I was informed a few days ago that a hacker was using my XOOPS admin account to send fraudulent spam. So they blocked my cache and then blocked my access into my server itself. My webhosting claims I must upgrade my old XOOPS files in order to correct this and prevent another hacker from sending spam from my account again, so I have a few questions.
1. How do I upgrade my XOOPS site without erasing all my data. Last time I upgraded I lost everything. I don't want to start from scratch building my site again, especially since it is a community based site, and I would lose all the users accounts and their uploaded data.
2. How do I prevent a hacker from sending spam mail from my account in the future?

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Make sure you have a full backup of the home directory as well as the database. This way if anything breaks you can safely restore to the original.

See this XOOPS System Upgrade Flash Tutorial for an overview of the method to upgrade. Even if watching this tutorial, read the readme files carefully and ask here if you do not fully understand how to upgrade. The tutorial itself shows an older upgrade than is available now.

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Several things will help with this, first use strong passwords for the admin account. Second keep your XOOPS and modules up to date. Third use the Protector Module to help prevent common exploits.

There is no 100% guaranteed way to prevent this activity, but you can surely use the above to make it harder.