Young widow struggles with late husband’s debts
Dear Liz: Do you have any resources available for young widows with children? My husband died 10 months ago and I am struggling to make sense of my financial situation, which is complicated because of debt. I would be so grateful for help.
Answer: Widows and widowers are often advised not to make any big decisions in the first year of their bereavement. Unfortunately, bill collectors aren’t willing to wait that long.
You need to determine your liability for your late husband’s debts. Don’t rely on what collection agents tell you. They may insist you have a legal or moral obligation to pay a bill when you don’t. An experienced probate or bankruptcy attorney can help you sort through the debts to see which ones need to be paid from your husband’s estate, which you may be responsible for and which can go unpaid. Student loan obligations, for example, typically end at death unless you or someone else co-signed the loans.
You also need to make sure you get all the money and property to which you’re entitled. You and your children may qualify for Social Security survivor benefits. (You can find out more at http://www.ssa.gov.) You also may inherit retirement funds and life insurance policies that are protected from creditors. Life insurance policies that name you as a beneficiary, for instance, pass outside your husband’s estate and don’t have to be shared with creditors — again, regardless of what collection agencies may tell you.
Once you’ve sorted out his estate, you can begin rebuilding your financial life for yourself and your children. A fee-only planner can help you get started. You can get referrals from the Garrett Planning Network at http://www.garrettplanningnetwork.com, which represents planners who charge by the hour, or the National Assn. of Personal Financial Advisors at http://www.napfa.org, which represents planners who charge retainer fees or a percentage of assets they manage for you.
Quit trying to change a spendthrift
Dear Liz: I’m desperate and need your input. My brother is in his 50s and makes only $10 an hour. His paycheck is gone after two days from eating out and bar hopping. He’s in collections with doctors, colleges, credit cards and more, and has been for 20 years. He’s draining my mother both financially and emotionally. The rest of my family says to let him go and make him realize the consequences. I keep helping him out with gas money and trying to help him budget, but he really doesn’t care. His thought is, “Take care of your needs now and worry about paying for it later.” What are my options?
Answer: Your options are pretty simple. You can continue to bail him out. Or you can stop.
A longtime spendthrift is unlikely to change his behavior. That’s particularly true if he still has people around him willing to give him money, but he may not change even if your entire family cuts him off.
Understanding that you don’t have the power to change your brother is an important, but difficult, first step. You may want to seek help from a counselor or a 12-step group that helps people deal with problem relationships. Since bar hopping is such a big part of his life, you (and your mother) may benefit from attending Al-Anon, the 12-step group for people who have alcoholics in their lives. You can find more information at http://www.al-anon.alateen.org. Another similar group is Codependents Anonymous (information at http://www.coda.org), which aims to help people develop healthier relationships.
Like elephants, some card companies never forget
Dear Liz: I was recently solicited by a credit card company. I didn’t need another credit card, but this offered airlines miles that I collect, so I applied. They didn’t approve the application because: “You have filed for bankruptcy and your previous account(s) with us was included in that filing. This includes any of your accounts issued by (us) such as Visa, MasterCard, store cards or gas cards.” Liz, the bankruptcy was 12 years ago, and I am very well financially situated now. I thought there was an expiration date on bankruptcies appearing on your credit report.
Answer: There is. Bankruptcies have to be removed from your credit reports after 10 years.
Individual lenders, though, are allowed to have much longer memories. And some have opted not to forget. If you ever file a bankruptcy that wipes out debt on one of the accounts they issue, they may never again approve you for credit. That’s perfectly legal.
Not all lenders are so unforgiving, of course, and those who don’t know about your bankruptcy likely will be perfectly willing to extend you credit as long as your credit scores are good. But you’re probably wasting your time trying to induce this once-spurned lender to change its mind.
Installment loans can boost credit scores
Dear Liz: I am working on paying my bad debt from the past to rebuild my scores. I have one credit card that I pay in full every month, but no installment loan. I recently was given the opportunity to take a car loan with monthly payments I could easily afford. Here is my confusion: Taking on more debt while trying to eliminate past debt is usually not advisable. But I also know creditors like to see both revolving and installment credit. Am I OK to take the car loan to improve my mix of credit, or should I just use that extra money to pay off my past debt?
Answer: Adding an installment loan such as an auto loan, mortgage or student loan to your credit mix can indeed help rehabilitate troubled scores. But it’s advisable only if you’re well on your way to having the rest of your debt paid off. Otherwise, you risk stalling on your debt repayment or — worst-case scenario — adding another bad debt to the pile.
If your scores are still troubled, the car loan probably has sky-high interest rates. If you go this route, put down at least 20% of the purchase price so that you can refinance to more favorable terms in a year or two when your scores improve.
A better option may be to skip the car loan and try to get a three-year personal loan from your credit union. This fixed-rate loan would allow you to pay off some of your other debt while improving your scores.
Once your debt is paid off, you can save up to either buy your next car with cash or at least make a substantial down payment so you have to finance only a portion of the purchase.
Finally, you should know that although using and paying off your credit card is definitely helping your scores, paying off old debts may not be so helpful to your numbers. If the bills are already in collections, you may not see dramatic improvements in your scores as you retire those debts. That’s why you would be smart to look for other means to improve your scores.
Pay off debt or save more for down payment?
Dear Liz: Next year we will be shopping for a house in the $150,000-to-$200,000 range and hope to have $20,000 to $30,000 saved for a down payment. We have about $75,000 in student loans we are paying down. Would it be better to eliminate, say, one $3,000 student loan early or keep the $3,000 for a bigger down payment?
Answer: Eliminating such a small loan is unlikely to have a big effect on the size of the mortgage you’ll get, so you’re probably better off boosting your savings for your down payment. Don’t forget to save a bit extra so you have enough cash to cover closing costs and the inevitable repairs and maintenance required with homeownership.
