Owing on a Cosigned Loan

I cosigned for a loan. The person I cosigned for is now filing for bankruptcy. What can I do?
—Janice Wong, Sacramento

Find a way to pay off the loan. You may see this debt as belonging to someone else, but the lender sure doesn’t. “The cosigner is on the hook,” says Craig Watts, spokesperson for credit scorer Fair Isaac. “The bleeding that the other person is going through will seep onto the cosigner’s credit report until it’s resolved.” In fact, even once your cosigner files for bankruptcy—and discharges the debt—you’ll still be held responsible.

Reach out to the lender. While the lender is under no obligation to negotiate, you may be able to stem the damage to your credit report by explaining the situation and committing to a payment plan. This may not seem fair, but “a lot of credit reputations have crashed on the rocks because of so-called moral high ground,” says Watts.

I have a universal life insurance policy as well as a newly renewed term-life policy and additional life insurance through my employer. We’ve saved a considerable amount for retirement, and our children are completing college. Should I cash out the universal policy?
—Marc Green-Lowe, Parkland, Fla.

Life insurance may be sold more aggressively than time-shares in Boca, but its purpose is simply to ensure that your dependents can maintain their current standard of living should you pass away. So ask yourself: Do you need the coverage? Well-funded empty nesters often don’t need much or even any life insurance, although it’s sometimes used for estate planning purposes. (Visit smartmoney.com/insurance to see how much life insurance you need.)

Should you decide to cut back on your coverage, the next question is which policy to drop. Universal life is a type of whole life insurance that combines flexible premiums with a tax-deferred investment component tied to interest rates.

Cashing out of a policy can be pricey, and it’s difficult to determine what sort of investment return you’re giving up, says life insurance expert James Hunt, of EvaluateLifeInsurance.org, which, for a small fee, evaluates the internal investment performance of whole-life policies. Fees for terminating can be in place for up to 20 years, plus you’ll owe income tax if the surrender value (the cash value after fees) exceeds what you’ve paid in premiums. Canceling your employer or term-life plan may make more sense. Talk to a tax pro or fee-only financial planner before making any big moves.

Should I make a 2008 contribution to my Roth IRA or just sock it away in a CD or under my mattress? My Roth has lost money, and I’m planning to retire in four to six years.
—Agnes Soderbeck, Ann Arbor, Mich.

Step away from the mattress. With retirement near, funding your Roth is one of the smartest things you can do. Remember, a Roth IRA is simply a type of account (that offers tax-free withdrawals during retirement). How you invest the account is up to you, whether it’s bonds, stocks, mutual funds or, yes, even CDs. Just keep in mind that your plan is for retirement to begin in the next several years—a happy state of affairs that will likely continue for decades. That means you need some of your account allocated to stocks. If you’re uncomfortable making asset-allocation decisions yourself, consider choosing a target-date retirement fund from a no-load fund family like T. Rowe Price or Fidelity, which will automatically shift your investments to more-conservative options as retirement nears. You can still make your 2008 contribution—$6,000, if you’re 50 or older.