Discipline and Planning Are Needed to Rebuild Credit After Bankruptcy
Q: I’m 38, a single mother of two, and I filed Chapter 7 bankruptcy last August because of less-than-judicious use of credit cards. My annual income is a shade under $40,000. After paying my mortgage, car insurance, child care costs and various miscellany, there’s not much left over. How best to rebuild my credit?
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A: Thank you, first of all, for not writing that you “had to” file bankruptcy. Some people do get forced to the financial brink through catastrophic medical bills, layoffs or other unexpected calamities; obviously, that’s not your situation. You made a choice to overuse those credit cards, and another choice to file bankruptcy in order to reduce your debts.
That’s not to say that lenders don’t make some bad choices by sending out too many credit cards and encouraging people to spend with abandon. But their bad choices are tax-deductible as business expenses; your bad choices can haunt you for years. Right now you’re facing some of the consequences of your choices, since lenders are understandably reluctant to deal with someone who has a history of not paying them back.
It sounds as if you need to rebuild more than your credit: You need to rebuild your whole relationship with money. The key to your financial health lies in the “various miscellany” that is making the difference between your living comfortably on your paycheck versus living paycheck to paycheck. Granted, it’s tough to raise two children in Southern California on your income. But people do it, and on much less too.
Most money problems can be traced to a single root: our refusal to accept reality. With few exceptions, most of us have far more wants than we have means to pay for them, yet we try to fool ourselves into thinking that overspending is OK: “I deserve this.” “Everyone else has one.” “This will make my life better.” Some of us have the fantasy in the back of our heads that we’ll be bailed out of our money troubles by winning the lottery, scoring in the stock market, inheriting money or marrying someone rich.
The reality is that we have to make some tough choices and that we can’t have everything we desire. (That’s true for the rich as well.)
Your first step should be finding out exactly what constitutes “various miscellany.” For at least a month, write down every penny you spend; you might be surprised to see where the money is going. Once you know, you can look for ways to trim the excess. Books like “Cut Your Spending in Half” and “Tightwad Gazette,” available at your local library, can provide some ideas. The groundbreaking “Your Money or Your Life” is also worth a read.
The nonprofit Consumer Credit Counseling Service can help you learn about budgeting and spending and help you become a smarter consumer. Its number is in the phone book.
Your goal should be to have enough control over your spending that you can start saving. At a minimum, you’ll want have an emergency cushion of at least three months’ expenses. You probably need to start saving for longer-term goals as well, such as your own retirement and possibly your children’s education.
In the meantime, keep paying your mortgage on time. Although the bankruptcy will stay on your credit report for up to 10 years, prompt loan payments will be a good start toward rebuilding your credit history.
Once you’re confident that your finances are under control, you can consider whether you want to apply again for a credit card. You probably will have to look for a secured card--a type of credit card that gives you a credit limit equal to the amount of money you deposit with the lender, typically $500 to $1,000. Avoid cards that charge expensive application fees or that do not have a grace period; some secured cards levy interest from the minute you charge anything, and that could cost you a bundle. You can get a list of secured credit cards by visiting https://www.cardtrak.com or, for $10, you can get a printed report by calling (800) 874-8999 or writing Secured Card Report, P.O. Box 3966, Gettysburg, PA 17325.
Once you get the card, charge only small amounts, and pay your bill in full each month. If you ever get behind, cut up the credit card. One bankruptcy in a lifetime is more than enough.
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Q: After reading your column on gift taxes, I was wondering if I need to claim on my income taxes a gift that I received this year?
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A: A gift is a gift, even to the IRS. You don’t have to include as income on your tax return any money or property you receive as a gift or inheritance. If the gift later produces income, however--if you get stocks that pay dividends or you earn interest on the money in a bank--that has to be declared as income. The IRS’ benevolence only extends so far.
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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
