Before filing for bankruptcy, try living within your means

Dear Liz: I am a 49-year-old single father with two boys, 17 and 12. I had my own business for five years, which I finally gave up last year. I have credit card debt of about $68,000. My credit score is still good and all payments are current. I do not own a house, and I do not own much personal property either. I found a job a few months ago, and with that, I can still make payments every month. But I just figured out that it will take me about 40 months to pay them all off.

I am considering filing for Chapter 7 bankruptcy. My thinking was to file for bankruptcy now to wipe out the credit card debt, so that I can start saving for my retirement and the boys’ college. But I also heard that some student loans are based on parents’ credit, which worries me.

I have a car in good condition, but I will need to replace it in a few years because it is 15 years old. I also would like to start another business on the side, which will be easier if I still have credit.

I’ve read a lot of advice on the Internet, but I’m not sure whether I should file for bankruptcy. What do you advise?

Answer: That you not rely on Internet opinions when making a decision this monumental.

You really need to speak to a bankruptcy attorney about your individual situation. What you’ll probably discover is that you’re not a good candidate for bankruptcy, since you’re able to pay off your debt in less than five years. People who are allowed to file for Chapter 7 bankruptcy liquidation typically have far more debt than they could repay in that time period.

There’s another reason you probably shouldn’t file: You need to learn how to live within your means. You seem to be eager to start the borrowing cycle all over again, even though it ended in disaster last time.

Business-related debt is good debt only if it helps you get ahead. If you use credit just to keep a failing business afloat, it’s bad debt.

‘Exit fee’ may be in the fine print

Dear Liz: My wife and I are rolling over our bank certificates of deposit to another investment company to consolidate our holdings. Two weeks before the CDs’ maturity date, we notified the bank and filed the necessary papers. The bank didn’t complete the rollover for two months and then withheld $50 for something it called a “Trustee to Trustee Transfer Fee.� What is this, and can the bank make this charge?

Answer: Such “exit fees� are a way for banks and brokerages to nip an ounce of extra flesh from departing customers. Many financial institutions charge them, but they often aren’t well disclosed and few investors know to ask about them. You’ll know better next time.

More on federal gift-tax rules

Dear Liz: I’m an estate-planning attorney and want to expand on the answer you gave to the parent who wanted to give her children money for their educations or a car but was worried about gift taxes.

Your explanation of the federal rule was accurate -- only gifts of more than $13,000 per recipient have to be reported, and gift tax isn’t owed until amounts over that exclusion exceed $1 million -- but state laws vary. (California levies no gift tax.) In addition, the $13,000-per-person annual exclusion and the $1-million lifetime exclusion is available for each giver, so a married couple could give $26,000 without reducing their lifetime exemptions.

Also, tuition is not considered a gift if paid directly to the school, irrespective of the amount, so the giver could offer to pay tuition directly and then give money separately for a car. Finally, 529 college savings plans are an excellent way to save for a child’s higher education and are often preferable to giving money directly to the children.

Answer: Thanks for the additional information. College savings plans allow people to contribute up to five times the annual gift exclusion amount at one time, meaning generous parents or grandparents could stow $65,000 into a 529 plan without having to file a gift tax return (as long as they make no other gifts to the recipient in that five-year period).

Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.� Questions for possible inclusion in her column may be sent to 12400 Ventura Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz� form at www.asklizweston.com. Distributed by No More Red Inc.