Ask Liz Weston

Get smart with your money

Q&A

Co-signing card leads to collectors’ calls

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Dear Liz: I co-signed a credit card for someone and the person defaulted on payment. I started making payments but could not continue because I became unemployed. The debt started at $15,631.23 but has gone up to $17,088.08 because of interest and fees. I previously had to go to court because my bank account was frozen. I recently got a notice about this again. Should I file for bankruptcy or try contacting the attorneys who are seeking payment? I am working part-time and have a tight budget. I don’t have anything saved and am living from paycheck to paycheck.

Answer: You should have gone to a bankruptcy attorney the first time you got sued.

Many people try to ignore their debts or hope that collection agencies will be lenient. That’s not a good strategy at a time when collectors are increasingly willing to file lawsuits to get paid, said Gerri Detweiler, director of consumer education for Credit.com. Once collectors have a judgment against you, they can freeze your bank accounts or garnishee your paycheck.

If you don’t have anything saved and can’t come up with any money for payments, you have little leverage in dealing with a collection agency. Bankruptcy may be your only recourse to get these collection efforts to stop.

A bankruptcy attorney can let you know whether you are “judgment proof,” which basically means that you have and make too little for a creditor to collect on any judgments. If you are judgment proof, you may not need to file for bankruptcy, but you may have to deal with frozen accounts and regular trips to court when a collector oversteps.

You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.

The only silver lining of this situation is that you’ve provided other people with a clear lesson in why they shouldn’t co-sign a credit card or any other loan for someone else.

How much should you spend on rent?

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Dear Liz: I am wondering about what percentage of your income should your rent be. Ours at the moment is 35% just for rent, not including utilities or anything else.

Answer: In high-cost areas, people regularly pay 40% or more of their income on housing. That doesn’t mean it’s a good idea.

When you spend a big chunk of your income on rent or mortgage payments, there’s often too little left over to save for the future, pay off the debt of your past and live for today.

There are no hard-and-fast rules for what’s affordable, but limiting your housing costs to about 25% of your gross pay or 30% of your after-tax pay will help ensure that you have money left over for other goals. “Housing costs” include rent, utilities and renter’s insurance if you don’t own, or mortgage, property taxes, property insurance and utilities if you do.

If you’re much over these limits, you should look into ways to reduce your costs, earn more income or both. Otherwise, you’re likely to continue to struggle with an unbalanced budget.

Divorced? You may qualify for half of ex’s Social Security

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Dear Liz: Many years ago I read about spousal benefits based on an ex-spouse’s Social Security earnings record. Is there a minimum length of time of the marriage to qualify? How do I apply for this benefit? I am within nine months of retirement.

Answer: You can qualify for Social Security spousal benefits based on an ex’s work record as long as:

•The marriage lasted 10 years or more.

•You are 62 or older and unmarried.

•Your ex-spouse is eligible to begin receiving his or her own Social Security benefit (even if he or she hasn’t applied yet).

•Your own benefit is less than the spousal benefit you would get based on his or her work record.

Any benefits you receive based on his or her record won’t affect what your ex receives, or what his or her current or other former spouses receive.

As with regular spousal benefits, the amount you get will be permanently discounted if you apply before you’ve reached your own full retirement age (which is currently 66 and will climb to 67 in a few years).

Tuesday’s need-to-know money news

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Champagne glassesFinancial survival tips for before the wedding and after the marriage ends, freedom from credit card debt, and beating the retirement clock.

Engaged? You Might Need Money Therapy
Things you should know before you walk down the aisle.

How Does Divorce Affect Bankruptcy and Mortgage
Things you should know for when the walk down the aisle fails.

Declare Your Independence From Credit Card Debt
Life, liberty and the pursuit of zero debt.

How to Get Help From a Student Loan Mediator
Student loan battles don’t have to be fought alone.
What to Do When You Haven’t Saved Enough for Retirement
How to get by when time isn’t on your side.

Save or pay debt? Do both

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Dear Liz: I am a 67-year-old college instructor who plans to teach full time for at least eight more years. Last year I began collecting spousal benefits based on my ex-husband’s Social Security earnings record. Those benefits give me an extra $1,250 each month above my regular income. I have been using the money to pay down a home equity line of credit that I have on my condo. The credit line now has a balance of $29,000. I have about $200,000 in mutual funds and should have a small pension when I retire. (I went into teaching only a few years ago.) Would it be better for me to split the extra monthly $1,250 into investments as well as paying off my line of credit? The idea of having no loan on my condo appeals to me, but I wonder if I should try to invest in stocks and bonds instead.

Answer: Paying down debt is important, but opportunities to save in tax-advantaged retirement plans are typically more important. Fortunately, you probably have enough money to do both.

First investigate whether your college offers a 403(b) or other retirement program that offers a match. If it does, you should be contributing at least enough to that plan to get the full match.

Your next step is to explore an IRA. Since you’re covered by at least one retirement plan at work (your pension), you would be able to deduct a full IRA contribution only if your modified adjusted gross income as a single taxpayer is $59,000 or less in 2013. The ability to deduct a contribution phases out completely at $69,000.

If you can’t deduct your contribution, consider putting the money into a Roth IRA instead. Roth contributions aren’t deductible, but withdrawals in retirement are tax free. Having a bucket of tax-free money to draw upon in retirement can help you better manage your tax bill, which is why some investors opt to contribute to Roths even when they could get a deduction elsewhere.

People 50 and older can contribute up to $6,500 this year directly to a Roth if their income is under certain limits. (For singles, the limit for a full contribution is a modified adjusted gross income of $112,000 or less.) If your income is over the limit, you can contribute to a traditional IRA and then immediately convert the money into a Roth IRA, since there’s no income limit on conversions. (This is known as a “back door” Roth contribution.)

Since you’re so close to retirement, you don’t want to overdose on stocks, but you still need a significant amount of stock market exposure so that your money has a chance to offset future inflation. You might consider a balanced fund that invests 60% in stocks, 40% in bonds.

Once you’ve taken advantage of your retirement savings options, you can direct the rest of your Social Security benefit to paying off your home equity line. These credit lines typically have low but variable rates. Higher interest rates are likely in our future, so paying this line down over time is a prudent move.

Estate taxes no longer a worry for most people

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Dear Liz: My father passed away two years ago and my mother recently died as well. I will be getting about $50,000 from the sale of their house. Everyone tells me the tax on this will be very high, so I need advice about how not to give my parents’ money to the government. Their grandchildren should be able to see a legacy of their grandparents.

Answer: You need to stop listening to “everyone,” since these people clearly don’t know what they’re talking about.

You have to be pretty rich to worry about estate taxes these days. The money you inherit wouldn’t be subject to federal estate taxes unless your parents’ estates exceeded the federal exemption limit (which is currently more than $5 million per person). Some states have lower limits and a few have “inheritance taxes,” which base the tax rate on who is inheriting (spouses are typically exempt, and lineal descendants such as children pay a lower rate than others).

The vast majority of inheritors, however, won’t face any of these taxes. You should check with a tax pro, but chances are good your inheritance won’t incur a tax bill and you’ll be able to pass the entire amount along to your children without taxes as well if you wish.