What Can I Do to Get Out of Debt Besides Bankruptcy? - Michelle
Posted March 16, 2013
WRAL Reader Question
I have about $9600 in credit card debt that cost me $260 (minimum payment)
Between my mortgage ($905) student loans ($605) Car and Ins ($360) and other expenses (utilities and tithes - I tithe 10% of my gross income $426 month).
I'm over my income $500. If I go on my current rate I will not pay off my credit card bill for 20 years!
I had a water leak at my house which I put on my credit cards and electrical issues as well (6 year old house 2nd owner, shoddy workmanship).
I would like to take a loan from my 401k to pay the debt off (which will result in a payroll deduction of $160).
I am also applying for a H.A.M.P (adjustment to my mortgage payment as well). I am working a second job and was able to pay off $3200 in the past year.
But I will not have this job past April 15th (seasonal employee). I'm currently looking for other employment opportunities but have not found any to date.
Am I missing some other actions I could do besides bankruptcy?
Will taking a (5yr) loan from my 401k (i'm 29 and been at this job for 4 years) hurt or help me?
In almost all the cases I've looked at, borrowing from the 401(k) makes no logical financial sense. Essentially what you are doing is stealing from your retirement to react to a current problem.
Only 14% of people say they have enough money for retirement when they stop working. The numbers will be even lower in twenty years.
Trust me, your older self will be pretty angry when she realizes your fund robbing stole loads of money from yourself when you needed it most in retirement.
When you borrow from a 401(k) most people think it's a cheap loan. What they fail to understand is what you are doing is paying interest on top of the rate of return you would have achieved if you had left the money alone in the creditor protected 401(k).
Want to see how this all adds up? Read Here’s Why a 401(k) Loan to Pay Off Debt Can Cost You a Massive Amount in Retirement.
Maybe you can post more details in the comments below but you did not share if you are short each month, unable to save, or will be in trouble when the seasonal job ends.
But I would like to address two issues you raised.
The first considers tithing. If you want to tithe that is a decision only you can make. Some might criticize you for doing so in the face of money troubles. I won't, but not for the reason you might think.
Tithing, like many things, is a priority for you that you have roped off. That's fine. But that is your choice.
If tithing is more important than getting out of debt quickly, that's fine, but again, that's your choice. And whatever we need to do to deal with getting you back on track will be the result of you making tithing a top priority.
In the past I have suggested to people who are financially struggling that they talk to their church about other ways they can tithe when they can't afford it. For example, you can tithe with your time, or do volunteer work.
One person I helped approached his church and explained his situation and they understood. Instead of continuing his money donation the church asked him if he could donate his time to mow the church property which had a similar value.
The other issue that troubles me is the apparent exclusion of bankruptcy. In fact I just wrote an article titled Do Not Avoid Bankruptcy. Many people put bankruptcy off limits based on incorrect assumptions and not reality. The reality is more people have been hurt by excluding bankruptcy, not filing bankruptcy.
About the mortgage modification, you need to understand that no bank is required to modify any mortgage. Hoping for a mortgage modification can be a stressful process. Some who write me have been trying to get one for years without luck.
If you do want to go for one I would suggest you contact a HUD Housing Counselor to help you with the process. Their services are free.
WRAL Get Out of Debt Guy
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