General & Misc. Planning: May 2006 Archives

In my experience, these are death to your credit rating. Why?



Because of how they work. The short story is they get your creditors to agree to accept some lesser number of dollars for your debts. The creditors, for their part, aren't happy about this. They often mark you as not having paid in full. But that's not the really painful thing.



Since you're not paying the service very much, what usually happens is that they sit on your money for as long as they can before passing it on to your creditors. Thirty, sixty, even ninety days, to earn all of the interest they can.



But your creditors want that payment every month on time. So of course they are marking you thirty days late, sixty days late, or even ninety days late. Every creditor, every account. Every single one that's late lowers you credit score. It's unusual for folks who go through this to have credit scores over 500, and the worst score I've ever actually seen was the result of a debt consolidation "service" promising to "help" them. To paraphrase Arthur Dent, these must be new definitions of those words "service" and "help" with which I was previously unacquainted.



(Unethical Chapter 13 bankruptcy trustees can do the same thing, which is one reason why Chapter 13 is usually worse on your credit than Chapter 7, a severe flaw in the bankruptcy reform law being that it forces folks to hurt themselves worse when they are already in a bad situation. I've seen people one day out of Chapter 7 with 650 scores, and 580 is pretty common. 650 would be possible A paper if you're full documentation and didn't have more than a couple late payments. 580 is eminently improvable to something that looks decent in a hurry. The score coming out of Chapter 13 is usually something under 500)



Furthermore, debt consolidation services don't do anything that you cannot do yourself. Call the company and tell them the situation. They will terminate any open line of credit and remove the privilege of new purchases from your account, but they'll do that as soon as contacted by debt consolidation services, anyway. Furthermore, if you're in a hole the first step to fixing the situation is to STOP DIGGING!



When you call, have a good idea how much you can really pay per month. If you need to do this with multiple creditors, keep in mind that whatever you've got to pay with is going to have to be parceled out amongst all of your creditors, and don't allow yourself to be talked into more than the proportional amount. If you run into a lot of problems with negotiation, go to a legal aid center. Bankruptcies are a large portion of what they deal with. Explain that you have tried to work out a payment plan but that creditors X and Y are not being reasonable. It may be that bankruptcy is the way to go, but that's between you and a lawyer to decide.



Furthermore, whatever you do, keep at least one or two accounts in good standing if you possibly can. Keep one or two credit lines outside the payment plan or bankruptcy, and pay the payments in full and on time every month. Once you come out of the payment plan or bankruptcy, you're going to wish you had. You see, percentage of trade lines you include is one thing that will help determine your credit score later. If you included everything, you've hit your credit report as hard as possible. If you don't have any credit lines, you have to have new ones to start building new credit, and every time you make an inquiry after bankruptcy, the hit is much harder on your score than an inquiry from someone who hasn't been bankrupt. Finally, if you don't have any post-situation record of payments, it's never going to get better. The poor schmoe who includes everything he owes is pretty much hosed for a long time. My understanding is that a credit line where you owe $75 counts for this every bit as heavily as one where you owe $75,000, but it would be wise to double check that as it may be incorrect.



Caveat Emptor

legal information on going through probate without money

That was a search hit I got.

The problem with this question is that you can't go through probate without money. The deceased's creditors want cash. The probate court wants cash. Attorneys and anybody else your executor has to hire want cash. Federal Estate tax may be on the way out, but while it's still here, that final tax form and the cash are due nine months after death. State estate tax is still here in most states, nor is it likely to go away, and the state wants cash, not promissory notes.

Your estate is going to have to get this money from somewhere, and I'll enumerate the classical alternatives, assuming that the point is not moot. If you die owing more than you have, settling your estate becomes a matter of purely academic interest, because your heirs aren't getting anything substantial.

Most obvious is to pay for it with money on hand, already in the estate. If you could afford this, you wouldn't have been running that search.

Also obvious is to have the executor (or other heir) loan the money out of their own pocket. This sometimes happens in the case of someone who's inheriting a house or other major assets. Sometimes executors take out short term loans for this purpose, also. Be careful - one thing most state laws require is that when you pay a debt for an estate, you must get written proof that you paid it out of your own funds for the settlement of the debts of the estate. On the other hand, if you could do this you probably wouldn't be running this search.

The next option is sale of assets to pay the debts, taxes, and anything else. This happens disturbingly often, mostly as a result of people who persist in believing that they're going to live forever. The notable drawbacks of this are two. The minor one is that maybe your heirs didn't want to sell, and the major one is that they're not likely to get anything like full price in such a situation. When you have to sell, the ones with the cash drive fire sale-like bargains. Also, the executor has to have the court approve this, which costs money in and of itself.

The next option is to do nothing. If this is what your heirs opt for, the vast majority of the time the court will order any assets there may be sold in order to pay the existing creditors and new assessments caused by your death. Your heirs are likely to get even less money here than the previous paragraph, and the court itself certainly won't cost any less.

The final option, and likely the best one, is to do what folks who plan ahead do, and have a policy of life insurance in effect. This is one of the reasons why Variable Life, and particularly Variable Universal Life Insurance, beats term life insurance like a red-headed stepchild when you consider the lifelong implications. The proceeds are all leveraged, tax free money, coming to pay your estate's bills as soon as your executor sends the insurance company your notice of death. Unfortunately, at the time your heirs are running that search, it's too late for this option. Like most really wonderful financial windfalls, you've got to plan ahead to make this work for your heirs.

Caveat Emptor.