Fixing Five Painful Financial Screw-Ups

Kiplinger

You goofed. You just found a credit-card bill tucked into your car's sun visor -- and it's due today. You neglected to file your tax return, and you're afraid to 'fess up to Uncle Sam. You got nailed for your lead-footed driving, and you're worried that the other shoe will drop when your insurance bill arrives.

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

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Pay up at the 11th hour. Steven Cowen lifted a stack of papers on his desk in La Jolla, Cal., and discovered at the bottom a credit-card bill that was due in a few hours. Fortunately, card issuers are usually just as eager to collect your money as you are to avoid credit-rating purgatory, so there are plenty of ways to pay at the last minute.

To avoid a black mark, Cowen called his MasterCard issuer, USAA, and arranged to make an electronic payment from his account at Union Bank of California. "They verified my identity and set up my checking account in their system, and now I can pay electronically either by phone or online in a matter of seconds," says Cowen, a financial adviser.

Delivering a check in person to the bank that issued your card is also a fine option for procrastinators. You won't incur any penalties, plus you get the added assurance of handing your money to a warm body.

If there's no 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.

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Arranging to transfer money by phone from an account at another bank can be more cumbersome. And some banks charge a fee when you pay by phone -- Citibank and Bank of America each exact $15, for example. But with many banks moving services to the Web, most will now let you pay online from any checking account without charge.

Setting up automatic payments guarantees that you won't miss a deadline in the future. But Cowen still prefers to pay with a personal check. He'd rather "feel the pain" of his credit-card bill every month.

Make Uncle Sam your friend. Death and taxes may be the only certainties in life, but each year millions of people try to avoid the inevitable by not bothering to file a tax return -- even when they're owed money. 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 just have to file an amended return," says Janie Strasser, a certified public accountant in Spokane, Wash.

If you owe taxes for a year in which you failed to file, you'll need to settle up. "It's always better if you make the first move," says Greg Rosica, a tax partner with accounting firm Ernst & Young. Penalties accrue at a rate of 5% per month, up to 25%, 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% a month, up to 25%, plus interest.

Coming clean may just work in your favor. John Bowen, a financial planner in Midlothian, Va., once advised a client who hadn't filed a tax return in four years and had just received a bill from the IRS for $140,000. When the IRS calculates your taxes, says Bowen, "it doesn't include itemized deductions, uses 'married filing separately' for the filing status, doesn't list a cost basis for securities sold, and doesn't include dependents." After recalculating his client's tab and filing the old returns, Bowen got his client a total refund of nearly $11,000 for the previous three years.

If you owe several years of unpaid taxes or you're having trouble tracking down the documents you need, consider hiring an accountant. And if you think you owe a lot of money -- because, say, you were self-employed for several years -- you may need a lawyer.

Avoid a car-insurance hit. Barbara Arcoleo's teenage son Gunnar racked up two fender benders and a speeding ticket in his first two months on the road. You'd think that Mom's insurance premiums would also take a big hit -- but they didn't change one cent.

Before the older of her two teenage sons hit the road, Arcoleo had the foresight to switch to a policy that affords virtually unlimited accident forgiveness. "I knew that with three men in the house, something would happen sooner or later," says Arcoleo, who lives in Freehold, N.J. Her Allstate Platinum package costs 10% to 12% more than basic coverage, but it guarantees that her premiums won't rise in case of an accident as long as her family members aren't involved in a socially irresponsible situation, such as driving under the influence. Other insurers, including Nationwide, offer extra accident protection if you're a longtime customer with a clean record.

But in many cases, your window of opportunity closes on impact. Each black mark for an accident or speeding violation will hound your driving record for as many as three years. "All things being equal," says Raleigh Floyd, of Allstate, "expect about a 30% increase" in your premiums for each accident.

Once the damage is done, you have limited options, most of which involve finding other ways to cut your premiums until the black mark is expunged. One quick-and-dirty fix is to raise your deductible. An increase from $500 to $1,000 can save you 25%. Next, take advantage of every discount to which you're entitled. If a teenage driver is involved, your insurer might cut you a break if your child takes a safe-driving course. Installing an anti-theft device could also lower your costs.

Get a student-loan reprieve. 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 throw in the towel and 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 student loans.

In cases of unemployment or other economic hardship, for example, both you and your kids will likely qualify for a loan deferment, which can buy you a respite of up to three years. During that time, you won't have to make payments, and interest won't accrue on federal Perkins loans or subsidized Stafford student loans. (Interest will continue to accrue on Parent PLUS loans during a deferment, however.) Eligibility for deferment depends on the economic status of the borrower -- your child, in the case of Perkins and Stafford student loans, or yourself, in the case of Parent PLUS loans.

You can also obtain relief by requesting forbearance on your loans, although interest will continue to accrue. Forbearance is basically a permission slip from the lender to halt payments for a certain period; you or your kids should qualify if a 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). Private loans, however, usually don't have such lenient terms. Contact your lender to find out your options.

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, says Mark Kantrowitz, of Fin-Aid.org. If a payment is made before the lender reports a default, he says, "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 grace period is still applicable in your case. If not, the situation isn't hopeless. Default will stay on your child's credit report for seven years -- and yours, if you co-signed the loan, or in the case of Parent PLUS loans -- and it prohibits eligibility for forbearance, deferment and further access to additional federal student loans. But it is also 100% fixable. Completing a loan-rehabilitation program will remove the blot and reinstate all those privileges. Loan rehabilitation involves making payments within 20 days of the due date for nine of ten consecutive payment periods. Call the Department of Education at 800-621-3115 to begin rehabilitating your loan.

Painless parking tickets. If you're not going to contest the citation, get over it and pay up. Otherwise, your tardiness can get expensive. Many states boot or tow the cars of repeat offenders or delinquents, and it can cost hundreds of dollars to reclaim your vehicle.

In Florida, once you've accumulated three parking tickets, you can't renew your car's registration until you make good on your fines. Los Angeles can withhold your state tax refund if you have long-overdue tickets. And some jurisdictions now send unpaid accounts to collection agencies, after which the tickets will show up on your credit record (if they haven't already).

Many states are chummy with one another about sharing registration records. Connecticut, for example, suspends residents' licenses if they don't pay parking tickets issued in other states. If a ticket is no longer in your possession, contact the department of motor vehicles in the state where you received it to find out how to pay.

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