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Dear Liz: My wife and I accrued $28,000 of credit card debt over the past eight years. In addition to a sizable student loan bill for law school, our home mortgage and the expenses associated with three young children, we are struggling to get ahead enough to knock our credit card debt down. While we make good income between the two of us, it would seem not enough to pay more than the minimum on our debts. We have curbed a number of our bad habits (we eat out less, take lunch to work, say no to relatives) but the savings are not translating to lowered debt. Our 401(k)s are holding steady and we continue to contribute and I don’t want to touch those (I did when I was younger and regret it.). We’ve been considering taking out a home equity line of credit to pay off the cards and reduce the interest rate. Of course we have to be disciplined enough to not go out and create more debt, but I think my wife got the picture when I said no family vacations for the next few years. What are your thoughts?
Answer: You say, “Of course we have to be disciplined enough to not go out and create more debt,” but that’s exactly what many families do after they’ve used home equity borrowing to pay off their cards. They wind up deeper in the hole, plus they’ve put their home at risk to pay off debt that otherwise might be erased in Bankruptcy Court.
Bankruptcy probably isn’t in the cards for you, of course, given your resources. But before you use home equity to refinance this debt, you need to fix the problems that caused you to live so far beyond your means.
You’ve plugged some of the obvious leaks — eating out and mooching relatives — but you may be able to reduce other expenses, including your grocery and utility bills. If those smaller fixes don’t free up enough cash to start paying down the debt, the next places to look are at your big-ticket expenses: your home, your cars and your student loans. There may not be much you can do about the latter, although you should explore your options for consolidating and refinancing this debt. That leaves your home and your cars. If your payments on these two expenses are eating up more than about 35% of your income, then you should consider downsizing.
What you don’t want to do is to tap your retirement funds or reduce your contributions below the level that gets the full company match. Retirement needs to remain your top financial priority.
Reducing your lifestyle may not be appealing, but it’s better to sacrifice now while you’re younger than to wind up old and broke.
Dear Liz: My husband and I are 56. We need to plan for retirement, but whenever the topic comes up, I find that either we have no idea or we disagree on what we will do during our retirement. Naturally, our activities during retirement will affect the funds we will need. We need help to figure out the things we agree on and where we might want to plan for different individual options. Do you have some resources to suggest?
Answer: You can start with a visualization exercise that some financial planners use to clarify their clients’ values.
Imagine your ideal day in retirement. Start with when you’ll wake up and where — what type of dwelling and in what area. In your mind, walk through your day hour by hour — where you’ll be, what you’ll be doing and with whom. Write it all down, even if you don’t think what you’re visualizing is realistic or even possible. The point is to identify, for yourself and your partner, what’s most important to you: what you want your life to be like and whom you want in it. If you visualize waking up in Paris, for example, it doesn’t mean you need to move there. You may be just as content with a trip to the City of Light or travel to less-expensive destinations.
You each should do the exercise separately and then compare what you’ve written. Don’t despair if you visualize yourself on the Champs-Elysees and he’s fishing off his back porch. As you correctly note, you can have different goals and desires for retirement. Complete harmony has never been a requirement of staying married, and that won’t change when you quit your jobs.
Let’s say you want to get deeply immersed as a volunteer for a local, at-risk school, and your husband wants to spend a year roaming the country in an RV. He could opt to pursue other interests during the school year, and you could take extended trips together during the breaks.
Once you’re clearer about what you want for your retirements, you can start working the numbers and figuring out compromises that work for both of you. Start with your expenses — what you’re spending annually now — and subtract any costs that will disappear or substantially diminish when you retire (such as commuting expenses and work clothes). Add in the amounts you’ll need to pursue your passions. (Will you buy the RV used or new? In retirement or before? Tip: Buying a lightly used vehicle before retirement will give you both a chance to get the hang of RVing and its costs so you can decide whether it’s really for you.)
Compare your expected expenses with your expected income, including Social Security, any pensions and withdrawals from your retirement accounts (which initially should be just 3% to 4% of the total balance, planners say). If there’s a gap, that’s what you’ll need to fill in the coming years with increased savings.
Still at an impasse? Hire a fee-only planner who has experience in “life planning,” or helping clients figure out their life goals. You can get a referral from the Kinder Institute of Life Planning at http://www.kinderinstitute.com/dir/.
Dear Liz: How long must I be punished for my ex’s poor payment history? In our divorce he agreed to pay the credit cards and other bills. He defaulted and has filed for a Chapter 13 bankruptcy. My credit scores plummeted, and recently one of the cards I obtained on my own to help rebuild my credit has dropped me, stating my credit scores as the reason. Do I have any recourse here?
Answer: Not really. As you’ve discovered, creditors don’t have to pay any attention to divorce decrees that say who’s responsible for paying what. You agreed to pay the bill when you signed up for the card. So if your name is on the account, your credit scores will be hurt if it’s not paid.
That’s why it’s so important for separating couples to separate their credit as well. Jointly held accounts should be closed, and any balances transferred to a card that’s in the responsible party’s name only. Otherwise, missed payments and charge-offs will continue to affect both people’s credit for years.
Dear Liz: I have three credit cards that are in my name only, plus a small loan at my credit union. My husband did not sign for any of these, nor does he know the extent of my debt, which is about $10,000. If I should die before I can get them paid off, will he be responsible for my debt?
Answer: Your debts become an obligation of your estate when you die. That means creditors will be paid out of the assets you leave behind. The extent to which creditors can make a claim on jointly owned assets — such as, say, your home — varies by state. In a community property state such as California, debts are generally considered owed by both people in a marriage, so a jointly owned home would be fair game. In other states, creditors could go after assets co-owned by your husband if the debts were incurred to benefit you both.
That’s not the only reason secret debts are a bad idea. Every day you hide these debts, you’re lying to your spouse about your true financial picture, both as an individual and a couple. Even if you keep your financial accounts strictly separate, you should have a clear idea of each other’s assets and obligations so you can plan your future together.
If you’re keeping mum because you’re worried your spouse will get violent, call the National Domestic Violence Hotline at (800) 799−SAFE (7233) for advice and help.
Otherwise, it’s time to come clean so that the two of you can work out a plan to pay off your debt and prevent you from incurring more.
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Dear Liz: My boyfriend is deployed. I have his power of attorney, and during his deployment I have paid off all of his credit card debt. The accounts now need to be closed because they are ones that were acquired with his former wife. I know you say that it will hurt his credit to close accounts, but I’d rather close them because they’re tied to his ex.
Answer: If the former wife is a joint account holder on the cards, they should have been closed and the balances transferred to other credit cards in his name only before the divorce was final. The credit score dings from closing accounts and opening new ones pale compared with the potential damage a vengeful, or neglectful, former spouse could do with those cards. She could have run up big balances or tried to wrest control of the accounts and then failed to pay them, ruining his credit scores.
If your boyfriend has several other open credit cards, you could simply close these. If he doesn’t, you might talk to the credit card companies about closing these cards and simultaneously opening new ones in his name only. This might be tricky to do while he’s deployed, however, even with a power of attorney. Another option is to simply open a new card for him online before closing the others.
Dear Liz: My soon-to-be ex wants to refinance our mortgage to pay for renovations so we can sell it for more money. He also wants to take out some cash to pay off unsecured loans. (I have $11,000 in credit card debt, and he has over $50,000.) The house recently appraised for $310,000 and we owe $158,000 on it. Is it wise to refinance in this circumstance?
Answer: A cash-out refinance would be a risky maneuver even if you intended to stay married. Renovations rarely boost a home sale price enough to cover their cost. Also, home equity that’s used to pay off credit card bills is often wasted, since the borrower never fixes the problem that led to overspending in the first place and simply runs up more debt. Since he would be getting the bulk of the benefit by having more of his debt paid off, you also would need to adjust the rest of your property settlement.
Often, the best and easiest solution in a divorce is to simply sell the house. You certainly wouldn’t want to remain on a mortgage with an ex after the divorce was final, if you could possibly avoid it. A good divorce attorney can give you advice about how to proceed from here.