Fix Your Money Screw-Ups

EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.

You goofed.

You ran out of stamps, so of course you couldn't pay your credit-card bill. You lost your W-2, so you figured you'd save yourself some trouble by not bothering to file a tax return. Repaying your student loans completely slipped your mind -- for over a year.

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Unfortunately, these screw-ups neither go unnoticed nor fix themselves. As with a mess in your kitchen, a mess in your finances won't go away unless you clean it up. But it doesn't necessarily require a lot of elbow grease to make things right.

Below, we give solutions to five common financial indiscretions, but the advice works just as well for most other money mishaps. The bottom line: Pick up the phone and call the people you've slighted. That's the first step to getting back in their good graces. So go find that student-loan tab, utility bill or whatever it is that keeps you up at night, and call the number on the bill. Seriously, go.

Work off your debt

Susie Armitage racked up $3,000 in credit-card debt last year while preparing for a trip to Russia to do volunteer work. "Once I had too much debt to pay down in a month, I started blowing it off as 'Oh, whatever. Everyone's in debt,'" says Armitage, who works for a Washington, D.C., nonprofit. But when she got back from her two-month trip, the balance was still sitting there, plus finance charges on the 18% Citibank card.

So Armitage, 25, called Chevy Chase Bank, which agreed to transfer $1,000 of her Citibank balance to a new zero-interest card. She then worked three jobs and eliminated her entire balance in three months -- first making payments on the interest-bearing card, then on the 0% card.

Blowing off your credit-card payments damages both your credit score and your financial habits. The sooner you take control, the easier it is to get back on track. Now Armitage is back to one job and pays her bill in full each month.

Exceeding your credit limit isn't the end of the world if you've got the funds to make up the difference. But that, too, will send your credit score into a tailspin. If you breach your limit, call your bank immediately and let it know you'll send in a check. Be honest about how much you can pay and follow through.

If you're not sure whether you've missed a payment, or you don't know how much you owe, call the bank and ask. You can usually send in a check without your monthly statement if you include your account number. And if plain old disorganization leads you to skip payments, consider setting up automatic withdrawals from your checking account.

You have more serious credit issues if you can't afford your minimum payment or can't keep your balance within your credit limit. Call the National Foundation for Credit Counseling at 800-388-2227 to speak with a credit counselor if you're worried about deeper financial problems.

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A student-loan reprieve

Student loans come with exceptionally flexible terms, yet many borrowers have a checkered payment history. In 2006 the default rate for federally sponsored student loans was more than 12%. But if you can't pay, you have better options, none of which will affect your credit score or access to future loans.

If you can't find a full-time job or you experience some other kind of economic hardship, ask your lender about deferring your loan repayment. Each deferment can buy you up to three years in which to get on firmer financial footing. During that time, interest won't accrue on Perkins loans or subsidized Stafford loans. Tell your lender which kind of deferment you'd like to apply for, and the lender should be able to mail you the proper forms or tell you how to download them.

Forbearance also offers a financial respite, although interest will continue to accrue. Forbearance is basically a permission slip from your lender not to pay for a certain period; you should qualify if you are not already in default. Your lender can grant forbearance for up to 12 months at a time, for a maximum of three years. Call 800-848-0979 for information on deferment or forbearance on direct government loans, or contact your lender.

Private loans may not offer as many options, but the advice is the same: Contact your lender as soon as you realize you might miss a payment. At the very least, you should be able to extend the term of your loan to lower your monthly payment, provided you haven't defaulted.

Suppose you're among that 12% or so of borrowers who have defaulted. The good news is you might not have a black mark against you just yet. An official default on a monthly repayment schedule occurs when you haven't made a payment in 270 days. And lenders don't have to report a default to their guarantee agency for 90 days, says Mark Kantrowitz of FinAid.org. Call your lender immediately to find out if you're still within that grace period. If you are, count yourself lucky and send in a check.

If not, don't panic. Although default is serious -- it will stay on your credit report for seven years and you won't be eligible for deferment, forbearance or further Title IV federal student loans -- it is also 100% fixable. Completing a loan-rehabilitation program removes the default from your credit report and reinstates all those privileges. To rehabilitate your loan, you'll have to make payments within 20 days of the due date for nine of ten consecutive payment periods. Call the number on your bill to find out if you are eligible.

Uncle Sam is your friend

Death and taxes may be the only certainties in life, but each year millions of people try to evade the inevitable by not bothering to file a tax return. But there's no need to spend the rest of your days living in fear of retribution if you've crossed the tax man. The IRS can be surprisingly lenient if you make a good-faith effort to come forward. And if you're owed a refund, you'll be rewarded for your honesty. In 2003, the most recent year for which data is available, almost two million people who were owed a tax refund forfeited more than $2 billion because they didn't bother to file a return.

If you didn't file a federal return for 2006 or earlier, pull that year's Form 1040 off the Web (at www.irs.gov) and determine whether you owe money. If the feds owe you a refund, you have three years to claim it, and you won't be charged any penalties.

If you owe taxes for the year in which you failed to file, you'll need to settle up. "It's always better if you make the first move," says Greg Rosica, tax partner with Ernst & Young. And the sooner, the better. Penalties accrue at 5% per month up to 25%, and you'll also owe interest.

If you owe money for several years or you're having trouble tracking down the documents you need, consider hiring an accountant. A pro can help you figure out what you are missing, deal with incomplete records or work with the IRS to obtain old documentation. And if you think you owe a lot of money -- if, for instance, you were self-employed for several years -- you may want to consult an attorney.

If you filed a tax return but didn't pay what you owed, you should be receiving a bill about every 45 days. You will incur penalties of 0.5% a month, up to 25%, plus interest, so pay up immediately if you can afford it. If you can't afford to pay immediately, set up a payment plan. You don't need proof of specific financial hardship, such as injury or unemployment. Copies of your tax returns will do, plus a reasonable estimate of how much you can afford to pay. Download Form 9465 from www.irs.gov or call 800-829-1040 to apply.

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Avoid the bank blacklist

Bennett Madison, a writer living in new York City, overdrew his Washington Mutual checking account by $600 and waited seven months to pay off the debt. By that time the bank had reported him to ChexSystems, a reporting agency that tracks how consumers handle their deposit accounts.

Madison ended up on a bank blacklist, and read online that he likely wouldn't be able to open another account for five years. "I entered this netherworld of check-cashing stores," he says.

After a year as a financial itinerant, Madison ventured into a Commerce Bank branch to ask about opening a new account and found out that all he needed was a letter from Washington Mutual confirming that he had paid off the debt. He got the account and was able to move off the mean streets.

An overdrawn account can be a big nuisance, or worse. Bounced checks can affect your relationships with service providers, such as the electric utility or phone company, and usually cost you high fees. Writing a check when you don't have the funds to cover it is actually illegal, and in some cases it can result in criminal penalties. With checking accounts, the key is not to let a rubber check or negative balance sit there. Madison might have avoided the blacklist if he had just settled his account sooner.

Visit your bank as soon as you realize a check might bounce. If you can cover the difference with money from another account, by all means do so. And factor in other checks that may not have cleared yet.

If you don't have the cash, ask your bank to stop payment on any other checks. Notify anyone who might try to cash one of your bad checks. In the future, try to keep a buffer of at least a couple hundred dollars in your checking account, and look into your bank's overdraft-protection plan.

Pay those parking fines

Ignoring parking tickets can get expensive, fast. Many states boot or tow the cars of repeat offenders or delinquents, and it can cost a few hundred dollars to bail out your vehicle. Many jurisdictions, such as Miami, put a hold on your vehicle registration. Los Angeles can even withhold your state tax refund.

Some jurisdictions now send unpaid accounts to collection agencies and the tickets show up on your credit record. Roanoke, Va., takes a more creative approach. It publishes a list of unpaid accounts online (the list recently included 3,200 names) and threatens offenders with "liens, income tax refund offset, additional fees and/or court action." Brooksville, Fla., proposed placing a lien on the home of anyone who failed to pay a $5 parking ticket, but the proposition flopped.

Then again, plenty of petty rebels do escape unscathed. Presidential hopeful Barack Obama owed $375 in fines and late fees for 15 parking tickets he racked up while attending Harvard Law School, until he finally squared up last January. One Kentucky lawyer found a loophole in Louisville law that means that not only do parking offenders never have to pay but also that drivers who have been booted or towed for tickets may have grounds to sue the city.

Loopholes aside, ignoring even out-of-state tickets is risky because many states are chummy about sharing registration records. Connecticut, for example, suspends residents' licenses if they don't pay parking tickets issued in other states. And there's no simple way to find out which states share records.

So if you're not going to contest a ticket, suck it up and pay. Old tickets still in your possession should provide at least a phone number, if not a Web site or address where you can send a check. If you don't have the actual ticket, contact the department of motor vehicles in the state where you received the citation to find out how much you owe and how to clear your record.

Order your copy of Kiplinger's special issue Success With Your Money. It will tell you how to make the most of your money -- and make a seamless transition to the next phase of your life.