Regaining Credit After Bankruptcy
Q. I am in debt and considering filing for bankruptcy. How does one go about doing this? Will it hurt me in the future? C.G.K .
A. Personal bankruptcies are a time-honored way for over-extended debtors to wipe the slate clean and start their economic lives anew. However, they carry a considerable downside as well: social stigma, financial disgrace and a significant black mark on your credit rating. Perhaps you can accomplish your goals through alternative measures: simply ignoring your creditors if you don’t have any property they can legally seize, or negotiating with them if you believe you need only a little bit of time to get back on your feet.
If you do decide to file for personal bankruptcy you should know that while most negative financial information, such as foreclosures and loan delinquencies, can remain on your credit history report for seven years, a bankruptcy can stay there for 10 years.
However, with a lot of work and discipline it is possible to rebuild your credit within two or three years to the point where you won’t be turned down for a major credit card or loan.
Most major creditors are just as interested in positive credit information as negative. They look for evidence of steady employment and any indication that you are capable of repaying your debts. The first step, of course, is to create a budget that you can and will, live within. Then you must open a passbook savings account at a local bank. As soon as you have $500 or $1,000 saved, apply for what is known as a savings passbook loan, or a loan that is secured by your savings.
Although you may not need the loan proceeds, your goal is to show that you can repay a loan. Even if you want to, don’t repay the loan too quickly. It takes about six to nine months to appear on your credit report. Also, be sure to ask your bank if it reports this type of loan to credit agencies; if they don’t, go elsewhere. Remember, your goal here is to establish a positive credit history, not to get a bank loan.
Some banks automatically offer their savings account holders a secured credit card. If you think you have your spending impulses sufficiently under control, you can get one of these cards that will give you a credit limit somewhat lower than the amount in your savings account. Use it sparingly and only if you’re sure you can pay off the entire bill when it arrives.
Interest rates of these cards are usually quite steep. Department stores and gasoline companies are also more liberal than the major credit card companies about extending credit to customers. Get one or two of these charge cards and charge some minimal purchases that you can easily repay.
According to our experts, most major credit card and loan issuers will ignore a negative credit history if you can demonstrate two or three years of consistently responsible credit behavior. Furthermore, they add, most will ignore a personal bankruptcy filing after five years of good behavior.
Perhaps the best discussion of the issues and processes surrounding bankruptcy filings is contained in the book entitled “How to File for Bankruptcy,” published by Nolo Press in Berkeley. The $24.95 book contains all the work sheet you will need to assess whether you should file for bankruptcy and what type of bankruptcy you should seek.
For more information about credit rebuilding and responsible spending and budgeting techniques, contact Consumer Credit Counselling Services at (800) 388-2227. Another source is “Money Troubles: Legal Strategies to Cope with Your Debts,” by Robin Leonard, also published by Nolo Press.
Coupon Savings Don’t Escape Sales Tax
Q. Newspapers frequently print coupons for savings on taxable grocery items such as dog food and laundry detergent. Sometimes the stores will double the value of the coupon. However, state sales tax is applied to the pre-coupon sales price, not the amount after the coupon is redeemed. Is this a rip-off? --H.L .
A. The state doesn’t think so. It wants its share of the full sales price, not the amount the grocer receives from you. You should also remember that in most cases, the grocer is being reimbursed by the product manufacturer for at least some, if not all, the discount you enjoy. In reality, the total amount of money changing hands usually equals the full sales price. And the state feels entitled to levy its full tax on the transaction. By the way, this is the same procedure used with automobile rebates. Like the grocery stores where you shop, auto rebates are applied after the sales tax is computed on the full retail price of the vehicle.
Pay Off Student Loan Faster, Save Money
Q. My son recently graduated from college and will soon begin repaying student loans totaling $50,000. The loans are scheduled to be repaid at 7% interest over 10 years, but he is considering a repayment plan offering 9% interest over a 20-year period. His thought is to invest the extra money he does not repay each month. Does this make sense? --T.P.R
A. A $50,000 loan at 7% interest repaid in monthly installments over 10 years would cost a total of $69,600, with monthly payments of about $580. A $50,000 loan at 9% interest repaid in monthly installments over 20 years would cost a total of $108,000, with monthly payments of about $450. By repaying about $130 more each month--or $1,560 each year--for 10 years, your son can save a total of $38,400 in interest charges.
By the way, your son would have to work magic with his investments to earn the return necessary to offset the cost of paying 9%, non-deductible interest on his student loans. The interest paid on student loans is considered the same as personal or consumer interest. It is not deductible on federal or state income taxes.
