Don't let a disability ruin your credit
Experts share tips for the short term and long term
By Katie Ford
An unexpected illness or injury can send you into debt and sink your credit rating faster than you can say, "I need disability."
Just ask Holly White, whose husband, James, went on disability at age 42 due to a chronic illness. Now on a limited income, the San Diego couple struggles to pay their monthly expenses, rising medical bills, and personal and credit card debts.
"When my husband was put on disability, it took over a year to receive the first check," White says. "My husband's credit is shot and now mine is starting to get hit. I honestly don't know if we will ever recover and be able to be on solid financial ground again."
Disability: a statistical snapshot
According to the Social Security Administration's 2007 Fact Sheet:
• Three in 10 workers entering the workforce today will become disabled before retiring.
• Seventy percent of the private sector workforce has no long-term disability insurance.
• Of the more than 6.8 million people receiving Social Security disability benefits, almost half are under age 50.
Considering that the average monthly Social Security disability insurance benefit is $978 and that 70 percent of the private sector workforce has no long-term disability insurance, chances are likely that hard times are ahead for others whose careers are derailed by a disability.
However, there are steps you can take to minimize the damage. Your strategy will depend on whether you're up against a short-term or long-term disability -- short term being defined as six months to two years.
With short-term disability, "Your goal here is to keep your lifestyle -- to hang on to your house and to your car and to pay your bills on time," says Robert Pagliarini, author of "The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!" "To do this, you need cash. There are several ways to get cash, but you may only need to do one or two of these things to get by. Also, the short-term plan assumes that you'll return to work in the same capacity once you've recovered."
These are among the steps to take:
• Apply for Social Security disability benefits immediately.
As Holly and James learned, it can take months to receive a check.
• Create a separate bank account to hold just Social Security checks and disability payments.
Financial experts recommend to create a separate bank account just for Social Security checks and disability payments to protect against garnishment from medical debt collectors. These payments are exempt from any type of judgment or lien, but more often than not, those funds are mixed with other income, making it harder to combat court-ordered payments. In the event medical debt is overdue and a court-ordered judgment is issued, make it clear to any debt collector that this specific bank account contains only funds from Social Security and cannot be touched.
• Open additional lines of credit and take as many cash advances as you can.
Put that cash in a high-interest checking account. "If you're disabled long term, this is horrible advice; this is a temporary fix," Pagliarini emphasizes. "You might take a hit on your credit rating for opening several lines of credit, but not as big a hit as you would take if you stopped paying your bills."
• Call your credit card companies to see if they'll work with you.
While it is not guaranteed that your credit card company will try to lower your rates or payments, it's worth a try. Bank of America spokeswoman Betty Riess says, "We urge customers to contact us in these situations because we want to work with them if they're having trouble paying their bills. For Bank of America, there's not really an off-the-shelf program to address this. What we do is look at each customer's situation and determine the most effective route to take, whether it's offering a lower interest rate, a lower minimum payment or waiving fees."
• If you own a house, take out a home equity loan.
Take the cash and put it in your high-yield checking account.
• Take a hardship withdrawal from your 401(k).
These aren't always offered, but in a severe financial crisis, sometimes you can withdraw 50 percent of the value of your 401(k) (with a maximum of $50,000).
• Think of additional revenue streams.
Many temporary jobs don't require physical activity or even leaving your home. Consider renting a room to offset your mortgage or rent. Have a garage sale.
• Eliminate, or significantly reduce, discretionary spending.
Movie rental accounts, gym memberships, even your mobile phone are fair game. "If you're not leaving your house that often, rely on your landline," Pagliarini says.
• If you have investments, get conservative.
Bypass the growth funds; buy fixed-income bond funds. Pagliarini says: "Losing 10 percent of your assets in a volatile mutual fund can hurt you if you're trying to live off those assets."
• Be an opportunist.
Use your downtime from work to earn an online degree or get a professional certification. "When you recover, you'll know your time wasn't wasted," Pagliarini says. "This will increase your earning power and further help you recover financially once you're back at work."
A long-term disability warrants a lifestyle change. It's time to:
• Rethink your entire budget, not just your discretionary dollars.
• Start the application process for Social Security benefits immediately.
"Get out of any big expenses you might have -- car leases, expensive rent, et cetera," Pagliarini says. "To lower your housing costs, look at HUD housing, get a roommate, move in with your parents or kids, do whatever you need to minimize your expenses."
Find a new way to earn a living
"If you can talk on the phone, there are jobs out there that you can do," he says. Be warned: If you have long-term care or disability insurance, verify the income limits to make sure your earnings won't cancel your benefits if you still need them.
Consider legal action
What caused your disability? Where did it happen? Talk to a lawyer about whether you deserve remuneration.
An injury or illness may affect your earning power, but it doesn't have to scar your finances for life. The sooner you confirm your strategy and take action, the better off you'll be in the long run.
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Published: March 18, 2008