Ask Liz Weston

Dear Liz: On several occasions you’ve referred to the possibility of getting 8% annual returns on investments. Pray tell us where you can get this much. The best I can find is about 5%.

Answer: That’s because you’re looking at relatively low-risk options such as certificates of deposit where the return is guaranteed. If you’re willing to take more risk, you should be able to attain 8% average annual returns over the long term by investing in a diversified mix of stocks, bonds and cash. Large-company stocks have averaged 10.4% annually for the last 80 years, according to research firm Ibbotson Associates, while small-company stocks have averaged 12.6% in the same period.

Obviously, investing in stocks means you risk significant losses in some years, but if your time horizon is 20 years or more, you should still come out ahead.

Dear Liz: I’ve heard that some lenders offer mortgages where the payments represent 60% of the borrower’s income. I am in over my head financially because of recent hospitalizations and as a result have been late on my mortgage. I’m currently on a payment plan that is difficult for me. I have been juggling expenses every month and cannot catch up. I’m trying to find a second job but no luck at this point. I don’t want to sell my home nor do I want to lose it, so can you send me a list of lenders that allow 60% debt to income ratios?

Answer: When the mortgage market was booming, there were a few lenders that signed off on loans that ate up 50% to 60% of the borrowers’ monthly income. But those borrowers typically had sterling credit and substantial resources. That’s clearly not your situation.

Your late payments have substantially damaged your credit score, which means lenders aren’t going to cut you much slack. You might want to try your current lender again to see if lowering your payment is possible, or work with a seasoned mortgage broker who can help you evaluate your options.

It could be, though, that you simply can’t afford your house. If that’s the case, it’s better to sell now before a foreclosure makes your credit even worse.

Dear Liz: In the past, we’d heard that a bank account could be protected from creditors, U.S. Bankruptcy Court and other government authorities if it were set up to receive only Social Security funds.

For several years, we thought we had such an account, but now the bank denies that such protection is possible. We’re not facing any lawsuits or other problems, but we do wish to protect this money in the event of a catastrophe. Could you discuss this issue?

Answer: You can protect your Social Security income from most creditors, but it’s up to you not the bank to take the proper steps, said Lowell Kepke, a Social Security Administration spokesman.

“Banks generally will not have any special kind of account just for Social Security payments,” Kepke said. “It is up to the customer to maintain the account with only Social Security deposits.”

Specifically, you have to arrange for Social Security to electronically deposit your checks into the account and make sure you don’t mingle that money with other kinds of payments or deposits.

Social Security benefits are generally protected against garnishment, levy or bankruptcy proceedings as long as money is “still identifiable as Social Security benefits in a bank account where the only payments into the account are from direct deposit,” Kepke said.

There are some exceptions to the creditor protection, Kepke notes:

• The Internal Revenue Service can seize an account to collect unpaid federal taxes.
• The account can be garnisheed to enforce child support or alimony obligations.
• The state can be reimbursed for interim assistance to Supplemental Security Income recipients. (SSI is the Social Security disability program.)

Also, the protection may not prevent a creditor from trying to raid your account it just provides a remedy in case such an attempt is made.

If a creditor gets a judgment against you in court, for example, and asks the bank to freeze your account, you may have to contact the creditor’s attorney to get the funds released. Your bank statements showing Social Security as the only source of funds in the account should be proof that the account is protected. If the attorney balks, though, you may have to go to court to reverse the freeze.

Given what’s at stake, you may want an attorney’s help if you should ever face the catastrophe you fear. Your local bar association can provide referrals.

Dear Liz: In the past, we’d heard that a bank account could be protected from creditors, U.S. Bankruptcy Court and other government authorities if it were set up to receive only Social Security funds.

For several years, we thought we had such an account, but now the bank denies that such protection is possible. We’re not facing any lawsuits or other problems, but we do wish to protect this money in the event of a catastrophe. Could you discuss this issue?

Answer: You can protect your Social Security income from most creditors, but it’s up to you not the bank to take the proper steps, said Lowell Kepke, a Social Security Administration spokesman.

“Banks generally will not have any special kind of account just for Social Security payments,” Kepke said. “It is up to the customer to maintain the account with only Social Security deposits.”

Specifically, you have to arrange for Social Security to electronically deposit your checks into the account and make sure you don’t mingle that money with other kinds of payments or deposits.

Social Security benefits are generally protected against garnishment, levy or bankruptcy proceedings as long as money is “still identifiable as Social Security benefits in a bank account where the only payments into the account are from direct deposit,” Kepke said.

There are some exceptions to the creditor protection, Kepke notes:

• The Internal Revenue Service can seize an account to collect unpaid federal taxes.
• The account can be garnisheed to enforce child support or alimony obligations.
• The state can be reimbursed for interim assistance to Supplemental Security Income recipients. (SSI is the Social Security disability program.)

Also, the protection may not prevent a creditor from trying to raid your account it just provides a remedy in case such an attempt is made.

If a creditor gets a judgment against you in court, for example, and asks the bank to freeze your account, you may have to contact the creditor’s attorney to get the funds released. Your bank statements showing Social Security as the only source of funds in the account should be proof that the account is protected. If the attorney balks, though, you may have to go to court to reverse the freeze.

Given what’s at stake, you may want an attorney’s help if you should ever face the catastrophe you fear. Your local bar association can provide referrals.

Dear Liz: Do you recommend debt consolidation or debt settlement for a Californian who brings home only about $1,200 a month and owes $48,000 on credit cards? I’m over 45, have no assets and have lost my job twice in my lifetime.

In the past, I have always paid my bills as agreed, on time. Currently three of my five cards are on “credit protection,” which means I don’t have to make payments on them until next year. Right now, I am barely making payments on my two other cards and living expenses, plus I’m beginning to use the cards for everyday expenses such as gasoline and food, which frightens me.

The majority of the accumulated debt was for living expenses and paying the rent (by using bank-card checks) since 1996, the first time a managerial job ended. Other credit debt was from auto repair and maintenance for the older cars I had owned over time. About $4,000 was personal spending done in the last four years.

I have always somehow had faith (maybe wishful thinking) that I would be able to pay it all down substantially — even at times working two jobs seven days a week, having other responsible positions, and at times being able to pay larger monthly amounts on some cards. But now, at my age, the realities of life are really hitting me hard and I know that I am just way over my head. Come June 2007, I will need to change my entire financial life, because that’s when the credit protection expires on those other cards. What are my choices?

Answer: It’s human nature to hope that our circumstances will improve. But when it comes to debt, wishful thinking often leads to digging a hole that may be too big to get out of on your own.

The credit protection plan that’s allowing you to skip payments probably isn’t doing anything about your interest charges, which are still piling up. These expensive contracts are often touted as a way for people to protect their credit while they’re unemployed or disabled, but they often result in balances ballooning over time.

A good way to start is by talking to a legitimate credit counselor, preferably one affiliated with the National Foundation for Credit Counseling (www.nfcc.org). The counselor will take a look at your income and debt to see if you qualify for a debt repayment plan, which would allow you to repay what you owe while reducing or eliminating finance charges.

Given how much you owe, however, and how little you earn, a credit counselor may not be able to help you. If that’s the case, then bankruptcy may be the best of bad options. Filing for Chapter 7 liquidation costs more than it did before bankruptcy overhaul laws kicked in Oct. 17, but your low income means you won’t be prevented from doing so by a new income “means test.”

Debt settlement is a possibility if you want to try to pay at least some of your debt, but understand that settlements, like bankruptcy, can be devastating to your credit.

Also, unscrupulous collection agencies have been known to try to pursue borrowers for the unpaid portion of a supposedly settled debt, and the amount that’s forgiven may be reported to the Internal Revenue Service as taxable income to you. If you choose this path, get the help of an attorney experienced in such negotiations.

Dear Liz: Do you recommend debt consolidation or debt settlement for a Californian who brings home only about $1,200 a month and owes $48,000 on credit cards? I’m over 45, have no assets and have lost my job twice in my lifetime.

In the past, I have always paid my bills as agreed, on time. Currently three of my five cards are on “credit protection,” which means I don’t have to make payments on them until next year. Right now, I am barely making payments on my two other cards and living expenses, plus I’m beginning to use the cards for everyday expenses such as gasoline and food, which frightens me.

The majority of the accumulated debt was for living expenses and paying the rent (by using bank-card checks) since 1996, the first time a managerial job ended. Other credit debt was from auto repair and maintenance for the older cars I had owned over time. About $4,000 was personal spending done in the last four years.

I have always somehow had faith (maybe wishful thinking) that I would be able to pay it all down substantially — even at times working two jobs seven days a week, having other responsible positions, and at times being able to pay larger monthly amounts on some cards. But now, at my age, the realities of life are really hitting me hard and I know that I am just way over my head. Come June 2007, I will need to change my entire financial life, because that’s when the credit protection expires on those other cards. What are my choices?

Answer: It’s human nature to hope that our circumstances will improve. But when it comes to debt, wishful thinking often leads to digging a hole that may be too big to get out of on your own.

The credit protection plan that’s allowing you to skip payments probably isn’t doing anything about your interest charges, which are still piling up. These expensive contracts are often touted as a way for people to protect their credit while they’re unemployed or disabled, but they often result in balances ballooning over time.

A good way to start is by talking to a legitimate credit counselor, preferably one affiliated with the National Foundation for Credit Counseling (www.nfcc.org). The counselor will take a look at your income and debt to see if you qualify for a debt repayment plan, which would allow you to repay what you owe while reducing or eliminating finance charges.

Given how much you owe, however, and how little you earn, a credit counselor may not be able to help you. If that’s the case, then bankruptcy may be the best of bad options. Filing for Chapter 7 liquidation costs more than it did before bankruptcy overhaul laws kicked in Oct. 17, but your low income means you won’t be prevented from doing so by a new income “means test.”

Debt settlement is a possibility if you want to try to pay at least some of your debt, but understand that settlements, like bankruptcy, can be devastating to your credit.

Also, unscrupulous collection agencies have been known to try to pursue borrowers for the unpaid portion of a supposedly settled debt, and the amount that’s forgiven may be reported to the Internal Revenue Service as taxable income to you. If you choose this path, get the help of an attorney experienced in such negotiations.

Dear Liz: I’m starting to think that I made a huge mistake when it came to my choice for an education, but I was accepted to my “dream school” and I couldn’t pass up the opportunity to attend. As of now, I have a degree from a top-rated university as well as a master’s degree and about $115,000 of debt. I’m only making about $27,000 a year and must remain in my job for the next two years. I am paying over one-third of my monthly income towards these loans and don’t know how I am going to survive with this amount of debt. I really hope I don’t come to regret my schooling decision and all of the hard work I put into it. Right now, though, I have nothing to show for my effort other than a piece of paper. What’s your advice?

Answer: Unless your income will shoot dramatically higher in the next few years, the amount of debt you incurred was insane.

Generally, you shouldn’t borrow more for school than you expect to make in your first year out of college. If you have to take on much more debt than that, then you really can’t afford the education you’re buying, “dream school” or not.

What you’ve done is saddled yourself with debt that will inhibit or even prevent you from pursuing other important goals, like buying a house or saving for retirement. You’ve dramatically increased the chances that you’ll fall further into debt just trying to live day-to-day, since so much of your income is going toward these loans.

This is not a burden that you can escape, either. Unlike most other unsecured debt, student loans can’t be erased in bankruptcy court. Lenders are allowed to pursue this debt virtually to the grave: the U.S. Supreme Court recently ruled that student lenders could garnishee the disability check of a senior citizen for unpaid loans.

You might be able to put a small dent in the amount you owe with a loan forgiveness program, which typically pays part of your debt in exchange for activities like teaching in an inner-city school or enlisting in the armed forces. You can explore the details at a financial aid information site like FinAid.org.

But the real solution to your problem is pretty basic: you’re going to have to find a way to earn a lot more money. You didn’t explain why you have to keep your current job for two years, but if you really can’t move on then you should spend the time readying yourself for the highest-paid profession for which your degrees qualify you. This might not be your “dream” job, but it could save you from the nightmare of excessive debt.

Dear Liz: I’m starting to think that I made a huge mistake when it came to my choice for an education, but I was accepted to my “dream school” and I couldn’t pass up the opportunity to attend. As of now, I have a degree from a top-rated university as well as a master’s degree and about $115,000 of debt. I’m only making about $27,000 a year and must remain in my job for the next two years. I am paying over one-third of my monthly income towards these loans and don’t know how I am going to survive with this amount of debt. I really hope I don’t come to regret my schooling decision and all of the hard work I put into it. Right now, though, I have nothing to show for my effort other than a piece of paper. What’s your advice?

Answer: Unless your income will shoot dramatically higher in the next few years, the amount of debt you incurred was insane.

Generally, you shouldn’t borrow more for school than you expect to make in your first year out of college. If you have to take on much more debt than that, then you really can’t afford the education you’re buying, “dream school” or not.

What you’ve done is saddled yourself with debt that will inhibit or even prevent you from pursuing other important goals, like buying a house or saving for retirement. You’ve dramatically increased the chances that you’ll fall further into debt just trying to live day-to-day, since so much of your income is going toward these loans.

This is not a burden that you can escape, either. Unlike most other unsecured debt, student loans can’t be erased in bankruptcy court. Lenders are allowed to pursue this debt virtually to the grave: the U.S. Supreme Court recently ruled that student lenders could garnishee the disability check of a senior citizen for unpaid loans.

You might be able to put a small dent in the amount you owe with a loan forgiveness program, which typically pays part of your debt in exchange for activities like teaching in an inner-city school or enlisting in the armed forces. You can explore the details at a financial aid information site like FinAid.org.

But the real solution to your problem is pretty basic: you’re going to have to find a way to earn a lot more money. You didn’t explain why you have to keep your current job for two years, but if you really can’t move on then you should spend the time readying yourself for the highest-paid profession for which your degrees qualify you. This might not be your “dream” job, but it could save you from the nightmare of excessive debt.

Does this photo of credit card execs being sworn in before Congress remind anyone else of the infamous “smoking isn’t addictive” line-up of tobacco industry execs?

Anyway, to the point: Congress is intent on roasting credit card industry practices like jacking up people’s interest rates because their credit scores have dropped (which sometimes happens just because they applied for another credit card). As I noted on Nov. 19, Chase dodged this particular bullet by announcing it was abandoning this practice. Expect other issuers to follow suit.

The smartest (and easiest) way for consumers to deal with credit card debt is not to carry it–to always be in the habit of paying balances in full, so you’re not at the whim of the credit card companies. Short of that, you should have a Plan B–an unused, low-rate card to which you can transfer a balance or an unused home equity line of credit that you can tap if your credit card interest rates suddenly skyrocket. Set these up while your credit is still good so you have a fallback in case of emergency.