Getting back on track after setbacks in military finances
Courtesy of USAA
Article Sponsored by: Air Force Civilian Service
Bank accounts, jobs, homes and even marriages have been the collateral damage of the recent economic fallout. But financial experts agree it is possible to emerge from adversity in your military finances such as bankruptcy, job loss, foreclosure, divorce or illness and rebuild your military finances faster than you might think.
Taking control after bankruptcy
Once your debt has been discharged in bankruptcy, it’s important to quickly work on establishing good financial habits.
- Say goodbye to a credit cushion. You might have relief from debt payments, but you still have to pay for life’s necessities - food, utilities, housing and transportation. You’ll also be responsible for any child support, most student loans, alimony and taxes you owe. “It’s imperative to create a realistic budget and live within your means,” says Melinda Opperman with Springboard, a nonprofit consumer credit counseling organization. “A budget is the most important step after bankruptcy,” adds J.J. Montanaro, a certified financial planner practitioner with USAA. “You need to get into the weeds, and take control by tracking everything you spend,” Montanaro says. “It’s easy to figure out fixed expenses like your car payment or rent, but what about that $60 you took out of the ATM? Where did that go?” says Montanaro.
- Have cash on hand. To avoid falling back on credit, both Opperman and Montanaro urge you to establish an emergency fund. Start by having $50 a month automatically transferred into a savings account. Work up to saving one month’s worth of expenses. Then, depending on your situation, set your goal to save six to eight months of living expenses, or even up to a year’s worth, advises Montanaro.
- Clean up your credit. As you improve your money management skills, keep tabs on your credit report. Even though bankruptcy remains on your credit history for seven to 10 years, you still could be eligible for loans, even though you may pay a higher interest rate, says Montanaro. After you file for bankruptcy, check your credit reports from each of the major three reporting agencies - Experian, Equifax and TransUnion. If you notice blemishes or wrong information on your reports that you want to dispute, work directly with the credit reporting agencies. Avoid using credit repair services that sometimes charge as much as $1,000 to clean up your report, cautions Opperman. “They don’t do anything that a consumer couldn’t do themselves. It’s often illegal at worst and ineffective at best,” she says.
12 months, you can stay on top of this information yourself by going to AnnualCreditReport.com to request a free credit report. For unlimited access to both your credit report and score throughout the year, consider signing up for CreditCheck Monitoring offered through USAA.
Coping with job loss
Sooner or later, you’ll be employed again and earning a paycheck. To help your military finances survive this temporary strain, plan for the worst but still be prepared for the best.
- Hunker down for the long haul, says Montanaro. Start slashing unnecessary expenses. First, take care of your living expenses, including groceries, your home and utilities. Then, pay secured debt, like your car payment. If any money is left over, pay your creditors.
- Remember cash is king, adds Montanaro. Your immediate inclination might be to use your savings to pay off your debts. Instead, use your cash to make minimum payments until you’re back on your feet. Draw from your savings and nonretirement investment funds first.
- Resist the urge to put expenses on your credit card, says Gail Cunningham with the National Foundation for Credit Counseling. If you don’t find a job quickly, you could create a debt obligation you can’t pay. Equally as bad, you’ll have a massive debt to deal with after you find new employment.
Overcoming a divorce
The financial ripples of divorce can often last longer than the heartbreak. Besides hefty attorney fees, it’s also costly to maintain separate households.
- Keep legal costs down. Be as civil as possible, urges Carl Palatnik, executive vice president of the Association of Divorce Financial Planners. Unnecessary fighting gets expensive when lawyers are involved. If possible, try to come to an amicable agreement about property and custody of children through mediation or a collaborative divorce agreement where couples work to settle their disputes without going to court. But don’t lose out on what you deserve just because you don’t want to rack up legal fees. A financial planner can work up different settlement scenarios to help you make informed choices, Montanaro says.
- Dive into the details. Often, one spouse or the other handles the majority of financial decisions and activities. If you weren’t deeply involved, now is the time to get up to speed - quickly. Dig in and get a good handle on your total financial picture. For starters, Montanaro says to find out the answers to these questions:
- What are your investments? Do you have stocks, bonds, cash, real estate, etc.? How much is each worth?
- What are the details of the various types of insurance coverage you have?
- Where do you stand relative to your major financial goals, such as saving for your retirement or your children’s college education?
- What’s your credit score? Regularly watch your credit history and know your score. After a divorce, you will want to make sure your name is not on any debt for which you’re no longer responsible.
- Make it final. Disentangle your financial connections to your spouse. Joint accounts should be paid off and closed. Don’t forget to change your beneficiaries on investment and retirement accounts, insurance policies and your will, Palatnik says.
Keeping afloat in foreclosure
About 14% of mortgages in the United States are past due or in foreclosure, according to the Mortgage Bankers Association. So, most lenders are accustomed to working with homeowners to modify loans.
- Talk to your lender. If you anticipate you won’t be able to keep up on payments because you’re struggling with debt or just lost your job, call your lender immediately. You don’t have to wait until you slip into foreclosure to get the terms of your loan reworked so it’s more affordable.
- Become an expert at managing your credit. Pay all bills on time, every time. Seek opportunities to rebuild your credit. Accept even a high-interest rate offer and manage the privilege well by paying off your balance each month. If getting a credit card is not an option, then look for a secured card that requires a deposit in case of default. “The key is to recover as quickly and as well as possible. Don’t languish,” says June Walbert, a certified financial planner practitioner with USAA.
- Be patient. Finances are all about dollars and cents but that doesn’t mean that emotions don’t play a vital role in navigating a foreclosure. Remember that you’re already through the worst of it. “You may be further away from your goals than you thought you’d be at this point in your life, but don’t let that mountain ahead of you stop you from taking those small steps,” Montanaro says. Even though a bankruptcy and foreclosure can stay on your record for seven to 10 years, it is possible to get your credit back to adequate levels in just a few years by paying your bills on time and slowly building a good credit history. You could be eligible for certain home loans from the U.S. Department of Veterans Affairs in as little as two years, says Montanaro.
Healing sick military finances
An illness or injury that prevents you from working or requires expensive treatments can make your bottom line sick, too.
- Go over your bill with care. Watch for duplicate billing for the same service. This procedure can get complicated because you may be receiving bills from several providers. But the time spent can save you hundreds, if not thousands, of dollars. “Estimates show that an extremely high percentage of medical bills contain errors, and it is highly unlikely the error will be in your favor,” says Cunningham. Understand what payment you should be paying and what your insurance company is responsible for. Stay in the loop to make sure payments are made on time. “Many people don’t understand the ultimate responsibility for payment lies with them. You’ll want to stay on top of any dispute between the provider and your insurance company,” says Cunningham.
- Seek relief. If your illness has left you in the red with health care providers, Montanaro suggests attempting to negotiate the amount of debt or at least extending the payment timeframe. “If you don’t ask, you’ll never know what options might be available,” he says. An IRA can be used for medical expenses, says Walbert. Penalty-free early distributions can be made if the funds are used to pay unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. Income taxes will be due on the distribution, however.
- Use caution when applying for a credit card specifically designed for health care needs. You may be tempted to transfer all your medical debt onto a new credit card for health care needs. Pay close attention to the credit terms and conditions, especially promotional interest rates. Find out what happens to your interest rate if you don’t pay off the bill before the initial low or 0% interest rate expires.
If you’re struggling to pay the medical bills, Cunningham warns you’re also likely to fall behind on the credit card. You could get turned over to a bill collector and receive dings to your credit report and score.
Return to November/December 2010 Issue