September 23, 2013 By

Helping family led to unpayable debts

Dear Liz: I have $40,000 in credit card debt due to home healthcare I had to provide for my mom, who lived with me for six years before she passed away in 2011. I filed a Veterans Affairs claim on her behalf but just got a VA check for $344 with no explanation about whether this was all it was going to allow. If it is, I need to file for bankruptcy. I owe $18,000 on my mortgage and $32,000 on a home equity loan I took out in 2001 to help my son get on his feet after he finished graduate school and had his first child. I also had some credit card debt from helping my brother in 2009 when he had cancer and could not work and his wife left him so he had no income. I also have $20,000 in a money market account that I call my retirement fund. Is it protected if I were to file for bankruptcy? The economic downturn caused me to have to take a $700-a-month pay cut the first of this year that will reduce my annual salary to $55,000 if there are no more cuts or layoffs. If they were to close the business completely, my Social Security benefit will be $1,900 per month, compared with $3,400 that I take home now. I have always paid my bills, but Mom’s medical expenses really have taken a toll on my finances.

Answer: Your debt exceeds your income, and few people in that situation manage to pay off what they owe. But bankruptcy isn’t a get-out-of-jail-free card. Your home equity and your savings could be at risk. Had you actually put your money into a qualified retirement account, such as an IRA or a 401(k), it would have been protected from creditors. Just calling an account your retirement fund offers no protection whatsoever. A bankruptcy attorney familiar with the laws of your state can tell you what to expect. You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.

You also need to call the VA at (877) 222-VETS, or (877) 222-8387, to find out whether you can expect any more help. The VA does offer some long-term care benefits to veterans and their spouses who qualify for the aid. The time to request help, though, was when your mother was still alive.

Which leads us to the problem of your spending money you didn’t have to help people who may well have had other options. If your mother couldn’t get VA help, she may have had assets that could have paid for assistance. If not, she might have qualified for long-term care benefits through Medicaid, the federal healthcare plan for the indigent. Your brother also may have qualified for federal or state benefits. Your son may have had a rough time getting established, but he had a degree and a working lifetime ahead of him.

That doesn’t mean you should have thrown family members to the wolves. But it’s not clear you considered any other options before turning to credit. Sites such as Benefits.gov and the Eldercare Locator at http://www.eldercare.gov could have connected you and your family to resources that might have helped. Other family members may have been able to pitch in, or the people involved may have had assets to tap. If there truly were no other options, your assistance should have come out of your current income. If you have to borrow, then you really can’t afford to help.

As it is, your generosity has left you at the threshold of retirement with little savings and big debts. Let’s hope your family is as willing to help you in your old age as you were to help them.

Filed Under: Credit & Debt, Elder Care, Q&A Tagged With: , , , , , , , ,
September 16, 2013 By

Credit denial: a corporate trick or cause for alarm?

Dear Liz: A few years ago when buying my son his college laptop computer, I applied for the store card at a big, well-known electronics store (at the encouragement of the sales associate). I was denied. I have never been denied a credit card before. I have eight cards that are always paid off monthly, own my own home and have a satisfactory retirement income and a top credit score. By receiving the card, I would have had a substantial savings on the computer. The denial has bothered me ever since. Was this a ploy on the company’s part to deny me the savings?

Answer: That kind of bait-and-switch happens sometimes, but there may be other reasons you were denied.

When you were turned down, the company should have provided you with the name, address and phone number of the credit agency it used to evaluate you. You should have immediately requested your report from the agency to see if the information was accurate. Someone may have stolen your identity, and credit denials are often the first sign many victims have that there’s a problem.

A collections account also could have torpedoed your scores. Many people discover that a medical bill, library fine or parking ticket went unpaid only when they find the resulting collections on their credit reports.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: , , , , , , ,
September 12, 2013 By

Does charged-off debt disappear?

Dear Liz: I understand that creditors eventually write off unpaid debts and receive a federal tax deduction for the loss. Then they sell that “debt” to a collection agency. However, isn’t the debt rendered void by the fact the original creditor charged it off and got the deduction? So how can collection agencies attempt to collect an invalid debt?

Answer: Charging off a debt and taking the tax deduction for the loss indicates the original creditor doesn’t believe it can collect the money. That doesn’t render the debt invalid or erase it in a legal sense. Debts typically exist until they are paid, settled or wiped out in Bankruptcy Court.

Filed Under: Credit & Debt, Q&A Tagged With: , ,
August 5, 2013 By

A credit line can help with cash flow gaps

Dear Liz: My husband and I are self-employed. As we pay our bills, we are often a few thousand dollars short as we wait to be paid by our clients. Until now, we’ve been using a home equity line of credit to bridge the gap. We are ultra-responsible about paying it back. But our current 10-year draw period ends this month, and our lender has denied us either a new HELOC or a refinance. Is there another product that would help us? It would be sad if the only way to maintain our life is to sell our house, but that might be where we are if we can’t find some small line of credit.

Answer: Talk to the bank that has your business checking and savings accounts about the possibility of opening a line of credit. This is a standard tool for businesses of all sizes, but can be particularly helpful for small-business owners who have cash flow challenges. The interest rates on business credit lines are typically low, and you may be offered higher limits over time as you use the account responsibly.

If your bank isn’t interested in helping you, ask other entrepreneurs to help you find a more business-friendly financial institution. A community bank may be more flexible and more interested in winning your business than bigger, name-brand banks, but the experiences of fellow small-business owners can guide you to the best options in your community.

Filed Under: Credit & Debt, Q&A Tagged With: , , , ,
July 9, 2013 By

Co-signing card leads to collectors’ calls

Dear Liz: I co-signed a credit card for someone and the person defaulted on payment. I started making payments but could not continue because I became unemployed. The debt started at $15,631.23 but has gone up to $17,088.08 because of interest and fees. I previously had to go to court because my bank account was frozen. I recently got a notice about this again. Should I file for bankruptcy or try contacting the attorneys who are seeking payment? I am working part-time and have a tight budget. I don’t have anything saved and am living from paycheck to paycheck.

Answer: You should have gone to a bankruptcy attorney the first time you got sued.

Many people try to ignore their debts or hope that collection agencies will be lenient. That’s not a good strategy at a time when collectors are increasingly willing to file lawsuits to get paid, said Gerri Detweiler, director of consumer education for Credit.com. Once collectors have a judgment against you, they can freeze your bank accounts or garnishee your paycheck.

If you don’t have anything saved and can’t come up with any money for payments, you have little leverage in dealing with a collection agency. Bankruptcy may be your only recourse to get these collection efforts to stop.

A bankruptcy attorney can let you know whether you are “judgment proof,” which basically means that you have and make too little for a creditor to collect on any judgments. If you are judgment proof, you may not need to file for bankruptcy, but you may have to deal with frozen accounts and regular trips to court when a collector oversteps.

You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.

The only silver lining of this situation is that you’ve provided other people with a clear lesson in why they shouldn’t co-sign a credit card or any other loan for someone else.

Filed Under: Bankruptcy, Credit & Debt, Credit Cards, Q&A Tagged With: , , , , ,
July 1, 2013 By

Save or pay debt? Do both

Dear Liz: I am a 67-year-old college instructor who plans to teach full time for at least eight more years. Last year I began collecting spousal benefits based on my ex-husband’s Social Security earnings record. Those benefits give me an extra $1,250 each month above my regular income. I have been using the money to pay down a home equity line of credit that I have on my condo. The credit line now has a balance of $29,000. I have about $200,000 in mutual funds and should have a small pension when I retire. (I went into teaching only a few years ago.) Would it be better for me to split the extra monthly $1,250 into investments as well as paying off my line of credit? The idea of having no loan on my condo appeals to me, but I wonder if I should try to invest in stocks and bonds instead.

Answer: Paying down debt is important, but opportunities to save in tax-advantaged retirement plans are typically more important. Fortunately, you probably have enough money to do both.

First investigate whether your college offers a 403(b) or other retirement program that offers a match. If it does, you should be contributing at least enough to that plan to get the full match.

Your next step is to explore an IRA. Since you’re covered by at least one retirement plan at work (your pension), you would be able to deduct a full IRA contribution only if your modified adjusted gross income as a single taxpayer is $59,000 or less in 2013. The ability to deduct a contribution phases out completely at $69,000.

If you can’t deduct your contribution, consider putting the money into a Roth IRA instead. Roth contributions aren’t deductible, but withdrawals in retirement are tax free. Having a bucket of tax-free money to draw upon in retirement can help you better manage your tax bill, which is why some investors opt to contribute to Roths even when they could get a deduction elsewhere.

People 50 and older can contribute up to $6,500 this year directly to a Roth if their income is under certain limits. (For singles, the limit for a full contribution is a modified adjusted gross income of $112,000 or less.) If your income is over the limit, you can contribute to a traditional IRA and then immediately convert the money into a Roth IRA, since there’s no income limit on conversions. (This is known as a “back door” Roth contribution.)

Since you’re so close to retirement, you don’t want to overdose on stocks, but you still need a significant amount of stock market exposure so that your money has a chance to offset future inflation. You might consider a balanced fund that invests 60% in stocks, 40% in bonds.

Once you’ve taken advantage of your retirement savings options, you can direct the rest of your Social Security benefit to paying off your home equity line. These credit lines typically have low but variable rates. Higher interest rates are likely in our future, so paying this line down over time is a prudent move.

Filed Under: Credit & Debt, Q&A, Retirement Tagged With: , , , , ,
June 3, 2013 By

Don’t sweat the small (FICO) stuff

Dear Liz: Over the last couple of years I have managed to pay off my credit cards. I know that closing those accounts will hurt my credit so I kept them open. When I checked my credit report, I found that my rating had gone down and was told that I had to actually use the credit cards and pay them off to keep my score up. I’ve been doing that over the last year or so and my credit score responded well. This past month my credit score went down again by a few points and I learned that it was because the credit card companies had rewarded my diligence by raising my credit limit. This apparently hurt my score. What’s up with this? Is there any way not to get dinged by the reporting agencies?

Answer: Higher credit limits would reduce the percentage of available credit you are using, and that should help your credit scores, rather than hurt them. So the score you’re seeing either isn’t a FICO score, which is the score used by most lenders, or you are being given questionable information about what affects your scores. Many score monitoring systems are set up to give you explanations for any change in your numbers, but those explanations might be vague or might not accurately depict what’s truly influencing your scores.

Your FICO credit scores change all the time, based on the ever-changing information in your credit reports. Variations of a few points shouldn’t be a cause of concern. Continue to use your cards lightly but regularly, paying the balances off in full each month. Over time, the variations will smooth out into higher scores.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: , , , ,
May 29, 2013 By

Split credit accounts when you split with a spouse

Dear Liz: I just finished paying off my last credit card and checked my credit report as I am now separated from my wife. I found we had one joint account that she had not been paying. There are two stretches of five months each of no payment.

I immediately called up the creditor and paid off the balance and the creditor closed the account due to the lack of payments. This one account killed my credit score. I also found two old accounts on my credit report that are both still active but I have not used them for years. Both accounts are in good standing.

I was thinking that if I started using the accounts again, paying them off each month, it would boost my credit score faster. I am looking to buy a house this summer and would have an easier time with a better score. Do you think using the old accounts would help improve my score faster or do you think my score would be better if I closed those accounts?

Answer: Closing accounts can’t help your credit scores and may hurt them. You should avoid closing any credit account when you’re trying to improve your credit rating.

Your experience shows why it’s so important to separate financial accounts when you’re separating from a spouse. Failure to pay any joint account can hurt both parties’ scores. This would be true even if you were divorced and had a divorce decree making her responsible for the debt. Your creditors don’t have to pay attention to such agreements.

Lightly using a few credit cards can help you recover from missteps like this one. “Lightly” means charging 10% or less of their credit limits, and you should pay the balances in full each month, since carrying credit card debt doesn’t help your scores. You shouldn’t expect your scores to bounce back overnight, however. If you had good scores before this incident, it may take you a few years to recover completely.

Filed Under: Credit & Debt, Credit Cards, Credit Scoring, Divorce & Money, Q&A Tagged With: , , , , , ,
May 29, 2013 By

Opt out of credit card offers

Dear Liz: I am receiving many unsolicited credit card offers in the mail and am worried about identity theft. Do you know of a phone number or Web address whereby I can opt out of these offers?

Answer: You can call 1-888-5OPTOUT or visit www.optoutprescreen.com to remove your name from marketing lists that the three credit bureaus sell to credit card issuers. Opting out won’t keep every card solicitation out of your mailbox, but it should decrease substantially the number of offers you receive. You can opt out for five years or permanently, but you need to be prepared to give your Social Security number, since that’s one of the key ways the bureaus identify you in their records.

Filed Under: Credit & Debt, Credit Cards, Q&A Tagged With: , ,
May 5, 2013 By

Forgotten credit card trashes scores

Dear Liz: My husband and I are in the process of refinancing our mortgage. I just received my credit report in the mail, and my score was 724. The report indicated that a delinquency resulted in my less-than-stellar score. When I went to the credit bureau site to see where the problem was, I saw that I had a $34 charge on a Visa last year. I rarely use that card, so I did not realize that I had a balance. As a result, I had a delinquent balance for five months last year. I am sick about this, as I always pay my bills on time. To think that my credit score was affected by something so insignificant is really bumming me out. Is there anything I can do to fix this?

Answer: You can try, but creditors are often reluctant to delete true negative information from your credit files. That’s why it’s so important to monitor all of your credit accounts, and to consider signing up for automatic payments so that this doesn’t happen again.

You should know that your mortgage lender won’t look at just one credit score when evaluating your application. Typically, mortgage lenders would request FICO credit scores from each of the three bureaus for both you and your husband, then use the lower of the two middle scores to determine your rate. Even if 724 did turn out to be the lowest of the six scores, you should still get a decent rate, since that’s considered a good score.

Filed Under: Credit & Debt, Credit Cards, Credit Scoring, Q&A, Real Estate Tagged With: , , , , , , ,