Lingering bankruptcy cloud can be confronted

That low credit score isn't written in stone

Dollars & Sense

April 20, 2003|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

Five years ago, a lawyer talked my husband and me into filing a Chapter 13 bankruptcy, saying it would give us a "fresh start." The filing required us to pay off most of our debts in three to five years.

Two years after filing, however, we refinanced our house, used some of the proceeds to pay off our debts and got our bankruptcy discharged. We're now trying to clean up our credit report, but we've found that some of the accounts that were discharged in the bankruptcy are still not listed as paid off on our credit report.

Is that an error we should dispute? Will it help our credit score if those debts are correctly listed as paid?

Go ahead and contact the credit bureaus. You're not guaranteed a higher credit score, but getting those accounts reported correctly certainly won't hurt, said Craig Watts, spokesman for Fair Isaac Corp., the company that created the FICO credit score.

"While we can't guarantee that every such action will result in a higher score - this depends on how long ago the bankruptcy occurred, the amount of the balances and so on - the removal of these balances from the credit report will often raise one's score and should never lower a FICO score," Watts said.

Now, a word about your lawyer. Unfortunately, there are bankruptcy mills out there that maneuver unsuspecting clients into filing unneeded bankruptcies or into filing the wrong type of bankruptcies. A lawyer may get paid more for a Chapter 13, which requires a repayment plan, than for a Chapter 7, which erases most debts.

That's why it's important to get a second opinion, either from another lawyer or from a reputable nonprofit credit counseling service, before taking this irrevocable step.

People who need money for college are always told to fill out the Free Application for Federal Student Aid. I just want to say that the FAFSA is baloney.

According to the formula, my parents are supposed to contribute $11,000 a year for my education. If I could get that, I would not be filling out the FAFSA form! I am a good student. I graduated in the top 20 percent of my high school class, I was involved in many activities, and I now carry a 3.8 grade-point average in my first semester of college.

Yet I am paying for all of my tuition - no grants, no scholarships, just my paycheck from the job I have to pay for school. I refuse to take out a loan, because I do not want to be in debt my whole life. I just thought I would share my frustration, even though it will probably be heard by deaf ears.

"Heard by deaf ears"? That would be quite a trick - and so would expecting the FAFSA to measure your intelligence, your dedication or anything other than your family's ability to pay for an education.

The form, which is used by most colleges to determine financial aid packages, doesn't measure parental willingness to pay. It measures only what, given its resources and income, a family should be able to scrape together each year.

If anything, the FAFSA may undercount a family's assets, because it doesn't include home equity or retirement accounts in its formula. (Many private schools, mindful of this lapse, have additional forms that do ask about these assets and take them into account when making financial aid packages.)

Your parents' expected contribution indicates that they are not impoverished. They probably had the opportunity to save for your education through the years but chose otherwise. That's too bad, but again, it's not the form's fault.

You're obviously resourceful enough to find a job that allows you to attend and pay for school. You could probably find some merit-based scholarships that don't require a demonstration of financial need.

You're wise to be leery of student debt, but that doesn't mean you should rule it out entirely. As long as your total borrowing is half of your first year's salary or less, you should be able to handle the payments after graduation.

How does automatic bill payment affect your credit rating? Do the payments count as being on time, or does it look irresponsible? I am trying to repair my credit and was wondering if automatic payments would help.

The credit scoring system doesn't know or care how you pay your bills. It just cares that you pay them - and on time.

Therefore, automatic bill payments are an excellent way to improve your credit. These electronic transfers, which allow creditors to deduct money directly from your checking account, ensure that your bills get paid on time, every time.

Because your payment history makes up 35 percent of your credit score, paying bills on time is a powerful way to repair bad credit and build good new credit.

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

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