Laid-off car owner can dig out of the hole

Dollars & Sense

March 09, 2003|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

A year ago, I purchased a 2002 vehicle while I was employed. I purchased it purely on vanity (it looked swell) and paid the full sticker price of about $18,000. Three months later, I was laid off from my job. I spent three months on unemployment and have worked only part-time since July. I have not missed a payment, but I doubt that I can keep up the current pace based on the other bills I owe. I've tried twice to trade the vehicle in for another one, but the trade-in offers I've been given are about $4,000 less than the current balance I owe. What do you suggest I do? I'd really rather not allow the car to be repossessed.

First of all, good for you for not burying your head in the sand. Many consumers wait too long to deal with burdensome car payments, perhaps not realizing that a car can get repossessed if they're even a day late with a payment. Because repossession trashes your credit report, it's smart to want to avoid that outcome if possible.

Go back to your original lender and explain the situation. Some lenders are willing temporarily to lower your payments, although you'll wind up paying more interest in the long run.

If your lender is not willing to modify your loan, your next best bet might be trying to sell the car yourself. You'll probably be able to get more for your car than dealers would be willing to give you as a trade-in, although it still might not be enough to pay off your loan. You might need to come up with money from another source - a relative, a credit card, the sale of an asset - to pay the rest of what you owe.

Then you can set about the task of finding more affordable wheels - something used but reliable. As long as your credit rating is intact and you have income from your part-time job that exceeds your other bills, you should be able to get a loan. Your car might not be as swell, but it will get you where you need to go.

I am renting a house to people who filed for bankruptcy protection two years ago. They have an option to buy the home until May 2004. Are they likely to be able to get a mortgage? As far as I know, they have been paying their bills on time since the bankruptcy except for one or two late payments and some back taxes.

Let's turn the question around: Would you be willing to give these people money?

They've already bungled their finances badly enough to wind up in bankruptcy court once, and fairly recently at that. They're still not paying their bills on time, all the time, which is a requirement to have decent credit. They owe the Internal Revenue Service, which is pretty much the last creditor on Earth you'd want to have.

It's true that many people who have filed for bankruptcy protection can get a home loan within two years, but they generally have their financial act in gear. Late payments or tax problems on top of a bankruptcy filing will make it tough for your renters to get a mortgage loan with any kind of reasonable rate.

I have always been a careful spender, but I was married to someone who spent every dime we had coming in. We got a second mortgage on our home to pay the bills, but wound up losing the house when we couldn't pay the loan. We eventually filed for bankruptcy and divorce.

That was five years ago, and I've since been able to qualify for another home loan with a good-sized down payment. (If you don't turn around and rack up a lot of new debt, it is amazing how much you can save.) I also have a credit card with a $1,800 limit and a 16 percent annual rate. This was originally a secured card that limited my purchases to an amount I had deposited with the credit-card company, but it has since been upgraded to a regular, unsecured card.

I would like to get another card in case of an emergency, but I want better terms than I'm being offered. When can I reasonably expect to qualify for a credit card with decent terms? Five years is long enough to be paying your dues.

Not quite. Legally, your bankruptcy filing can remain on your credit report for 10 years, and many mainstream lenders won't be interested in you as long as that huge black mark stays on your file.

It might seem strange that it's easier to get a mortgage after a bankruptcy filing than it is a low-rate credit card. But think about it: If you fail to pay your mortgage, your lender can take back the house. Screw up on your credit cards, and your lender has little recourse against you other than nasty phone calls.

If you insist on getting another card, you'll probably have to accept one with a relatively high interest rate and annual fee. A better course might be to keep using the one you have, pay it off in full every month and wait for your credit score to improve. If you keep applying for cards and getting rejected, you run the risk of lowering your credit score.

Liz Pulliam Weston is a contributor to the Los Angeles Times, a Tribune Publishing newspaper.

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