Q&A: What happens to debts after death?

Dear Liz: When a person passes away, what happens to their debt obligations? A brother has been diagnosed with terminal cancer, and my husband is listed as the beneficiary. His residence is paid off but has monthly homeowners association fees and property taxes that we would expect to pay. However, he has had low income for years, so he also has substantial credit-card debt, a line of credit with a large outstanding balance and some other debts. He refuses to share pertinent details (such as account numbers) so that we can address these issues when he dies. It’s clear that he will not be able to address them. Any advice?

Answer: Your brother-in-law’s creditors typically will file claims against his estate after he dies. Those bills are paid before what’s left, if anything, can be distributed to his heirs. If his home equity and other assets aren’t sufficient to pay his debts, however, those heirs won’t be on the hook. The creditors will take what they can get and write off the unpaid balance.

You say your husband is “listed” as the beneficiary, but you don’t say where. If his brother doesn’t have a will or living trust, he should be encouraged to visit an estate-planning attorney as soon as possible. He should also have powers of attorney drafted that name the people he wants to make healthcare and financial decisions for him should he become incapacitated.

In the meantime, stop bugging the poor man for his account numbers. There’s no need for you to have that information while he’s still alive and able to handle his own affairs.

Q&A: Cleaning up your credit score

Dear Liz: I have several small dings on my credit. I’m now in the position to pay them off, but how do I know my credit will be improved? Should I call the companies and ask if they will remove it if I pay in full and get it in writing?

Answer: Paying off collections won’t help your credit scores, and creditors rarely agree to delete collection accounts in exchange for payment. You can always ask, but don’t count on this as a way to improve your credit. The best way to recover from “small dings” is to use credit responsibly in the future. That means paying bills on time and using less than 30% of your available credit on your cards. You don’t need to carry balances to improve your credit.

Q&A: When a new spouse brings surprise debt to the marriage

Dear Liz: I’m 58 and got married for the first time almost two years ago. I discovered my wife has several incredibly large outstanding student loans, including a parent Plus loan for her son’s education that she thought was in deferment and that has nearly doubled to well over $100,000. In addition, my wife has her own student loans, which total over $40,000 and have rates from 3% to nearly 7%. Needless to say, I was shocked and dismayed to discover this debt and wish she had shared it with me earlier.

We have looked into consolidating the loans into the U.S. Department of Education’s student debt relief program, which creates a monthly payment program based on income and forgives the remaining balance after 25 years. I’m uncomfortable with this plan. The long duration of monthly payments would be a big struggle and, after 25 years, we would have paid nearly $40,000 over the current principal even with the outstanding balance being forgiven.

I’m contemplating liquidating all my non-retirement accounts and half of our savings to pay off the larger parent PLUS loan.This would leave us with very little liquid reserve but still some substantial retirement accounts. Our combined income is around $75,000. We would then consolidate my wife’s lower-rate debt and try to take a personal loan out to pay off the higher rate loans if we can secure a lower rate. Do you have any other suggestions as to my options?

Answer: Your situation is a perfect example of why couples should review each other’s credit reports before marriage. At the very least, you could have figured out a plan to deal with the debt at least two years earlier and saved the interest that’s accrued since then.

As you probably know, your wife is stuck with this debt. The government can pursue her to her grave because there’s no statute of limitations on federal student loan debt collections. The government also can take part of her Social Security retirement or disability checks, something collectors of other kinds of debt can’t do. Even bankruptcy isn’t a viable option for most borrowers because student loan debt is extremely hard to get erased.

It’s understandable that you don’t want to be making student loan payments into your 80s, but paying the loans off much faster probably isn’t a reasonable option, given your income. So liquidating other assets to pay off the parent loan may be the best option. The wisdom of this approach, however, depends on how well you’ve saved for retirement, your job security and how much of an emergency fund would remain. If you lost your job after paying off the parent loan, you couldn’t get that money back to pay your expenses. By contrast, you could have your payment lowered under the Department of Education’s plan if you lost a source of income.

Consolidating your wife’s debt inside the federal student loan program would allow her to retain some important consumer protections that aren’t available with other debt, such as the ability to defer payments for up to three years if she faces an economic setback. If you do refinance your wife’s debt with private lenders to lower the rate, consider doing so with a private student loan rather than a personal loan if you want to retain the ability to write off the interest.

This is a complex decision with a lot of moving parts, so you’d be smart to discuss your plan with a fee-only financial planner before deciding what to do.

Q&A: Will paying off collections help credit scores?

Dear Liz: I have a question about clearing up collections on my credit reports. I used a credit repair company that did help me with most of the setbacks on my credit reports, but I still had collections that were recent and my scores were going up and down. The credit repair company left me to deal with the collections. Will it hurt my scores if I pay them off, and is there a way to get them off my report for good?

Answer: Paying off the collections shouldn’t hurt your scores, but probably won’t help them either. You can try to negotiate with the collection agency to stop reporting the collection accounts in return for payment, something known as “pay for delete” or “pay for deletion,” but debt experts say few agencies will agree to do that.

Plus paying off collections is more complicated than it may seem. Many agencies pay pennies on the dollar for collection accounts, which means virtually anything you pay them is pure profit. That means you should be able to negotiate a significant discount of 50% or more if you can pay in full.

However, not all collectors are ethical. Some pretend to own debts they actually don’t, so any payment to them is money down the drain. Other agencies will re-sell any debt you don’t pay in full to another collection agency, which means more collection calls.

Before you attempt to settle any collection account, visit DebtCollectionAnswers.com and download the free e-book written by consumer advocates Gerri Detweiler and Mary Reed.

Q&A: Fixing your credit scores after a bankruptcy

Dear Liz: How do you repair credit scores after filing for bankruptcy? My husband and I are in this situation and are looking to reestablish credit and increase our credit scores. Also, how long do closed accounts appear on the credit report?

Answer: Filing for bankruptcy may have actually helped your scores. Researchers at the Federal Reserve Bank of Philadelphia found scores typically plunged in the 18 months before people filed for bankruptcy and rose steadily afterward. The average credit score before someone filed Chapter 7 was 538.2 on Equifax’s 280-to-850 scoring range. By the time filers’ cases were discharged, their average score was 620.3.

You can continue the upward trend with a credit-builder loan. These loans, typically offered by credit unions, put the money you borrow — usually $500 to $1,000 — into a certificate of deposit or savings account that you can claim once you’ve made 12 monthly payments. Your payments are reported to the credit bureaus, so you can build a decent credit history and your savings at the same time. If your local credit union doesn’t offer these loans, check to see if there’s a community development financial institution near you that does. You can find links to these at www.cdfifund.gov. Another option is Self Lender, an online company that makes credit-builder loans.

If you don’t already have a credit card, you can accelerate your scores’ rehabilitation with a secured credit card. You make a deposit, typically $200 to $2,000, with the issuing bank and get a credit line equal to that deposit. You should use the card lightly but regularly, being careful not to charge more than about 30% of its credit limit and paying the balance in full each month.

Another option is to wait until your scores are in the mid-600s and then apply for a regular credit card.

The bankruptcy will remain on your credit report for 10 years, but it will have less effect on your scores as time goes by as long as you continue to use credit responsibly.

Q&A: Getting out of a bad car loan can be tricky

Dear Liz: My car payment is $465 a month with a 22% interest rate. I need to get out of this car and into a lower car payment. My credit is poor. What is the best solution to go about this?

Answer: There are a number of solutions, most of which probably won’t work for you.

If you could do without a car for a while and owe less than this car is worth, you could sell it to pay off the loan. The fact you haven’t already done so indicates that you either need a car or have no equity, or both.

Fixing your credit could help you get a better deal, but that’s tough to do with an unaffordable car payment. You need to have enough free cash flow to put a down payment on a secured credit card or make monthly payments on a credit builder loan, which are two of the best ways to rehabilitate your credit. Your finances also have to be sound enough that you don’t miss payments on any credit obligation, including the car.

If you bought an overpriced jalopy from a “buy here, pay here lot,” or you were approved at a regular dealership but your rate got jacked up at the last minute, the dealer may have violated Truth in Lending laws that would allow you to get out of the deal. You’d probably need an attorney to help you pursue this option. You may luck out and find one that can help you at your local legal aid society. Otherwise, you could check with the National Assn. of Consumer Advocates to see if you can find affordable help.

Even if you were successful in getting out of this loan, of course, you still are likely to need a car and you’d still have bad credit, which means that you probably wouldn’t get a better deal on the next car than the bad one you have now.

If you can, the best option might be to get a second job or ask for overtime hours to pay this loan off as fast as possible. Then you could get a credit builder loan, which puts the money you borrow into a certificate of deposit you can claim after making 12 monthly payments. This small loan could be enough to significantly boost your credit scores and give you some cash to make a down payment on the next vehicle.

Q&A: Paying credit card debt after death

Dear Liz: I am 80 and I have a substantial amount of credit card debt, approximately $30,000. What becomes of this credit card debt in the event of my death? Will it become a future liability for my two sons or will this eventually become a bad debt for the credit card company? I would hate to see this become a financial burden for my sons.

Answer: Any credit card balances you leave behind will be a liability for your estate, not for your sons — although the debt could reduce any inheritance they get. Creditors have to be paid before any remaining assets are distributed. If you don’t have enough assets to cover the bill, creditors will get a proportionate amount of whatever’s left after paying your final expenses. Any remaining debt will be a write-off for the creditor, and your sons typically wouldn’t get anything.

You didn’t ask for help dealing with this debt, but you shouldn’t assume you can just tread water until you die and leave it for someone else to sort out. Your life expectancy at age 80 is another eight years if you’re male and nearly 10 years if you’re female, and you could live considerably longer. If overspending or medical bills led to the debt, you could accrue a lot more before you’re done. If you rack up so much debt that you can’t make the minimum payments, your interest rates could skyrocket and you may have to fend off collection calls.

You should at least discuss your options with an experienced bankruptcy attorney and with a nonprofit credit counselor.

Q&A: What to consider before paying off a vehicle loan

Dear Liz: In January, I used financing to buy a used car, and now I have about $8,000 left to pay off. I recently received a windfall and can pay off that debt in full. Is there any reason to not go ahead and do that? This car loan is my only current debt. However, I do anticipate buying a home and thus getting a mortgage in the near future. Additionally, would paying off the car loan help lower my auto insurance payment?

Answer: Having an open installment loan showing on your credit reports can help your scores, according to credit expert Barry Paperno, who used to work for leading credit scoring firm FICO. But paying it off shouldn’t hurt you much if at all. By contrast, paying off revolving debts such as credit card balances can give a real boost to your scores.

Paying off the loan should save you some interest and eliminating the payment could help you qualify for a bigger mortgage. Those are real advantages. Still, there may be better uses for your windfall. Are you taking full advantage of your 401(k) match, if your company offers one? If you don’t have a workplace retirement plan, are you contributing to an IRA? Do you have an emergency fund?

A paid-off car doesn’t automatically qualify for lower insurance rates. You can consider dropping collision and comprehensive coverage on older cars, since you’re no longer required to carry that coverage, but make sure that you’re comfortable with the risk of not getting anything from your own insurer to repair or replace your car if, for example, you cause an accident and your car is damaged.

Q&A: Divorced, and in debt

Dear Liz: I recently got divorced and found myself in about $50,000 of credit card debt. While I’m struggling to slowly pay off this debt, I do have some money saved in a tax-sheltered annuity as well as a small Roth IRA. Should I use those, take a personal loan or file for bankruptcy?

Answer: A good rule of thumb is to leave retirement money alone for retirement. Early withdrawals can trigger taxes and penalties that eat up one quarter to one half of what you take out. You can always withdraw your contributions tax free from a Roth, but any earnings can trigger taxes and penalties. The biggest cost, though, is the loss of future tax-deferred compounding that can equal 10 times or more of what you take out.

If your credit is good, low-rate balance transfer offers could help you lower the interest rate on your debt so you can pay it off faster. A personal loan from a credit union, your bank or an online lender could work if it offers a low, fixed rate and a repayment term of five years or less.

If you can’t pay this debt off within five years, then you should talk to both a credit counselor (visit the National Foundation for Credit Counseling at www.nfcc.org) and a bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org).

Q&A: Are credit checks a scam?

Dear Liz: In July last year, I accessed the website for my free credit report before applying for a car loan. I have also been in recovery from cancer treatment and haven’t been great about checking my Visa statement until now. For the past year, my credit card has been charged $19.95 each month for some kind of “credit check” service. I never authorized this, nor did I request this service. I contacted the site, and they will refund me only one month of billing. Is this some kind of scam? How do they get away with this, and what can I do?

Answer: It may not technically be a scam, but the site’s business model profits from people’s confusion about how to get free credit reports.

The site you used is not the federally mandated site for free credit reports. It’s likely one that you found by typing “free credit reports” into a search engine and then clicking on one of the first results, which was probably an ad. To find the real site, you need to type www.annualcreditreport.com into your browser. You won’t need to give your credit card number to get your reports.

You may be able to get another month’s fee refunded by contacting your credit-card issuer and disputing the charge. By federal law, you’re supposed to make such disputes within 60 days after the statement containing the disputed charge was sent to you. Write to the issuer at its address for billing inquiries (not the address where you send your payments) and send it certified mail, return receipt requested.