Credit Counseling Less Costly Than Debt-Settlement Services
Question: After I lost my job, I got talked into using a debt-settlement service, the kind that helps you pay off your bills for less than what you owe. The firm assured me and my wife that our credit would recover quickly after all debts were paid off. I now know we were naive to believe them. But how long will it take our credit to recover from what we’ve done?
I’m now employed and have a good income, as does my wife. We own our home and have two credit cards, one with no balance and one for unplanned purchases that never has a balance greater than $500. Knowing how long our credit is going to suffer from this will help us do some planning for the future.
Answer: Two to four years of good credit behavior--on-time payments, no new accounts and light use of your credit cards--should help undo some of the damage, but the black marks will remain on your credit report for seven years.
It’s too bad you didn’t sign up with a nonprofit consumer credit counseling service rather than with a debt-settlement firm. Credit counseling services set up a debt-repayment plan and negotiate lower interest rates with your creditors so you can pay your debts back in full.
Debt settlement firms, by contrast, ask your creditors to accept less than what they’re owed--that is, if they even stick around to fulfill their part of the deal. Some settlement firms simply disappear with the hefty $3,000 to $5,000 payment they typically demand up front.
The difference to your credit rating is immense. Credit counseling in the vast majority of cases does not affect your three-digit credit score, which is used by many lenders to evaluate your creditworthiness. Your creditors may put a note in your credit report saying you’re participating in a debt-repayment plan, but the leading credit scorer, Fair, Isaac & Co., ignores that information when computing your score.
Once you’ve completed the plan, your lenders remove the notation and no one looking at your credit report would know that you were ever on a repayment plan.
With debt settlement, however, your creditors typically report that you’ve paid less than you owed. That stays on your record for seven years and lowers your credit score. What’s more, that “forgiven” debt may be considered taxable income to you. So in addition to trashing your credit report, you also may have a hefty tax bill to pay.
It’s probably not too late to contact the lenders who haven’t yet settled and make arrangements to pay them in full. It won’t undo the damage that’s already been done, but it could prevent matters from getting worse.
Timing Is a Factor in
Mark-to-Market Move
Q: Several months ago you answered a question from someone who had quit his job to become a day trader, only to lose tens of thousands of dollars in the stock market. He wanted to offset these losses against his wife’s income, but you told him he was limited to writing off $3,000 in capital losses each year, so it probably would take him years to use up all of his red ink.
Why didn’t you tell him about the mark-to-market election traders can make, which allows full-time traders to write off all their losses in a given year?
A: Two reasons. One, it was far too late for him to make this election. And two, once the election is made, any subsequent gains must be reported and taxed, even if the underlying investments haven’t been sold.
The mark-to-market election allows true full-time stock traders to treat their holdings as though they had been sold at the end of the year, even if they weren’t. Any paper gains or losses are treated as though they actually occurred. That means traders can write off the full value of any losses, but they have to pay taxes on the full value of any gains.
This election has to be made in advance, however--by the due date of the previous year’s return, to be precise. The man who wrote in would have had to opt for mark-to-market treatment for his 2001 trading by the due date of his year 2000 return.
Take Steps to Prove
Out-of-State Residency
Q: My wife and I are going to retire in a couple of years and we want to move to a place with no state income tax but keep our home in California for occasional visits. If we register to vote and buy a home to live in the other state, do we still have to pay California state taxes on our pensions because we have decided to keep our home here?
A: Tread very carefully in this area.
California no longer is able to tax the pensions of former residents who move out of state--something it used to do with relish, but which ended when former President Clinton put the kibosh on the practice. (Other states had been pursuing retirees too, but perhaps none as aggressively as the Golden State.)
Still, California tax authorities don’t like to let money get away from them. If they can prove you’re still a resident of the state, you’ll get taxed. You’ll want to spend the bulk of your time out of state, and you may need to take other steps to verify that you’re really no longer a resident.
For more information, chat with a good tax professional who stays current on residency issues.
Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at asklizweston@hotmail.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.
