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Painful financial screw-ups can be fixed

Posted: March 8, 2008 10:03 a.m.
Updated: May 9, 2008 5:03 a.m.
 
You goofed! You just found a credit card bill stuck in your car's sun visor and it's due today. You forgot to file your tax return, and you're afraid to "fess up" to Uncle Sam. You got nailed for running that tail-end yellow to red light, and you're worried that you'll get your rates raised when your insurance company learns of the ticket.

These and other financial screw-ups can result in a hit to your credit rating as well as your pocketbook. It only takes a little effort to make things right, and your best strategy is to come clean. Pick up the phone and call the people involved. In most cases you'll find a sympathetic ear and a reprieve.

If you find a credit card bill on the bottom of a pile of papers on your desk, and it's due in a few hours, do something about it now. Usually card issuers are just as eager to collect your money as you are to avoid credit-rating purgatory.

To avoid this, call the credit card company to explain your dilemma and make an electronic payment from your bank account over the phone. In a matter of seconds after some verification of information, this problem can be solved and no black marks for you.

Delivering a check in person to the bank is another solution for procrastinators who wait until the due date to make a payment. You won't incur any penalties, plus you get the assurance of handing your money to a warm body. If there isn't a bank branch nearby, call the number on the back of your card and ask about paying by phone or online. As long as you can transfer the funds by phone from a checking account with the same bank, you're in the clear.

Can't avoid IRS
Death and taxes may be the only certainties in life, but each year millions of people try to avoid paying Uncle Sam by not bothering to file a tax return. Last year the IRS reported that almost two million people who were owed refunds for 2003 forfeited more than $2 billion because they failed to file a return for that year.

If you still owe the IRS a return for 2006 or earlier, get a copy of that year's Form 1040 at the IRS Web site (www.irs.gov) and determine whether the feds owe you a refund. If so, you have three years to claim it and you won't be charged a penalty. The process is similar if you filed a return but missed claiming a deduction in the past three years. You have to file an amended return - that's all. If you owe taxes for a year in which you failed to file, you'll need to settle up, and it's always better if you make the first move.

Penalties accrue at a rate of 5 percent per month, up to 25 percent, and you'll also owe interest. If you filed a return but didn't make your payment, you should already be receiving bills. In that case, you'll incur a penalty of 0.5 percent a month, up to 25 percent, plus interest.

Coming clean may just work in your favor because when the IRS calculates your taxes it doesn't include itemized deductions, uses "married filing separately" filing status, doesn't list a cost basis for securities sold, and doesn't include dependents. After calculating your taxes using these deductions you may find you owe less than the IRS bill or even be due a refund.

If you owe several years of taxes or you're having trouble tracking down documents, you might consider hiring an accountant. Or if you think you owe a lot of money, say because you were self-employed for several years, you may need a lawyer. At any rate, do what you must to get right with Uncle Sam or tax problems can haunt you and your credit life.

When it comes to repayment of student loans, it is possible to get relief or at least a reprieve for a spell. If you or your children have borrowed money for college through federal programs and are struggling to repay the loans, the last thing you want to do is to default. Federal education loans come with exceptionally flexible terms that can help you or your kids climb out of a hole without affecting your credit score or access to future loans.

In cases of unemployment or other economic hardship, both you and your kids will likely qualify for a loan deferment, which can buy you up to three years of not having to make payments. You won't accrue interest on federal loans, Perkins loans or subsidized Stafford student loans either. Investigate the possibilities for other types of loans and you might be able to obtain relief by requesting forbearance on them. Forbearance is basically a permission slip from the lender to halt payments for a certain period, although interest will continue to accrue. You or your kids should qualify if the loan is not already in default. Lenders can grant forbearance for up to 12 months at a time, for a maximum of three years. Call the U.S. Department of Education's Direct Loan Servicing Center at 800-848-0979 for information.

If a loan is already in default, you may still have time to set things right. An official default on a monthly repayment schedule occurs when no payments have been made for 270 days, but lenders don't have to report the default to their guaranty agency for another 90 days. If a payment is made before the lender reports a default, you'll still be delinquent unless you pay the debt in full but it won't be recorded as a default. Call immediately to find out whether the grade period is still applicable in your case.

Tackle the problem
These are just a few of the tactics to use when you find that you've goofed somewhere along the line. Procrastination is not the answer when it comes to righting financial problems. Facing things head-on and tackling the problem personally or on the phone is always the best way to stay out of "credit problem hell" and keep your business and good name intact.

Commentary by Dr. Maureen Stephenson, a local author and owner of REMS Publishing & Publicity. Her column represents her own views, and not necessarily those of The Signal.

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