

car’s true cost to the dealer, you can

order a report from Consumer Reports

(http://www.consumerreports.org or

800-888-8275) for about $12.

• Don’t 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

don’t want, which jack up the price.

• Don’t 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 didn’t exist.

And have the rebate sent to your

home—don’t allow the dealership to

“apply” it to the amount you owe.

Rebates come from the manufac-

turer and shouldn’t be a reason to

pay the dealer more for the car.

• Don’t discuss the possibility of a

trade-in until you fix the price for

your new car.

• Don’t 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). Don’t 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

Don’t Get Taken Every Time, by

Remar Sutton (Penguin Books), and

So…You Wanna Buy a Car, by Bruce

Fuller and Tony Whitney (Self-

Counsel Press).

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10. 4

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 manufacturer’s

warranty

• how likely it is that you’ll need it

(whether the covered parts have a

history of problems)

• the vehicle’s estimated miles per

gallon for city and highway driving,

and

• the dealer’s 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, it’s hard to see

nicks or dents. You’ll 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 doesn’t have to take the car

back and probably won’t, and you’ll

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 state—California—

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

Soon after I brought my new car

home, it started having problems.

How do I know if it’s 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 car’s

use, value or safety, such as faulty

brakes or turn signals. Minor defects,

such as loose radio and door knobs,

don’t 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

State’s Lemon Law

If you want to find out if your car quali-

fies as a lemon in your state, get a copy

of your state’s lemon law. If you have

access to the Internet, http://

www.autopedia.com has links to each

state’s lemon law. Or, see this book’s

Appendix on Legal Research for informa-

tion on how to find the law in the library.

For a summary of each state’s 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 you’re 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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10. 6

• in-house programs run by the auto

makers

• programs set up by the Better

Business Bureau’s Auto Line

• programs run by the American

Automobile Association or the

National Automobile Dealer’s

Association, and

• programs run through a state

consumer protection agency.

You probably won’t get to choose

which program to use—the 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

manufacturer’s 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 you’re 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

10.7

Center for Auto Safety’s 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 aren’t 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 don’t like the

arbitrator’s decision?

If you don’t like the ruling, you can

usually sue the manufacturer in court.

You may want to do this if you have

substantial “consequential” dam-

ages—that 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.

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 isn’t for

everyone, some people swear by it.

Before you sign on the dotted line, be

sure you know what you’re 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 don’t have to deal with getting

rid of their old car—they 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?

Yes—there 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, don’t lease.

• If you decide to buy the car at the

lease-end, you’ll 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, you’ll pay a

total of $24,000. You might be

able to lease it for only $400 a

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10. 8

month (total payments of $19,200),

but you’ll probably have to pay

another $8,000 to keep it—and if

you finance that $8,000, you’ll pay

even more.

• Most leases charge you as much as

25¢ a mile if you exceed the annual

mileage limit—usually between

12,000 and 15,000 miles. If you

plan to do extensive driving, leasing

probably isn’t for you.

• It’s very, very expensive to break a

lease early. If you no longer want, or

can afford, to keep your car—for

example, because you lost your job

or your financial situation

changed—you are stuck.

• If you lease a lemon, the leasing

company has to do the complaining

(remember, you don’t 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 you’ll 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 others—do not

eliminate all of the abuses. For ex-

ample, the revised law does not obli-

gate a dealer to disclose the interest

rate that’s been built into your pay-

ments. If you want to lease, you’ll

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 you’ll get the

approximate interest rate.

Are there any good

leasing deals?

Yes—especially 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 you’re not paying

for a lot of depreciation during the

lease term), and offer to lock-in the

price you’d 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 that’s not

in the ad, the dealer will throw out

the entire lease offer and you’ll 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 leases—look for these

companies in your telephone Yellow

Pages under “Automotive—Leasing.”

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

10.9

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 manufacturer’s

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 it’s not stolen)—a difference

that could amount to thousands of

dollars.

Can I cancel my lease

agreement early?

Probably not, unless you’re 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 you’ll 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 can’t 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 can’t 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 dealer’s 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 can’t get the dealer to drop

his claim that you owe money, try to

negotiate to reduce your payments or

to extend them over time.

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

10. 10

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, it’s a transaction ripe with

potential disaster. We probably all

know someone who bought a used

car—assured 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?

It’s best if you have some idea of the

make, model and year that you’re

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 you’ve

made this preliminary decision, look

at the listings in your local newspa-

per. Don’t 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 car’s mileage, con-

dition and additional equipment

(such as power windows or compact

disc player). The report also provides

information about the car’s 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 vehicle’s

wholesale and retail values, you’ll

C A R S A N D D R I V I N G

10.11

want to pay wholesale (the lower

number) and the seller will want to

charge retail (the higher number).

You’ll 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 contract—if the dealer refuses to

make good on the warranty, you’ll need

it as proof of your original agreement.

Obviously, price isn’t 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. They’re more

expensive—but 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

doesn’t match up or looks fishy,

don’t buy the car.

• Do your own visual inspection—

you’ll 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 you’re

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 seller’s driver’s

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 you’re 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 isn’t, and

for how long. You’ll 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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10. 12

warranty that doesn’t cover emissions,

for example, if the type of car you’re

buying is likely to have emission

problems in a year or so.

If you’re 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

warranty—and 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

you’re 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 don’t

have a large sum of cash to plunk

down for a new or used car. This

means you’ll have to finance your

purchase. Of course, after you spend

time shopping for a car and negotiat-

ing a good deal, the last thing you’ll

want to do is haggle over financing

terms. But if you don’t 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 I’m not

sure how to finance my

purchase. Do you have any

general advice?

Clearly, if you can pay for the pur-

chase outright you’ll save money by

not paying any interest charges. But if

you don’t 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

terms—for 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 don’t require you to

buy upgraded features—such as air

conditioning or rust protection—or

credit insurance. And don’t 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 isn’t 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

10.13

count rates for loans tied to your

other accounts.

• Credit unions. If you’re 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, you’ll

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 insurance—insurance 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 it’s 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,

you’ll 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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10. 14

• Named insured—the person or people

named in the policy.

• Spouse—a spouse not named in the

policy, unless he or she does not live

with the named insured.

• Other relative—anyone 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 vehicles—an accident in a

nonnamed vehicle is covered only if

a named insured (see above) was

driving.

• Added vehicles—any 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 vehicles—any 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:

C A R S A N D D R I V I N G

10.15

• 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 driver’s car must

have actually hit you—being 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 else’s car, your UM cover-

age will be secondary to the UM

coverage of that other car’s owner.

What is no-fault automobile

insurance?

Under no-fault insurance, each

person’s own insurance company pays

for his or her medical bills and lost

wages—up 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 person’s

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 Aren’t 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:

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

10. 16

• Shop around for insurance. Just

because your current company once

offered you the best deal doesn’t

mean it’s 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 company—such as

automobile and homeowner’s

insurance.

• Find out which vehicles cost more

to insure. If you’re 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.

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 Driver’s

License

To a teenager, a driver’s license seems

magical—a ticket to freedom. For the

rest of us, driver’s licenses aren’t 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 I’m in danger of losing my license?

State laws governing how you can

get, use and lose your driver’s license

vary tremendously. We can’t answer

every question here, but we do discuss

some of the bigger issues that arise in

connection with driving privileges.

Is my driver’s 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, you’ll

C A R S A N D D R I V I N G

10.17

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, there’s no need to

get another driver’s license. But when

you set up housekeeping in the new

state and pay taxes there as well, it’s

time to apply.

Young Drivers Who

Cross State Lines

Adults who visit another state may rely on

their driver’s 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

state’s 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 “Driver’s License

Compact” or to the “Non-Resident

Violator Compact.” (The only states

that don’t 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 state—and 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 Driver’s Permit,

issued by the American Automobile

Association. This document translates

the information on your driver’s 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

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

10. 18

consulate to find out whether you’ll

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 driver’s license

be suspended or revoked?

Driving a car is considered a privi-

lege—and a state won’t 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,

• failing to file an accident report.

In addition, many states use a

“point” system to keep track of a

driver’s 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, you’ll 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 driver’s 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

inevitable—the 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

don’t always identify unsafe driving

habits.

All licensing departments accept

information from police officers, fami-

lies and physicians about a driver’s

abilities. If a licensing agency moves

to cancel someone’s license as the re-

sult of an officer’s 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

10.19

What will happen if I’m caught

driving with a suspended or

revoked license?

You’ll 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;

you’ll 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 driver’s 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

don’t tell the truth, you may get your

license—but you’re setting yourself up for

big legal trouble if you are in an acci-

dent caused by one of these impairments.

It’s 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 You’re

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 car’s resemblance to

a crime suspect’s 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 car—don’t

get out unless the officer directs you

to do so. It’s 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,

don’t reach for a purse or backpack or

open the glove box unless you’ve

asked the officer’s permission, even if

you are just looking for your license

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

10. 20

and registration

card. The officer

may think you’re

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 officer’s 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 stop—and even if she

issues you a valid ticket for a traffic

violation—that 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 officer’s 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 can’t single out your car

unless they have good reason to be-

lieve that you’ve broken the law.

C A R S A N D D R I V I N G

10.21

Drunk

Driving

If you’re caught while driving drunk

or under the influence of drugs, you’ll

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 you’re convicted

more than once, you may also lose

your driver’s license.

How drunk or high does

someone have to be before he

can be convicted of driving

under the influence?

In most states, it’s 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 driver’s body to prevent him from

thinking clearly or driving safely.

Many people reach this level well

before they’d 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 erratically—swerving,

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 test—others

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

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

10. 22

conversion formula when driver’s

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, they’ll 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 wouldn’t 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

don’t 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 tricky—you 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 officer’s car for a few minutes,

you are probably not under arrest.

Keep in mind that you don’t have to

answer an officer’s questions, whether

you are under arrest or not—and

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 don’t 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,

you’re 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

10.23

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

occurs—and help make any insurance

claims process less painful, too.

What should I do if I’m 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 process—and 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 others—those

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 you’ll 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

statement—and 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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10. 24

Sometimes it is obvious that one

driver violated a traffic rule which

caused the accident—for 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 State’s

Traffic Rules

The traffic rules are contained in each

state’s Vehicle Code. You can usually

obtain a simplified version of these

rules—often 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 book’s 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 person’s own

insurance company of medical bills and

lost wages—up to certain dollar

amounts—regardless 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 car’s front end and your car’s

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

10.25

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.

http://www.nolo.com

Nolo offers self-help information about a

wide variety of legal topics, including

what to do if you’re 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.

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

10. 26

http://www.edmunds.com

Edmund’s 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 state’s 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 consumer’s 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.

abb

•

eeef

•

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 vacations—the

trip to Europe after graduating from college or our children’s faces

the first time they visited a Disney theme park—we often share

with one another the horror stories: The plane that took off

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11.2

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

smoothly—and 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 haven’t 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 grandpa’s an-

tique pocket knife or Aunt Lucy’s

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 haven’t

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 you—either 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

• 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 items—such as

perfume and aerosol hairspray—con-

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 doesn’t 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 threatening—or 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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11.4

Benefits and Risks

of E-Tickets

E-tickets aren’t really tickets at all, but are

reservations for air travel that are kept in

the airline’s 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, you’re

going to need more than just your

driver’s 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 there’s 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 entry—they want you to visit, but they

don’t 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 airline’s flight. This can be time

consuming. And, if your airline goes on

strike, other airlines that might honor a

paper ticket won’t 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.

What’s 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 you’ll find

a statement that various “applicable

tariffs” and the “Carrier’s 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

11.5

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 airline’s 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

cash—tickets 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

passenger’s 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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11.6

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 don’t 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

airline’s ticketing, check-in and

reconfirmation requirements.

• You are not acceptable for transpor-

tation under the airline’s usual rules

and practices—for 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

• 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 it’s 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 airline’s 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 airlines—full-

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

airline’s 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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11.8

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)

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

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 passenger’s bags and

throwing the passenger’s 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 airline’s 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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11.10

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 don’t 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 airline’s

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 airline’s 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

11.11

discounted travel using the bankrupt

airline’s 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 doesn’t

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 haven’t 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 won’t 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-

ward—you 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 company’s 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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11.12

My son was told he couldn’t

rent a car because he’s 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 don’t 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 don’t 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

driver’s record as reported by your

state department of motor vehicles. If

your record doesn’t 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

11.13

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 doesn’t, then relax and

don’t 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 don’t 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 employer—the

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

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

11.14

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 you’re 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

don’t 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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