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Lisa Weston, Published July 15 2013

Money Talk: Consider bankruptcy to deal with co-signer credit card debt

Q: 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 paycheck to paycheck.

A: 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 garnish 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 Association of Consumer Bankruptcy Attorneys at www.nacba.org.

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

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

A: In high-cost areas, people regularly pay 40 percent 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 percent of your gross pay or 30 percent 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.

Q: 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.

A: 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).

Questions may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form

at asklizweston.com.