From my 20 years of experience as a Colorado personal injury attorney, and from my representation of injured people and their families, I have become somewhat proficient in certain associated areas of medicine, science, and the law. These collateral areas of learning include an understanding of topics such as the latest spinal surgery techniques, certain innovative vocational rehabilitation programs, and even successful consumer credit preservation and repair techniques. I gained my knowledge of these areas by working with families that are coping with the challenges associated with piecing together normalcy after a loved one has been injured in a catastrophic or semi-catastrophic event.
Industry-wide, there is a well-recognized correlation between suffering a car crash personal injury and subsequent financial hardship. Consequently, people who are injured in car accidents nearly always lose their good credit rating.
The purpose of this article is to provide my readers with the requisite knowledge and battle-tested strategies to preserve their credit scores if they are injured. Also, this article will explain how individuals can repair their credit scores after their personal injury case is settled or resolved.
As a side-note, most of the advice in this article can be effectively utilized to beef up or repair a bad credit score, even if you had a bad credit score before you were injured. In fact, these strategies are applicable to anyone who wishes to preserve their credit score. So, in my humble opinion, this article is required reading for anyone who expects to function financially in the United States in 2012.
Your Credit Score: What Is It?
Nationwide, there are three major credit reporting bureaus (Experian, Equifax, and TransUnion). Depending on the banks, credit cards, and collection companies working with you, the credit reporting bureaus record your credit history and the promptness of your bill payments. This is why credit counselors, car salesman, and loan providers talk in terms of "pulling all three reports." All three credit bureaus have only a part of your "credit story," accurate or note, when it comes to your credit history. Recently, a company named Innovis emerged as a fourth major credit bureau. However, Innovis is much smaller and less widely used than the three major credit reporting bureaus.
These credit reporting companies generate reports about you that reflect your credit worthiness. Your credit worthiness is capsulized in a rating or score that dictates whether you are viewed by lenders as a good, average, or bad credit risk. In accordance with the economic principle of supply and demand, the better your credit score, the more companies will want to do business with you and want you to be their customer. Conversely, if you have a low credit score, companies will not want your business and will not pursue you as a customer.
When a lender sets out to select a customer, one major factor that they consider is the likelihood that they are going to get paid back. When people default on a loan, it costs the lender extra money and time because they have to hire a collection companies, lawyers, and account executives to watch over the lawyers and collection companies. For a lender, the perfect customer is one who pays month after month until the loan is paid back. In that situation, the lender recovers a profit from the interest paid on the loan. When a lender loans money to someone with a more questionable credit history, the lender factors in the potential added hassle of having to expend time and money to collect on the loan if the customer defaults on that loan.
Lenders perceive people with higher credit scores as easier to work with than people with poor credit because it is less likely that they will default on their loans. This is precisely why people with good credit scores are offered low interest rates with low monthly payments on things like cars and houses. Alternatively, folks with more dubious credit will pay more for all of these things. People with low credit scores have fewer lenders vying for their business. Accordingly, they have to take what they can get by taking on less desirable loan terms, higher interest rates, and higher monthly payments. Simply said, it costs people with good credit a lot less to borrow money than people with poor credit history.
Your FICO score is the financial standard that is most relied upon to rank you compared to others as far as your credit worthiness is concerned. FICO stands for "Fair Isaac Corporation" and is a credit risk calculator that takes information from the three credit reporting bureaus and provides a current snapshot of you as a credit risk to potential lenders. FICO calculates your score based on a combination of factors, some of which are unknown to most because they are considered trade secrets. However, we know that your FICO score is largely based on your payment history, the length of your credit history, and even the type of borrowing that you have done. FICO scores range from a low score of 300 to a maximum score of 850. Very few folks actually have credit scores in the 800s. FICO reports that as of 2006, sixty-percent of the nation's population had scores that were between 650 and 799, with the median at 723. People with scores in the high 700s are considered to have good credit and people with scores in the 600s have poor credit.
Credit Scores Go Way Down After Injury Crashes: Why?
When people are injured in car crashes, they often suffer temporary work loss because they usually cannot work, or work as much as they did before they were injured. Consequently, they take home fewer wages or no wages at all. To add to the problem, when people are injured, they suffer an influx of medical charges, out of pocket expenses, and have to expend their money on services that they did not need before they were injured. So, while earned wages are lower after an accident, the degree and extent of household expenses go way up. In that situation, something has to give and unfortunately, that is usually your credit score.
Within months of a car crash, even people with good credit can potentially see their credit score slipping downward. Because of the decreased wages, they start to live more on credit. As a result, their available credit begins to lessen and they might apply for more credit credits or refinance their home. All of these activities are noticed by FICO and these activities decrease your credit score. As your score goes down, your problems compound because the cost of continued borrowing money goes up. Consequently, you become less and less credit worthy and lenders will treat you with less regard by increasing your interest rates to borrow money.
Next, the bills from hospitals, therapists, and chiropractors start to roll in. Even a person with good health insurance has to make co-pays and deductible payments. Within months, hospitals, ambulance companies, and other healthcare providers turn your past due medical bills over to collection companies. Collection companies motivate people to pay their bill by threating to report defaults to credit bureaus. Reported collection notices radically and quickly decrease your credit score. The more credit bureaus hear of collection efforts and charge offs for bad debt on your behalf, the worse your credit score becomes.
These negative credit reports stay on your credit for 7 years. So, just a few months of negative credit history can poison your credit score even if it has been perfect in the past.
Minimizing Credit Score Damage During The Rough Times:
First off, it is important to understand that no advice in this article is a guarantee. Nothing besides the uninterrupted and timely payment of your bills can guarantee the maintenance of a good credit score.
However, after you are in an accident, maintaining your credit score should be viewed more as "damage control." While your credit score is likely to dip, strict compliance with the following advice should keep the bleeding to a minimum.
What to Avoid:
By reading this article and understanding the factors that affect your credit score, you can avoid several credit pitfalls. Accordingly, you know that after you have been injured in a car crash, you should avoid opening up additional credit card accounts, borrowing more, and nonpayment of your bills. Easier said than done, right? Wrong. The strategies that I propose in this article contemplate managing your finances with less incoming wages and increased bills/expenses. If you want to do some damage control, you must play it smart. Rather than hoarding your remaining money, not paying your bills, maxing out your credit cards, and ignoring phone calls from bills collectors, I propose a far more workable strategy.
Generally, financial planners are really smart people. I highly recommend that you hire one to help you achieve your long-term financial goals after your life has returned to normal and you get past your short term/post-injury cash flow crisis. I am not a financial planner. So, please understand that some of the lifesaving (or at least credit-saving) damage control alternatives that I propose run squarely in opposition to long-term financial principles. Ultimately, what you do with your finances is your choice, but, for this type of crisis, I suggest you listen to me, not to financial planners.
Financial planners advise consumers to pay down debt, fully maximize tax deferred IRAs, and to place 10% of your monthly income into savings. This is great advice and I hope that you always have the resources to do such things. But, this is an article about when your physical crash turns into a financial crash and you are struggling to keep your head above water. I am sorry to say that when you are facing a post-injury cash flow crisis, funding your IRA is much less important than avoiding foreclosure.
So, in the short-run, my strategies should lessen the damage to your credit rating. Afterwards, when your financial crisis is over, you should hire a financial advisor with a flip-chart who will tell you stuff like, "People don't plan to fail – they fail to plan," to fix what you had to do to get you through your short-term crisis.
Keep Paying Your Creditors/Lenders That Report:
Definitely do not hoard your money and stop paying your bills. This is a classic fear-driven tactic that decreases your credit rating. Instead, put your bills into two stacks- one stack for the creditors that report late payments, and the other stack for creditors who don't. Ideally, you should continue to pay your mortgage, second mortgage, and your credit card bills. These creditors all report to the credit bureaus if you don't pay your bills. Hold off, slow pay, or reduce payments to creditors that don't report such as utility companies, maintenance folks who have done work around your house, and the IRS. It's true, the IRS does not report derogatory credit information to credit bureaus. When your bills are way past due, these creditors file tax liens that bureaus do pick up on, but that is a long way down the road. As long as you are talking and working with these creditors, they usually don't report you or seek to impose a lien on you.
More importantly, you will find that only paying the creditors who report your defaults will significantly reduce your monthly expenses. Moreover, by following this strategy, you reduce your monthly expenses, and in the eyes of FICO, nothing seems afoul.
Borrow From Sources That Don't Report:
While helpful, simply paying companies that don't report is not usually a complete fix. In addition, you are going to need to find a source of additional money to keep your head above water. So, in the short-term, you are going to need to borrow more money from a source that doesn't report to preserve your credit score.
Firstly, I suggest you borrow from your Individual retirement account or IRA. An IRA is a tax- deferred financial account designed to help you save for retirement. An IRA is not tax free because you will have to pay taxes when you withdraw money from it. The rationale for using an IRA is that once you retire and are not earning the big salary that you used to, your tax rate will be lower than it was before you retired. As a result, you will pay a lower tax rate on the money when you withdraw it in retirement. However, IRAs might not be the greatest place to put your money because there is no way to really know what the tax rate is going to be when you retire.
You can borrow money from your IRA yearly and you do not have to pay a penalty or interest as long as you pay back the money that you borrowed within 60 days of withdrawing it. If you don't pay your IRA back, you will have to pay taxes on that money in the next taxable year (since it has not been taxed yet), and you will have to pay a small penalty as well for the early withdrawal. More importantly, borrowing from your IRA is a method that you can use to temporarily increase your cash flow without FICO finding out.
Suze Orman would say that it is a huge mistake because IRA funds are excluded from Bankruptcy proceedings. Ms. Orman would say that it is a mistake to pay off credit card debt that could easily be discharged in bankruptcy with IRA money that cannot be touched by your creditors. So, if you are planning on discharging your debt by declaring bankruptcy, you should listen to Ms. Orman and not to me. Otherwise, if you see your situation as a temporary cash flow crisis that should right itself with the injury settlement, then you should go with my advice.
Also, you should avoid excessive borrowing from your credit cards. You should definitely avoid maxing out credit card after credit card. FICO sees when you max out credit cards and knows what's up. In such a case, your credit score won't be up, it will go down. If possible, you should borrow privately from family and friends. If you have good credit and equity in your home, you could also consider taking an equity line of credit or even a signature loan to pay all of your revolving credit. FICO likes when you pay off revolving credit and keep your credit card balances low. While FICO will know that you took out a line of credit, they will also see that you reduced your credit card debt, and those will cancel each other out and not lower your credit score.
The main goal is to prevent FICO from learning of your cash flow problems. If you utilize the payment and borrowing strategies that I explained above, FICO will be none-the-wiser about your temporary financial woes. But, in combination with the strategies explained above, I cannot over-emphasize the importance of communication with your creditors.
Communicate, Communicate, Communicate:
As I already explained, the last thing that any creditor wants to do is turn your file over to collection. In addition, if you want to maintain your FICO score, that is exactly the last thing you want a creditor to do as well.
Since you know that you and your creditors have a mutual interest, you should communicate, communicate, and communicate some more. You should take the initiative to contact the accounts receivable representative at utility companies, the IRS, the State Department of Revenue, the cable company, and the exterminator to provide them with as much detail and documentation as they want. You should tell them that you ultimately want to bring your account into balance and offer them at least a small payment. Or, you can at least provide a date when you will be able to pay something.
For my clients, I often write letters to creditors and landlords that explain the status of their cases, when we think that the cases are going to settle, and my best estimate as to the likely settlement range.
You could also consider signing promissory notes to bring your accounts current when you settle your case. Creditors usually like this option because such notes get lodged with your attorney and your attorney can pay these creditors directly when you settle your case. By utilizing promissory notes, some of my clients have been able defer rent payments for up to a year without any negative reporting to credit bureaus.
In addition to communicating with your creditors, you should also communicate with your personal injury attorney about your financial struggles. Like anything else, if we don't know what is going on with you, we certainly can't help.
I have found that the more you communicate with creditors that you are slow to pay, or are not paying, the more likely those creditors will avoid placing derogatory information with credit reporting bureaus.
Fixing What Can Be Fixed Once The Siege Is Over:
So, now that your case has settled, you are hopefully back at work and able to once again make ends meet. Now that you can focus on fixing the damage done to your credit, what do you do first?
Once you receive your settlement and have money to pay your outstanding bills, I suggest that you communicate with your creditors and see if they will agree in writing to payments conditioned on their removal of any derogatory information from your credit history. Not all of your creditors will agree to that, but some will. Furthermore, some creditors might agree to be paid only a fraction of what they are owed and also agree to change their report to the credit bureaus to show "paid as agreed."
Next, assuming that there are some holdout creditors who won't agree to correct your credit report upon payment, I suggest that you order all three of your credit bureau reports so that you can file disputes to combat all of the adverse information on your credit history. For your convenience, the following serves as links to the major reporting bureaus and to Innovis:
This process does not lend itself to adding excuses to your report to explain away your negative history. While this can be done, in my experience, it is of little value in fixing your credit score. Instead, you should dispute that you paid late or that you were part of any collection effort.
The Fair Credit Reporting Act requires that credit bureaus research and correct any derogatory information that they cannot validate within 30 days of your protest. Once a bureau receives your protest, they go to the creditor who reported the negative information to seek confirmation. Few creditors are equipped to validate negative credit information. Accordingly, the law requires the bureaus to remove adverse information that is not validated within 30 days of your lodged protest. Most debtors do not take the time to correct their negative credit history. Consequently, the rewards go to those consumers who take the time to dispute their negative history. I have seen this dispute process used to clean up negative credit information that was both correctly and incorrectly reported.
At Anderson, Hemmat & McQuinn, we believe that it is the responsibility of any good personal injury attorney to help you with every aspect of your life that is affected by your injury, including damage control for your credit score. We understand that when a family's breadwinner is injured, the whole family suffers as money gets tight and the medical bills start to role in. That is precisely why we use all of the legal tools at our disposal to help our clients with the financial difficulties that inevitably accompany car accident injuries. If you have been injured in a car crash and you are worried about a financial crash, please call and speak with one of our attorneys today.