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Debt relief offers aren’t all equal. Is bankruptcy a good option?

Some debt consolidation companies charge large upfront fees and interest rates.
(iStockphoto / Getty Images)

Dear Liz: There seems to be an abundance of companies offering debt reduction, debt settlement and debt consolidation programs now. Are there any differences in these programs? Some of these companies offer a program whereby high credit card balances and loans are combined and substantially reduced, and the debtor would make a single payment to said company. What are the pros and cons of this type of program? What would be the effect on the credit history of the debtor?

Answer: If a company is promising to help reduce the total amount you owe, that’s known as debt settlement. Typically, you stop paying your debts and instead make payments to the debt settlement company, which tries to negotiate a deal with your creditors.

Debt settlement can have a substantial negative impact on your credit scores, and you may be sued by creditors that are unwilling to settle. The process can take several years and you may have to pay taxes on any amount of debt that is forgiven, because that’s considered taxable income to you. Once you add in the company’s fees, the amount you save through debt settlement may be less than you expect.

If you’re considering debt settlement, first consult with a bankruptcy attorney (the National Assn. of Consumer Bankruptcy Attorneys offers referrals), because bankruptcy is often a faster, cheaper and safer way to erase overwhelming debt. The most common type of bankruptcy, Chapter 7 liquidation, typically takes three or four months, stops collection actions, legally erases many types of debt and allows you to begin rebuilding your credit immediately.

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If a company is promising to lend you money to pay off your loans and credit cards in full, that’s known as debt consolidation. Debt consolidation can make sense if you can get a lower interest rate than what you’re currently paying, the payments are affordable and the loan allows you to get out of debt faster. However, you’ll need to beware of debt consolidation companies that charge large upfront fees or that charge high interest rates. If you have bad credit, you probably would be better off consulting with a nonprofit credit counseling agency than paying high rates for a debt consolidation loan.

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Two husbands. Which benefit?

Dear Liz: I am 66 and recently widowed after a five-year marriage. I was previously married and divorced after more than 20 years. I paid into Social Security as a professional for 20 years. How do I determine how to file for Social Security benefits? Should I just file for my benefits? Should I wait until I am over 70? Should I file for spousal benefits and, if so, for which husband?

Answer: Let’s take that last question first. You’re only eligible for spousal or divorced spousal benefits if the worker on whose record you’d be claiming is still alive. Spousal benefits can be up to half what the worker would get at the worker’s full retirement age. If the worker has died, by contrast, you could be eligible for survivor benefits, which can be up to 100% of the worker’s benefit.

So you may be eligible for three different types of benefits: your own retirement benefit, a divorced spousal benefit based on your ex’s record (because you were married at least 10 years) and a survivor benefit based on your late husband’s record (because you were married for at least nine months at the time of his death). Normally, you lose the ability to claim divorced spousal benefits when you remarry, unless the second marriage ends in divorce, annulment or death, as yours did.

Which one to claim and when will depend on the details of your situation. You can call Social Security at (800) 772-1213 to get estimates of what you’d get on each record. Consider using a paid service such as Social Security Solutions or Maximize My Social Security to help you figure out the best strategy for claiming benefits.

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More about Medicare choices

Dear Liz: I’ve enjoyed your columns about choices between traditional Medicare and Medicare Advantage. I have a terminology question: What is the difference between a Medigap policy and a supplemental one? I have traditional Medicare and a supplemental plan, which covers the deductibles and copayments that Medicare doesn’t cover. According to your article, it seems a Medigap policy does the same. Please clarify and keep up the good work.

Answer: Medigap and supplemental policy are two terms for the same product: an insurance policy sold by private insurers to cover the “gaps” in Medicare coverage. If you have traditional Medicare (also known as original Medicare), it’s generally advisable to have a Medigap supplemental policy as well.

You can’t get a Medigap policy, however, if you have Medicare Advantage. Medicare Advantage is also provided by private insurers but is meant to be an all-in-one alternative to traditional Medicare, rather than a supplement to it.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “contact” form at asklizweston.com.


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