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Published September 12, 2011, 12:00 AM

Money Talk: Find out if you’re ‘judgment proof’

Q: I was hurt on the job and was fired. I have a lawyer helping me fight the company, but I have no income, and I’m being haunted by collection agencies.

By: Liz Weston, INFORUM

Q: I was hurt on the job and was fired. I have a lawyer helping me fight the company, but I have no income, and I’m being haunted by collection agencies. I owe $5,000 on credit cards and have a student loan that started at $20,000 but is now $30,000. I was thinking of filing for bankruptcy. I have nothing, and I feel bad all the time. I can’t afford Christmas or birthday presents or find a job that I can do. Any advice would be helpful.

A: Bankruptcy could wipe out your credit card debt but probably won’t erase your student loans. Student loan debt usually can’t be discharged in bankruptcy unless you’re totally and permanently disabled. Since you’ve been looking for work, that doesn’t seem to be your situation.

Besides, filing for bankruptcy costs money that you probably don’t have. A Chapter 7 filing can easily cost $1,500.

What you might want to do instead is discuss your situation with a bankruptcy attorney to find out if you might be “judgment proof.” If you are, your creditors can still sue you, but they’ll be unable to collect – at least until your circumstances improve.

Many bankruptcy attorneys offer free or discounted initial sessions. You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys, or find an attorney through its website at www.nacba.org.

In the meantime, you can visit www.debtcollectionanswers.com for strategies on how to deal with collection agencies when you can’t pay.

Q: I’m frustrated. A Visa card we’ve had since 1996 now has an annual percentage rate of 18.24 percent. When I questioned the card issuer about it, the phone representative blew me off, saying it’s automatically reviewed and adjusted every six months. We paid it and our other credit cards off two years ago. Our only debt is our mortgage ($179,000 on a $500,000 home). I went to MyFico.com and found one of my FICO scores is 801. What’s wrong with this picture?

A: It’s not entirely clear why you care what the interest rate on the card is if you’re not carrying a balance. Whether the card charges 18.24 percent or 1.824 percent makes no difference to your bottom line.

If you’re objecting on principle, you should know that credit card companies can charge pretty much any interest rate they want. The good news is that you have plenty of options if you want a card with a better rate. The average credit card interest rate is somewhere around 16 percent. Many issuers offer single-digit rates to people like yourself who have high credit scores. You can check out sites such as www.cardratings.com, www.creditcards.com and www.nerdwallet.com to find lower-rate cards.

Since your issuer refused to lower your rate when asked, it either doesn’t think you’ll bolt to another credit card company or doesn’t care if you do.

Q: We have a 7 percent fixed-rate mortgage with a $150,000 balance and a second, adjustable rate mortgage with a balance of $100,000. I’m self-employed, and my wife doesn’t work. My income fluctuates a lot every month. We just sold a property and have $240,000 left after taxes. Should I pay off both mortgages or just the adjustable loan?

A: When deciding whether to pay off a mortgage, many people focus on how much interest they could save or what their “return” on their money would be. (If you’re in a 35 percent tax bracket for federal and state income taxes, for example, your return on paying off a 7 percent mortgage would be 4.6 percent.)

In reality, though, most people have better things to do with their cash than pay off relatively low-rate, tax-deductible debt.

Are you, for example, on track with your retirement savings? Do you have a substantial emergency fund? Most families would be wise to set aside a cash reserve to cover three to six months’ worth of expenses. Someone who is self-employed with a non-working wife might want to boost that emergency fund to 12 months’ worth of expenses.

Are you adequately insured? Since your wife is financially dependent on you, you probably should have a substantial life insurance policy. You may want to get one on her as well, if she cares for minor children and you’d have to hire a nanny if she died. You may also need disability coverage.

If you’ve covered all these bases and still want to pay off your mortgages, feel free. Otherwise, put the money to better use.

Liz Weston is the author of “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 http://asklizweston.com.