December 2nd, 2010, by

Q: I would like to know if we could file bankruptcy against IRS back taxes. I really don’t know if we should file bankruptcy or consolidate our debt.

Muskogee, OK

A: You can try to erase your tax debt in bankruptcy, but it’s not as easy as just filing. There are some hoops you have to jump through, making it difficult to get rid of that debt.

You should consult a bankruptcy attorney to determine if your federal tax debt could be eliminated.

Additionally, you should contact the IRS
and see how best to handle your debt. You may be surprised to find that a
payment plan could work. I know it’s a scary thought to contact the IRS, but you do have options other than bankruptcy, considering it’s likely the debt wouldn’t be wiped out anyway.

You don’t need a consolidation loan for the IRS debt. You can work out a payment plan directly with the IRS
that allows you to pay your full tax obligation in equal monthly
payments. The amount of your installment payments and the number you
make will be based on the amount you owe and your ability to pay. I
should note that the IRS charges interest and
penalties on the unpaid portion of the debt. There is a set up fee of
$52 for direct debit agreements and $105 for non-direct debit

Setting up a payment plan for $25,000 or less in tax is fairly easy.
If you owe more than $25,000, you can still set up an installment
agreement, but the IRS may also ask for financial information to help determine your ability to pay.

You can apply online at the IRS site and
also get more information on how to set up an installment agreement at
the “Payment Plans, Installment Agreements” section of the site.

If you are uneasy about doing this online, call the number on your IRS bill or notice. Most importantly, don’t ignore this debt.

November 29th, 2010, by

Q: I was forced into a foreclosure because my spouse cleaned out our bank accounts and abandoned the house, and it is the only thing that should be negative on my credit. As a result of the foreclosure, all of my credit cards lowered my limits. I am looking for a counselor to advise me on how to repair my credit rating in the fastest time possible. Or, do you have to wait the seven years before the foreclosure comes off your credit history?

Houston, TX

A: I’m so sorry you have lost your home. It’s a story I hear far too often these days.

As for your foreclosure, the information about it stays on your credit report for seven years. But that doesn’t mean the impact is the same for all seven of those years. A foreclosure will have the greatest impact–bringing your scores way down–during the first few years. As time passes, the negative information will be less of a blow to your scores.

However, that doesn’t mean lenders won’t give you a hard time or require you to pay more in interest should you need credit in the future, especially if you attempt to purchase a home soon. Nonetheless, having a foreclosure in your past won’t shut you out of the housing market. In time, you can still get a home loan.

To deal with your lower credit limits, aggressively pay off your balances. If you aren’t carrying any balances, the lower limits shouldn’t negatively impact your credit scores.

You are right to be proactive on this front. But often, people want to fix their credit in a hurry. It just doesn’t work that way. It takes time; but, rest assured, your credit will get better as long as you do better with paying your current debts.

By far, the best and fastest way to improve your credit history is by paying your bills on time, all the time. It’s recent negative information that has the greatest influence on your credit scores.

The one thing you shouldn’t do is fall for any misleading company that claims it can “fix” your credit. If the information is correct, which in this case it is (you did have a foreclosure), there isn’t anything they can do but take your hard-earned money.

If you want some good credit counseling on how to budget better and perhaps handle other debts, go to the National Foundation for Credit Counseling Web site, where you can find a nonprofit credit counseling agency.

November 22nd, 2010, by

Q: What are the legal consequences of refusing to pay unsecured credit card bills? What can they do to the debtor?

Chattanooga, TN

A: I have a question for you. Why would you “refuse” to pay your credit card bill? Is it because you are unemployed? Are your finances so tight that you can only afford to pay for necessities?

These are important questions you need to settle with yourself;
because, regardless of your financial situation, you purchased something
with those credit cards. You got something in return, and to simply
refuse to pay is just not right.

I hope what you meant to ask is what happens when you have done all
you can do to negotiate with your credit card lenders, and they refuse
to work with you on a reasonable repayment plan?

So what happens?

The credit issuers, or its debt collector, can and may sue you and
get a judgment. With that court order, the lender can garnish or send
the order to your bank, which then may be required to get the funds from
your bank account.

You might try saving up some cash and offering your credit card
lenders a settlement for less than what you owe. With cash in hand, you
are in a better position to negotiate.

But, just because the debt isn’t secured by any property (a point you
seem to be making), don’t think you are in the clear. Increasingly,
lenders are taking debtors to court; so, don’t just ignore this debt or
think it’s going away. Don’t ignore a lawsuit summons. You should do
what you can to avoid getting a judgment.

You should read the article, “How wage garnishment works — and how to avoid it,” on the CreditCards.com Web site.

Here’s the thing: Don’t refuse to pay. Try to figure out how to pay your debts.

November 18th, 2010, by

Q: I filed for bankruptcy this month. I need help with getting my student loan and IRS debt clear. Can someone help me?

A: As a result of the recession and its aftermath, many people think bankruptcy is the answer to their financial headaches. And it can provide relief for credit card debts or other bills. But, I’m afraid, my friend, that the two debts you mentioned–student loans and taxes–are the most difficult and unlikely to be discharged in bankruptcy.

Concerning the student loans, the laws in this area were tightened so
that, unless you are destitute and have no prospects of earning much,
if any, wages in the future, you are stuck with the student loan debts,
both federal and private loans. To get them discharged by way of a
bankruptcy, you have to prove paying the loans will create “undue
hardship,” a hurdle that is very difficult to jump.

At the FinAid Web site, there is a lengthy discussion of how student loans are handled in bankruptcy court.

You should also know it is equally hard to get rid of your tax bill
by filing for bankruptcy. Most tax debts can’t be wiped out in
bankruptcy, whether you file for a Chapter 7 or Chapter 13, according to
Nolo, which provides online legal information, along with self-help
books and software. Nolo says in order to wipe out debts for federal
income taxes in a Chapter 7, ALL of the following conditions have to be met:

• The taxes are income taxes. Taxes other than income, such as
payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
• You did not commit fraud or willful evasion.
• Your tax return must have been originally due at least three years before you filed for bankruptcy.
• You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
• Your income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.

So, I’m afraid if your primary reason for filing for bankruptcy
protection was to get out of those two types of debt, you may find in
the end you have little recourse than to figure out a way to pay both.

Contact your student loan lenders and discuss your repayment options.
If you are not in default on your federal student loans, you may
qualify for the Income-Based Repayment (IBR)
option in which your monthly payments are based on your income and
family size. Unfortunately, this plan is not available for private
student loans. For more information about the IBR plan, visit the IBR info page of the Project on Student Debt Web site.

Contact the IRS and find out what payment plans are available to you.

Most importantly, read up on your rights concerning these debts and
discuss it with your bankruptcy attorney, which I hope you have.

November 15th, 2010, by

Q: Would it benefit me to get a consolidation loan instead of paying on three separate credit cards? I have excellent credit. It’s just difficult making three separate payments. One would be better.

Lynn, Fort Lauderdale, FL

A: I don’t understand what’s difficult about making three payments? You send three checks or make three clicks on your computer to pay electronically. Simple.

I say that because, in people’s quest to reduce their bills, they
think a consolidation loan is their saving grace. But these loans aren’t
all that they’re advertised to be. Yes, you get to merge your debt into
one payment; but, what’s the true cost of that convenience?
Consolidation loans often have a high interest rate. Or, in the quest to
lower your monthly payments, you may stretch out the debt, which means
you end up paying more interest overall than had you kept the three
separate credit card payments.

If you are determined to get a consolidation loan, do your homework.
Look at the terms carefully and calculate what you would end up paying
with the new loan.

Further, in my experience, many people clear those credit cards by
way of a consolidation loan and then run up the cards once the debt is

Making those three separate payments are three separate opportunities
to remind yourself you got into too much debt. And I say that because,
if you can’t pay off your credit card bill every single month, you have
overextended yourself.

My advice is to cut your expenses and aggressively pay off the cards, one by one.

November 11th, 2010, by

Q: I currently have a car loan that has a 17.5% interest rate because I had poor credit when I applied for it. Despite paying my bills on time for several years, my credit score does not seem to improve over time. I am interested in refinancing my car at a lower interest rate to lower my payments, pay off other debts and save. Can you offer advice about how to accomplish this?

Washington, DC

A: If you are paying your bills on time every month, then there is something else in your credit files that continue to drag down your scores. It could be that you are carrying too much debt.

If that is the issue, then you have more to be concerned with than a
car loan with a high interest rate. You have got to pay off some of your
bills, and that should help boost your credit scores.

As for the car, call around and get some quotes on what it will take
for you to refinance it. Check with your bank or credit union.

Edmunds.com, an auto information Website, recommends you shop around
by going to Bankrate.com, which pulls together interest rate quotes from
different lenders.

After looking, you may find you can get a lower rate. But, as I often
tell people, do the math. Do the homework. Make sure any refinance deal
will actually save you money. If you are close to paying off your auto
loan, it doesn’t make sense to get another three- or four- or five-year
loan just because the interest rate is lower than what you are paying
now. If you owe more on the car than it’s worth, you might be asked to
bring money to the table to refinance the loan.

The point is don’t just focus on the interest rate. Look at the
entire deal to determine if refinancing is right for you, especially
given the fact that your credit history hasn’t improved much.

November 8th, 2010, by

Q: I make over $100,000 a year and have about $20,000 in my 911 fund. But the kicker is my credit sucks. I made stupid mistakes when I was younger and in a bad relationship; he basically ruined my credit. Either way, it was my fault. I am ready to buy a house. I can afford a nice mortgage payment, but can’t get a loan. What next?

Karen, Orlando

A: When I hear tales like yours, my heart just sinks. It’s yet another example of why you shouldn’t mix your money and credit with people you are dating, even a serious boyfriend or girlfriend.

But, as you said, you know that now, and you are suffering as a result of the bad decisions.

So, what’s next?

Time is what’s next. Only time can heal a bad credit history. The further away you get from those bad bills, the less impact
they will have on your credit score. Negative information on your
credit reports stick around for seven years (a bankruptcy, 10 years).

But, you can also improve things by merely paying your bills on time,
all of the time. It sounds so simple, and yet, that is the number one way
to correct past mistakes.

So, while you are waiting, continue to build up your savings. If that
$20,000 is your emergency fund, then you will still need money for your
home purchase. I hope you weren’t expecting to spend down your 911 fund
for the house.

Don’t despair; things will get better, and you will eventually qualify for a home loan.

November 4th, 2010, by

Q: How do I get rid of debt if I am barely making money? I earn an annual salary of $35,000, but my student loans owed are approximately $40,000. I would like to go back to school for a master’s, but that means accumulating more debt.

Hartford, CT

A: First, don’t you dare accumulate more debt. In this economy it would be unwise to pile on more debt. Further, you already say you are barely making enough money, which means you are probably barely handling your current expenses, including the student loan payments. So what makes you think an advanced degree will immediately solve that problem? There is no guarantee a master’s will boost your income. It may, but it may not. I got my master’s in business, and it didn’t do a darn thing to get me a raise. It raised my knowledge of business, but didn’t help me get raises.

For now, you should concentrate on getting a handle on the student
loan debt you already have. And I have some good news. If you are not in
default, and you have federal student loans, there’s a new repayment
plan that could make your loan payments more affordable.

You should ask your lender or lenders about the income-based repayment (IBR), which is a fairly new payment option for federal student loans. This program is not available for private student loans.

Payments are capped based on the borrower’s income and family size.
And, new rules recently put in place will let you calculate your
eligibility using either your current monthly payment or your original
monthly payment, whichever is larger.

Beginning in 2014, payments under the income-based repayment program
will be capped at no more than 10% of your discretionary income. If you
keep up your payments, any borrowed amount not paid after 20 years will
be forgiven (down from the current 25 years). For public service
workers–teachers, nurses and those in military service–the debt is
forgiven after 10 years.

November 1st, 2010, by

Q: I have made some quick decisions over the past year (leasing a nice car, leasing a nice apartment, etc.), all because I have taken a position that can pay for these luxuries. I have $17,000 in credit card debt and was sure I could really start making a good dent into them. But, unfortunately, even with living as frugally as possible, I can only make the minimum payments, and now I never have money (or a savings).

Unfortunately, I am stuck with the leased car, and I cannot break my lease for a less expensive apartment until April 2011. Any insights on how I can help myself?

I have excellent credit, and I do not want to damage it, and I certainly cannot continue this debt insanity any longer. Action needs to be taken.

I have thought about another part-time job on top of my full-time one, but I am afraid that I will become too burnt out to continue with what is giving me my vital income. Any suggestions would be great!

Denver, CO

A: Let’s take the leased car first.

You might be stuck with your car lease–and, by the way, I hope you’ve
learned your lesson that leasing is a bad financial move if you want to
save long-term.

Anyway, there are a number of companies that help people transfer car
leases that they no longer want or can afford. Check out Swapalease or
. They are in the business of what’s called “lease

Essentially, the companies find people who want to assume your lease.
Of course, there are some caveats. Some leasing companies may allow you
to transfer the lease, but you may still remain ultimately liable for
it. Other companies won’t permit you to transfer your lease at all. You
will have to check your agreement with the leasing company to see
what is allowed.

And now, about the apartment and that $17,000 in credit card debt.
I’m thinking a second job isn’t out of the question. But, that depends
on how long you want to hang onto the debt and how strapped you want to
be until April. If you continue to cut expenses and earn some additional
income, you could get rid of the credit card debt fairly quickly.

So, yup you might get tired by adding a part-time job, but use your
weariness from working that second job as a reminder that it’s not a
good idea to live above your means.

October 28th, 2010, by

Q: I have a high debt ratio. I don’t own a home, but rent a very expensive two bedroom apartment. My son lives with me, and he is going to community college. This first semester, I paid for out of my salary. However, I need to get help with that, because of all the debt I have.

Next year, my car will be paid off, and another bill I have will be paid off. I plan to use that money to pay off all of my small bills. However, I know I need to move, but I don’t want to move into a dump. Where I live now, I don’t have to drive to work, and it’s nice and quiet and a great location to get around. It’s location, location, location.

Should I still try to get into a first time homebuyer program and buy a condo just to own something and have an investment? I just couldn’t buy anything when my son was growing up, and now, I’m at retirement age. Does it make sense to buy now?

Silver Spring, MD

A: Adding up everything you just told me tells me one thing: You are not ready to buy a home.

Let’s add this up together:

• You don’t have the money to help pay for your son to continue in school.
• You are still loaded down with heavy debt.
• Your expenses are high now.
• You don’t have much or any money saved for emergencies, much less for a home down payment.

There are a lot of people who still think they are a financial
failure if they are renting. And, many of these people don’t understand
that homeownership can be costly beyond the money it takes to get into
the home. Have you read the news lately? In many areas of the U.S., home
values have significantly dropped, making homeownership as an
investment not so great right now.

You shouldn’t buy a home just to own something.

So, no; based on your current financial situation, which is getting
better by your own account, but still shaky, it doesn’t make sense to
buy now. You have much too much work to do to shore up your financial

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