Credit Counseling Isn’t Necessarily Harmful

Question: I recently started with a credit counseling service, which is helping me deal with three creditors that had increased my interest rates to 29%. When I informed the credit card companies, however, I was told that credit counseling was as bad as filing bankruptcy. My current credit report shows no late payments and I am quite concerned.

Answer: It’s too bad some creditors try to scare their clients away from credit counseling, which can be helpful if you’re overwhelmed by debt and unable to make minimum payments on your cards. Reputable credit counseling services can help you lower your interest payments and work out a plan to pay off what you owe.

It’s true that some lenders view credit counseling in a negative light, but it’s hardly “as bad as filing bankruptcy.” Bankruptcy stays on your credit report for up to 10 years, and is universally viewed as a huge black mark by mainstream lenders.

By contrast, lenders have a wide range of views about credit counseling, with some viewing it as a positive and others seeing it as neutral.

The most widely used credit scoring formula, for example, now ignores any reference to consumer credit counseling that might be in your file.

The company that creates the score, Fair Isaac & Co., discovered three years ago that consumers who participate in the programs are at no higher risk of default than anyone else, according to spokesman Craig Watts.

Not all lenders use this score, of course, and some won’t make loans to people who have recently been through credit counseling.

Because lenders react in different ways, credit counseling is probably best for those who can’t work out reasonable payment plans with their creditors on their own.

People with generally good credit, for example, often can win a lower rate from their lenders simply by threatening to take their business someplace else.

Estate Tax Exemption Is

Per Person, Not Couple

Q: I am confused about the exemption of $1 million for the estate tax. I always thought it was $1 million per person, but my friends all tell me that what a husband and wife own jointly is considered part of one estate, and so couples get only a $1-million exemption if they die simultaneously. Who’s right?

A: Friends shouldn’t let friends give estate-planning advice.

You don’t give up your exemption when you marry. The exemption is per person, not per couple. This year, the first $1 million of any person’s assets can go to heirs free of estate taxes. (The limit is scheduled to rise until 2010, when the estate tax is supposed to disappear for a year. In 2011, the limit is again scheduled to be $1 million.)

What’s more, spouses can leave each other an unlimited amount of property and assets without any estate tax. That’s one of the many advantages, financially speaking, of being married.

With Firm in Chapter 11,

Time to Sell the Shares

Q: Your column on stock in bankrupt companies was timely for me. The week before, I had received a court document notifying me that a company whose shares I own had filed for Chapter 11. For the last couple of years, I’ve been meaning to sell my shares (which had dropped to the $1 level) and take the tax loss, but there didn’t seem to be any rush. Now I’m not sure what to do.

A: If your company filed for Chapter 11 reorganization, its shares probably still are trading somewhere. If that’s the case, you can sell them and take the tax loss. You also could ask your broker, if you have one, to buy the shares from you for $1. Some brokerages are willing to do this as a courtesy to their customers.

It’s usually better to do this than to opt for the “worthless stock” deduction. In general, the company must be out of business and the stock must have stopped trading for you to take that route.

There’s a reason that most professional money managers sell stocks long before they drop below $1 a share. Although a few companies bounce back, many that have fallen to this level never recover.

Servers Pay Taxes Even

If They Get No Tips

Q: Thank you so much for your reply to the person who wrote to complain about tipping. You are so right that this guy is just plain cheap and has obviously never toted a tray in his life! Most of us servers work for minimum wage and rely on tips to supplement our income. We’re not making six figures or defrauding the government. I hope your response will make someone think twice before stiffing their server, bartender or bellman.

A: The original writer’s contention was that servers are skirting tax rules by not declaring their tip income. That seemed to justify, to him, his practice of not tipping at all.

His letter certainly stirred up a hornet’s nest. I heard from several servers who complained that the IRS taxes them on 8% of their receipts, whether or not they collect that much in tips. The Supreme Court recently strengthened the IRS’ ability to estimate tips based on restaurant receipts, a decision that means more tip income will be reported (whether it’s actually received or not).

People who are tempted to stiff a server might also consider that the minimum wage for employees who get tips can be as little as $2.13 an hour, according to the Fair Labor Standards Act. Employers are supposed to make up the difference between that rate and the regular minimum wage of $5.15 an hour if tips fall short, but some don’t even do that.

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Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at [email protected] or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries.