Strange But True: Not Filing For Bankruptcy Can Slow Your Credit Recovery


Question: Several years ago, I was hospitalized three times within an 18-month time span. During that time I was out of work, got divorced, lost my house and collapsed financially. I was well over $75,000 in debt in credit cards alone. Fortunately, my health was restored and for the last four years I've had a great job. I am enrolled in a debt-management program with a consumer credit counselor and have never missed my $1,800 monthly payment. Within the next 17 months, I will be debt free. But recently, I checked my credit score and found that it is still awful. I had hoped someday to rent a nicer home or purchase a car on my own with a reasonable interest rate, but I'm wondering if that will ever be the case. (A parent co-signed my current auto loan, which I've always paid on time.) Will my credit score ever improve or am I not living in the real world?

Answer: Here's the brutal truth: Many people who file for bankruptcy are able to boost their credit scores to near-prime levels within three to four years of their cases being discharged. Instead of using their money to pay old bills, they use it to make down payments on homes or cars and get loans that help rehabilitate their credit.

People who try to pay off their debts instead of filing for bankruptcy often find it takes much longer to restore their credit. Lenders are wary of them because of the huge amounts they still owe (and because they still have the option of filing bankruptcy, whereas those who have already filed are generally prohibited from filing another case for several years). Participating in a credit counseling debt-repayment plan can make lenders leery as well.

That's not to say you made the wrong decision ? far from it. The lessons you learned about credit and living within your means will serve you the rest of your life. You had the means, the ability and the tenacity to pay what you owed, and should be congratulated. Now you'll need to apply the same resources to improving your credit.

If you can get your debt-management program paid off early, do so. Although the leading credit scoring model, the FICO, treats credit counseling as a neutral factor, you could still run into lenders who are unwilling to let you borrow while you're participating in the program.

If you still have a credit card available to you, charging small amounts each month and paying those off promptly can help build your score. If you no longer have any cards, look for a secured card that gives you a credit line equal to a deposit you make with the issuing bank. Just make sure the fees are reasonable and that the issuer reports to all three credit bureaus.

Your car loan is already helping you rebuild your score, whether you can tell or not. If you continue making those and all your other payments on time, you should begin to see a gradual improvement in your scores.

Question: How much can I contribute to my IRA for 2005? I am 62 years old. I know the contribution limit was raised but I get confused because I will make my contribution this year (before April 15) even though I want it counted as last year's contribution. Can you help?

Answer: Because you're over 49, you're allowed to contribute $4,500 for the 2005 tax year. (People 49 and under are limited to a $4,000 contribution.) You can put the money in your account any time before the April 15 filing deadline; just make it clear to your financial institution that you're contributing for 2005.

For 2006 and 2007, you'll be able to contribute $5,000, while the younger set can put in $4,000. In 2008, your limit will climb to $6,000, and younger people can contribute $5,000.

Here's a chart that might help:

Tax Year          Age 49 & Below           Age 50 & Above

2005                             $4,000                          $4,500

2006                             $4,000                          $5,000

2007                             $4,000                          $5,000

2008                             $5,000                          $6,000

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Liz Pulliam Weston is author of the new book "Deal with Your Debt: The Right Way to Manage Your Bills and Pay Off What You Owe? (2005, Prentice Hall). Questions for Money Talk can be can be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or submitted via her website,, although she regrets that she cannot respond personally to queries. Distributed by No More Red Inc.

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