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Save part of inheritance and pay down debt with the rest

Gift from grandfather can help young person get out of the habit of carrying balances and into the habit of paying credit cards in full every month.

January 16, 2011|Liz Weston | Money Talk

Dear Liz: My grandfather gave me his car just before he passed away. I drove it for a few years and now am ready to sell it. My question: What to do with the money? The car is worth about $10,000. Should I put the money toward my $13,000 credit card debt or should I put the money in savings, as I currently don't have any?

Answer: Use your grandfather's generous gift to both help you retire most of your debt and get a start on an emergency fund.

After you sell the car, take $500 to $1,000 of the proceeds for your emergency fund. That will cover most minor emergencies and should keep you from adding to your credit card debt. Put the money in a safe account that's accessible but not too accessible. If it's too easy to tap, you might be tempted to raid it for non-emergencies. A savings account at an online bank or a credit union are two good choices.

Take what's left and pay down your credit card bills. Stop using your cards and figure out how much you need to put toward your debt to get the rest of it paid off in a few months. Then trim your expenses to come up with the money and set up an automatic transfer from your checking account to your cards.

Despite what you may have heard, credit card debt isn't normal — a majority of U.S. households don't carry credit card balances, according to Federal Reserve statistics — and it's a real cancer on your finances. While you're young, you should get out of the habit of carrying balances and into the habit of paying your cards in full every month. You'll be richer for it, and less likely to find yourself in the sad position of being old and in debt. Read on:

Creditors can go after your equity

Dear Liz: I am 72 and have some credit card debt I can't pay. I live on Social Security and a small pension and am still paying a mortgage on a house I own in another state. (I'm currently renting.) I've been trying to sell the house for quite some time with no success. Can my creditors take my income or my house?

Answer: Creditors other than the federal government are not allowed to garnish your Social Security benefits. Many pensions are exempt as well.

Your equity in your home, however, may be fair game. States have "homestead exemptions" that protect a certain amount of equity in a primary residence, with the amount varying by the state. But creditors may be able to go after equity above those amounts, or any equity in a property that's not your primary residence.

You need to find an experienced bankruptcy attorney familiar with the laws of both states to give you advice. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.

A resource for small firms

Dear Liz: I read with great interest your recent advice for the struggling self-employed. I was curious, though, why you did not mention Small Business Development Centers as an option for them to explore.

The Small Business Development Centers are a national group of affiliated centers that are sponsored by grants from the Small Business Administration and various colleges and universities. The centers provide free consulting to owners of small businesses in the areas of law, accounting, grants and loans, Web design, marketing, green optimization, import-export, business-plan writing and related areas. They also give low-cost, three-hour classes in these areas for time-pressed businesspeople with limited resources.

Answer: Thanks for highlighting this wonderful resource, which helps more than 1 million small-business owners every year with free, one-on-one consultations and low-cost training. Readers, you can find out more about these centers at the Assn. of Small Business Development Centers' website at http://www.asbdc-us.org. You can search by ZIP Code or state to find a center near you.

Liz Weston is the author of the upcoming book "The 10 Commandments of Money: Survive and Thrive in the New Economy." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via the "Contact Liz" form at asklizweston.com. Distributed by No More Red Inc.

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