Don’t drain your retirement to pay debts

Dear Liz: My husband and I are struggling with whether to file for bankruptcy. We have $80,000 in credit card debt, which has ballooned because of high interest rates and our paying only the minimum. My husband and I were both laid off in 2008. I collected unemployment for not quite a year and still have not been able to find work. My husband found a job after a year and a half, but then was injured at work and faces another four to six months of recovery, so he is receiving only 67% of his former wage. Now we can’t keep up with our bills. We have stopped paying three of our credit cards and are getting hounded to no end. We are trying to sell our house but even that is not selling. We have nothing left. No retirement, no savings, just debt. We are drowning. We both have such a hard time with the idea of filing for bankruptcy, but is it time?

Answer: People can sometimes avoid bankruptcy if they seek help early enough. If they’re able to pay more than the minimums on their credit cards, for example, they may be able to use a legitimate credit counselor’s debt management plan to pay off their debt.

But debt management plans require that you have at least some disposable income. If you can’t keep up with your bills or find employment, that doesn’t describe your situation.

You still can contact a creditor counselor via the National Foundation for Credit Counseling at http://www.nfcc.org, but you also should contact an experienced bankruptcy attorney (you can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org). You may not want to file, but you may not have much choice, particularly if you want the collection calls to stop.

What’s especially sad is that you apparently drained your retirement to pay your bills. Your retirement money would have been protected from creditors, but you essentially threw good money after bad. Retirement money should be left alone for retirement, so you can support yourself in your old age. Anyone who’s considering draining a retirement account or home equity to pay credit card debt or medical bills should first consult a bankruptcy attorney to understand the ramifications of this often-foolish act.

Collectors can’t reset the clock on old debt

Dear Liz: What can I do to get credit card debts that are over 7 years old off my credit reports? I have at least three accounts that are 10 or more years old, but the collection agencies keep selling the accounts to other collectors who report the accounts as younger than they are.

Answer: The collection agencies are violating federal credit reporting laws. Negative information such as charged-off accounts and collections are supposed to be removed from your credit reports seven years and 180 days after the account first goes delinquent (typically when you miss your first payment). Collection agencies are not allowed to “reset the clock” when an account is sold.

You can dispute these accounts with the credit bureaus, but the reselling and illegal reporting may continue. If it does, you will need to contact the collection agencies directly and tell them to stop. If they refuse, you may need an attorney’s help to get them to mend their ways. You can find a lawyer familiar with credit reporting laws through the National Assn. of Consumer Advocates at http://www.naca.net.

You might think that paying the bills would help, but you really don’t want to deal with a collector so unethical that it would change the date on a debt. Such a company is unlikely to deal in good faith, and you don’t want to give it any ammunition to do you further harm, such as access to your bank account (which it could have if you wrote it a check) or even your phone number, since it may start harassing you.

How lost credit cards can affect your scores

Dear Liz: Yesterday I lost my wallet along with four major credit cards. I called the card companies to report the loss. They canceled the cards, created a new account for each and are sending me new cards. They told me the new accounts would be exactly the same as the old ones in all aspects. But will this closing of old accounts and creation of new ones hurt my credit scores?

Answer: Typically, no. The information from your old accounts usually is just transferred to your new accounts at the three major credit bureaus. If you pull your credit reports from http://www.annualcreditreport.com, the only site that provides your federally mandated free look at your credit reports, you’ll see that the opening date for your accounts is the date you opened the original accounts, not the date the replacement accounts were opened. Your history of payments, credit limits and other details of the accounts will also show up under the new account numbers.

If for some reason this is not the case, you can call your issuers and ask them to export the data for the old account into the new one.

Credit cards must be paid before estate is distributed

Dear Liz: My oldest sister died recently. She owed a fair amount of credit card debt. She willed her condominium and the rest of her estate to my brother. Must my brother pay my sister’s debts from what he receives after he sells the condo, or are those debts considered closed?

Answer: Creditors typically must be paid before the remainder of an estate can be distributed to any heirs. That’s true even if specific items or dollar amounts are willed to specific people — they get what’s left only after the creditors get their share. If there isn’t enough money in the estate to pay the creditors in full, the executor of the estate is responsible for arranging settlements and the heirs typically get nothing.

Since it sounds as if your brother is also the executor, he would be wise to consult an attorney at this point. Executors can be held personally responsible — and sued — for any mistakes made in settling an estate.

New card, worse terms? You have options

Dear Liz: I recently received a credit card to replace an existing one. The retailer that provided the card switched it from a Visa to an American Express. But the retailer also cut my credit limit to $1,000. My old limit was $10,000. Currently I have three other major credit cards with available credit limits totaling more than $10,000. My FICO scores are excellent and I always pay my balances in full. Could you please advise whether I should activate this new card or cancel it? Would it hurt my FICO scores if I cancel the account?

Answer: The new card is probably showing up on your credit reports already, whether it’s activated or not. If you were to close it now, you would risk hurting your good scores.

That’s not to say that you can never close an account. But if you’re trying to improve your scores, or you’ll be in the market for a major loan such as mortgage in the near future, you generally want to avoid closing accounts.

If you don’t activate the card, you might not receive the benefits that typically come with a co-branded retailer card, such as coupons and discounts. If you’re a fan of the retailer, you’ll probably want those goodies.

You might try contacting the retailer and letting it know that you’re unlikely to use the card because the credit limit is so low. Let the retailer know you’re concerned about your good credit scores, since you know you should use 10% or less of your card’s available credit to preserve them. That would mean any shopping spree would have to end at $100.

That might win you a higher limit, or it might not. If it doesn’t, feel free to substitute another card that treats you a little better.