Ask Liz Weston

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Credit & Debt

Q&A: Bankruptcy may be best option for indebted widow

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Dear Liz: I am an 82-year-old widow with a disabled daughter in a desperate financial situation. Payments on my credit cards and a personal loan eat up half the income I get from Social Security, my late husband’s pension and my IRA. My total debt is over $100,000 and my only assets are a car worth $35,000 and the fast-dwindling IRA with just $25,000. I need advice on how best to proceed: bankruptcy or loan consolidation or something else?

Answer: Please make an appointment with a bankruptcy attorney as soon as possible.

There are other solutions for debt, including a debt management plan through a credit counselor, debt settlement or a consolidation loan. Debt management allows people to pay off what they owe over time, often at a lower interest rate. Debt settlement involves negotiating with creditors to accept less than what they’re owed. A consolidation loan replaces multiple debts with a single loan, often at a fixed interest rate.

Your situation is simply too dire for these other methods to make much sense, however. Bankruptcy could allow you to legally erase the debt and preserve what’s left of your limited funds.

Q&A: Speaking of credit cards, what if a spouse has a balance when they die?

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Dear Liz: When a spouse dies, is the surviving spouse responsible for outstanding credit card debt from a card issued only in the deceased’s name?

Answer: In community property states — including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — debts incurred during marriage are usually considered owed by both spouses, even if only one spouse’s name is on the account. In other states, debts can be considered separate, but creditors typically are paid out of the dead person’s estate before any remaining assets go to heirs.

Q&A: Why debt settlement companies are the wrong way to deal with high credit card debt

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Dear Liz: Finance companies claim if you owe too much credit card debt that by law you need not pay it all back, but can retire some or most of this debt. They say this is not a credit card debt reduction program through balance transfers or debt consolidation loans. It sounds more like a faux semi-bankruptcy declaration. Are you familiar with these programs? They sound too good to be true.

Answer: Most likely you’re seeing advertisements for debt settlement companies. With debt settlement, the debtor stops making payments on their credit card debt, hoping that the issuers eventually will settle for less than what is owed. Results aren’t guaranteed and the process often takes a few years.

As you might expect, not making payments can lead to significant credit score damage as well as creditor lawsuits. In addition, any amounts that are forgiven in this process may be considered taxable income to the debtor. You’ll also pay fees to the debt settlement company if you hire one to handle these negotiations. The fees and taxes can significantly offset any savings achieved through the process.

Most people who struggle with credit card debt would be better off filing bankruptcy or using a credit counseling service’s debt management program.

Debt management programs enable people to pay off what they owe over three to five years, typically at reduced interest rates. Bankruptcy, meanwhile, allows credit card debt to be legally erased without triggering a tax bill. The most common form of bankruptcy, Chapter 7, usually takes just a few months, after which people can begin rebuilding their credit.

Q&A: How landlords weigh your credit history when deciding whether to rent to you

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Dear Liz: I recently paid off a large amount of credit card debt: over $15,000 in total to several credit card companies. How long does it take for my credit report to reflect that? I will be moving into an apartment in the next month or two. I don’t want my application to be denied because my debt is still listed on my credit report. I live with my father right now as he needs 24-hour care, but in the near future he will need to move into a nursing home as he has advanced dementia.

Answer: Credit card issuers typically report balances to the credit bureaus every month. Many report your balance as of your card’s statement closing date. If you paid off a balance a few days after the card’s statement closing date, you may not see the change reflected in your credit reports and credit scores until the next billing cycle.

High debt levels relative to your income could be a concern for landlords. Typically, though, they’re looking for bigger red flags such as late payments and collections that indicate you don’t pay on time.

Many landlords use credit scores as an initial way to evaluate applicants, followed by a closer look at applicants’ credit reports. If you maintain good scores and have no negative marks, you should be seen as a good candidate.

Q&A: Establishing credit without debt

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Dear Liz: My wife and I are retired. We have always paid our credit card balances in full each month and have zero debt. A banker recently advised us to establish credit and make timely monthly payments in order to maintain a high credit rating in case we need to borrow in the future. I feel uncomfortable taking money from our investment portfolio to service debt, but I also wish to maintain our high credit rating.

Answer: You don’t need to take on debt or carry credit card balances to have good credit scores. Using a few credit cards lightly but regularly is enough.

Taking out an installment loan can help boost your scores if you’re trying to repair troubled credit. You also may need an installment loan on your credit reports if you want the highest scores possible. But the highest possible scores only give you bragging rights, not better rates and terms on borrowing.

If you’re concerned about maintaining your credit, consider monitoring at least one of your scores. Your bank or one of your credit card issuers may provide a free score, or you can sign up on one of the many sites that offer them. That will give you a better idea of how lenders view you as a credit risk and can help you see which behaviors help and hurt your scores.