Ask Liz Weston

Get smart with your money

Credit & Debt

Q&A: A husband’s death. A pile of bills. Now what?

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Dear Liz: After my husband died, I was in shock and really not in my right mind for at least a year, but really more. During this time I didn’t pay attention to bills. Only the ones that were getting shut off got paid. Now I’m behind on several credit cards that I’ve had for years. I can’t keep up anymore, but I don’t know what to do.

Answer: It’s natural in your situation to be overwhelmed and not know where to start. Your first task should be determining if you can realistically pay what you owe.

If your unsecured personal debt — credit cards, medical bills, payday loans and personal loans — equals half or more of your income, then you may not be able to dig yourself out. If that’s the case, consider making appointments with a credit counselor and a bankruptcy attorney to review your options. You can get referrals from the National Foundation for Credit Counseling at www.nfcc.org or (800) 388-2227 and the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org.

Even if your debts don’t total half your income, you may find it helpful to discuss your situation with a credit counselor or an accredited financial counselor (referrals from the Assn. for Financial Counseling and Planning Education at www.afcpe.org). These counselors can review your situation and help you craft a plan to get your finances back on solid ground.

Social Security survivor benefits also can be a way to restore your financial stability, depending on your age. You can receive survivor benefits starting at age 60, or age 50 if you’re disabled, or at any age if you’re caring for your husband’s child if the child is younger than age 16 or disabled.

Applying for survivor benefits doesn’t preclude you from applying for your own retirement benefit later. You could take a widow’s benefit at 60 and then switch to your own benefit when it maxes out at age 70, if your own benefit would be larger at that point.

Q&A: Can creditors get your IRA funds?

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Dear Liz: You recently wrote that workplace retirement plans offer unlimited protection from creditors but that IRAs are protected only up to $1,283,025. When I transferred my 401(k) to a rollover IRA, the advisors at the brokerage assured me that the rolled-over money also enjoys the unlimited protection. Your article seems to imply otherwise. Can you clarify what is the correct rule?

Answer: Two sets of rules apply, which causes a fair amount of confusion.

In bankruptcy court, your transferred money would be protected. Money rolled into an IRA from a workplace plan such as a 401(k) enjoys unlimited protection from creditors in bankruptcy filings. Outside of bankruptcy court, however, creditor protection is determined by your state’s laws, which may not be as generous. If someone successfully sues you and wins a judgment, for example, your IRA could be at risk.

Q&A: Building an emergency fund beats out building credit

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Dear Liz: I am trying to raise my credit scores, which are very low. I have one negative mark on my account from a paid collection and I just got my first secured credit card. I have a bit of extra money right now and I’m wondering what’s the best way to use it to raise my scores. Should I get another secured credit card from a different issuer, get a secured 12-month loan through my financial institution or something else?

Answer: People rebuilding their credit often overlook the importance of an emergency fund. Having even a small amount of savings can keep a financial setback, such as a decrease in income or an unexpected expense, from causing you to miss a payment and undoing all your efforts to boost your scores. You can start with just a few hundred dollars and slowly build the fund over time.

Adding an installment loan can assist with building credit as well, but a secured loan may not be the best option if money is tight. The cash you deposit with the lender as collateral for the loan won’t be available again until you pay off the loan. Consider instead a credit-builder loan, in which the money you borrow is placed in a savings account or certificate of deposit to be claimed when you’ve finished making the monthly payments, typically after one year. That means you can keep the cash you already have for emergencies. Credit-builder loans are available from some credit unions and Self Lender, an online company.

You’ll want to make sure both the credit card issuer and the installment loan lender are reporting your payments to the three credit bureaus. If your accounts don’t show up on your credit reports, they’re not helping to build your scores.

In addition to making payments on time, you’ll want to avoid using too much of the available credit on the card. There’s no bright line for how much to charge, but typically 30% or less is good, 20% or less is better and 10% or less is best. Use the card lightly but regularly and pay it off in full every month because there’s no advantage to carrying a balance.

Q&A: Get your credit score ready for the home-buying process

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Dear Liz: What score do you need to be approved for a mortgage? Is 520 even close? If not, how do I get that score higher quickly?

Answer: A score of 520 on the usual 300-to-850 FICO scale is pretty bad. Theoretically, you might be able to get a mortgage if you can make a large down payment, but you’ll have more options — and pay a lot less in interest — if you can get your scores higher.

That, however, takes time. You need a consistent pattern of responsible credit behavior to start offsetting your mistakes of the past. If you don’t already have and use credit cards, consider applying for a secured credit card, which requires a cash security deposit, typically of $200 or more. You’ll get a credit limit equal to your deposit. Using the card lightly but regularly, and paying in full every month, can help your scores.

A credit builder loan, offered by credit unions and the online company Self Lender, is another way to improve your credit while building your savings at the same time. The money you borrow is put into a savings account or certificate of deposit that you can claim once you’ve made 12 monthly payments. Making your payments on time helps improve your credit history and scores.

Taking a year to build your credit also would give you more time to save for your down payment and for closing costs. Rushing into homeownership is rarely a good idea, so take the time you need to get your financial life in order first.

Q&A: How to find your way out of difficult financial circumstances

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Dear Liz: I desperately need your help! My husband, who is 91, is in the early stages of dementia. I just turned 88 and for the first time am responsible for making all the financial decisions.

We are deeply in debt and I don’t know the best way to proceed. We owe more than $40,000 on credit cards, nearly $50,000 on a home equity loan, $20,000 on solar panels and $3,500 for a timeshare.

I am thinking of getting a low-interest mortgage on our home to pay off all these debts. We have no savings left. I just don’t know if this is a good idea or who to go to for answers.

Answer: If you have a younger family member or friend you trust, please consider involving this person in your search for answers. The possible solutions you need to consider are complex and would be daunting even for someone with a lot of experience in making financial decisions.

Getting a mortgage could be one solution, assuming you can get approved and afford the payments. Start by consulting a mortgage loan officer at your bank to see if this is an option.

Another possibility is a reverse mortgage, if you have sufficient home equity. The reverse mortgage could allow you to pay off some or all of your debts without having to make monthly payments. If you have substantial equity, you also may be able to supplement your income.

The reverse mortgage would have to be paid when you sold the home, died or moved out. A housing counselor, available from many National Foundation for Credit Counseling agencies, can discuss those with you. You can get referrals at www.nfcc.org.

Bankruptcy is yet another option to consider.

If your income is below the median for your area, you may be able to file for Chapter 7 bankruptcy liquidation to legally rid yourself of the credit card debt and timeshare. You also may be able to erase the solar panel loan, if it’s unsecured. If you have a lot of equity in your home, though, you could be forced to sell the house to pay your creditors, making Chapter 7 a bad option.

The other type of bankruptcy, Chapter 13, allows you to keep more property but requires a repayment plan that typically lasts for five years.

If you don’t have a lot of equity, on the other hand, and your income is protected from creditors, you may be “judgment proof.” That means if you stop paying your unsecured debts, your creditors could sue you but be unable to collect. An experienced bankruptcy attorney can assess your situation and let you know your options.

Referrals are available from the National Assn. of Consumer Bankruptcy Attorneys, www.nacba.org.

If you don’t have a trusted person to help you sort through your options, or even if you do, consider hiring a fee-only planner who charges by the hour. An experienced planner who agrees to be a fiduciary — which means he or she puts your best interests first — can help ease your mind that you’re making the right choice.

You can get referrals from the Garrett Planning Network, www.garrettplanningnetwork.com.

Q&A: Here’s how to find that annual free credit report

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Dear Liz: Please tell me the website for the free credit check. At a department store checkout counter, a stranger’s name came up connected to my cellphone number. I think I should check my credit reports, but I don’t want to pay for what I understand I can get free.

Answer: It’s entirely possible a clerk simply made a mistake in entering another customer’s phone number. But you should be checking your credit reports regularly anyway, and this is as good an excuse to do so as any. The federally mandated free site can be found at www.annualcreditreport.com. Searching for “free credit reports” can turn up a number of other sites, so make sure you use the correct one.