Ask Liz Weston

Get smart with your money

Credit & Debt

Q&A: Who is responsible for credit card debt after death?

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Dear Liz: My mother, who is widowed, has credit card debt. When she dies, are my sister and I responsible for that debt? There is no estate, but she does have a small amount of life insurance that mainly would go toward her funeral expenses and fixing things in her home to get it ready for sale.

Answer: If your mother owns property, then she has an estate. If she has any equity in the property when she dies, some of that equity might have to be used to pay her debts.

You and your sister, however, are not responsible for your mother’s debts. The life insurance also does not have to be used to pay debts if your mother names a beneficiary (or beneficiaries) for the policy and at least one of the people named outlives her. In that case, the insurance proceeds would go directly to the beneficiaries, bypassing the probate process.

If she doesn’t name a beneficiary, the insurance proceeds may be included in her estate and used to pay her final bills, including credit card debt.

If your mother can’t pay what she owes, she should consider talking with a bankruptcy attorney about her options.

Q&A: Debt obligations and voluntary surrender

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Dear Liz: My husband returned a car to the dealer when he lost his job. Now the company says he owes it more than $7,000 (the difference between what he owed to the dealer and the price for which the car was sold). He refuses to pay any amount, but recently he received a letter from a law office demanding payment or they will take him to court. Is he obliged to pay this money? What options does he have to get rid of this debt?

Answer: A debt doesn’t disappear simply because someone decides not to pay it.
Your husband signed loan paperwork to buy the car, and this paperwork obligated him to repay a certain amount. Voluntarily surrendering the car didn’t change his obligation. Also, the surrender probably is being reported to the credit bureaus as a repossession, which is a big negative mark on his credit reports. Some people mistakenly believe that a voluntary surrender avoids credit damage. Typically, it does not.

Your husband could make matters worse if he continues his stubbornness. The law firm can take the collection to court, where it’s likely to win. That will add a judgment to your husband’s credit files and cause further damage to his scores. His wages could be garnished to pay the debt.

Your husband may be able to settle this debt for less than he owes, especially if he can offer a substantial lump sum, but negotiations with a collector can be tricky. He may want to consult an attorney for help or at least arm himself with more knowledge about what to do from sites such as DebtCollectionAnswers.com.

If this is just one of a number of unpaid bills, though, you both may benefit from talking to a bankruptcy attorney about your options.
In the future, keep this experience in mind when you go to buy another car. Making at least a 20% down payment and limiting the loan term to four years or less will help ensure that you’re never “upside down” like this again.

Q&A: Forgiving credit card debt

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Dear Liz: Recently you wrote about debt being forgiven after seven years, but in your book “Deal With Your Debt,” I’m sure you said after four years credit-card debt is usually not collectible. Could you clarify? When I tell debt collectors about this, they merely laugh.

Answer: That’s understandable, because there is no forgiveness for most debt. It’s legally owed until it’s paid, settled or wiped out in Bankruptcy Court.

Each state sets limits on how long a creditor has to sue a borrower over an unpaid debt. Those limits vary by state and the type of debt. In California, credit card debt has a four-year statute of limitations. Creditors may continue collection efforts after four years; they’re just not supposed to file lawsuits.

Seven years is how long most negative marks, such as unpaid debts, can remain on your credit reports. Technically, most unpaid debts are supposed to be removed seven years and 180 days after the account first went delinquent.

Q&A: Credit cards vs student debt. Which should be paid off first?

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Dear Liz: I have $8,000 in savings. Should I use it to pay the accrued interest on federal student loans that go into repayment soon? Or should I pay credit card debts of $662 at 11.24%, $3,840 at 7.99% and $3,000 at 6.99%?

Answer: Pay off the credit card debt. The interest isn’t tax deductible, and balances you carry on credit cards just eat into your economic well-being.

Your student loans, by contrast, offer fixed rates, a wealth of consumer protections and tax-deductible interest. You needn’t be in any rush to pay them off, particularly if you’re not already saving adequately for retirement and for emergencies. Federal student loans offer the opportunity to reduce or suspend payment without damaging your credit scores should you face economic difficulty and the possibility of forgiveness. Those aren’t options offered by credit card issuers.

If your student loan payments exceed 10% of your income when you do go into repayment, you should investigate the federal government’s “Pay as You Earn” program, which offers more manageable payments for many people, especially those with large debts and small incomes.

Q&A: Will having no debt affect our FICO score?

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Dear Liz: My wife and I have paid off our mortgage, we have no car loans, and we pay our credit card balances completely each month, which means that we basically pay no interest. We have four credit cards that are active and a couple more that are rarely used. My FICO score is currently just above 800. At some point we will need to replace our cars and will need car loans, so our FICO scores will be important. Since we currently have no mortgage, no car loans or any other loans, will our FICO score slowly drop, and will that affect our car loans?

Answer: Paid-off loans typically don’t disappear from your credit reports, at least not immediately. Many lenders continue to report these closed accounts for years, which contributes positively to your scores.

Even if none of these paid obligations show up on your reports, though, your responsible use of credit cards should support your high scores. Just continue to use your cards lightly but regularly and pay off all balances in full.

Since you have time before you plan to replace your cars, consider paying cash for them, or at least making a substantial down payment. It’s typically best to use loans only for assets that appreciate — and cars certainly don’t do that.

Q&A: Inheritance vs Reality

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Dear Liz: I have really bad credit. I always have because I have never really had any money. So now I am inheriting a lot of property and some cash. Most of the property is rental properties that bring in income. There are no mortgages on them. I may want to sell one or two of them and buy a four- or five-unit apartment building so I can live in one and rent the others out. How do I do that? Unfortunately, it isn’t happening as quickly as it should since one of my siblings thinks it is all hers. So I have to go through litigation first.

Answer: Let’s start with some reality checks.

The kind of litigation you’re talking about can get expensive fast and eat into the estate’s assets. If your sister happens to be the executor, she may be able to have the estate pay for her defense. You’ll need to come up with the money to hire your own attorney to advise you, but often in these cases a settlement makes a lot more sense than a family war.

The next reality check has to do with your bad credit. Yes, it’s harder to pay your bills on a low income, but people do it. In fact, income is not even a factor in credit scoring formulas, since how much money you make doesn’t predict whether you’ll pay your debts. If you have bad credit, it’s because you borrowed money that you didn’t pay back on time, not because you “never really had any money.”

What will change if you get your hands on a substantial amount of money is that your creditors will renew their efforts to get paid. You’ll probably need some more legal advice to deal with those efforts and to avoid getting sued.

What probably won’t change, without some effort, is your poor money management skills. If you don’t improve, you’ll probably blow right through your inheritance. So you should add to your list of advisors a fee-only planner who can help you with budgeting, rebuilding your credit, investing and retirement planning. Seeking good advice and following it are the key to making money last. You can get referrals to fee-only planners from the Garrett Planning Network, http://www.garrettplanningnetwork.com. Another option is the National Assn. of Personal Financial Advisors at http://www.napfa.org.